AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 18, 2005
Registration No. 333-120412
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 2
to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
FUSION TELECOMMUNICATIONS INTERNATIONAL,
INC.
Delaware
4813
58-2342021
(State or Other Jurisdiction
of Employer
(Primary Standard Industrial
(I.R.S. Employer
Incorporation or Organization
Number)
Classification Code Number)
Identification Number)
420 Lexington Avenue, Suite 518
New York, New York 10170
(212) 972-2000
(Address and Telephone Number of Principal
Executive Offices)
Heitz & Associates, P.C.
345 Woodcliff Drive
Fairport, New York 14450
(585) 387-0000
(Name, Address and Telephone Number of
Agent for Service)
Copies of all communications to:
Arthur Marcus, Esq.
David Alan Miller, Esq.
William R. Heitz, Esq.
Gersten, Savage, Kaplowitz,
Graubard Miller
Heitz & Associates, P.C.
Wolf & Marcus, LLP
600 Third Avenue
345 Woodcliff Drive
101 East 52nd Street
New York, New York 10016
Fairport, New York 14450
New York, New York 10022-6018
212-818-8800
585-387-0000
212-752-9700
Fax: 212-818-8881
Fax: 585-387-0130
Fax: 212-813-9768
Approximate date of commencement of proposed sale to the public: As soon as practicable following the date on which this Registration Statement becomes effective.
If any securities being offered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: |X|
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. | |
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. | |
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. | |
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. | |
(continued on next page)
CALCULATION OF REGISTRATION FEE
(1) Pursuant to Rule 416, also being registered are such additional securities as may become issuable pursuant to antidilution provision of the Representatives Warrants, stock splits, stock dividends or similar transactions.
(2) Estimated solely for the purpose of calculating the registration fees.
(3) Includes
498,750 shares of common stock issuable upon exercise of the underwriters
over allotment option and 150,000 shares registered on behalf of a selling shareholder.
(4) Includes 498,750 Redeemable Warrants issuable upon exercise of the underwriters over allotment option.
(5) Represents Redeemable Warrants issuable to investors upon their conversion of series C preferred stock.
EXPLANATORY NOTE
This Registration Statement
contains two forms of prospectus: one to be used in connection with an initial public
offering of 3,325,000 shares of our common stock and 3,325,000 purchase warrants
(the Prospectus) and one to be used in connection with the potential
resale of an aggregate of 3,141,838 purchase warrants by certain selling securityholders
and 150,000 shares on behalf of a selling stockholder (the Selling Securityholder
Prospectus). The Prospectus and Selling Securityholder Prospectus will be
identical in all respects except for the alternate pages for the Selling Securityholder
Prospectus included herein which are labeled Alternate Page for Selling Securityholder
Prospectus.
The information in this preliminary prospectus supplement and the accompanying prospectus is not complete and may be changed. This preliminary prospectus supplement and the accompanying prospectus are not an offer to sell these securities nor a solicitation of an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion
PRELIMINARY PROSPECTUS
FUSION TELECOMMUNICATIONS INTERNATIONAL,
INC.
3,325,000 Shares of Common Stock
___________
This is our initial public offering of
3,325,000 shares of our common stock and 3,325,000 redeemable common stock purchase
warrants. We anticipate that the offering price per share of our common stock will
be between $5.00 and $7.00 and that the offering price per warrant will be $.05.
Each purchase warrant will entitle you
to purchase one share of our common stock for $____ (100% of the
offering price of one share of our common stock) during the four-year period beginning
on the first anniversary of the date of this prospectus. The warrant excercise price
will increase to $____ (133% of the offering price of one share
of our common stock) on the eighteen month anniversary of the date of this prospectus
provided that the registration statement covering the shares of common stock underlying
the purchase warrants has been effective for at least sixty (60) days prior to the
exercise price reset date.
Prior to this offering, there has been
no public market for our securities and we cannot assure you that a market will
develop. We have applied to list our common stock and purchase warrants on the American
Stock Exchange under the symbols FSN and FSNW, respectively.
Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this prospectus. Any representation
to the contrary is a criminal offense.
___________
Our underwriters have an option to purchase
up to an additional 498,750 shares of our common stock and/or 498,750 purchase warrants
to cover over allotments.
Our underwriters are offering our securities
as set forth in the section entitled Underwriting. Our underwriters
expect to deliver our securities to purchasers on or about _____,
2005.
Table of Contents
You should rely only on the information contained
in this prospectus. We have not authorized anyone to provide you with information
different from that contained in this prospectus. We are offering to sell shares
of common stock and purchase warrants and seeking offers to buy shares of common
stock and purchase warrants only in jurisdictions where offers and sales are permitted.
Until _______,
all dealers that effect transactions in these securities, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition to
the dealers obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotment or subscription.
i
PROSPECTUS SUMMARY
You should read the following summary
together with the more detailed information regarding us, the securities being sold
in this offering, the risk factors and the financial statements and notes thereto
appearing elsewhere in this prospectus.
In the spring of 2000, our board of directors
assembled a new management team who restructured and refined our business and corporate
strategy. As part of this refinement and restructuring we exited non-core operations,
such as providing domestic long distance services, local access and consulting services,
and focused on the emerging markets and new services, such as VoIP. Our management
team has significant experience in communications and international business development
and has demonstrated a keen ability to establish relationships with local partners
in emerging countries, who can distribute and support our products and services.
Since January 2004, we have raised $5.9 million in financing from the sale of our
equity securities and converted $0.6 million in debt. The funds from these offerings
helped us to increase revenues in the first nine months of 2004 by 63.0% over the
prior year period to $40.5 million and develop our Softswitch based infrastructure.
In addition, our improved financial condition enabled us to further reduce accounts
payable and debt by $3.5 million in 2004, which includes $2.2 million in negotiated
reductions with vendors and other debtors.
Services.
Although VoIP
is our lead product, we provide a full suite of services which we believe gives
us a competitive advantage over other providers. Our services include:
1
For the nine months ended September 30, 2004, voice accounted for 92.5% of our revenues, of which 68.4% was VoIP, 24.1% was traditional telephony and the remaining 7.5% was other services.
We generate 92% of our revenues from U.S. based
customers. We generate 3% and 19% of our consolidated revenues globally through
our joint ventures in United Arab Emirates, and Pakistan, respectively. We generate
4% of our revenues in India. We have financed our operations from inception from
financing activities and we have experienced significant operating and net losses
since inception. We had net losses of $19,141,739, $9,358,524 and $4,176,571 for
the years ended December 31, 2001, 2002 and 2003, respectively. For the nine months
ended September 30, 2003 and 2004, our net loss was $4,105,236 and $2,226,815, respectively.
Strategy.
Our strategy is to gain early entry in an emerging country and then market advanced communication services such as VoIP, private networks, Internet access, Internet video conferencing, and other Internet services. In many cases, we will establish a foothold within an emerging market through a partnership with a local organization. We believe that working with strong local partners allows us to best distribute services and attract, retain and support customers. These local partners offer time to market advantages as their existing infrastructure, sales distribution channels, and technical support can be utilized, while simultaneously reducing the capital needed to enter the market. Additionally, these partners typically provide or arrange for the last mile connectivity that is required for the delivery of local Internet access and private networks. This last mile connectivity, which is the connection between the in-
country telecommunications facility and the customers physical location, in combination with local support, expands the geographic coverage of our global service offering and helps differentiate us from our competitors.
We work with our partners to enable them to distribute
and support our products and services which can be Fusion branded, co-branded or
private labeled. Our private label alternative allows our partners to market our
products, technology platform and global reach under their own brand. This alternative
is ideal for partners that do not have the capital, expertise and technology platform
required to deliver our services but want to build or leverage their own brand.
2
The Offering
3
The information in this prospectus reflects a
recapitalization of the old common stock outstanding by a conversion rate of 3.5
shares of old common stock into one share of class A common stock, or an aggregate
of 17,480,562 shares of class A common stock. The class A common stock has the same
voting and other rights as the new common stock being sold in this offering except
that it is not publicly transferable until after the first anniversary of the date
of this prospectus, at which time it will automatically convert into the same class
of new common stock being sold in this offering. Prior to the conversion date of
the class A common stock, holders may convert their stock after the effective date
of the prospectus, by entering into a lock up agreement with the company until the
first anniversary of this prospectus, which restriction on public sale can be released
only with the consent of the representative. The series C preferred stock converts
into shares of common stock, subject to a lock up agreement for one year, and warrants
equivalent to those offered hereby. The warrants being offered by this prospectus
and the warrants issued on conversion of the series C preferred stock and to the
representative will be exercisable for the common stock. The data in this prospectus
has been adjusted for the recapitalization.
Except as set forth in the financial statements
or as otherwise specifically stated, all information in this prospectus assumes:
no conversion of
the 17,480,562 shares of class A common stock into an equal number of shares of
our common stock;
no exercise of
our underwriters over-allotment option to purchase up to 498,750 shares of
our common stock and/or 498,750 purchase warrants;
no exercise of
the purchase warrants offered by us in the offering;
no exercise of
the representatives purchase option to purchase up to 332,500 shares of our
common stock and/or 332,500 purchase warrants;
no exercise of
3,141,838 warrants issued to investors in our offering of series C preferred stock
to purchase an equal number of shares of our common stock;
the mandatory conversion
of series C preferred stock into 3,141,838 shares of our common stock;
no exercise of 286,567
warrants to purchase 286,567 shares of our common stock;
2,680,857 shares of our
common stock reserved for issuance under our 1998 Stock Option Plan; and
the conversion
of an aggregate of $2,508,333 of convertible promissory notes into 651,515 shares
of our common stock.
4
SUMMARY HISTORICAL FINANCIAL DATA
The following financial information should
be read in conjunction with Selected Financial Data, Managements
Discussion and Analysis of Financial Condition and Results of Operations and
our consolidated financial statements and notes thereto contained elsewhere in this
prospectus:
The below summarizes actual and proforma as adjusted
September 30, 2004 consolidated balance sheet data.
(2) The proforma
as adjusted column of this consolidated balance sheet data table reflects (a) the
conversion of all outstanding series C preferred shares into common stock upon completion
of this offering, (b) the repayment of $1,523,100 in debt and $516,000 in interest
payable to certain officers and directors, and (c) a refinancing transaction that
occurred subsequent to September 30, 2004, whereby the Company received net cash
proceeds of $1,330,000 ($1,400,000 for a convertible note net of a $70,000 advisory
fee) and refinanced $1,108,333 of existing notes payable and accrued interest in
exchange for a convertible note. The $1.1 million note was refinanced as the interest
rate was reduced from 13% to 6.5%, the term was extended two years, and collateral
related to the refinanced debt was released. These two notes aggregate $2,508,333
and automatically convert upom the com-
5
pletion of this Offering into 651,515 shares of
common stock based upon a conversion price of $3.85 per share, (d) the payment
of $500,000 in cash and the issuance of 1,547,617 shares of common stock related
to the January 2005 agreement whereby the Company will be acquiring the 49.8%
minority interest in its Efonica joint venture contingent upon successful
completion of this offering by March 1, 2005. $4.4 million worth of such shares of common
stock will be held in escrow until March 2006 at which point the final purchase
price will be determined, and (e) the issuance and sale by us of 3,325,000
shares of common stock and common stock purchase warrants in this offering at
the assumed initial public offering price, after deducting estimated underwriting
discounts and commissions and estimated offering expenses, as if these events
had occurred as of September 30, 2004.
6
January 18, 2005
and
3,325,000 Redeemable Common Stock Purchase
Warrants
Investing in our securities involves
a high degree of risk. Please see the section entitled Risk Factors
beginning on page 7 to read about risks you should consider carefully before buying
our securities.
Per
share of common stock
$
$
$
Per purchase warrant
Total
$
$
$
(1) Before
deduction of our other expenses related to this offering, estimated at $625,000.
The date of this prospectus
is January 18, 2005.
Global Opportunity Knocks.
Fusion Answers.
One World.
One Vision.
One Voice.
Prospectus
Summary
1
Summary
Historical Financial Data
5
Risk Factors
7
Special
Note Regarding Forward-Looking Statements
15
Use of Proceeds
15
Dividend
Policy
16
Capitalization
17
Dilution
18
Management's Discussion
and Analysis of Financial Condition and Results of Operations
21
Operating
Expenses
24
Company Highlights
24
Business
35
History and Corporate
Information
35
Services
35
Growth Strategy
37
Marketing
39
Network Strategy
41
Dynamics
of the Global Communications Market
43
Competition
48
Government
Regulation
49
Trademarks
50
Employees
51
Properties
51
Legal
Proceedings
52
Management
53
Executive
Officers and Senior Management
53
Board of Directors
55
Advisory
Board
57
Board Committees
58
Certain
Relationships and Related Transactions
63
Principal Stockholders
65
Description
of Securities
67
Shares Eligible
for Future Sale
70
Underwriting
71
Legal Matters
73
Experts
73
Where You Can
Find More Information
73
About Us.
We
seek to become a leading provider of VoIP (Voice Over Internet Protocol) and other
Internet services to, from, in and between emerging markets in Asia, the Middle
East, Africa, the Caribbean and Latin America. With our lead product, VoIP, we currently
provide a full suite of communications services to corporations, postal telephone
and telegraph companies, international carriers, government entities, Internet service
providers and consumers in over 45 countries. In the third quarter of 2005 we intend
to begin marketing services to cable operators. Our infrastructure features Softswitch technology
which enables us to more rapidly deploy our products and services, and more quickly
and economically expand our capacity and geographical reach. We started to migrate
customers to our new Softswitch in August 2004 and began to rely on it in October
2004.
VoIP:
Our VoIP services have accounted for the majority of our revenues in 2004. VoIP
enables customers, typically for a lower cost than traditional telephony, to place
voice calls anywhere in the world using their personal computer, Internet protocol
phone or regular telephone when accompanied by a hardware device. VoIP services
utilize the Internet as opposed to circuit switching (traditional telephony technology),
thereby offering cost savings to customers. These services are offered directly
to corporations around the world, on a private label, co-branded or wholesale basis
to Internet service providers, postal telephone and telegraph companies and, in
the near future, cable operators who wish to market to corporations and consumers
under their own brand name, or through our retail services company, Efonica FZ,
LLC. Efonica offers PC-to-Phone and Internet protocol Phone-to-Phone services to
customers located in Asia, the Middle East and Africa, and is currently expanding
into Latin America. Advanced services that will shortly be available to customers
include voicemail, call waiting and call forwarding.
Additionally, we enter
into VoIP interconnect agreements with postal telephone and telegraph companies
or other carriers in our target markets. These agreements enable us to terminate
traffic into a country and in some cases originate traffic from that country through
the postal telephone and telegraph companies or other carrier. We use capacity on
these networks to carry our own retail traffic in addition to selling capacity to
other carriers desiring to send retail traffic to an end-user at that specific destination.
As we grow, we intend to use an increasing percentage of our capacity for higher
margin, retail traffic.
Managed private
networks:
We offer managed end-to-end networks that typically connect multinational
corporations or government facilities in emerging markets with locations in other
countries. End-to-end networks describes an entire private network service which
is contracted for and managed by a single provider as a service to the customer.
We also market this service to software developers, call centers, and telemarketing
facilities, all of which rely on high quality, reliable service. In markets where
we do not have network facilities deployed, we
utilize other carriers
networks, allowing us to provide an integrated global network that can connect a
customer to virtually anywhere in the world. We also offer services on a private
label basis as a subcontractor for other communication carriers that are seeking
network connectivity to countries that they do not otherwise service.
Internet Access:
We offer peering with multiple tier-one Internet backbone providers utilizing an
intelligent routing capability. This ensures efficiency, speed and reliability.
The tier-one providers we utilize own or control a national network that trades
traffic with other national providers. Tier-one Internet backbone providers describes
large Internet carriers that have deployed a substantial network that is under their
own direct management. This traffic trading is referred to as peering.
A tier-one provider can carry its own Internet traffic across the country and hand
it off at any one of the public or private hand-off locations known as peering
points, metropolitan access points or national access points. In select locations
such as India, we have established Internet points of presence that are then connected
to our New York facility. This, in turn, provides interconnectivity with the Internet
and peering with the top Internet backbone networks. In regions where we do not
own network facilities, we utilize other carriers facilities. We also provide
services on a private label basis as a subcontractor for other communication carriers
that are seeking Internet access in countries that they do not otherwise service.
Internet video
conferencing:
We offer an Internet-based video conferencing service that
can be initiated instantly on a personal computer (similar to popular instant messaging
services) and can handle from two to two hundred participants per conference, of
which six can be visually displayed. The service can be installed in a matter of
minutes and only requires a standard camera and headset to operate. We are marketing
our desktop video conferencing service directly to multinational corporations seeking
to enhance face-to-face communications without the costly inefficiencies of business
travel, and to our international partners to distribute within their country.
Co-location:
We offer facility co-location services to other communication service providers,
enabling them to co-locate their equipment within our facility, or lease a portion
of our equipment. Often, we provide wholesale services to the parties who co-locate
with us.
Securities Offered
3,325,000 shares of our common stock and 3,325,000 purchase warrants. Each purchase warrant will entitle you to purchase one share of our common stock for $____ (100% of the offering price of one share of our common stock) during the four-year period beginning on the first anniversary of the date of this prospectus. The warrant exercise price will increase to $____ (133% of the offering price of one share of our common stock) on the eighteen month anniversary date of issuance provided that the registration statement covering the shares of common stock underlying the purchase warrants has been effective for at least sixty (60) days prior to the exercise price reset date. We may redeem the purchase warrants, at any time after they become exercisable, for $.01 per purchase warrant, on not less than thirty (30) days prior written notice if the last sale price of our common stock has been at least 200% of the then-current exercise
price of the purchase warrants (initially $____) for the twenty (20) consecutive trading days ending on the third day prior to the date on which notice is given.
Common equity outstanding prior
to the offering
Class
A common stock
17,480,562 shares
Common stock
0 shares
Common equity to be outstanding
after the offering
Class A common stock
17,480,562 shares
Common stock
8,665,970 shares
Purchase warrants to be
outstanding after the
offering
6,466,838 purchase warrants
Use of proceeds
At an assumed initial offering
price of $6.00 per share of common stock and $.05 per warrant we estimate that we
will receive approximately $17,616,562 in net proceeds after deducting commissions
and offering expenses. We intend to use approximately $4,516,250 of the net proceeds
of the offering for working capital and general corporate purposes; $2,100,000 for
repayment of certain indebtedness; $500,000 payment towards the acquisition of the minority
interest in Efonica joint venture; $2,000,000 to fund the purchase of equipment
for expanded capacity and service offerings; $1,250,000 for marketing and advertising;
and $7,250,000 for international deployment, including the purchase of business
licenses, network equipment and securing letters of credit and bonds, all as more
particularly described herein. Any net proceeds from the exercise of the Underwriters
over allotment option will be added to working capital.
Proposed American Stock Exchange
symbols
Common Stock: FSN
Purchase Warrants: FSNW
Corporate information
Fusion was incorporated in Delaware in September 1997. Our principal executive offices are located at 420 Lexington Avenue, Suite 518, New York, NY 10170. The main telephone number is (212) 972-2000. Our web site is
www.fusiontel.com
. The information contained in our web site is not part of this prospectus.
Certain terms used in this
Prospectus
In this prospectus common
stock refers to our common stock, par value $.01 per share and purchase
warrants refers to the redeemable common stock purchase warrants being sold
in this offering. We refer sometimes to our common stock and purchase warrants as
our securities.
that
no additional shares will be issued to or returned by the seller of Efonica (assuming
a $6.00 per share offering price);
no
exercise of 1,832,659 options outstanding, which were granted under our plans to
purchase 1,832,659 shares of our common stock;
2001
2002
2003
2003
2004 (1)
Consolidated
Statement of
Operations:
Revenues
$ 29,614,565
$ 28,422,149
$33,725,275
$ 24,840,556
$ 40,499,353
Loss from operations
(11,629,584)
(10,014,342)
(7,541,513)
(5,289,855)
(2,976,652)
Loss from continuing operations
(12,112,228)
(9,358,524)
(4,385,191)
(4,105,236)
(2,226,815)
Income/(loss)
from discontinued
operations
(7,029,511)
0
208,620
0
0
Net loss
(19,141,739)
(9,358,524)
(4,176,571)
(4,105,236)
(2,226,815)
Operating
Data:
Capital expenditures
501,882
533,610
645,340
55,242
578,888
Consolidated
Balance Sheet Data:
Cash and cash equivalents
$ 0
$ 768,898
$ 3,240,652
$ 108,179
$ 4,619,248
Restricted
cash
784,000
1,250,793
961,536
984,426
508,976
Total assets
14,273,723
12,287,532
13,033,913
10,630,670
15,046,671
Total debt
12,211,878
9,640,955
5,176,861
9,437,701
4,808,592
Preferred shares subject to
mandatory
redemption
0
0
3,466,538
0
9,861,431
Total stockholders
deficit
(11,537,659)
(14,800,981)
(9,774,002)
(14,727,648)
(10,613,664)
(unaudited)
As of September 30, 2004
Pro Forma
Actual
As Adjusted (2)
Cash
and cash equivalents
$ 4,619,248
$21,026,498
Restricted cash
508,976
508,976
Total assets
15,046,671
36,881,921
Total debt
4,808,592
2,285,592
Preferred shares
subject to
mandatory redemption
9,861,431
0
Total stockholders (deficit)
equity
(10,613,664)
24,230,350
RISK FACTORS
An investment in our securities involves
a high degree of risk. You should carefully consider the risks described below before
you decide to invest in our securities. If any of the following events actually
occur, our business could be seriously harmed. In such case, the value of your investment
may decline and you may lose all or part of your investment. You should not invest
in our securities unless you can afford the loss of your entire investment.
Risks Related to Business
We have a history of operating losses, a working capital
deficit and a stockholders deficit and there can be no assurance that we will
ever achieve profitability.
There can be no assurance that any of our
business strategies will be successful or that we will ever achieve profitability.
At September 30, 2004, we had a working capital deficit of approximately $6,600,000
and a stockholders deficit of approximately $10,614,000. We have continued
to sustain losses from operations and for the years ended December 31, 2003, 2002
and 2001, we have incurred a net loss applicable to common stockholders of approximately
$4,812,000, $10,001,000 and $19,142,000, respectively. We incurred a net loss applicable
to common stockholders of approximately $2,613,000 and $4,676,000 for the nine-month
periods ended September 30, 2004 and 2003. In addition, we have not generated positive
cash flow from operations for the years ended December 31, 2003, 2002 and 2001 and
the nine months ended September 30, 2004. We may not be able to generate future
profits and may not be able to support our operations, or otherwise establish a
return on invested capital.
We have substantial past due liabilities which are payable
on demand, which if called would result in a severe liquidity crisis.
As of September 30, 2004, our
liabilities, other than the recorded liability to holders of the series C preferred
stock, totaled approximately $15.7 million. Approximately $2.4 million of these
liabilities are past due and payable on demand. Of the $2.4 million, approximately
$928,000 is owed to one equipment vendor and $261,000 of principal and interest
is owed to three different individuals, such principal and interest will to be paid
from the proceeds of this offering. After the offering, we may not be able to make
the required principal and interest payments on the remaining obligations. Certain
of our indebtedness is payable on demand. In the event that a demand is made on
these liabilities, there could be a severe liquidity crisis.
If we are unable to manage our growth or implement our expansion
strategy, we may increase our costs
We may not be able to expand our product
offerings, our client base and markets, or implement the other features of our business
strategy at the rate or to the extent presently planned. Our projected growth will
place a significant strain on our administrative, operational and financial resources
and may increase our costs. If we are unable to successfully manage our future growth,
establish and continue to upgrade our operating and financial control systems, recruit
and hire necessary personnel or effectively manage unexpected expansion difficulties,
we may not be able to maximize revenues or profitability.
The success of our planned expansion is dependent upon
market developments and traffic patterns which will lead us to make expenditures
that may not result in increased revenues.
Our purchase of network equipment and software
will be based in part on our expectations concerning future revenue growth and market
developments. As we expand our network, we will be required to make significant
capital expenditures, including the purchase of additional network equipment and
software, and to add additional employees. To a lesser extent our fixed costs will
also increase from the ownership and maintenance of a greater amount of network
equipment including our Softswitch, gateways, routers, satellite equipment, and
other related systems. If our traffic volume were to decrease, or fail to increase
to the extent expected or necessary to make efficient use of our network, our costs
as a percentage of revenues would increase significantly.
7
We may be unable to adapt to rapid technology trends and evolving
industry standards which could lead to our products becoming obsolete.
The communications industry is subject
to rapid and significant changes due to technology innovation, evolving industry
standards, and frequent new service and product introductions. New services and
products based on new technologies or new industry standards expose us to risks
of technical or product obsolescence. We will need to use technologies effectively,
continue to develop our technical expertise and enhance our existing products and
services in a timely manner to compete successfully in this industry. We may not
be successful in using new technologies effectively, developing new products or
enhancing existing products and services in a timely manner or that any new technologies
or enhancements used by us or offered to our customers will achieve market acceptance.
Our growth is dependent upon our ability
to build new relationships with postal telephone and telegraph companies, bring
on new customers and to obtain the necessary licenses in new countries in which
we have not previously operated, of which there can be no assurance.
Our ability to grow through quick and cost
effective deployment of our Internet protocol services is due, in part, to our ability
to create new interconnection agreements with postal telephone and telegraph companies,
and other licensed carriers, to sign contracts with new customers, and, in many
cases, to enter into joint venture or strategic agreements with local partners,
as well as to obtain the necessary licenses to operate in emerging markets. While
we pursue several opportunities simultaneously, we might not be able to create the
necessary partnerships and interconnections, expand our customer base, deploy networks
and generate profitable traffic over these networks within the time frame envisioned.
We are pursuing new business lines, which require specialized
skill sets. Our ability to effectuate our business plan is due, in part, to the
roll out of new services, including PC-To-Phone, Internet protocol Phone-To-Phone
and Internet video conferencing.
Our ability to deploy new products and
services may be hampered by technical and operational issues which could delay our
ability to derive profitable revenue from these service offerings. These issues
include our ability to competitively price such products and services, in addition,
certain service offerings such as Internet protocol video are relatively new in
our industry and the market potential is relatively untested. Additionally, our
ability to market these products and service offerings may prove more difficult.
To date, we have not significantly focused on selling Internet video conferencing
and thus have derived extremely limited revenue from this service, and there can
be no assurance that we will increase our current focus and/or derive significant
revenue from this service.
The communications services industry is highly competitive
and we may be unable to compete effectively.
The communications industry,
including Internet and data services, is highly competitive, rapidly evolving, and
subject to constant technological change and intense marketing by providers with
similar products and services. We expect that new competitors, as well as gray market
operators (operators who arrange call termination in a manner that bypasses the
postal telephone and telegraph company, resulting in high margins for the gray market
operator and substantially lower revenues for the postal telephone and telegraph
company), are likely to join existing competitors in the communications industry,
including the market for VoIP, Internet and data services. Many of our current competitors
are significantly larger and have substantially greater market presence as well
as greater financial, technical, operational, marketing and other resources and
experience than we do. In the event that such a competitor expends significant sales
and marketing resources in one or several markets we may not be able to compete
successfully in such markets. We believe that competition will continue to increase,
placing downward pressure on prices. Such pressure could adversely affect our gross
margins if we are not able to reduce our costs commensurate with such price reductions.
In addition, the pace of technological change makes it impossible for us to predict
whether we will face new competitors using different technologies to provide the
same or similar services offered or proposed to be offered by us. If our competitors
were to provide better and more cost effective services than ours, we may not be
able to increase our revenues or capture any significant market share.
Industry consolidation could make it more difficult for us
to compete.
Companies offering Internet,
data and communications services are, in some circumstances, consolidating. We may
not be able to compete successfully with businesses that have combined, or will
combine, to produce companies with sub-
8
stantially greater financial, sales and marketing resources, larger
client bases, extended networks and infrastructures and more established relationships
with vendors, distributors and partners than we have. With these heightened competitive
pressures, there is a risk that our revenues may not grow as expected and the value
of our common stock could decline.
Certain of our competitors are emerging from bankruptcy and
may have an advantage over us in pricing.
Several companies in the telecommunications
industry have gone through bankruptcy proceedings and have emerged, or are expected
to emerge, as viable competitors. These companies may emerge with cost structures
that are significantly lower than those companies that have not entered into and
emerged from bankruptcy proceedings, allowing them to market services at lower prices.
This in turn may result in us having to reduce our prices, which would have an adverse
impact on our future profitability.
Our ability to provide services is often dependent on
our suppliers and other service providers who may not prove to be effective.
We rely on third party equipment suppliers who may not be able
to provide us the equipment necessary to deliver the services that we seek to provide.
We are dependent on third party equipment
suppliers for equipment and hardware components, including Cisco, Nuera, Juniper
Networks, Santa Cruz Networks and Veraz. If these suppliers fail to continue product
development and research and development or fail to deliver quality products or
support services on a timely basis, or we are unable to develop alternative sources,
if and as required, it could result in our inability to deliver the services that
we currently and intend to provide.
We rely on the cooperation of postal telephone
and telegraph companies who may hinder our operations in certain markets.
In some cases we will require the cooperation
of the postal telephone and telegraph company or another carrier in order to provide
services under a license or partnership agreement. In the event the postal telephone
and telegraph company or another carrier does not cooperate, our service roll-out
may be delayed, or the services we offer could be negatively affected. If we acquire
a license for a market and the postal telephone and telegraph company or incumbent
carrier desires to negatively affect our business in the area, they may be in a
position to significantly delay our ability to provide services in that market and
ultimately make it not worth pursuing.
If we do not operate our new Softswitch technology effectively,
many of the potential benefits of the new technology may not be realized.
We have made a fundamental change in our
business operations by migrating to new Softswitch technology. There
9
are inherent risks associated with using such a relatively new technology. We may be required to spend additional time or money on integration of this technology, which could otherwise
be spent on developing our services. We expect to experience a temporary decline
in revenues during and immediately following the migration to the new softswitch
technology. If we do not operate the technology effectively or if we and our technical
staff spend too much time on operational issues, it could result in increased costs
without the corresponding benefits.
Efonica relies on outside vendors to provide
key functions, including billing and providing of service(s) which may result in
inefficiencies which we cannot control.
We rely on outside vendors to support certain
capabilities including billing, provisioning and certain other back office services
for our Internet protocol Phone-to-Phone, and PC-to-Phone services. In the event
that any of these outside vendors, for any reason, fail to adequately perform in
a timely and effective manner, there will be an interruption in these services.
If we are unable to develop and maintain successful relationships
with our joint venture partners, we could fail in an important market.
We are engaged in certain joint ventures
where we share control or management with a joint venture partner. If we are unable
to maintain a successful relationship with a joint venture partner, the joint ventures
ability to move quickly and respond to changes in market conditions or respond to
financial issues, can erode and reduce the potential for value creation and return
on investment. For example, our joint venture partner in India has been unable to
pay us in a timely manner for services rendered. Further, the joint ventures may
also restrict or delay our ability to make important financial decisions, such as
repatriating cash to us from such joint ventures. This uncertainty with our joint
ventures could result in a failure in an important market.
Should our joint venture partners decide to raise capital,
it could result in our ownership or voting control falling below the majority and
we would be unable to consolidate our financial statements.
If our joint ventures decide
to raise capital, we may find ourselves unable to consolidate our financial statements,
resulting in loss of revenue. Our Pakistan and Estel joint ventures accounted for
19% and 3% of our consolidated revenues, respectively. In addition, the resulting
ownership change may cause us to lose our current voting controls and accordingly,
we may not have the same ability to control the operations of the joint venture.
We need to retain key management personnel and hire additional
qualified personnel. If we cannot retain qualified management personnel, we may
not be able to hire suitable replacements.
Service interruptions could result in a loss of revenues
and harm our reputation.
Our networks have been and may be shut
down from time to time as a result of disputes with postal telephone and telegraph
companies, vendors, carriers or general service providers due to billing disputes,
late payments, or other issues. As an example, in 2002, we experienced a service
interruption which resulted in a loss of revenues of approximately $8.2 million
and a loss of $395,000 in gross profits. These losses were related to the shut down of
three networks, two of which were in Latin America and one in the Caribbean.
Any future network shut downs can have a significant negative impact on revenue
and cash flows, as well as hurting our reputation. In addition, there is no assurance
that we will be
10
able to quickly resolve disputes, if ever, which could result in a permanent loss of revenues.
If our information and processing systems for billing and client
service are not properly implemented, it could harm our ability to bill and provide
services effectively.
Sophisticated back office information and processing
systems are vital to our growth and our ability to monitor costs, bill clients,
provision client orders, and achieve operating efficiencies. Our plans for the development
and implementation of these systems rely, for the most part, on having the capital
to purchase and maintain required software, choosing products and services offered
by third party vendors, and integrating such products and services with existing
systems. We also may require customized systems in order to meet our requirements
which may delay implementation and increase expenses. These systems must also integrate
with our network infrastructure. In the event that these systems do not integrate
with our network infrastructure, our ability to manage our operational or financial
systems will be inhibited. We cannot ensure that they will be implemented at all,
or that, once implemented, they will perform as expected. Furthermore, our right
to use some of these systems is dependent upon license agreements with third party
vendors. These third-party vendors may cancel or refuse to renew some of these agreements,
and the cancellation or non-renewal of these agreements may harm our ability to
bill and provide services efficiently.
Breaches in our network security systems may hurt our
ability to deliver services and reputation and result in liability.
We could lose clients and expose ourselves
to liability if there are any breaches to our network security systems, which could
jeopardize the security of confidential information stored in our computer systems.
In the last four years we experienced two known breaches of network security, which
resulted in a temporary failure of network operations. Any network failure could
harm our ability to deliver certain services, our reputation and subject us to liability.
Because we do business on an international
level we are subject to an increased risk of tariffs, sanctions and other uncertainties
that may hurt our revenues.
There are certain risks inherent in doing business
internationally, especially in emerging markets, such as unexpected changes in regulatory
requirements, the imposition of tariffs or sanctions, licenses, customs, duties,
other trade barriers, political risks, currency devaluations, high inflation, corporate
law requirements, and even civil unrest. Many of the economies of these emerging
markets are weak and volatile. We may not be able to mitigate the effect of inflation
on our operations in these countries by price increases, even over the long-term.
Further, expropriation of private businesses in such jurisdictions remains a possibility,
whether by outright seizure by a foreign government or by confiscatory tax or other
policies. Deregulation of the communications markets in developing countries may
not continue. Incumbent providers, trade unions and others may resist legislation
directed toward deregulation and may resist allowing us to interconnect to their
network switches. The legal systems in emerging markets frequently have insufficient
experience with commercial transactions between private parties. Consequently, we
may not be able to protect or enforce our rights in any emerging market countries.
Governments may change resulting in cancellations or suspensions of operating licenses,
confiscation of equipment and/or rate increases. The instability of the laws and
regulations applicable to our businesses and their interpretation and enforcement
in these markets could materially and adversely affect our business, financial condition,
or results of operations.
Regulatory treatment of VoIP outside the
United States varies from country to country. Some countries are considering subjecting
VoIP services to the regulations applied to traditional telephone companies and
they may assert that we are required to register as a telecommunications carrier
in that country. In such cases, our failure to register could subject us to fines,
penalties, or forfeiture. Regulatory developments such as these could have a material
adverse effect on our international operations.
The success of our business depends on the acceptance
of the Internet in emerging markets that may be slowed by limited bandwidth, high
bandwidth costs, and other technical obstacles.
The ratio of telephone lines
per population, or teledensity, in most emerging countries is low when compared
to developed countries. Bandwidth, the measurement of the volume of data capable
of being transported in a communica-
11
tions system in a given amount of time, remains very expensive in these regions, especially when compared to bandwidth costs in the United States. Prices for bandwidth capacity are generally set by the government or incumbent telephone company and remain high due to capacity constraints among other things.
While this trend tends to diminish as competitors roll out new bypass services,
these rollouts may be slow to occur. Further, constraints in network architecture
limit Internet connection speeds on conventional dial-up telephone lines, and are
significantly less than the up to 1.5 megabits per second connection speed on direct
satellite link or digital subscriber lines and cable modems in the United States.
These speed and cost constraints may severely limit the quality and desirability
of using the Internet in emerging countries and can be an obstacle to us entering
emerging markets.
We need to obtain additional licenses and approvals in order
to expand our services and enter new markets.
We must, from time to time, obtain additional
licenses and approvals from governmental agencies in order to provide our services.
There may be difficulties or delays in obtaining them. If we encounter difficulties
or delays in obtaining licenses, our ability to provide new services and expand
into new markets could be adversely affected.
Additional taxation and the regulation of the communications
industry may slow our growth, resulting in decreased demand for our products and
services and increased costs of doing business.
We could have to pay additional taxes because
our operations are subject to various taxes. We structure our operations based on
assumptions about various tax laws, U.S. and international tax treaty developments,
international currency exchange, capital repatriation laws, and other relevant laws
by a variety of non-U.S. jurisdictions. Taxation or other authorities might not
reach the same conclusions we reach. We could suffer adverse tax and other financial
consequences if our assumptions about these matters are incorrect or the relevant
laws are changed or modified.
We are subject to varying degrees
of international, federal, state, and local regulation. Significant regulations
imposed at each of these levels govern the provision of some or all of our services
and affect our business. We cannot assure you that we or our joint venture partners,
have, or, will receive the international, United States Federal Communications Commission
(FCC), or state regulatory approvals we or they require. Nor can we
provide you with any assurance that international, FCC or state regulatory authorities
will not raise material issues with respect to our compliance with applicable regulations
or that the cost of our compliance will not have a materially adverse effect on
our revenues and profitability.
The U.S. Federal Government and state authorities
have the power to revoke our regulatory approval to operate internationally, interstate,
or intrastate, or to impose financial penalties if we fail to pay, or are delinquent
in paying, telecommunications taxes or regulatory fees or fail to file necessary
tariffs or mandatory reports. We are currently, and have been, delinquent in such
financial obligations and required filings in the past. Furthermore, delays in receiving
required regulatory approvals or the enactment of new and adverse legislation, regulations
or regulatory requirements could also have a materially adverse affect on our condition.
In addition, future legislative, judicial and regulatory agency actions could alter
competitive conditions in the markets in which we intend to operate, to our detriment.
In addition to new regulations being adopted, existing
laws may be applied to the Internet, which could hamper our growth.
New and existing laws may cover issues
that include: sales and other taxes; user privacy; pricing controls; characteristics
and quality of products and services; consumer protection; cross-border commerce;
copyright, trademark and patent infringement; and other claims based on the nature
and content of Internet materials. This could delay growth in demand for our products
and services and limit the growth of our revenue.
We are exposed to fluctuations in exchange rates and
exchange control regulations, which could adversely affect our profit margins.
Our business plan contemplates
that during the next twelve months we will begin to earn more revenues paid in foreign
currencies. We also expect to have more costs payable in foreign currencies. There
may be instances where we have net foreign currency exposure. Although none of our
currrent foreign operations having any such restrictions, some
12
of the foreign currencies in which we may be paid in the future, might be subject to exchange control regulations or other impediments to convertibility to U.S. dollars. We may not be able to hedge our currency risks. To the extent that we are unable or choose not to convert these currencies to U.S. dollars
or utilize them to pay our expenses in-country, we might earn revenues which we
are unable to repatriate outside of the country in which they are earned. We do
not anticipate that this will have a materially adverse effect on our financial
statements.
Since Indian law limits the percentage of foreign investment
in companies in the telecommunications sector, we could lose control of our operations
in India.
We currently own a 49% direct interest
in Estel Communications Private Ltd. (Estel), the joint venture through
which we conduct our operations in India. In addition we have voting rights in another
1.01% of Estel, giving us voting control over 50.01% of Estel until May 2007. However,
our percentage ownership remains subject to regulation by the Government of India.
If Indian law changes it could result in a loss of operational control and an inability
to consolidate our revenues.
Our Indian partner currently manages Estels operations,
which negatively affects our ability to control our operations in India.
Our Indian partner currently manages Estels
operations. Our operations in India are dependent on our relationship with our partner.
Limited financial resources have caused a strain between the joint venture partners,
and may inhibit future growth prospects.
An unfavorable change in current regulations
or the interpretation thereof, may result in the loss of our voting control in Estel.
In addition, we may not be able to further capitalize on our relationship with Estel
if our partner is incapable or unwilling to invest its proportional share of capital
in this joint venture.
Risks related to the offering
The offering price of our securities is arbitrary, and
as a result the stock price may decline after the offering.
The offering price of our securities was
arbitrarily determined by negotiation between us and our underwriters and may not
bear a direct relationship to our assets, revenues, book value, results of operations
or any other objective standard. Accordingly, our stock price may suffer a decline
in value.
A significant portion of the proceeds of this offering
will be used for the repayment of debt to certain of our officers and directors
and will not be used to fund our operations.
We will use approximately $2,100,000,
of the proceeds of this offering to repay certain indebtedness. These amounts consist
primarily of (i) approximately $1,065,000, including accrued interest of approximately
$313,000 through September 30, 2004, owed to Marvin Rosen, (ii) approximately $812,000,
including accrued interest of approximately $143,000 through September 30, 2004,
owed to Philip Turits and members of his family to repay demand notes; and (iii)
approximately $162,000, including accrued interest of approximately $60,000 through
September 30, 2004, owed to Evelyn Langlieb Greer. The use of a significant portion
(12%) of the net proceeds from this offering to repay this indebtedness instead
of funding our operations could have an adverse effect on our ability to grow our
business.
We have broad discretion as to the use of the net proceeds
from this offering and we may use the proceeds of this offering in a manner that
you may not approve.
We have broad discretion as to the use
of the net proceeds we will receive from the offering. We cannot assure you
13
that we will apply these funds effectively or in a manner that you would approve. If we do not utilize the net proceeds of the offering effectively, our business and prospects may be seriously harmed and the value of our securities may decrease.
Our
principal stockholders will continue to hold a substantial portion of our stock
after the offering, which means that they will have significant voting control.
There may be substantial sales of our common stock after
the expiration of lock-up periods, by the selling stockholder and upon the exercise
of warrants, which could cause the price of our stock to fall.
After the offering, 26,034,032 shares of
both classes of our common stock will be outstanding, including 17,480,562 shares
of our class A common stock. All of the 3,325,000 shares of our common stock sold
in the offering and the 150,000 shares registered on behalf of the selling stockholder
will be freely tradable, except for shares purchased by holders subject to lock-up
agreements or by any of our existing affiliates, as that term is defined
in Rule 144 under the Securities Act, which generally includes officers, directors
or 10% stockholders. The selling stockholder for whom the 150,000 shares of our
common stock are being registered has agreed not to sell any shares for 45 days
and then not to sell more than 75,000 shares during the following 45 day period
and the remaining 75,000 shares can be sold thereafter. The class A common
stock may not be converted into common stock until one year after the offering unless
the holder executes and delivers, after the effective date of this prospectus, a
one year lock up agreement from the effective date of the prospectus. The remaining
5,190,970 shares of of our common stock outstanding after the offering and the 17,480,562
shares of class A common stock outstanding will be restricted as a result of its
terms or lock-up agreements from transfer for 12 months after the date of this prospectus.
Our underwriter in its sole discretion, however, may waive or permit us to waive
the lock-up at any time for common stockholders. In addition, we will have an aggregate
of 6,466,838 warrants which are exercisable into common stock. Sales of a substantial
number of shares of our common stock at prices that may be less than the initial
public offering price could cause the price of our securities to fall.
Our stock price may be volatile because of factors beyond our
control. As a result, you may lose all or a part of your investment.
Our securities have not previously been
publicly traded. Following the offering, the market price of our securities may
decline substantially. In addition, the market price of our securities may fluctuate
significantly in response to a number of factors, many of which are beyond our control,
including, but not limited to, the following:
Furthermore, in the past, companies that have
experienced volatility in the market price of their stock have been subject to securities
class action litigation. A securities class action lawsuit against us, regardless
of its merit, could result in substantial costs and divert the attention of our
management from other business concerns, which in turn could harm our business.
Investors in the offering will suffer immediate and
substantial dilution.
The assumed public offering
price of $6.00 per share of our common stock is substantially higher than the pro
forma net tangible book value per share of our outstanding common stock immediately
after the offering. Accordingly, if you purchase our common stock in the offering,
you will experience immediate and substantial dilution of approxi-
14
mately $5.07 per share, or approximately 85% of the assumed offering price. See Dilution for a more detailed description of the dilution you will experience if you purchase our common stock in the offering.
If you do not exercise your purchase warrants prior to 18 months
it will cost you more to exercise.
The purchase warrants contain a feature that provides
for an increase in the exercise price after 18 months. During the first 18 months,
the purchase warrants will be exercisable at $_______
per share (100% of the per share offering price). Thereafter, the exercise price
will increase to $_______ per share (133% of the per
share offering price). In order to exercise the warrants, we must have an effective
registration statement. In the event that a holder of the purchase warrants does
not exercise during the first 18 months, the holder will have to pay a higher price
to exercise. In addition, the existence of the 18 month reset provision may adversely
affect the market price of the purchase warrants.
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking
statements. The forward-looking statements involve a number of risks and uncertainties.
A number of factors could cause our actual results, performance, achievements or
industry results to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements. These
factors include, but are not limited to:
You can identify forward-looking statements generally
by the use of forward-looking terminology such as believes, expects,
may, will, intends, plans, should,
could, seeks, pro forma, anticipates,
estimates, continues, or other variations thereof, including
their use in the negative, or by discussions of strategies, opportunities, plans
or intentions. You may find these forward-looking statements under the captions
Prospectus Summary, Risk Factors, Use of Proceeds,
Managements Discussions and Analysis of Financial Condition and Results
of Operations, and Business, as well as under other captions elsewhere
in this prospectus. These forward-looking statements necessarily depend upon assumptions
and estimates that may prove to be incorrect.
Although we believe that the assumptions
and estimates reflected in the forward-looking statements contained in this prospectus
are reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause actual results to differ in significant ways from
any future results expressed or implied by the forward-looking statements.
USE OF PROCEEDS
We estimate that we will receive net proceeds
of approximately $17,616,562 from the sale of the 3,325,000 shares of common stock
and 3,325,000 purchase warrants being offered by us, assuming an initial public
offering price of $6.00 per share and $.05 per warrant, after deducting approximately
$1,308,000 for underwriting discounts and commissions and estimated expenses of
approximately $1,188,000. If our underwriters exercise their over-allotment option
in full, we will receive an additional $2,821,000 from the sale of an additional
498,750 shares of our common stock and 498,750 purchase warrants, after deducting
approximately $196,000 for underwriting discounts and commissions.
15
The following table describes the expected allocation of the net
proceeds of the offering, assuming that our underwriters do not exercise their over-allotment
option:
(1) Of such
amount, (i) approximately $1,065,000, including accrued interest of approximately
$313,000 through September 30, 2004, will be paid to Marvin Rosen to repay demand
notes that bear interest at 4.75% per annum (except for one note for $125,000 which
bears interest at 9.25%), (ii) approximately $812,000, including accrued interest
of approximately $143,000 through September 30, 2004, will be paid to Philip Turits
and members of his family to repay demand notes. Philip and Lisa Turits notes
bear interest at 4.75% per annum, except for one note for $125,000 which bears interest
at 9.25%, and Michael Turits note bears interest at 12.00% per annum, and
(iii) approximately $162,000, including accrued interest of approximately $60,000
through September 30, 2004, will be paid to Evelyn Langlieb Greer for a note that
bears interest at 15% per annum. The proceeds of these loans were utilized for international
deployment, working capital and the purchase of equipment.
(2) If
our underwriters exercise their over-allotment option in full, we will receive an
additional $2,821,000 from the sale of an additional 498,750 shares of our common
stock and 498,750 purchase warrants, after deducting approximately $196,000 for
underwriting discounts and commissions. This amount will be allocated to working
capital and general corporate purposes and will be used for the payment of salaries,
professional and administrative expenses, rental and capital lease obligations,
all of which are our historic uses of working capital and general corporate purposes.
We believe that the net proceeds of the
offering will be sufficient to fund the purchase of equipment to expand our infrastructure
domestically and deploy our business internationally. Our management will have broad
discretion in the use of the net proceeds of the offering. Investors will be relying
on the judgment of our management regarding the application of the proceeds of the
offering.
Until we use the net proceeds as discussed above,
we may invest the net proceeds from the offering in short term direct obligations
of the United States or Federal agencies, in each case with maturities of less than
one year, short term certificates of deposit or other time deposits with banks or
corporate bonds.
DIVIDEND POLICY
During 2004, we paid dividends
to the holders of our series A convertible preferred stock and series B convertible
redeemable preferred stock in the form of common stock at the rate of $2.98 per
share times the aggregate dividends due to these stockholders. In 2004, we issued
315,583 shares of common stock associated with these dividends.
The series C preferred stock is entitled
to receive cumulative pro rata dividends at the rate of 8% per annum of the stated
value of $90 per share. The dividends are payable in cash, annually, commencing
on December 19, 2004. As of January 14, 2005, we had not made the required dividend
payment of approximately $665,000, which we intend to pay in the first quarter of
2005.
We do not anticipate paying any cash dividends
on either of our classes of common stock in the foreseeable future but plan to retain
future earnings, if any, to be used in implementing our business plan.
16
CAPITALIZATION
The following table sets forth our consolidated
capitalization as follows:
(b) The
table above excludes the following:
17
DILUTION
When you purchase a share of our common stock,
you will suffer immediate per share dilution in an amount equal to the
difference between the price you paid per share and the net tangible book value
per share after the offering. Net tangible book value per share represents the amount
of our tangible assets less the amount of our liabilities divided by the number
of shares of our common stock outstanding.
As of September 30, 2004, our
net tangible book deficit available to our common stockholders was $(10,532,811)
or $(0.60) per share of our common stock. Our net tangible book deficit per share
is based on 17,480,562 shares outstanding as of September 30, 2004.
As of September 30, 2004, our pro forma
net tangible book deficit would have been $(671,380) or $(0.03) per share of common
stock. Our pro forma net tangible book deficit gives effect to the conversion of
all of our outstanding series C preferred stock into 3,141,838 shares of our common
stock.
Giving effect to (1) a transaction that
occurred subsequent to September 30, 2004, whereby the Company received net cash
proceeds of $1,330,000 ($1,400,000 for a convertible note net of a $70,000 advisory
fee) and refinanced $1,108,333 of existing notes payable and accrued interest in
exchange for a convertible note. The two notes aggregate $2,508,333 and automatically
convert upon the completion of this offering into 651,515 shares of common stock
based upon a conversion price of $3.85 per share, (2) the payment of $500,000 in
cash and the issuance of 1,547,617 shares of common stock related to the January
2005 agreement whereby the Company will be acquiring the 49.8% minority interest
in its Efonica joint venture contingent upon successful completion of this offering
by March 1, 2005. $4.4 million worth of such shares of common stock will be held in escrow until March
2006 at which point the final purchase price will be determined and (3) the issuance
of 3,325,000 shares of common stock and 3,325,000 purchase warrants offered by us
at an initial public offering price of $6.00 per share and $.05 per warrant (after
the deduction of estimated underwriting discounts and offering expenses payable
by us), our net tangible book value on a pro forma as adjusted basis as of September
30, 2004, would have been $24,311,203 or $0.93 per share. This represents an immediate
increase in net tangible book value of $0.96 per share to our existing stockholders
and an immediate dilution of $5.07 per share to investors in the offering.
The following table illustrates this dilution
per share of common stock as of the closing of the offering in an adjusted pro forma
net tangible book value basis:
If the over-allotment option is exercised in full,
the proforma net tangible book value after this offering would be $1.02 per share,
which would result in dilution to new investors in this offering of $4.98 per share.
If all stock options and warrants outstanding at September 30, 2004 were exercised,
the proforma net tangible book value after this offering would be $1.31 per share,
which would result in dilution to new investors in this offering of $4.69 per share.
18
The following table shows as of September 30, 2004, the number
of shares of both classes of our common stock to be owned following the offering
by existing securityholders and the new investors in the offering:
without maximizing our revenues.
A majority of the voice calls
made by our clients are connected through other communication carriers which
provide us with transmission capacity through a variety of arrangements. Our
ability to terminate voice traffic in our targeted markets is an essential
component of our ongoing operations. If we do not secure or maintain operating
and termination arrangements, our ability to increase services to our existing
markets, and gain entry into new markets, will be limited. Therefore, our
ability to maintain and expand our business is dependent, in part, upon our
ability to maintain satisfactory relationships with incumbent and other licensed
carriers, Internet service providers, international exchange carriers, satellite
providers, fiber optic cable providers and other service providers, many of
which are our competitors, and upon our ability to obtain their services on a
cost effective basis, as well as the ability of such carriers to carry the
traffic we route to their networks or provide network capacity. If a carrier
does not carry traffic routed to it, or provide required capacity, we may be
forced to route our traffic to, or buy capacity from, a different carrier on
less advantageous terms, which could reduce our profit margins or degrade our
network service quality. In the event network service is degraded it may result
in a loss of customers. To the extent that any of these carriers raise their
rates, change their pricing structure, or reduce the amount of capacity they
will make available to us, our revenues and profitability may be adversely
affected. During the first nine months of 2004 and during the years ended
December 31, 2003, 2002 and 2001, 19.5%, 31.1%, 3.3% and 0%, respectively, of
our voice traffic was terminated in Asia through equipment we provide in the region. If our arrangement with our carrier in
Asia is terminated, we may be prevented from providing services in Asia or we
may be required to use a different carrier with less advantageous
terms.
We anticipate that in order
to successfully implement our business strategy, including the expansion of the
geographic scope of our operations, we will be required to recruit and hire a substantial
number of sales and other personnel. Failure to attract and retain additional qualified
sales and other personnel, including management personnel who will train and integrate
our new employees, in addition to their role in continuing to manage our growth
strategy, could adversely affect us. The loss of services by any of our key management
personnel or executive officers could materially and adversely affect our business
and our future prospects. We have not entered into employment agreements with any
of our senior officers, except Matthew Rosen, our President and Chief Operating
Officer and Roger Karam, our President of VoIP services and CEO of Efonica.
Additionally, Mr. Marvin Rosen does not receive compensation for his services as
our Chief Executive Officer and there is no guarantee that he will spend a substantial
portion of his time working for us. To the extent that he devotes his time to other
endeavors and not to us, our business could be adversely affected. The loss of either
Matthew or Marvin Rosen could adversely affect our business.
Estel has been unable to pay
us in a timely manner for services rendered. They currently owe us approximately
$750,000. We cannot be assured that Estel will make the payments due us in a timely
manner in the future or that we will be fully paid for past obligations by Estel.
Our executive officers and
directors collectively will control approximately 27.5% of our outstanding common
stock after the offering and, therefore they will be able to significantly influence
the vote on matters requiring stockholder approval, including the election of directors.
This control means that purchasers of our securities being sold in the offering
will not be able to effectively influence the manner in which we are governed.
our ability to obtain securities
analyst coverage;
changes in securities analysts
recommendations or estimates of our financial performance;
changes in market valuations of companies
similar to us; and announcements by us or our competitors of significant contracts,
new offerings, acquisitions, commercial relationships, joint ventures or capital
commitments; and
the failure to meet analysts
expectations regarding financial performances.
general economic and business conditions;
our business strategy for expanding
our presence in our industry;
anticipated trends in our financial
condition and results of operations;
the impact of competition and technological
change;
existing and future regulations effecting
our business; and
other risk factors set forth under
Risk Factors in this prospectus.
Application of
Percentage of
Net Proceeds
Net Proceed
To
fund the purchase of equipment for expanded capacity
and
service offerings
$ 2,000,000
11.4%
Payment of
certain indebtedness
(1)
2,100,000
11.9
Payment towards the acquisition of the
minority interest in Efonica joint venture
500,000
2.8
International
deployment including purchase of business license,
network
equipment and securing letters of credit and bonds.
7,250,000
41.2
Marketing and Advertising
1,250,000
7.1
Working capital
and general corporate purposes
(2)
4,516,250
25.6
Total
$17,616,250
100%
On an actual basis, as of September
30, 2004.
On a pro forma basis to reflect the
automatic conversion of all of our outstanding series C preferred stock into an
aggregate of 3,141,838 shares of common stock, which will occur upon completion
of the offering.
On a pro forma as adjusted basis
to give effect to (1) the repayment of $1,523,000 in debt and $516,000 in interest
payable to certain officers and directors and (2) a transaction that occurred subsequent
to September 30, 2004, whereby the Company received net cash proceeds of $1,330,000
($1,400,000 for a convertible note net of $70,000 advisory fee) and refinanced $1,108,333
of existing notes payable and accrued interest in exchange for a convertible note.
The two notes aggregate $2,508,333 and automatically convert upon the completion
of this Offering into 651,515 shares of common stock based upon a conversion price
of $3.85 per share, (3) the payment of $500,000 in cash and the issuance of 1,547,617
shares of common stock related to the January 2005 agreement whereby the Company
will be acquiring the 49.8% minority interest in its Efonica joint venture contingent
upon successful completion of this offering by March 1, 2005. $4.4 million worth of such shares of common stock will be held in escrow until March 2006 at which point the final purchase
price will be determined, and (4) the receipt of the net proceeds from the sale
by us in this offering of shares of common stock and purchase warrants at an assumed
initial public offering price of $6.00 per common share and $.05 per purchase warrant,
after deducting estimated underwriting discounts and commissions and estimated offering
expenses.
September 30, 2004
Proforma
Actual
Pro Forma
as
adjusted
(unaudited)
(unaudited)
(unaudited)
Cash
and cash equivalents
$ 4,619,248
$ 4,619,248
$ 21,026,498
Long-term
debt, including current portion:
Notes
payable to related parties
2,752,467
2,752,467
229,467
Notes
payable
153,358
153,358
153,358
Short-term
borrowing obligations
531,387
531,387
531,387
Capital
leases
1,371,380
1,371,380
1,371,380
Convertible preferred
stock, series C, subject to
mandatory redemption
(a)
9,861,431
Stockholders
deficit:
Common Stockholders
equity (deficit):
Common stock, $0.01 par value: 105,000,000 shares
authorized, 0 shares issued and outstanding, actual;
105,000,000 shares authorized, 3,141,838 shares
issued and outstanding pro forma; 105,000,000 shares
authorized, 8,665,970 shares issued and outstanding
proforma, as adjusted
31,418
86,660
Common stock,
class A $0.01 par value: 21,000,000
shares
authorized, 17,480,562 shares issued and
outstanding, actual; 21,000,000 shares
authorized,
17,480,562 shares issued and outstanding pro forma;
21,000,000
shares authorized, 17,480,562 shares issued
and outstanding, pro forma as adjusted
174,806
174,806
174,806
Common stock
held in escrow
(4,357,703)
Capital
in excess of par value
64,899,255
74,729,268
104,014,311
Accumulated
other comprehensive income
100,938
100,938
100,938
Accumulated
deficit
(75,788,663)
(75,788,663)
(75,788,663)
Total
stockholders (deficit) equity
(10,613,664)
(752,233)
24,230,349
Total
capitalization
$ 4,056,359
$ 4,056,359
$ 26,515,941
(a) Each share
of series C preferred stock is convertible into our common stock at a conversion
price equal to the lesser of (i) 75% of the initial public offering price of common
stock, or (ii) $3.15 per share.
1,696,706
shares of class A common stock issuable upon the exercise of options outstanding
at September 30, 2004, at a weighted average exercise price of $5.53 per share;
and 286,567 shares of class A common stock issuable upon the exercise of warrants
outstanding at September 30, 2004, at a weighted average exercise price of $3.61
per share.
Initial
public offering price per share
$6.00
Net
tangible book deficit per share available to common
stockholders
as of September 30, 2004
$(0.60)
Increase
attributable to pro forma adjustments
before
offering
$ 0.57
Pro
forma net tangible book deficit per share
before
offering
$ (0.03)
Increase
per share attributable to new investors
in
the offering
$ 0.96
Pro
forma net tangible book value per share after
the
offering
$0.93
Dilution
per share to new investors in the offering
$5.07
Selected Financial Data
The following table sets forth selected
historical financial data as of and for each of the periods ended December 31, 1999,
2000, 2001, 2002 and 2003, and September 30, 2003 and 2004. The selected financial
data as of December 31, 2001, 2002 and 2003 are derived from consolidated financial
statements of Fusion Telecommunications International, Inc., which have been audited,
by Rothstein, Kass & Company, PC., independent auditors. The consolidated financial
statements, and the report thereon, as of December 31, 2002 and 2003, and for each
of the three years ended December 31, 2003, are included elsewhere in this prospectus.
The historical financial data as of and for the nine months ended September 30,
2003 and 2004 are derived from our unaudited consolidated financial statements.
The following financial information should be read in conjunction with Managements
Discussion and Analysis and Results of Operations and our consolidated financial
statements and related notes appearing elsewhere in this prospectus.
19
20
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
The following discussion of our financial
condition and results of operations should be read together with our consolidated
financial statements and the accompanying notes included elsewhere in this prospectus.
Overview
We are an international communications
carrier delivering VoIP, private networks, Internet access, Internet protocol video
conferencing and other advanced services to, from, in and between emerging markets
in Asia, the Middle East, Africa, the Caribbean and Latin America. In 2000, after
early acquisitions, our focus on domestic retail and residential services and incurring
significant losses, our board of directors selected a new management team to develop
and initiate a new corporate strategy, improve our operational and financial performance
and identify growth opportunities.
The new corporate strategy focused our
resources on VolP and the emerging international markets, and we exited the more
highly competitive, infrastructure-dependent businesses that characterized us in
2000 and 2001. Since then, we sought to gain early entry in high growth emerging
markets, often in partnership with local organizations that have strong distribution
channels, regulatory experience, market intelligence, the ability to deliver local
loops and the capability of providing customer service support. This approach enabled
us to introduce our Internet protocol communications services in these markets,
thereby benefiting from the time-to-market advantages, expanded geographic reach
and reduced capital requirements that local partnerships afford. We embarked on
a network strategy that employs the most currently available Softswitch technology,
relieving us of the burden of costly, inefficient legacy systems and allowing more
rapid and cost-effective deployment and expansion of services worldwide. Additionally,
long-range efforts in cost controls and reductions were initiated, which included
significant reductions in staffing, fixed overhead expenses and debt. The combination
of these efforts has led to improved financial results.
21
The following table summarizes our results of operations for the
periods indicated:
22
Revenues
Since our restructuring in
2001, we have generated the majority of our revenue from voice traffic sold to other
carriers, with a primary focus on VoIP terminations to the emerging markets. We
have increased our business in this area through an internal focus on the growth
of our existing customer base, adding new customers, and the establishment of in-country
partnerships that help us to more quickly deploy direct VoIP terminating arrangements
with postal telephone and telegraph companies and other licensed carriers in emerging
markets. Although we believe that this business continues to be strong, ongoing
competitive and pricing pressures have caused us to increase our focus on higher
margin, value-added services (VoIP to consumers and businesses, Internet access,
Internet protocol videoconferencing and private networks) and market them to, or
in conjunction with, international carriers, Internet service providers, cable companies
and wireless operators on a direct, co-branded or private label basis.
In an effort to further increase margins,
expand our customer base, and develop more stable revenue streams, we have begun
to target enterprise customers (large corporations, government entities and other
businesses). Revenues generated from sales to these customers are primarily derived
from the sale of the value-added services mentioned above. With a primary focus
on marketing VoIP services to these Enterprise customers, we believe we will recognize
higher margin and stronger growth opportunities. While this does not yet represent
a significant portion of our revenue base, we expect to continue to increase our
emphasis in this area. We believe that this will complement our carrier business
with a higher margin and more stable customer base. In the third and fourth quarter
of 2004, we expect to experience a temporary decline in revenues during, and immediately
following, the migration to the new Softswitch technology.
In 2002, we established Efonica F-Z, LLC
as a retail services company marketing VoIP products to consumer and corporate customers
in emerging markets. Beginning in the Middle East, Asia and Africa, then extending
into Latin America, Efonicas services are primarily sold through distribution
channels on a pre-paid basis. Efonicas customers can place calls from anywhere
in the world to any destination using a personal computer, Internet protocol telephone
or regular telephone when accompanied by a hardware device that may be purchased
through Efonica. We believe that the introduction of advanced features such as voicemail,
call waiting and call forwarding enhance this value-added offering. Since its inception
in 2002, Efonicas VoIP revenue grew from $0 to $0.3 million in 2003, and to
$1.7 million in the first nine months of 2004. In January 2005, we purchased the
49.8% minority interest in Efonica. See BusinessJoint VenturesEfonica.
Our increased focus on VoIP services resulted
in a growing upward trend in voice traffic carried over Internet protocol. During
the first nine months of 2004, voice traffic terminated on our network was 68% VoIP,
compared to 51% VoIP in the first nine months of 2003.
We also receive revenues from
other services, including co-location and the sale of customer premise equipment.
These services currently represent a small portion of the revenue base.
We manage our VoIP business primarily
by analyzing its customers and vendors (not terminating destinations). We track
revenues for areas where we terminate traffic only in the event that we have
invested capital, deployed equipment or leased transmission facilities. For this
reason, we have included terminating revenue by region for each region in which we have
invested capital, deployed equipment or leased transmission facilities, defined
below as On-Net. All other traffic not terminated On-Net is considered
Off-Net.
Fusion Telecommunications International
Regional percentages are calculated based
on Total Consolidated Revenue.
23
OPERATING EXPENSES
Our operating expenses are categorized
as cost of revenues, selling, general and administrative expenses, depreciation
and amortization and loss on impairment.
Selling, general and administrative expenses include
salaries and benefits, commissions, occupancy costs, sales, marketing and advertising,
professional fees and other administrative expenses.
Depreciation and amortization includes
depreciation of our communications network equipment, amortization of leasehold
improvements of our switch locations and administrative facilities, and the depreciation
of our office equipment and fixtures.
COMPANY HIGHLIGHTS
The following summary of significant events
from the past three fiscal years ended December 31, 2003 and the first nine months
ended September 30, 2004, highlights the accomplishments and events that have influenced
our performance during that time period.
First Nine Months 2004
2003
24
2002
2001
The information in our period-to-period comparisons below represents
only our results from continuing operations.
Nine Months Ended September 30, 2004 Compared with
Nine Months Ended September 30, 2003
Revenues
Revenues increased $15.7 million or 63.0%
to approximately $40.5 million in the first nine months of 2004 compared to $24.8
million in the first nine months of 2003. Most of the increase ($13.5 million) was
attributable to an increase in revenues in voice services, primarily VoIP terminating
to the emerging markets sold to carriers. For the first nine months of 2004 we have
added 15 new carrier customers representing an increase of revenue of $4.6 million.
We have also experienced an increase in demand from Fusions existing customer
base for VoIP services which contributed the balance of the increase of $7.5 million.
In addition, during 2004, there was an increase of 10% in the total amount of VoIP
traffic terminated, evidencing our increased focus on VoIP services. Our VoIP services
to consumers more than quadrupled from $0.3 million in the first nine months of
2003 to $1.6 million in the first nine months of 2004, mainly due to the growth
of our joint venture Efonica.
25
Consolidated revenues from our Enterprise services grew 66.7%, from
$1.5 million in 2003 to $2.5 million in 2004, primarily due to the addition of Government-related
contracts that were awarded in the latter part of 2003.
Operating Expenses
Cost of Revenues.
Cost of Revenues
increased $13.1 million or 61.1% to $34.5 million in 2004 from $21.4 million in
2003. This percentage increase is consistent with the percentage increase in revenues
resulting from the higher volume discussed above.
Depreciation and Amortization.
Depreciation
and amortization decreased $.1 million or 8.2% for the first nine months of 2004
to $1.5 million from the first nine months of 2003 primarily due to the impairment
of Fusions existing switch which was replaced with our new Softswitch at the
end of 2003 and disposed of assets that are no longer generating revenue for us.
Loss on impairment.
Loss on impairment
was $0.3 million during the first nine months of 2003. This impairment related to
the adjustment of equipment being used by our joint venture in India to its fair
value based on estimated cash flows. No loss on impairments occurred during the
nine months ended September 2004.
Selling, General and Administrative.
Selling, general and administrative expenses increased $0.7 million or 9.9% to $7.5
million in 2004 from $6.8 million in 2003. This increase is primarily attributed
to the increase of salaries in our Efonica joint venture of $0.2 million as more
back office personnel were required to support its growth, and a small increase
in salaries in Fusion of $.2 million. Selling, general and administrative expenses
have declined as a percentage of revenue from 27.4% for the first nine months of
2003 to 18.5% for the first nine months of 2004. We believe that as we execute our
business strategies, selling, general and administrative expenses as a percentage
of revenue will continue to decline.
Operating Loss.
Our operating loss decreased
$2.3 million or 43.7% to $3.0 million in the first nine months of 2004 from a loss
of $5.3 million in the first nine months of 2003. The decrease in operating loss
was primarily attributable to the increase in revenue and gross margin.
Other Income (Expense).
Total other
income (expense) decreased $0.4 million to $0.8 million in the first nine months
of 2004 from $1.2 million in the first nine months of 2003. Interest expense increased
$0.8 million to $1.4 million in 2004 from $0.8 million in 2003, primarily attributable
to the adoption of SFAS 150 during 2003. This resulted in our recording $1.2 million
in interest expense related to dividends and accretion on the series C convertible
preferred stock subject to mandatory redemption for the nine months ended September
30, 2004, partially offset with a decrease in interest expense of $0.5 million during
2004 resulting from the reduction of average outstanding debt. Gain on debt forgiveness
realized from vendor settlements increased in the first nine months of 2004 by $0.4
million to $2.2 million from $1.8 million for the nine months ended September 30,
2003. The 2004 gain on debt forgiveness is attributed to $0.2 million of settlements
of capital lease obligations, $0.2 million of settlements of general obligations
and $1.8 million of settlements of network obligations. Minority interest due from
joint venture partners changed $118,000 to $(41,000) in 2004 from $77,000 in 2003.
Net Loss.
Our 2004 net loss attributable
to common stockholders was $2.6 million after giving effect to $0.4 million in dividends
applicable to common stockholders. This was an improvement of $2.1 million from
the prior years net loss applicable to common stockholders of $4.7 million.
We anticipate that as we execute our business plan we will achieve net income in
the future.
Year Ended December 31, 2003 Compared with
Year Ended December 31, 2002
Revenues
Revenues.
Revenues from
continuing operations increased $5.3 million or 18.7% to $33.7 million in 2003 compared
to $28.4 million in 2002. Voice services sold to carriers represented approximately
$5.0 million of this growth, par-
26
tially fueled by growth in 2 international network deployments in
the Middle East & Asia in late 2002. The remaining $0.3 million of the revenue
increase was attributed to the introduction of VoIP services to consumers and corporations
in early 2003, which was mainly fueled by the growth of our Efonica joint venture.
Operating Expenses
Cost of Revenues.
Cost of Revenues
increased $3.8 million or 14.9% to $29.2 million in 2003 from $25.4 million in 2002.
This increase was caused by the growth in volume over the prior year as explained
above. The improvement in gross margin of $1.5 million in 2003 is a result of a
reduction in fixed cost of revenues that related to two large international voice
networks of $0.5 million that were turned down late in 2002 due primarily to capital
constraints and disputes with the vendors. In addition, we increased our efforts
in utilizing least cost routing options which accounted for $1.0 of increased margin.
We do not anticipate any further network shutdowns in the near future due to capital
constraints.
Depreciation and Amortization.
Depreciation
and amortization from continuing operations decreased $0.4 million to $2.1 million
in 2003 from $2.5 million in 2002. This decrease was attributable to fixed assets
impaired during 2002 being depreciated during a portion of 2002 but not at all during
2003 the majority of which is associated with the abandonment of equipment located
in a country where a Caribbean voice network had been deactivated as it was no longer
producing revenue.
Loss on Impairment.
Loss on Impairment
increased $0.3 million in 2003. The $0.7 million recorded during 2003 relates to
an impairment on switching equipment which was replaced by upgraded equipment and
an impairment on equipment being used by the Companys joint venture in India.
These impairments were determined based upon estimated future cash flows from these
assets. The $0.5 million impairment recorded during 2002 related to the termination
and abandonment of a voice network located in the Caribbean which was deactivated
and no longer generating revenue.
Selling General and Administrative.
Selling, general and administrative expenses decreased $0.8 million or 8.2% to $9.2
million in 2003 from $10.0 million in 2002. This decrease is primarily attributed
to reduction of salary expense of $.8 million on Fusion due to staff reductions.
Operating Loss.
The operating loss
decreased $2.5 million or 24.7% to $7.5 million in 2003 from $10.0 million in 2002,
due to the items mentioned above.
Other Income (Expense).
Total other
income (expense) increased $2.5 million or 381.3% to $3.2 million in 2003 from $0.7
million in 2002, due to several factors. Interest expense decreased $0.3 million
to $0.9 million in 2003 from $1.2 million in 2002, mainly due to settlements of
$3.9 million and conversions of $3.2 million of outstanding debt. Gain on Debt Forgiveness
increased by $2.1 million to $3.9 million, from $1.8 million. The 2003 gain on debt
forgiveness of $3.9 million is attributed to $0.9 million of settlements of capital
lease obligations and $3.0 million of settlements of network obligations. Minority
interest due from joint venture partners increased $138,000 to $158,000 in 2003
from $20,000 in 2002.
Discontinued Operations.
Income
from discontinued operations in 2003 was $0.2 million due to the elimination of
a prior accrual for a vendor obligation, as it was determined it was no longer due.
There was no discontinued operations income in 2002. See Discontinued Operations
note.
Net Loss.
The factors discussed
above resulted in a decrease in the 2003 net loss applicable to common stockholders
by $5.2 million to $4.8 million in 2003 from $10.0 million in 2002 after giving
effect to $0.6 million in stock dividends in both 2003 and 2002.
Year Ended December 31, 2002 Compared with
Year Ended December 31, 2001
Revenues
Revenues.
Revenues from continuing
operations decreased $1.2 million or 4.0% to $28.4 million in 2002 compared to $29.6
million in 2001. This decline was primarily due to the deactivation of two large
voice networks in late 2001 caused by disputes with the related vendors and our
inability to stay current with accounts payable.
27
Operating Expenses
Cost of Revenues.
Cost of revenues
increased $0.8 million or 3.5% to $25.4 million in 2002 from $24.6 million in 2001
due primarily to a less effective job in least cost routing during 2002 in comparison
to 2001. In addition, there was a reduction in gross margin from 2002 versus 2001.
This was caused partially by our increased cost of revenues, but also was impacted
by our inability to stay current on our accounts payable and certain disputes, which
resulted in the loss of a large Caribbean voice network that had been earning high
gross margins during a significant portion of 2001.
Depreciation and Amortization.
Depreciation
and amortization from continuing operations increased $0.4 or 23.1% million to $2.5
million in 2002 from $2.1 million in 2001. The increase was attributable to recognition
of the depreciation associated with the assets transferred from our discontinued
retail communication service operations.
Loss on Impairment.
The loss on
impairment decreased $2.3 million to $0.5 million in 2002 from $2.8 million in 2001.
The significant charge in 2001 relates primarily to a joint venture we had with
Clarion Global Network, Inc. to form an entity called C&F Switching, LLC. The
joint venture was created in order to combine efforts in building gateway telecommunications
switches. In connection with this acquisition, we accounted for the transaction
under the purchase method of accounting and allocated the purchase price of $2.5
million to goodwill and property and equipment. The goodwill was considered impaired
during 2001 and is consequently included in loss on impairment. The $0.5 million
loss on impairment in 2002 was related to the deactivation and abandonment of a
large voice network in the Caribbean which was no longer generating revenue for
us.
Selling, General and Administrative.
Selling, general and administrative expenses decreased $1.8 million or 15.1%
to $10.0 million in 2002 from $11.8 million in 2001 primarily due to staff reductions
and cost containment strategies after the divestiture of our domestic retail subsidiary.
Operating Loss.
Our operating loss decreased
$1.6 million or 13.9% to $10.0 million in 2002 from $11.6 million in 2001 due to
the factors discussed above.
Other Income (Expense).
Total other
income (expense) changed 235.9% from $(0.5) million in expense in 2001 to $0.7 million
in income in 2002. Interest expense increased from $0.6 million in 2001 to $1.2
million in 2002 due to higher average borrowings during 2002, which was offset by
a gain on debt forgiveness of $1.8 million, compared to zero in the prior year.
The 2002 Gain on debt forgiveness of $1.8 million is attributed to $1.3 million
settlement of a capital lease obligation, $0.4 million of settlements of general
vendor obligations and $0.5 million of settlements of network vendor obligations.
Minority interest due from joint venture partners decreased from $0.1 million in
2001 to $20,000 in 2002.
Discontinued Operations.
There was
no income or loss from discontinued operations in 2002. The 2001 loss from discontinued
operations was $7.0 million.
Net Loss.
The 2002 net loss applicable
to common stockholders was $10.0 million, compared to $19.1 million in 2001, after
giving effect to the $0.6 million of dividends in 2002. This $9.1 million decrease
in net loss applicable to common stockholders is primarily attributed to the $7.0
million loss for discontinued operations in 2001 as well as other factors previously
disclosed.
During 2001, we decided to
cease the operations of our domestic retail telecommunication services. In connection
with this decision, we opted out of a capital lease under which we were leasing
switching equipment located in Miami, Florida and returned all of the switching
equipment covered under the lease to the lessor. In 2002, we abandoned a telecommunications
facility located in Miami, which was being used to house the switching equipment
utilized by C&F Switching, LLC. The office was being leased under a non-cancelable
operating lease agreement, which is currently the subject of an on-going litigation.
The principal costs of the discontinuation of
the retail services included the remaining unpaid operating lease obligations on
the Miami office space, which aggregated approximately $0.8 million (this amount
includes a draw down on a letter of credit securing the lease of approximately $0.1
million). The costs also include the write-off of the remaining
28
net book value of leasehold improvements made to the Miami location
of approximately $0.3 million. In accordance with the provisions of SFAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, we have not included
the results of operations of our retail telecommunication services in the results
from continuing operations. The results of operations for these services have been
reflected in discontinued operations for the year ended December 31, 2001. The loss
from discontinued operations for the year ended December 31, 2001, consists of the
following:
During the year ended December 31, 2003, certain
trade payables, associated with the discontinuation of our retail services, were
determined not to be payable to a vendor, which resulted in a gain on trade payable
reductions of approximately $0.2 million.
Liquidity and Capital Resources
Since our inception, we have incurred significant
operating and net losses. In addition, we have not generated positive cash flows
from operations. As of September 30, 2004, we had an accumulated stockholders
deficit of approximately $10.6 million and a working capital deficit of approximately
$6.6 million. However, during the nine months ended September 30, 2004, we have
been able to increase our revenues and renegotiate and pay down certain obligations,
which has resulted in reduced losses and reduced outstanding debt.
Below is a summary of our cash flows for
the periods indicated. These cash flow results are consistent with prior years in
that we continued to use significant cash in connection with our operating and investing
activities and had significant cash provided by financing activities.
A summary of our cash flows for the periods
indicated is as follows:
Our cash flow results were impacted by
the costs associated with implementing the new corporate strategy focusing our resources
on VoIP and the emerging international markets, as we completed our exit from the
more highly competitive, infrastructure dependent business that previously characterized
us. We only started to migrate customers to our new Softswitch in August 2004 and
began to rely on it in October 2004. Therefore, we have only recently completed
the deployment of our packet-based network infrastructure including the latest Softswitch
technology. Because certain of our costs are fixed, we would expect that as our
revenues increase, total expenses will represent a smaller percentage of our revenues.
29
Source
of Liquidity
As of September 30, 2004 we had cash and
cash equivalents of approximately $4.6 million. In addition, as of September 30,
2004, we had approximately $0.5 million of cash restricted from withdrawal and held
by banks as certificates of deposits securing letters of credit (equal to the amount
of the certificates of deposit).
From our inception through
September 2004, we financed our operations from cash provided from financing activities.
These activities were primarily through the private placement of approximately $52.2
million of equity securities and $20.3 million of net proceeds resulting from the
issuance of notes. In addition, during this period we financed the acquisition of
$6.0 million of fixed assets through capital leases.
Although we believe the net proceeds from
this offering, together with our existing cash and cash equivalents and revenues
from operations will be sufficient to meet our working capital and capital expenditure
needs for the next 12 months, our long-term liquidity is dependent on our ability
to attain future profitable operations. We cannot predict if and when we will be
able to attain future profitability.
On November 10, 2004, we issued convertible promissory
notes to one individual in the aggregate amount of $2,508,333, representing $1,400,000
in cash and $1,108,333 to refinance certain debt and accrued interest owed to an
existing related party. This transaction generated $1,330,000 in net proceeds to
us after deducting an advisory fee. The promissory notes bear interest at 6.5% per
annum and are due on November 2006. The notes will automatically convert into common
shares at a conversion price of $3.85 per share upon the closing of the offering.
Uses of Liquidity
Our short-term and long-term liquidity
needs arise primarily from interest and principal payments relating to our debt
and capital lease obligations, capital expenditures, working capital requirements
as may be needed to support the growth of our business, and any additional funds
that may be required for business expansion opportunities.
Our cash capital expenditures were approximately
$0.6 million during the nine months ended September 30, 2004 and were $0.6 million
during the year ended December 31, 2003. We expect our cash capital expenditures
to be approximately $1.0 million for the full year ending December 31, 2004. The
2004 estimated capital expenditures include a significant investment we are making
to upgrade our switching and transmission systems utilizing the latest softswitch
technology.
Cash used in operations was approximately
$5.1 million during the year ended December 31, 2003 and approximately $3.9 million
during the nine months ended September 30, 2004. The cash used in our operations
has historically been a function of our net losses, gains on forgiveness of debt,
and changes in working capital as a result of the timing of receipts and disbursements.
Our net cash used in operating activities included in our September 30, 2004 and
December 31, 2003 cash flows statements include a significant amount of cash payments
and forgiveness of debt that relates to liabilities from prior periods. Consequently,
the resulting net cash used in operating activities during these two periods was
negatively impacted. Now that we have paid and settled a significant amount of these
old liabilities, as well as seeing an improvement in our operating results, we expect
our net cash used in operating activities to improve during future periods. Additionally,
the 2004 net cash used in operating activities includes approximately $1.2 million
in interest and dividends accreted on our series C preferred stock. The accretion
on this stock will cease upon completion of the offering.
We expect to use the net proceeds from
this offering for working capital and general corporate purposes, for the repayment
of certain indebtedness, for international deployment, including purchase of business
license, network equipment and securing letters of credit and bonds, to fund the
purchase of equipment for expanded capacity and service offerings, and marketing
and advertising. We expect to continue to expand our business into new countries
and geographic regions by purchasing business licenses; partnering with companies
that own licenses, or partnering with a company to acquire a license. In connection
with this activity, we will incur equipment costs associated with deploying a network
and certain working capital expense associated with the development of partnerships
or joint ventures. In some situations, we may also be required to guarantee payment
or performance under agreements, and in these circumstances we would need to secure
letters of credit or bonds to do so.
30
We intend to fund corporate overhead, including management salaries,
from working capital and cash flow from operations.
Debt Service Requirements
At September 30, 2004, we had approximately
$4.3 million of current and long-term notes payable and capital leases. We owe approximately
$1.6 million in debt and accrued interest to two of our officers who have signed
forbearance agreements, providing that they will not call due this debt and interest
until such time that a successful offering is completed or March 31, 2005, whichever
comes first. A significant portion of our debt is due during the 12 months subsequent
to September 30, 2004 and approximately $1,523,000 in debt and $516,000 in accrued
interest will be repaid with the proceeds from the offering. Also, this reduction
in our debt balances is expected to result in a significant reduction in our interest
expense in the future.
Capital Instruments
The only outstanding preferred stock we
have as of September 30, 2004 is our series C preferred stock. This stock provides
for the payment of dividends at a rate equal to 8.0% per annum. The dividends are
payable in cash annually, commencing on the first anniversary of the initial closing
of the series C preferred stock offering, unless the series C preferred stock is
converted into common stock upon the completion of the offering, in which case no
dividend will be due. If we choose to redeem the series C preferred stock, we are
required to give holders 30 days notice of such redemption during which period holders
shall have the right to convert to common stock at a price of $3.15 per share, subject
to adjustment. So long as our common stock or other securities into which series
C preferred stock is convertible into, is not publicly traded, at any time after
the second anniversary of the initial closing of this offering, the holders of the
series C preferred stock may require us to redeem their respective shares of the
series C preferred stock may require us to redeem their respective shares of the
series C preferred stock for cash equal to 112% of the stated value plus payment
of accrued and unpaid dividends. Each share of the series C preferred stock is convertible,
at the option of the holder at any time, at the conversion price of $3.15 per share.
Upon the closing of this offering, the series C preferred stock shall automatically
convert into shares of our new common stock at the lesser of (i) $3.15 per share
or (ii) 75% of the offering price of the common stock, and, the holders of the series
C preferred stock shall also receive a warrant equivalent to those offered hereby
for each share of common stock issued.
Summary of Contractual Obligations
As of September 30, 2004
Payments due by period before the offering:
(2) A
settlement with a vendor that will require us to spend an additional $284,735 between
October 1 and December 31, 2004. The remaining commitment amount relates to outstanding
purchase orders of $16,117.
31
Critical Accounting Policies and Estimates
We have identified the policies and significant
estimation processes below as critical to our business operations and the understanding
of our results of operations. The listing is not intended to be a comprehensive
list. In many cases, the accounting treatment of a particular transaction is specifically
dictated by accounting principles generally accepted in the United States, with
no need for managements judgment in their application. In other cases, management
is required to exercise judgment in the application of accounting principles with
respect to particular transactions. The impact and any associated risks related
to these policies on our business operations is discussed throughout Managements
Discussion and Analysis of Financial Condition and Results of Operations where
such policies affect reported and expected financial results. For a detailed discussion
on the application of these and other accounting policies, see Note 2 in the Notes
to Consolidated Financial Statements for the year ended December 31, 2003, included
in this Form S-1. Our preparation of our consolidated financial statements requires
us to make estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
consolidated financial statements, and the reported amounts of revenue and expenses
during the reporting periods. Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the circumstances.
There can be no assurance that actual results will not differ from those estimates
and such differences could be significant.
Revenue Recognition
Our revenue
is primarily derived from fees charged to terminate voice services over our network,
and from monthly recurring charges associated with Internet and Private Line services.
Variable revenue is earned based on the
number of minutes during a call and is recognized upon completion of a call, adjusted
for allowance for doubtful accounts receivable and billing adjustments. Revenue
for each customer is calculated from information received through our network switches.
Customized software has been designed to track the information from the switch and
analyze the call detail records against stored detailed information about revenue
rates. This software provides us the ability to do a timely and accurate analysis
of revenue earned in a period. Consequently, the recorded amounts are generally
accurate and the recorded amounts are unlikely to be revised in the future.
Fixed revenue is earned from monthly recurring
services provided to the customer that are fixed and recurring in nature, and are
contracted for over a specified period of time. The initial start of revenue recognition
is after the provisioning, testing and acceptance of the service by the customer.
The charges continue to bill until the expiration of the contract, or until cancellation
of the service by the customer. Additionally, the majority of our VoIP services
to consumers are prepaid. The revenue received from the prepayments that is related
to VoIP termination services in the current month is booked to the current months
revenue, and the remainder of the prepayments are booked to deferred revenue, until
usage occurs.
Accounts Receivable
Accounts
receivable are recorded net of an allowance for doubtful accounts. On a periodic
basis, we evaluate our accounts receivable and record an allowance for doubtful
accounts, based on our history of past write-offs and collections and current credit
conditions. Specific customer accounts are written off as uncollectible if the probability
of a future loss has been established and payments are not expected to be received.
Cost of revenues and cost of revenues
accrual
Cost of revenues is comprised primarily of costs incurred from
other domestic and international telecommunications carriers to originate, transport
and terminate calls. The majority of our cost of revenue is variable, based upon
the number of minutes of use, with transmission and termination costs being the
most significant expense. Call activity is tracked and analyzed with customized
software that analyzes the traffic flowing through our network switches. Each period
the activity is analyzed and an accrual is recorded for minutes not invoiced. This
cost accrual is calculated using minutes from the system and the variable cost of
revenue based upon predetermined contractual rates.
In addition to the variable cost of revenue,
there are also fixed expenses. One category of fixed expenses are those that are
associated with the network backbone connectivity to our switch facilities. These
would consist of hubbing charges at our New York switch facility that allow other
carriers to send traffic to our switch, satellite or cable charges to connect to
our international network, or Internet connectivity charges to connect customers
or vendors to Fusions switch via the public Internet, a portion of which are
variable costs. The other category of fixed expenses is associated with charges
that are dedicated point to point connections to specific customers (both private
line and Internet access).
32
Income Taxes
We account for income taxes in accordance
with the provisions of SFAS No. 109, Accounting for Income Taxes (SFAS
109). SFAS 109 requires companies to recognize deferred tax liabilities and
assets for the expected future income tax consequences of events that have been
recognized in our consolidated financial statements. Deferred tax liabilities and
assets are determined based on the temporary differences between the consolidated
financial statements carrying amounts and the tax bases of assets and liabilities,
using enacted tax rates in the years in which the temporary differences are expected
to reverse. In assessing the likelihood of utilization of existing deferred tax
assets and recording a full valuation allowance, we have considered historical results
of operations and the current operating environment.
Recently Issued Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151,
Inventory
Costs,
an
Amendment
of
ARB
No.
43,
Chapter
4
(SFAS No. 151). The amendments made by SFAS
No. 151 clarify that abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) should be recognized as current-period charges
and require the allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities. SFAS No. 151 will become effective
beginning in fiscal 2006. The adoption of this Statement will not have a significant
impact on our financial condition or results of operations.
In December 2004, the FASB issued SFAS
No. 152, Accounting for Real Estate Time-Sharing Transactions - an amendment
of SFAS No. 66 and 67. This Statement amends SFAS No. 66, Accounting
for Sales of Real Estate to reference the financial accounting and reporting
guidance for real estate time-sharing transactions that is provided in Statement
of Position (SOP) No. 0402. This Statement also amends SFAS No.
67, Accounting for Costs and Initial Rental Operations of Real Estate Projects
to state that the guidance for (a) incidental operations and (b) costs incurred
to sell real estate projects does not apply to real estate time-sharing transactions.
The accounting for those operations and costs is subject to the guidance of SOP
No. 0402. This statement is effective for financial statements for fiscal
years beginning after June 15, 2005 with earlier application encouraged. The adoption
of SFAS No. 152 will not have a material impact on our overall results of operations
or financial position.
In December 2004, the FASB issued SFAS
No. 153, Exchange of Nonmonetary Assets an amendment of APB Opinion
No. 29, Accounting for Nonmonetary Transactions. The amendments made
by SFAS No. 153 are based on the principle that exchanges on nonmonetary assets
should be measured based on the fair value of the assets exchanged. Further, the
amendments eliminate the narrow exception for nonmonetary exchanges of similar productive
assets and replace it with a broader exception for exchanges of nonmonetary assets
that do not have commercial substance. SFAS No. 153 is effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal periods
after the date of issuance. The provisions of SFAS No. 153 shall be applied prospectively.
We are in the process of evaluating whether the adoption of SFAS No. 153 will have
significant impact on our overall results of operations or financial position.
33
Inflation
We do not believe inflation has a significant
effect on our operations at this time.
Quantitative and Qualitative Disclosures About Market
Risk
We are exposed to certain market risks
that are inherent in our financial instruments. These instruments arise from transactions
in the normal course of business.
At September 30, 2004, the majority of
our cash balances were held primarily in the form of a short-term highly liquid
investment grade money market fund in a major financial institution. Due to the
short-term nature of our investments, we believe that we are not subject to any
material interest or market rate risks.
We are subject to interest rate risk on
certain of our convertible notes payable and our short-term borrowings. Our exposure
to interest rate risk is limited as a significant portion of our debt is at fixed
interest rates. Of the approximate $4.8 million debt balance as of September 30,
2004, only $0.5 million of this debt was variable. As such, we currently believe
that our interest rate risk is fairly low.
We currently conduct a minimal
portion of our business in currencies other than the United States dollar (approximately
3% of our revenues are denominated in foreign currencies). The foreign currencies
are primarily the Indian Rupee and the SDR. The reporting currency for our financial
statements is the United States dollar. The functional currency for all (except
one) of our respective subsidiaries is the U.S. dollar. We have accounted for any
adjustments resulting from foreign currency translations as an adjustment to accumulated
other comprehensive income within the stockholders deficit section of
the consolidated balance sheet. Based upon our current volume of activity in this
country, foreign currency risk is considered minimal. However, in the future, we
may conduct a larger percentage of our business in this currency or other foreign
currencies that could have an adverse impact on our future results of operations.
34
2004
Revenues
$ 3,714,290
$24,806,641
$ 29,614,565
$ 28,422,149
$33,725,275
$24,840,556
$40,499,353
Operating
expenses:
Cost
of revenues
3,926,451
16,886,171
24,591,188
25,443,863
29,246,014
21,432,409
34,517,162
Depreciation
and
amortization
1,647,904
745,145
2,069,361
2,546,869
2,128,610
1,616,607
1,484,418
Loss on impairment
6,861,412
2,825,149
467,765
735,354
280,683
Selling, general
and
administrative expenses
5,893,989
9,614,610
11,758,451
9,977,994
9,156,810
6,800,712
7,474,425
Operating
loss
(7,754,054)
(9,300,697)
(11,629,584)
(10,014,342)
(7,541,513)
(5,289,855)
(2,976,652)
Other
income (expense)
Interest
expense, net
(63,120)
(113,436)
(595,116)
(1,175,714)
(919,590)
(671,364)
(1,433,849)
Forgiveness
of debt
1,812,092
3,918,295
1,779,033
2,174,530
Other
49,899
Minority
interests
531,317
2,017,389
112,472
19,440
157,617
76,950
(40,743)
468,197
1,903,953
(482,644)
655,818
3,156,322
1,184,619
749,837
Loss
from continuing
operations
(7,285,857)
(7,396,744)
(12,112,228)
(9,358,524)
(4,385,191)
(4,105,236)
(2,226,815)
Discontinued
operations:
Income
(loss) from
discontinued operations (1)
(25,949,828)
7,588,938
(7,029,511)
208,620
Net
income (loss)
$(33,235,685)
$ 192,194
$(19,141,739)
$ (9,358,524)
$ (4,176,571)
$ (4,105,236)
$ (2,226,815)
Losses
applicable to
common stockholders:
Loss
from continuing
operations
$ (7,285,857)
$ (7,396,744)
$(12,112,228)
$ (9,358,524)
$ (4,385,191)
$ (4,105,236)
$ (2,226,815)
Preferred
stock dividends
(642,552)
(635,254)
(570,685)
(385,918)
Net loss applicable
to
common stockholders
from
continuing
operations
(7,285,857)
(7,396,744)
(12,112,228)
(10,001,076)
(5,020,445)
(4,675,921)
(2,612,733)
Income
(loss) from
discontinued operations
(25,949,828)
7,588,938
(7,029,511)
208,620
Net income
(loss)
applicable to common
stockholders
$(33,235,685)
$ 192,194
$(19,141,739)
$(10,001,076)
$ (4,811,825)
$(4,675,921)
$(2,612,733)
1999
2000
2001
2002
2003
2003
2004
Basic
and diluted net loss
per common share:
Loss
from continuing
operations
$ (0.89)
$ (0.81)
$ (1.30)
$ (1.01)
$ (0.37)
$ (0.35)
$ (0.16)
Income
(loss) from
discontinued
operations
(3.15)
0.83
(0.76)
0.02
Net
income (loss)
applicable to
common
stockholders
$ (4.04)
$ 0.02
$ (2.06)
$ (1.01)
$ (0.35)
$ (0.35)
$ (0.16)
Weighted
average shares
outstanding
Basic
and diluted
8,218,367
9,082,483
9,305,857
9,885,901
13,616,803
13,209,897
16,444,858
Operating Data:
Capital
expenditures
(6,049,699)
(2,919,821)
(501,882)
(533,610)
(645,340)
(55,242)
(578,888)
Summary Cash
Flow Data:
Net
cash used in operating
activities
$(12,175,123)
$ (4,917,915)
$ (9,561,199)
$ (4,322,231)
$(5,056,370)
$ (3,726,228)
$ (3,885,825)
Net cash provided by (used in)
investing activities
(6,049,699)
(1,188,662)
(1,271,632)
(901,056)
(612,635)
(37,169)
177,660
Net cash provided
by
financing activities
20,741,578
2,998,217
10,618,846
5,992,185
8,140,759
3,102,678
5,086,761
Balance Sheet
Data
(at period end):
Cash
$ 3,322,345
$ 213,985
$
$ 768,898
$ 3,240,652
$ 108,179
$ 4,619,248
Restricted cash
784,000
1,250,793
961,536
984,426
508,976
Property and
equipment
7,684,197
15,109,868
13,686,124
12,700,397
11,858,931
12,848,883
13,173,616
Property and equipment, net
7,180,231
12,438,899
10,145,087
7,429,433
5,054,973
5,966,584
4,929,090
Total assets
24,593,019
18,806,300
14,273,723
12,287,532
13,033,913
10,630,670
15,046,671
Total debt
3,389,794
7,616,413
12,211,878
9,640,955
5,176,861
9,437,701
4,808,592
Redeemable
preferred stock
3,466,538
9,861,431
Total
stockholders deficit
(6,871,098)
(665,330)
(11,537,659)
(14,800,981)
(9,774,002)
(14,727,648)
(10,613,664)
(1) The December
31, 2000 income from discontinued operations includes a $16.4 gain on the sale of
one of our subsidiaries which is net with a loss of $8.8 million from the discontinued
operations of three subsidiaries.
CONDITION
AND RESULTS OF OPERATIONS
Terminating Revenue by Geographic Region
On-Net Revenue Only
Terminating
On-Net
Consolidated
Year
Caribbean
Latin America
Asia
Middle East
Africa
Revenue
Revenue
$12,058,853
$4,427,966
$
$
$
$16,486,819
$29,614,565
40.7%
15.0%
0.0%
0.0%
0.0%
55.7%
$ 7,229,459
$5,303,856
$ 940,244
$ 110,068
$
$13,583,627
$28,422,149
25.4%
18.7%
3.3%
0.4%
0.0%
47.8%
$ 1,070,571
$ 714,529
$10,490,215
$2,869,919
$ 19,113
$15,164,347
$33,725,275
3.2%
2.1%
31.1%
8.5%
0.1%
45.0%
$ 1,522,667
$ 180,681
$ 7,899,147
$3,529,765
$441,764
$13,574,024
$40,499,353
3.8%
0.4%
19.5%
8.7%
1.1%
33.5%
Cost of revenues includes costs
incurred with the operation of our leased network facilities, and the purchase of
voice termination and Internet protocol services from other telecommunications carriers
and Internet service providers. As we have increased the percentage of VoIP traffic
carried on the network, our fixed network cost of voice services to carriers as
a percentage of the voice revenues has declined. This is illustrated by the decrease
of this percentage to 1.8% in the first nine months of 2004 from 3.3% in the first
nine months of 2003. We also continue to work to lower the variable component of
the cost of revenue through the use of least cost routing, continual negotiation
of usage-based and fixed costs with domestic and international service providers.
Revenue Growth
Revenue
grew 63% in the first nine months of 2004 over the first nine months of 2003.
Reduced SG&A
As a percent of revenue, SG&A decreased from 27.4% in 2003 to 18.5% in 2004.
Purchase of Veraz Switch
In April of 2004, we invested in excess of $0.8 million in a Veraz Softswitch which is now operational. Management believes that compared to older infrastructure, this switch is easier to expand with reduced deployment time. Management also believes this will further enhance our service offerings, flexibility and will allow us to size the network equipment to the traffic as the volume grows, rather than requiring heavy capital investments in anticipation of future revenue growth.
Debt Reduction
We further reduced debt by negotiating $2.2 million in reductions of outstanding vendor obligations through settlements, and by another $1.3 million that was paid off in outstanding vendor obligations and notes. In addition, the Company converted $0.6 million of debt to series C convertible preferred stock and converted $0.1 million of outstanding vendor obligations to common stock.
Capital fund-raising
We raised $4.6 million to complete the second tranche of a series C convertible
preferred stock offering that had been initiated in November of 2003. Additionally,
we raised $1.3 million from a common stock offering that was initiated in 2003.
Revenue Growth
Revenue
grew $5.3 million, or 18.7%, from the prior year, excluding discontinued operations.
Successful bid of Government Contracts
We were awarded a subcontractor bid to be the provider for Internet access for seventeen U.S. Embassies and Consulates located in Asia and the Middle East, and we also were awarded a bid to supply a private network for the U.S. Department of Defense in the Persian Gulf.
Addition of San Jose Point of Presence
In November of 2003, we added network equipment and a point of presence in San Jose, California, to support service to Asia.
Reduced SG&A
We reduced SG&A by $0.8 million, or 8%, from the prior year, while total revenues increased 18.7%.
Debt Reduction
We further reduced debt by negotiating $3.9 million in reduction of outstanding vendor obligations through settlements. We also converted $3.2 million in debt to preferred and common stock.
Capital fund-raising
In November 2003, we initiated a series C convertible preferred stock offering, with the first of two stock closings occurring in December 2003. In the first closing, the Company raised $2.5 million. We also raised $3.0 million from common stock purchases in 2003 initiated with the private placement from 2002, and we raised an additional $3.8 million from common stock purchases in 2003 associated with an equity offering initiated in 2003.
Revenue
Revenue
decreased $1.2 million, or 4%, from the prior year, excluding discontinued operations.
This decrease was primarily attributable to the loss of two large voice networks.
Reduced SG&A
SG&A decreased $1.8 million or 15.1% from 2001.
Efonica FC-LLC
We established a joint venture in December of 2002 that gave us a 50.2% equity interest in a company that provides VoIP services to consumers and corporations throughout emerging markets in the Middle East, Africa, Asia and Latin America.
Pakistan J.V.
We established a joint venture in mid 2002 that gave us a 75% equity interest in an entity which provides VoIP service to Pakistan.
Debt Reduction
We further reduced debt by negotiating $1.8 million in reductions and outstanding obligations through settlements, and we converted $3.7 million of debt into common stock.
Capital fund-raising
We raised $0.7 million in an equity offering for series B preferred stock in March of 2002, which was extended until September of 2002. Additionally, we raised $1.6 million through an equity offering for common stock that was initiated in July of 2002, and was extended into 2003.
Revenue growth
Revenue
grew $4.8 million, or 19%, from the prior year, excluding discontinued operations.
Capital fund-raising
We raised $4.2 million in an equity offering for series A preferred stock
that was initiated in June of 2001, and closed in November of 2001. Additionally,
we raised $0.8 million from a common stock offering.
Divestiture of Domestic Retail
Services
In mid-2001, we divested the domestic retail telecommunications
service by selling three different lines of business to three non-affiliated parties.
This resulted in a loss from discontinued operations of approximately $7.0 million
during 2001.
Revenues
$ 4,274,000
Cost of revenues
(4,407,000)
Depreciation and amortization
(424,000)
Selling, general
and administrative expenses
(5,049,000)
Interest expense
(60,000)
Accrual of
office lease expenses
(1,073,000)
Write-off of leasehold improvements
(291,000)
Net
loss
$(7,030,000)
Year Ended
Year Ended
Year Ended
Nine months ended
December 31, 2001
December 31, 2002
December 31, 2003
September 30, 2004 (1)
Cash
used in operating activities
$ (9,561,199)
$(4,322,231)
$(5,056,370)
$(3,885,825)
Cash provided
by (used in)
investing activities
(1,271,632)
(901,056)
(612,635)
177,660
Cash provided by financing activities
10,618,846
5,992,185
8,140,759
5,086,761
Increase
(Decrease) in cash and
cash
equivalents
(213,985)
768,898
2,471,754
1,378,596
Cash and cash
equivalents, beginning
of
period
(213,985)
768,898
3,240,652
Cash
and cash equivalents, end
of
period
$ 0
$ 768,898
$ 3,240,652
$ 4,619,248
(1) These figures
include an aggregate of approximately $2.2 million that was paid during the period
to satisfy past obligations.
Less than
More than
1 year
1-3 years
3-5 years
5 years
Total
Contractual
obligations:
Debt maturing
within one year
$ 2,905,825
$ 0
$ 0
$ 0
$ 2,905,825
Preferred shares subject to mandatory
redemption (1)
9,861,431
0
0
9,861,431
Capital leases
1,114,244
257,136
0
0
1,371,380
Operating leases
1,028,000
2,128,000
2,200,000
391,000
5,747,000
Minimum purchase
commitments (2)
300,852
0
0
0
300,852
Total
contractual cash obligations
$ 5,348,921
$12,246,567
$2,200,000
$391,000
$20,186,488
(1) This represents
the obligation for the redemption of series C preferred stock plus accrued and unpaid
dividends if we do not convert the shares to common stock in an initial public offering
prior to the second anniversary of the initial closing. This obligation will be
eliminated upon the occurrence of the initial public offering because this series
C preferred stock will automatically convert into shares of our common stock in
connection with the offering.
In December 2004, the Financial
Accounting Standards Board FASB) issued SFAS No. 123 (revised 2004)
(123R), Share-Based Payment. Statement 123(R) will provide
investors and other users of financial statements with more complete and neutral
financial information by requiring that the compensation cost relating to share
based payment transactions be recognized in financial statements. That cost will
be measured based on the fair value of the equity or liability instruments issued.
SFAS No. 123(R) covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share appreciation
rights and employee share purchase plans. SFAS No. 123(R) replaces SFAS No. 123,
Accounting for Stock Based Compensation, and supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees. SFAS No. 123, as originally
issued in 1995, established as preferable a fair-value-based method of accounting
for share-based payment transactions with employees. However, that Statement permitted
entities the option of continuing to apply the guidance in APB Opinion No. 25, as
long as the footnotes to financial statements disclosed what net income would have
been had the preferable fair-value based method been used. Public entities (other
than those filing as small business issuers) will be required to apply SFAS No.
123(R) as of the first interim or annual reporting period that begins after June
15, 2005. We are in the process of evaluating whether the adoption of SFAS No. 123(R)
will have a significant impact on our overall results of operations or financial
position.
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities (FIN 46). In December 2003, FIN 46 was replaced by FASB interpretation No. 46(R) Consolidation of Variable Interest Entities. FIN 46(R) clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46(R) requires an enterprise to consolidate a variable interest entity if that enterprise will absorb a majority of the entitys expected losses, is entitled to receive a majority of the entitys expected residual returns, or both. FIN 46(R) is effective for entities being
evaluated under FIN 46(R) for consolidation no later than the end of the first
reporting period that ends after March 15, 2004. We do not believe the adoption
of FIN 46(R) will have a material impact on our financial position or results
of operations, as we do consolidate our joint ventures as required by this FIN.
BUSINESS
History And Corporate Information
We were founded as a Delaware corporation
in September 1997 as a traditional U.S.-based domestic and international communications
provider offering primarily domestic long distance services, local access, and consulting
services. In 2000, we made a strategic decision to focus on VoIP and other Internet
service business opportunities in emerging markets. This change was due to deteriorating
margins and increasing competition in the domestic and international long distance
business, and our expanding knowledge base in the area of VoIP and emerging markets.
For these reasons, we sold our US domestic local access and services business lines
in September 2001, and Integrated Telemanagment Solutions, Inc., a hospitality consulting
company, in December 2001. Since then, we sought to gain early entry in high growth
emerging markets often in partnership with local organizations that have strong
distribution channels, regulatory experience, market intelligence, the ability to
deliver local loops and the capability of providing customer service support.
Overview
Through our key assets of market knowledge, technical
expertise and strategic relationships, we believe we are poised to:
Capitalize upon
the growth in VoIP, a market that Insight Research Corporation expects to grow from
$13 billion in 2002 to nearly $197 billion by 2007 and expand our international
penetration of VoIP applications to consumers and corporations.
Establish our company
as an early mover in emerging markets through our product suite, technology
platform and relationships with our partners.
Continue to expand
the number of international partnerships in key emerging markets to facilitate the
distribution and local support of our product line and leverage our existing international
partnerships to sell our additional services in targeted markets.
Expand our emerging
market network connectivity by acquiring additional communications licenses through
existing and new strategic relationships.
We target markets that we believe have:
(i) barriers to entry, (ii) substantial growth prospects, (iii) an increasing number
of corporations operating within them, and (iv) a substantial quantity of voice
and data traffic between the developed world (e.g., the United States and United
Kingdom) and other countries within our network. In select emerging markets, we
will deploy network facilities in order to connect that country to the United States.
We currently provide services to customers
in over 45 countries. We believe that by using local partners in select markets,
we can best distribute our services while providing a high level of local customer
support.
Services
To date, we derive a significant
portion of our revenues primarily from U.S.-based customers requiring voice and
data connectivity to emerging markets. As we continue to execute our strategy, we
anticipate a larger number of non-
35
U.S. based customers. We are currently seeking to expand our revenue
stream by providing our services from, in and between emerging markets, which to
date, have not generated material revenues for us. We deliver our services directly
to end users and through partnerships with companies that distribute and support
our services locally. We also deliver our services through joint ventures.
We have service contracts with several customers,
including government agencies. Our contracts with carriers typically have a one
year renewable term, with no minimum volume per month, and allow the customer to
terminate without penalty. Our contracts with corporate customers are typically
for a one year term, and have an early cancellation penalty. Our government contracts
range from one year to five year terms, and are terminable at the governments
option without penalty. For the years ended December 31, 2003 and 2002, the Telco
Group accounted for 13.7% and 13.8%, respectively, of our total revenues and for
the year ended December 31, 2001. Qwest Communications accounted for 16.0% of our
total revenues for voice services.
We have tailored our service offerings
to meet the needs of our target customers requiring services to, from, in and between
emerging markets.
36
In December 2004, the Company entered into an
agreement to acquire 51% of the common stock of a Jamaican company in exchange
for $150,000. Substantially all of the net assets of the company consist of international
and domestic carrier license agreements with the Jamaican government which expire
in 2013 and 2018, respectively. We expect to begin to deliver services in Jamaica by the second quarter of 2005.
Growth Strategy
Strategy:
Our strategy is
to gain early entry in an emerging country and then market advanced communication
services such as VoIP, private networks, Internet access, Internet protocol video
conferencing, and other Internet services. In many cases, we will establish a foothold
within an emerging market through a partnership with a local organization. We believe
that working in conjunction with local partners enables us to offer global services
with local support.
The details of our strategy include:
We believe that working with strong partners allows
us to best distribute services and attract, retain and support customers. We seek
to develop partnership arrangements in each of our markets. Local partners offer
time to market advantages as their existing infrastructure, sales distribution channels,
and technical support can be utilized, while simultaneously reducing capital needed
to enter the market. Additionally, these partners typically provide last mile connectivity
in their country required for the delivery of local Internet access and private
networks. This last mile connectivity, which is the connection between the in-country
telecommunications facility and the customers physical location, in combination
with local support, expands the geographic coverage of our global service offering
and helps differentiate us from our competitors.
We intend to work with our partners to
enable them to distribute and support our products and services (either co-branded
or private labeled). Our private label alternative enables our partners to market
our products, technology platform and global reach under their own brand. This alternative
is ideal for partners that do not have the capital, expertise and technology platform
required to deliver our services but want to build their own brand. Local partners
also offer critical insights into the regulatory environment and are familiar with
the specific cultural nuances of their region. Additionally, we anticipate that
prior to the rollout of any new services, our partners will work with us, contributing
market intelligence, to ensure a successful introduction of new products. This partnering
approach allows the local infrastructure to progress to a more technologically advanced
platform while positioning us to benefit from the rapid growth and reserves that
these technologies enable.
We deliver a broad array of Internet protocol
based communication services, primarily VoIP, which require a lower capital investment
than traditional strategies. This approach allows us to accomplish what we believe
many of our partners in emerging markets are seeking a way to enhance existing in-country
technology and service offerings at minimal cost. This allows the local infrastructure
to progress to a more technologically advanced platform while positioning us to
benefit from the rapid growth that these new technologies and under penetrated markets
enable.
37
One of our key service offerings is VoIP, which
allows us to offer Internet-based long distance services at competitive prices to
any business, consumer or carrier with broadband or dial-up Internet access. Quality
levels, which had once been a significant issue, are fast approaching those associated
with traditional voice transmission. We typically market our VoIP services to corporations
and consumers through an in-country distribution partner. Additionally, we seek
to enter into relationships with in-country carriers to transport voice traffic
to and/or from that country. We believe that we have established our presence in
the voice markets due to (i) direct interconnections to postal telephone and telegraph
companies, and other licensed carriers, which facilitate higher quality transmission
than the services offered by gray market operators, and (ii) competitive pricing.
We believe that carriers seeking to access these gray markets will increasingly
want to work with companies that have established relationships with postal telephone
and telegraph companies and other licensed carriers, as opposed to quasi-legal gray
market operators who divert long distance traffic and revenue from those carriers.
We believe gray market operators generally provide poorer quality and reliability.
In several markets, we receive inbound traffic from the postal telephone and telegraph
company and other licensed carriers that tend to produce higher margin than our
outbound voice services. We believe this inbound traffic from postal telephone and
telegraph companies and other licensed carriers strengthens our ability to ensure
favorable contractual arrangements. We will use capacity on our international voice
networks to carry our own retail traffic in addition to selling capacity to other
carriers desiring termination to that specific destination. As we progress in the
execution of our business plan, we intend to use a greater percentage of our network
capacity to carry higher margin retail traffic.
Support Partners
and Services with Advanced Packet Switched, Low Cost, Flexible Network.
We believe that this strategy allows us to control
the network intelligence critical to providing transmission quality and high quality
customer support. At the same time, we are not burdened by large capital requirements
and high fixed network costs in a market that has seen dramatic price reductions.
The majority of our network operating costs are variable; that is, directly proportional
to usage and revenue.
We intend to build upon our market position in
the international VoIP business to market our managed private networks and other
Internet-based services to multinational businesses. By utilizing our own direct
sales force and local partner distribution channels, we are able to market our services
to customers in the United States and abroad. Our engineering team works closely
with both our sales team and customers to provide solutions to our clients. As part
of our corporate service offerings, we provide a single point of contact, ensure
active end-to-end management and guarantee service levels. As a result of our geographic
coverage, we have been approached by several large communication carriers and have
discussed the possibility of becoming their subcontractor for services in regions
they do not otherwise cover.
We believe that the U.S. Federal Government
provides an opportunity for us. By leveraging our relationships and experience in
navigating international markets, we have been able to penetrate this sector. In
2003, we were approved by the U.S. Government as a prime contractor to provide services
to the Department of Defense (DoD) and was awarded our first contract
in this sector. Under this contract, we are providing a private network connecting
two DoD facilities in the Persian Gulf. Although we are seeking to increase the
amount of our government contracts, only 3% of our revenue is currently derived
directly from them and arrangements whereby we act as a subcontractor on government
contracts. Under one such arrangement, we provide Internet connectivity to 16 U.S.
embassies and consulates in Asia and the Middle East, with another scheduled to
be installed by the end of 2004. These contracts, however, often give the government
the right to terminate at any time. Although we try to include liberal cancellation
arrangements with our suppliers, we may make contractual commitments with third
party vendors to fulfill portions of such contracts that do not
38
contain similar termination provisions. In the event that the government
terminates a contract that we have made third arrangements for we may have significant
unrecouped costs.
We look to provide connectivity to, from, in and
between our emerging markets. We are seeing demand from our business customers for
multi-country connectivity such as a U.S. corporation seeking connectivity to India,
China and the Philippines from one provider. We recently began marketing this service.
In addition, we are targeting connectivity between markets with significant traffic
flows such as the traffic flows between India and multiple countries in the Middle
East. In countries where we do not have facilities, we will work with other international
communications providers to utilize their networks to deliver this service. In our
VoIP business, we are seeing similar trends. We believe that traffic among emerging
markets is less susceptible to price and margin erosion than traffic among developed
countries. In countries where we install equipment, it is common that our partners,
customers or vendors will provide a facility to locate the equipment.
Marketing
We market our services via a variety of distribution
channels.
39
Joint Ventures
We enter into formal joint venture agreements
with certain partners and have established three joint ventures to market and provide
our services. The profits of each joint venture agreement are typically allocated
according to percentage of equity ownership.
40
Network Strategy
The core of our network design is a packet-based
switching system that accommodates VoIP and traditional voice, Internet, data and
video services. Packet-based networking is considerably more efficient than circuit-switched
systems because it can disperse packets (information) in many directions and then
reassemble them at the destination. This makes much more efficient use of available
facilities when compared to circuit-based systems. We believe that this design offers
an extensible platform to support envisioned growth. The network design is intended
to embrace emerging technologies as they become available. The network supports
expansion outside of the United States and, if necessary, can deliver packet technology
to every part of the network.
We are currently using a Veraz Softswitch,
Nuera Orca equipment, and carrier class Cisco and Juniper routers to transport voice,
data, video, and Internet traffic. Softswitch is a generic term that refers to a
new generation of telecommunications switching equipment that are entirely computerized
and are essentially software mounted on robust computer servers. This provides us
with routing capabilities to further enhance services and performance available
to our clients.
Key attributes of our soft switch include:
41
Benefits of the Fusion Distributed Network Architecture
Historically, most large international
communications networks required investment and implementation of self-contained
switching hardware that, in turn, could then be connected with other comparable
equipment nodes via leased lines or other forms of networking. Examples of these
would include equipment such as large traditional carrier switching equipment. All
of the intelligence and functionality has to be replicated in each major location.
We, however, have implemented an environment
that we believe is far more flexible, adaptable, and less costly than the legacy
systems in use by some of our competition. Our Softswitch environment permits us
to centrally control our network and service offerings from one location yet deploy
gateways that interface with customers and vendors in remote locations. Each remote
gateway is able to deliver our service suite even though the intelligence is centrally
located in our New York facility. Instead of needing duplicative and expensive infrastructure
in every location, we economize by allowing multiple disparate network equipment
to be centrally managed. We believe that we can capitalize on market opportunities
that would previously have been unadvisable due to the expense of deployment and
associated marketplace risks.
Capacity
In traditional telecommunications systems,
capacity is a function of equipment and software. Because of its modular architecture,
Softswitch capacity is much less dependent on hardware. We believe that our Softswitch
environment will enable us to expand our capacity to handle traffic and our geographic
reach with greater ease in the future.
Ease of Modular Service Creation
Traditional telecommunications switching
systems are not easily modified to incorporate new features and functionality. Because
our Softswitch environment is entirely computer driven, our systems are flexible
and designed for the addition of features. We intend to expand our service offerings
by integrating additional hardware and software systems. Our distributed architectures
and flexible technology platform allows us to roll out new services in a shorter
period of time than many traditional telecommunication companies.
Ease of Deployment
42
ence where the partner or vendor does not have the necessary equipment, where
it is a requirement pursuant to a license agreement or the partner or vendor contractually require us to provide
the equipment.
This modular approach allows us to respond and
deploy our services rapidly.
Dynamics of the Global Communications Market
Voice over Internet Protocol (VoIP)
According to Telegeography 2004, VoIP providers
carried only 150 million minutes of international telephone calls in 1998, less
than 0.2% percent of the worlds international traffic. By 2002, cross-border
VoIP traffic had grown to just under 19 billion minutes, about 11 percent of the
worlds international traffic.
International VoIP carriers have achieved
growth by carrying traffic on behalf of other long-distance service providers. Consequently,
most end-users are likely unaware that many of their phone calls are traversing
the Internet, rather than traditional long-distance networks.
According to Telegeography 2004, a combination
of aging regulations and new technology enabled these and other start-up carriers
to capture significant market share in only a few years.
Although there have been recent improvements
in VoIP technology, there are, however, several drawbacks still inherent in the
technology. These drawbacks consist of reduced sound quality attributable to technological
issues such
43
as delays in the transmission of packets across Internet systems.
In addition to the technological drawbacks, we have, and will continue to experience,
certain drawbacks associated with our strategy to expand our business in emerging
markets. Specifically, these drawbacks may include the high cost of Internet access
in emerging markets, limited consumer knowledge about VoIP, difficulty in maintaining
local customer support and in dealing with local companies and governments in some
of these emerging markets.
Private networks generally fall into two
categories: leased line networks and virtual private networks. Leased line networks
refer to point-to-point connectivity on satellite, fiber optic, or wireless facilities
to interconnect various locations. These private networks are totally separate from
the Internet or other networks, although some may permit interconnection with the
Internet through stringent security methods such as firewalls. Virtual private networks
utilize shared network facilities such as the Internet, frame relay, ATM (Asynchronous
Transfer Mode) or MPLS networks to carve out a secure portion of the network, thus
making it a virtual private network. As carriers have become more technically adept,
the use of leased lines has begun to decline. Virtual private networks are more
cost effective and can achieve similar levels of confidentiality.
According to Interactive Data Corporation
(March 2004), carrier-based Internet protocol virtual private network growth is
expected to outperform other data networking options, such as frame relay and ATM
connectivity.
Revenue from worldwide virtual private
network services was $18 billion last year and, driven by the quest for increased
productivity and cost savings, is projected to reach over $30 billion in 2008. Demand
for security services is also rising, with revenues growing from $3.1 billion in
2003 to $7.7 billion in 2008, according to Infonetics Research, August 2004.
Internet Access
The growth in number of Internet users between
2000 and 2004 and the percentage of global users in each region of the world is
illustrated below:
As of September 30, 2004
From a growth perspective, the greatest opportunities
are represented internationally, especially from previously underserved markets.
44
Video Conferencing
According to the Telecommunications Industry
Association (February 2004), Internet protocol applications, revenues are also expected
to grow at a rapid rate. Internet protocol revenues for audio conferencing, videoconferencing,
Web conferencing, follow-me services (follow-me services permit incoming calls to
a mobile device or Personal Data Assistant (PDA) to be routed to a service subscriber,
giving them the ability to know the identity of the caller and to then decide whether
to accept or defer the caller to voicemail), unified messaging and instant messaging
totaled $1.5 billion in 2003, more than twice the $696 million of 2002. Revenues
will increase to a projected $11.4 billion by 2007, a 66.5 percent compound annual
growth rate. We believe that this is an important trend and has led us to emphasize
increasing this area of our business.
There are a variety of video conferencing types
available. These include full conference room video, requiring substantial bandwidth
and significant investment in equipment, as well as free Internet-based services.
The growth is likely to come from affordable, high quality integrated voice and
video services that can be used with modest investment and with a reasonable amount
of Internet bandwidth.
Regional Outlook
Deregulation
45
Emerging Market Dynamics
Growth of Multinational Businesses in Emerging
Markets
Asia
According to BuddeCom, 2003 Information
Highways in Asia, although Asia has rebounded from the economic crisis of the late
1990s, the region has had to contend with the impact of a global economic slowdown.
Through 2002 into 2003, the regions telecommunications sector has grown but
at a slower rate, but in a somewhat muted fashion. Despite this, the Internet has
continued to develop, with spectacular growth in broadband access occurring in some
of the developed Asian economies. According to BuddeCom, 2003 Information Highways
in Asia, the giant telecommunications market in China has continued to rapidly expand
and is expected to reach $US27 billion by 2006, or 20% of the total Asian market.
Moreover, Asia had a total of over 870 million (fixed and mobile) telephone subscribers,
according to BuddeCom, 2003 Information Highways in Asia.
According to Telecomasia.net, incumbent
telecommunications carriers are experiencing the impact of five dynamics:
We believe that Asia represents an opportunity
for us to work with incumbent as well as emerging competitive carriers to expand
products, services, and pursue entrepreneurial opportunities that fit within our
capabilities.
Middle East
In terms of communications development,
the Middle East is one of the most diverse regions in the world. According to Telecommunications
International 2 October 2003, fixed line teledensity ranges from almost 56% in Cyprus
to just 2.7 percent in Yemen. The Israeli mobile market has reached the saturation
point, with reported penetration of 99 percent. Despite variances among Middle Eastern
markets, each is characterized by liberalization, except Iraq, where market regulation
is secondary to rebuilding basic infrastructure after years of war and neglect.
46
Bahrain, Saudi Arabia and Lebanon have all passed new communications
laws and have either established new independent regulatory bodies to oversee the
development of the industry, or are in the process of doing so. The Syrian government
has, to date, shown no inclination to open up the fixed line telecom sector to competition
but in early 2003, the Ministry of Communications revealed plans for the creation
of a new council to regulate and encourage investment in the telecom industry.
According to Telecommunications International
2 October 2003, the United Arab Emirates (34.2 percent teledensity) is reluctant
to discuss liberalization, but is under pressure to introduce competition. The World
Trade Organization (WTO) is interested in competition for Etisalat, the incumbent
communications provider for the UAE. The private sector is anxious to see the government
end the monopoly situation and create a competitive business environment.
Africa
Despite remarkable changes in Africas
telecommunications market over the past few years, teledensities remain extremely
low. According to Research and Markets (
http://www.researchandmarkets.com
)
July 2004, with around 12% of the worlds population and less than 3% of the
worlds telephone lines, Africa is a continent of substantial opportunity.
Many governments are relinquishing their grip on telecommunications operators resulting
in advancement in communications through the deployment of innovative technologies,
which creates unprecedented growth. This trend is opening new frontiers and brings
with it considerable possibilities for development and progress.
We believe that the convergence of fixed and mobile
networks and services will continue to dominate the market with future licensees
gaining combination licenses with the ability to operate both wired and wireless
systems. The ability to offer wireless services should speed development of badly
needed last mile services, such as broadband Internet access and VoIP.
According to Global Information, Inc. (2/2004),
recent telecommunications sector reforms have had impressive results, especially
in rolling out access to basic telecommunications services. However, the lack of
telecommunications infrastructure is the most pressing economic issue currently
holding back the continents development. Africa remains the least Internet
connected continent in the world, both from a total bandwidth and Internet penetration
perspective.
Africas data traffic is experiencing
strong growth, according to Telecommunications in Asia 2004, Global Information,
Inc., particularly in South Africa. Demand for value-added data services is driven
by market forces and rarely as an initiative of service providers.
Another important development is the introduction
of new entrants in the fixed-line market. SNO (Second National Operator) licenses
have been issued to companies in Ghana, Nigeria, Tanzania, Seychelles, South Africa,
Zimbabwe, and other countries are following this lead.
Caribbean
47
Unlike the initial stages of deregulation in the U.S., deregulations
of the telecommunications industry in the Caribbean has proven to be an underlying
stimulant for Caribbean economics. Forrester Research, 2004 predicts that telecommunications
worldwide will grow from $901 billion in 2001, to $1.57 trillion by 2006. This represents
a five-year compound annual growth rate of 11.7%. The Caribbean represents 4% of
the growth.
Cable & Wireless (C&W), the incumbent
operator in the Caribbean, still commands a significant portion of the telecommunications
markets, approximately 95% of the PSTN market, and 48% of the Mobile market. With
operations in more than 16 countries in the Caribbean, C&W has worked effectively
to raise the barrier of entry into these markets by enforcing the establishment
of costly interconnection fees for competitors. Although the opening of the Caribbean
markets has allowed a number of telecom providers an opportunity to take advantage
of the burgeoning voice traffic market, there is still little competition in the
traditional PSTN and Internet protocol based voice services market across the Caribbean
where C&W operates.
Latin America
Over the past few years, circumstances
in Latin America have severely impacted communications growth. Consumer confidence
is now returning to Latin America with communications spending on the rise. Not
only have consumers and corporations begun signing up for value-added services,
operators are once again making solid network investments. One of the areas expected
to benefit the most from this renewed customer confidence is broadband, according
to
www.telecommagazine.com
, Americas: Latin America, Broadband and
Wireless lead the way forward, October 2003.
As a portion of overall communications, revenues
from broadband remain very small. Broadband growth is high, but Latin America remains
voice-centric and will likely continue to be so for the coming years as consumer
based broadband connectivity increases as does the number of prospects for VoIP
services. We are aggressively pursuing opportunities in this market.
Competition
The international communications industry
is highly competitive and significantly affected by regulatory changes, technology
evolution, marketing strategies, and pricing decisions of the larger industry participants.
In addition, companies offering Internet, data and communications services are,
in some circumstances, consolidating. We believe that service providers compete
on the basis of price, customer service, product quality, brand recognition and
breadth of services offered. Additionally, carriers may compete on the basis of
technology. Recently, we have seen carriers competing on their ability to carry
Voice over Internet Protocol (VoIP). As technology evolves and legacy systems become
an encumbrance, we expect carriers to compete on the basis of technological agility,
their ability to adapt to, and adopt, new technologies.
In the area of VoIP we compete with companies
such as Net2Phone, Vonage, 8X8, Deltathree, Dialpad and Mediaring. This business
segment is marketing-intensive and does not have high barriers to entry. While we
believe our distribution relationships and marketing skills provide us with a competitive
advantage, our competitors generally have more resources and more widely recognized
brand names.
We compete with several emerging
international carriers, many of whom are in or entering the VoIP market, among which
are Primus Telecommunications Group, Teleglobe International Holdings Ltd (which
completed its merger with IP-telephony pioneer ITXC in May 2004), and IDT Corporation.
We also compete with non-U.S. based emerging carri-
48
ers. For example, in India, we compete with Bharti Tele-Ventures,
Reliance Telecom and Data Access, all of which are larger, better capitalized and
have broader name recognition than Fusion. Many of these competitors are becoming
increasingly focused on emerging markets as they seek to find higher margin opportunities.
Many of these carriers are also focused on voice carriage but may become increasingly
focused on providing private networks and other Internet protocol services.
In each country where we operate, there are numerous
competitors, including VoIP service providers, wireline, wireless and cable competitors.
We believe that as international telecommunications markets continue to deregulate,
competition in these markets will increase, similar to the competitive environment
that has developed in the United States following the AT&T divestiture in 1984
and the Telecommunications Act of 1996. Prices for long distance voice calls in
the markets in which we compete have been declining and are likely to continue to
decrease. In addition, many of our competitors are significantly larger, have substantially
greater financial, technical and marketing resources and larger networks.
In the area of Internet conferencing, we
compete with other Internet-based video or audio conferencing providers such as
WebEx Communications, PlaceWare, Talkway Communications, and InterCall. We can be
perceived as competitive with free services such as Yahoo video and Microsoft Netmeeting.
Each of these competitors has their own strengths and weaknesses. Some are unable
to do more than one-on-one conferencing or require use of free public servers and
are therefore subject to varying levels of quality and usefulness. Others are designed
solely for the corporate marketplace and require substantial up-front investment
in servers and on-going management. We also expect that companies such as Microsoft
and IBM will seek to integrate a video conferencing service directly into personal
computers.
We compete with business-oriented Internet
access providers, including AT&T, MCI, Qwest, and Cable & Wireless. These
providers may offer both wholesale and retail Internet connectivity and are considerably
larger than us and have greater brand recognition.
We have been unable to identify any direct
and comprehensive competitors that deliver the same suite of services to the same
markets with the same marketing strategy as our Company. We compete with many different
providers in various aspects of our Business Plan, but have found none that directly
offer the same breadth of services focused on emerging markets. Some of our competitive
advantages include:
Government Regulation
General.
In the United States, we
are subject to varying degrees of federal, state and local regulation and licensing,
including that of the Federal Communications Commission. Internationally we also
encounter similar regulations from governments and their telecommunications agencies.
At each of these levels, there are significant regulations imposed on the provision
of telecommunications services in our business.
We cannot assure you that the applicable
U.S. and foreign regulatory agencies will grant required authority or refrain from
taking action against us if we are found to have provided services without obtaining
the necessary authorizations. If authority is not obtained or if our pricing, and/or
terms or conditions of service, are not filed, or are not updated, or otherwise
do not fully comply with the rules of these agencies, third parties or regulators
could challenge these actions and we could be subject to forfeiture of our license,
penalties, fines, fees and costs.
49
During July 2004, the United States Senate continued to consider
how it might apply regulations to VoIP. The VoIP Regulatory Freedom Act of 2004
exempts VoIP service from state taxes and regulations and defines it as a lightly
regulated information service for U.S. government regulators. This does not, however,
remove the uncertainty of regulatory impact within the United States. For example,
the bill reserves the ability for states to require VoIP to provide 911 services,
to require VoIP providers to contribute to state universal service programs, and
to pay intrastate access charges to other telecom providers.
Although the FCC determined the services provided
by AT&T to be a telecommunications service subject to interstate access charges
rather than information services not subject to such charges, they did not make
a determination regarding the regulatory status of phone-to-phone VoIP or its exposure
to Universal Service Fund (USF), 911, Communications Assistance for Law Enforcement
Act (CALEA) or any other public policy issues. The FCC further qualified the decision
by stating that they in no way intend to preclude the Commission from adopting
a different approach when it resolves the
IP-Enabled Services
rulemaking
proceeding or the
Intercarrier Compensation
rule making proceeding.
(Developing a Unified Intercarrier Compensation Regime, CC Docket No. 01-92, Notice
of Proposed Rulemaking, 16 FCC Rcd 9610 (2001)(Intercarrier Compensation)).
As of August 2004, VoIP services of all
types are not regulated by the FCC, and, as such, are not subject to USF charges
or other public policy regulation such as 911/E911, CALEA, etc.
Some states have tried to directly regulate
VoIP services on an intrastate basis, but these attempts, have, so far, not held
up to court challenges. Many states are holding forums to research the issues surrounding
VoIP, some are encouraging or even requesting that VoIP providers subject themselves
to public service commission jurisdiction and obtain certification as telephone
companies, most are hesitant to act until a final determination is made by the FCC,
but some have voluntarily done so.
Trademarks
We have several trademarks and service
marks, all of which are of material importance to us.
The following trademarks and service marks
are registered with the United States Patent Trademark Office:
50
The following trademarks and service marks are filed with the United
States Patent Trademark Office and are currently in registration process:
The telecommunications markets have been characterized
by substantial litigation regarding patent and other intellectual property rights.
Litigation, which could result in substantial cost to and diversion of our efforts,
may be necessary to enforce trademarks issued to us or to determine the enforceability,
scope and validity of the proprietary rights of others. Adverse determinations in
any litigation or interference proceeding could subject us to costs related to changing
names and a loss of established brand recognition.
Employees
Properties
We are headquartered in New York, New York
and lease offices and space in a number of locations. Below is a list of our leased
offices and space as of September 30, 2004.
We also maintain facilities in India, Dubai and
Lebanon which are leased by our joint ventures, which we do not believe are material.
(1)
We believe that our leased facilities are adequate
to meet our current needs and that additional facilities are available to meet our
development and expansion needs in existing and projected target markets.
51
LEGAL PROCEEDINGS
On May 8, 2002, Donna Marie Furlong, a
former employee, filed a complaint against us with the Executive Department, Division
of Human Rights, New York Office, State of New York (
Donna Marie Furlong vs.
Fusion Telecommunications International, Inc.,
Case No. IB-E-DS-02-1254784-D)
seeking damages in an unspecified amount. This employee claims that she was discharged
from her job in violation of Title VII and the New York State Human Rights Law.
We are vigorously opposing these claims and have filed a position statement with
the Department. We believe the claim to be without merit.
On April 15, 2003, World Access, Inc.,
a former customer of ours, brought an action against us for recovery of preferential
transfers and other claims under the Bankruptcy Code in the United States Bankruptcy
Court, Northern District of Illinois Eastern Division (
In Re: World Access, Inc.,
et al vs. Fusion Telecommunications International, Inc.,
Adv. Pro. No. 03 A
00851). The suit seeks damages in the amount of $334,877 for our alleged Avoidance
of Preferential Transfers, Recovery of Transfers, Setoff, Recovery Setoff, Payment
of Improperly Setoff Debt, Turnover of Property, and Damages for Overdue Debt &
Turnover of Property. We filed a Proof of Claim with the Court in the amount of
$85,475.78 for amounts that were due us at the time this customer filed bankruptcy.
We plan to defend this suit vigorously and do not expect the outcome to have an
adverse effect on our financial condition.
On May 28, 2003, Jack Grynberg,
et al.,
an investor in one of our private offerings; filed a complaint with the Denver District
Court, State of Colorado (
Jack Grynberg, et al v. Fusion Telecommunications International,
Inc., et al,
03-CV-3912) seeking damages in the amount of $400,000 for the purchase
of an interest in Fusions 1999 private placement offering of subordinated
convertible notes through Joseph Stevens & Company, Inc., a registered broker
dealer. This complaint asserted the following claims for relief against us: Breach
of Fiduciary Duty, Civil Theft, Deceptive Trade Practices, Negligent Misrepresentation,
Deceit Based on Fraud, Conversion, Exemplary Damages and Prejudgment Interest. On
June 25, 2004, we filed with the Court our Motion to dismiss which was granted.
The plaintiffs have filed an appeal of the motion which is pending.
In 1999, we guaranteed a real property
lease on behalf of our joint venture, C&F Switching, LLC. The joint venture
subsequently defaulted on the lease and on July 17, 2003, the landlord, NWT Partners,
Ltd., brought an action in the Miami-Dade County Circuit Court, State of Florida.
(
NWT Partners, Ltd. v. C&F Switching L.L.C. et al.,
Case No. 03-16654
CA 01 (6)). We are being sued for back rent, interest, courts costs and attorney
fees in the amount in excess of $96,931.48. In addition, the landlord is seeking
to accelerate the balance of the lease, which would result in us owing approximately
$1,005,000 in additional rent. We believe that this dispute will be resolved amicably,
but if we are unable to resolve the action, we can make no assurance that the outcome
will not have an adverse effect on our financial
Due to the regulatory nature of the industry,
we are periodically involved in various correspondence and inquiries from state
and federal regulatory agencies. Management does not expect the outcome of these
inquiries to have a material impact on the operations or the financial condition
of the company.
52
MANAGEMENT
The following tables set forth information
concerning our directors, executive officers, and other key members of senior management
as of the date of this prospectus. Our directors are elected to serve for one-year
terms at our annual meeting of stockholders.
Directors and executive officers:
Executive Officers and Senior Management
The following are our Executive Officers
and Senior Management:
Marvin S. Rosen,
co-founded the
Company in 1997 and has served as our Chief Executive Officer since April 2000,
the Chairman of our Board of Directors since November 2004, the Chairman of our
Executive Committee since September 19, 1999, Vice Chairman of the Board of Directors
since December 1998 and a member of our Board since March 1998. Since November 1983,
Mr. Rosen has been a Shareholder of, and currently serves as Of Counsel
to, the national law firm of Greenberg Traurig, P.A. where he also served on the
Executive Committee until June 2000. Mr. Rosen was Finance Chairman for the Democratic
National Committee from September 1995 until January 1997. Currently, he serves
on the Board of Directors of the Robert F. Kennedy Memorial, and Terremark Worldwide,
Inc. and previously was Budget and Finance Chairman for the Summit of the Americas
and Chairman of the Florida Housing Finance Agency.
Matthew D. Rosen
has served as our
President and Chief Operating Officer since August 2003, Executive Vice President
and Chief Operating Officer between February 2002 and August 2003, Executive Vice
President and President of Global Operations between November 2000 and January 2002
and as President, US Operations between March 2000 and November 2000. From 1998
to 2000, he held various management positions including President of the Northwest
and New England Operations for Expanets, a $1.3 billion integrated network communications
service provider. From 1996 to 1998 he was Corporate Director of Operations for
Oxford Health Plans, a $4 billion health care company, where he worked on developing
and executing turnaround strategies. Prior to his role as Corporate Director of
Operations, Mr. Rosen held an executive position in a start-up healthcare technology
subsidiary of Oxford where he was an integral part in developing strategy and building
its sales, finance and operations departments. Prior to Oxford, Mr. Rosen was an
53
investment banker in Merrill Lynchs corporate finance department.
Mr. Rosen also serves as Chairman of our joint venture, Efonica, and he is the son
of our Chief Executive Officer, Marvin Rosen.
Joel H. Maloff, Ph.D.,
has served
as our Executive Vice President and Chief Technology Officer since March 2000. Dr.
Maloff first became involved with the Internet in 1986 and has written four books
and numerous articles on the Internet, business applications for the Internet, network
security, and international Internet development. He has also served as advisor
to former Senator Al Gore and Senator John Kyl on Internet-related issues. From
September 1998 to September 1999 he served as Chief Operating Officer of Internet
Operations Center. Acting as an advisor and turn-around expert for the
Board of Directors, from May 1996 to May 1997, he served as Chief Technology Officer
for VASCO Data Security, and from June 1997 to August 1998, he served as General
Manager of CAI Wireless Internet. From November 1990 to December 1993, he served
as Vice President-Client Services for Advanced Network & Services, which was
acquired by America Online. From March 1989 to November 1990, Dr. Maloff served
as the Executive Director of CICNet (the Big Ten universities research network).
Eric D. Ram,
has served as our Executive
Vice President - International since August 1999. Mr. Ram served as Chairman and
Managing Director of The World Group of Companies, a group engaged in the development
and management of communications businesses worldwide, which he founded in May 1995.
From 1988 through 1995, Mr. Ram was an investor in international business ventures.
From June 1986 to December 1988, he served as a Senior Vice President of US WEST
Financial Services, Inc., the finance subsidiary of the Regional Bell Operating
Company in the United States, which is now a subsidiary of Qwest Communications
International Inc. Mr. Ram has engaged in business activities in more than 75 countries
worldwide, including both developed and emerging countries in Africa, Asia, Australia,
Europe and Latin America. In addition to his business background, Mr. Ram is a lawyer
having graduated first in his class and Magna Cum Laude from law school. He also
is a Certified Public Accountant.
Barbara Hughes
has served as our
Vice President of Finance since June of 2003, Vice President of Operations Finance
between December of 2000 and June of 2003, and Finance Director from December 1999
until December of 2000. From 1996 to 1999, Ms. Hughes held various financial management
positions within the international telecommunications industry including Director
of Finance for TresCom International and Primus Telecommunications. Ms. Hughes also
held several positions in Finance at Federal Express Corporation from 1980 to 1996,
including Regional Finance Manager for Central Region Operations in the U.S. Domestic
Operations and later as Finance Director of the Latin American Division.
Jan Sarro
has served as the Vice
President of Sales and Marketing since March 2002. Prior to joining us, Ms. Sarro
was the President of the Americas for Viatel, Inc., a global, facilities-based communications
carrier and has over 20 years of experience in developing telecommunications solutions
for international businesses and carriers worldwide. At Viatel, Ms. Sarro grew annual
carrier revenues from $20 million to $160 million in under two years, and built
a $140 million sales organization to market Internet access, corporate networks
and international voice services to multinational corporations in the United States
and Latin America. Ms. Sarro has also held senior executive marketing and sales
management positions at Argo Communications, the international record carriers FTC
Communications and TRT Communications, and WorldCom.
Roger
Karam
has served as
President and Vice Chairman of Efonica since December 2002 and will serve as Chief
Executive Officer of Efonica and President of Fusions VoIP Services beginning
upon the closing of this transaction. In 1996, Karam founded DOT LB s.a.r.l., a
company offering VoIP and financial services throughout Europe, the Middle East
and African markets. Since 1996, DOT LB has established a large distribution channel
for IP Phone-to-Phone, PC-to-Phone, and other VoIP services. Today DOT LB is the
exclusive representative and consultant for Trackdata Corporation (NASDAQ:TRAC)
in the regions above, a financial services company that provides direct access brokerage,
real-time financial market data, news and research to institutional and individual
investors.
54
BOARD OF DIRECTORS
Cesar A. Baez
has served as a director
since March 1998. Since January 2004, Mr. Baez has been serving as the head of alternative
investments for the public employees retirement fund for the State of New Jersey,
a $72 billion pension fund. From September 2001 to November 2003, Mr. Baez was a
Partner of Momentum Media Capital. From April 1995 to July 2001, Mr. Baez was a
Principal at Hicks, Muse, Tate & Furst Incorporated, an international private
investment firm and responsible for much of the firms investment activities
in Latin America. January 1994 to March 1995, he was President and Chief Executive
Officer of Bancomer Securities International, the United States investment banking
subsidiary of Grupo Financiero Bancomer, Mexicos largest financial group.
From September 1991 to January 1994, Mr. Baez was in charge of Smith Barneys
Investment Banking Group for Latin America and from February 1990 to August 1991,
he was in charge of the Latin American Investment Banking Group of Nomura Securities
International. Mr. Baez currently serves on the boards of Pan American Sports Partners
Company, Pan American Sports Holdings Ltd., International Outdoor Advertising Holdings
Company, Venezuela Cable Service Holdings Ltd., Hicks, Muse, Tate & Furst
LA Argentina Cable Company (Teledigital), and Seed Cayman L.L.C.
E. Alan Brumberger
has served as
a director since March 1998. He formerly was a partner in Andersen & Co. and
its predecessor firms, from 1997 to 2004. From 1995 through 1997, he was a Managing
Director of the Taylor Companies and from 1994 through 1995 a Managing Director
of Brenner Securities, Inc. From 1983 through 1990, Mr. Brumberger was a Managing
Director of Drexel Burnham Lambert and a member of the Underwriting and Commitment
Committees. Prior to that, he was a Managing Director of Shearson American Express
and a partner at Loeb, Rhoades & Co., a predecessor of Shearson American Express.
Mr. Brumberger served for three years as President and Chief Executive Officer of
Shearson American Express International Limited, the firms international investment
banking business in London.
Julius Erving
has served as a director
since June 2003. Mr. Erving has been President of the Erving Group and Executive
Vice President of RDV Sports/Orlando Magic since September 1997. Mr. Erving was
employed by the National Broadcasting Company between December 1994 and June 1997,
and by the National Basketball Association between 1987 and September 1997. Mr.
Erving is a Trustee of the Basketball Hall of Fame and has served on the Board of
Directors of Saks Incorporated since 1997.
Evelyn Langlieb Greer
has served
as a director since January 1999. Ms. Greer is the President of Greer Properties,
Inc., a Florida-based real estate development company founded in 1976. She is also
a partner in the law firm of Hogan, Greer & Shapiro, P.A. Ms. Greer has been
a director of City National Bank of Florida, N.A. since 2000, a member of the Board
of Trustees of Barnard College since 1994 and is Vice Chair of the Columbia Law
School Board of Visitors. Since 1996 Ms. Greer has served as the elected Mayor of
the Village of Pinecrest, Florida.
Raymond E. Mabus
has served as a
director since January 1999. Mr. Mabus is Chairman of the Board of Directors of
Foamex International and also manages his family timber business. From 1998 to 2002,
he served as the President of Frontline Global Resources and since 1996 he has served
as Of Counsel to the law firm of Baker, Donelson, Bearman and Caldwell. From 1994
to 1996 he was the United States Ambassador to Saudi Arabia and from 1988 to 1992
he was the Governor of Mississippi.
Manuel D. Medina
has served as a
director since December 1998. Since 1982, Mr. Medina has served as the Chairman
of the Board of Directors and Chief Executive Officer of Terremark Worldwide, Inc.,
a publicly held operator of Internet exchanges and provider of Internet infrastructure
and managed services around the world. In addition, Mr. Medina is a managing partner
of Communications Investors Group. Before founding Terramark, Mr. Medina worked
with PricewaterhouseCoopers LLP.
Paul C. OBrien
has served
as a director since August 1998. Since January 1995 Mr. OBrien has served
as the President of The OBrien Group, Inc., a consulting and investment firm.
From February 1988 until December 1994, he was the President and Chairman of New
England Telephone (a subsidiary of NYNEX), a telecommunications company. Mr. OBrien
also serves on the Board of Directors for Cambridge NeuroScience, Inc., Merlot Communications,
Renaissance Worldwide, Inc., Mangosoft, Inc., Essential.com, eYak.com, Spike Technologies,
and Mind Grow (formerly Interactive Education).
55
Michael J. Del Giudice
has served as a director since November
2004. He is a Senior Managing Director of Millennium Credit Markets LLC and Senior
Managing Director of MCM Securities LLC, both of which he co-founded in 1996. Michael
J. Del Giudice also serves as Chairman and Chief Executive Officer of Rockland Capital
Energy Investments LLC, founded in April 2003. Mr. Del Giudice is a Member of the
Board of Directors of Consolidated Edison Company of New York, Inc., and is currently
Chairman of the Audit Committee and a Member of its Planning and Executive Compensation
Committees. He is also a Member of the Board of Directors of Barnes & Noble,
Inc., and a Member of the Board of Trustees of the New York Racing Association.
He also serves as Chairman of the Governors Committee on Scholastic Achievement.
Mr. Del Giudice was a General Partner and Managing Director at Lazard Frères
& Co. LLC from 1985 to 1995. From 1983 to 1985, Mr. Del Giudice was Chief of
Staff to New York Governor Mario M. Cuomo. He served from 1979 to 1981 as Deputy
Chief of Staff to Governor Hugh L. Carey and from 1975 to 1979 as Chief of Staff
to the Speaker of the Assembly.
Fred P. Hochberg
has
served as a director since November 2004. In 2004, he became Dean of the Robert
J. Milano Graduate School of Management and Urban Policy of New School University
and chief administrator of the graduate division. From 2001-2002, he was Senior
Advisor to Mario Cuomo during his campaign for Governor of New York and has been
a speaker on National Public Radio. From May 1998 to January 2001, Mr. Hochberg
served as Deputy then Acting Administrator of the Small Business Administration,
an agency elevated to Cabinet rank by President Clinton. Additionally, Mr. Hochberg
served on President Clintons Management Council. From 1994 to 1998, he was
founder and President of Heyday Company, a private investment company managing real
estate, stock market investment and venture capital projects. From 1975 to 1993,
Mr. Hochberg served as president and chief operating officer of the Lillian Vernon
Corporation, a publicly traded direct marketing corporation. Mr. Hochberg has served
on numerous business and civic boards including the Democratic National Committee,
the Young Presidents Organization, and as co-chair of the Human Rights Campaign.
Mr. Hochberg is currently a trustee of New School University, The Citizens Budget
Commission, FINCA, Lillian Vernon International House at New York University and
the Wolfsonian Museum in Miami Beach, Florida.
56
ADVISORY BOARD
We have the benefit of an advisory board
which provides us advice and general assistance concerning the business of the company.
The advisory board may be compensated for the business they generate for the company
and may be eligible to participate in the companys stock option plan. Our
advisory board members include:
John H. Sununu
Mr. Sununu serves
as Chairman. He is currently the President of JHS Associates, Ltd. and was formerly
a partner in Trinity International Partners, a private financial firm. From 1989
through 1992, Governor Sununu served President Bush as Chief of Staff and as Counselor
to the President. Prior to that, Governor Sununu served three consecutive terms
as Governor of New Hampshire. Governor Sununu also serves on the Board of Directors
of Kinark Corporation.
Patrick A. Bello
Mr. Bello is the
co-founder, President and CEO of Belldon Development, LLC, an oceanfront real estate
development company. Prior to founding Belldon, Mr. Bello was co-founder, President
and CEO of Topline Group, LLP, a professional services company. From February, 1998
to September 1999, Mr. Bello served as President and CEO of Fusion Telecommunications
International, Inc. Mr. Bello has also provided consulting services to other telecommunications
companies in both the United States and the Caribbean. He co-founded a telecommunications
company that was sold to GE Capital Communications Services and then served as President
and COO of the combined entity. Mr. Bello has also started companies in the systems
integration field, one of which was sold to a NYSE listed company.
Jack Rosen
Mr. Rosen is the chief executive
of several commercial and residential real estate firms. His business interests
include investments in healthcare, cosmetics and telecommunications. Mr. Rosen is
Chairman of the American Jewish Congress. He is very active in government and political
affairs. Mr. Rosen has also served on numerous presidential commissions and delegations
and has personal relationships with the leaders of numerous countries throughout
the world. Jack Rosen is not related to Matthew Rosen or Marvin Rosen.
Joseph R. Wright, Jr.
is President
and Chief Executive Officer of PanAmSat, Inc., one of the largest providers of satellite/fiber
communications services around the globe. Prior to becoming Chief Executive Officer
in 2001, he was Chairman of GRC Intl., Inc., a public company that provided advanced
IT technologies to government and commercial customers, and was sold to AT&T
in 2000. He was also Co-Chairman of Baker & Taylor Holdings, Inc., an international
book/video/software distribution company. From 1989-1994, he was Executive Vice
President and Vice Chairman of W. R. Grace Company, a global chemicals and material
company. In the 1980s, he served in the U.S. Government under President Reagan
as Deputy Secretary of Commerce, and then as Deputy Director and Director of the
Office of Management and Budget in the Executive Office of the President and a member
of the Cabinet. Prior to his time in Washington, he was President of two Citibank
subsidiaries and was a partner of Booz, Allen and Hamilton. Mr. Wright currently
serves on the Board of Advisors/Directors of AT&T Government Solutions, Titan
Corporation, Proxim, Barington Capital, Terremark Worldwide, and Verso Technologies.
He is a member of the Federal Communication Commissions Network Reliability
and Interoperability Council as well as the Media Security and Reliability Council,
and was on former President Bushs Export Council, and the current President
Bushs Commission on the U.S. Postal Service Reform. He is a member of the
Council on Foreign Relations, Council for Excellence in Government, Chief Executives
Organization, Committee for a Responsible Federal Budget and the New York Economic
Club.
57
BOARD COMMITTEES
Audit Committee.
Our audit committees
main function will be to oversee our accounting and financial reporting processes,
internal systems of control, independent auditor relationships and the audits of
our financial statements. This committees responsibilities include, among
other things:
The members of our audit committee are Paul C.
OBrien, Chairman; Evelyn Langlieb Greer, Raymond E. Mabus and Cesar A. Baez,
each of whom is a non-employee member of our board of directors. Cesar A. Baez will
be our audit committee financial expert as currently defined under SEC Rules. Our
board has determined that each of the directors serving on our audit committee is
independent within the meaning of the Rules of the SEC and the listing standards
of AMEX. We intend to comply with future audit committee requirements as they become
applicable to us.
Compensation and Nominating Committee.
Our
compensation and nominating committees main function will be (i) to review
and recommend to our board compensation and equity plans, policies and programs
and approve executive officer compensation, and (ii) to review and recommend to
our board the nominees for election as directors of the company and to review related
Board development issues including succession planning and evalualtion. The members
of our compensation and nominating committee are Cesar A. Baez, E. Alan Brumberger
and Manuel D. Medina, each of whom is a non-employee member of our board of directors.
Our board has determined that each of the directors serving on our compensation
and nominating committee is independent within the existing standards of AMEX.
Strategic and Investment Banking Committee.
The members of our strategic and investment banking committee are E. Alan Brumberger,
Chairman; Cesar A. Baez, Manuel D. Medina, Marvin S. Rosen, Kenneth I. Starr and
Philip D. Turits. Our strategic and investment banking committee evaluates and recommends
investment strategies with investment banks and brokerage houses and assists in
the evaluation of possible acquisitions and mergers.
Director Compensation
We have granted to each of our directors
options to purchase 21,429 shares of our class A common stock, under our 1998 stock
option plan. These options will have an exercise price per share of no less than
the higher of the aggregate offering price of one share and warrant or market price
of stock of a share of our common stock on the date of grant. These options will
vest in four equal installments over a three-year period commencing on the date
of grant. We also reimburse our directors for out-of-pocket expenses associated
with their attendance at board of directors meetings.
58
Code of Ethics
We have adopted a Code of Ethics to apply
to our directors, officers and employees. This code is intended to promote ethical
conduct and compliance with laws and regulations, to provide guidance with respect
to the handling of ethical issues, to implement mechanisms to report unethical conduct,
to foster a culture of honesty and accountability, to deter wrongdoing and to ensure
fair and accurate financial reporting.
Limitations on Liability and Indemnification Matters
We are a Delaware corporation and are governed
by the Delaware General Corporation Law. Delaware law authorizes Delaware corporations
to indemnify any person who was or is a party to any proceeding other than an action
by, or in the right of, the corporation, by reason of the fact that he or she is
or was a director, officer, employee or agent of the corporation. The indemnity
authorized by Delaware law also applies to any person who is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation or other entity. Indemnification applies against liability incurred
in connection with an indemnifiable proceeding, including any appeal, if the person
acted in good faith and in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation. To be eligible for indemnity
with respect to any criminal action or proceeding, the person must have had no reasonable
cause to believe his or her conduct was unlawful.
In the case of an action by or on behalf
of a corporation, indemnification may not be made if the person seeking indemnification
is found liable, unless the court in which the action was brought determines such
person is fairly and reasonably entitled to indemnification.
The indemnification provisions of Delaware
law require indemnification of a director, officer, employee or agent who has been
successful in defending any action, suit or proceeding to which he or she was a
party by reason of the corporation. The indemnity covers expenses actually and reasonably
incurred in defending the action.
The indemnification authorized under Delaware
law is not exclusive and is in addition to any other rights granted to officers
and directors under the certificate of incorporation or bylaws of the corporation
or any agreement between officers and directors and the corporation.
Our certificate of incorporation provides
for the elimination, to the fullest extent permissible under Delaware law, of the
liability of our directors to us for monetary damages. This limitation of liability
does not affect the availability of equitable remedies such as injunctive relief.
Our bylaws also provide that we shall indemnify our directors and officers against
certain liabilities that may arise by reason of their status or service as a director
or as an officer, other than liabilities arising from certain specified misconduct.
We are required to advance all expenses incurred as a result of any proceeding against
our directors for which they could be indemnified, including in circumstances in
which indemnification is otherwise discretionary under Delaware law.
Currently, we are not aware of any pending
litigation or proceeding involving a director, officer, employee or other agent
of ours in which indemnification would be required or permitted. We are not aware
of any threatened litigation or proceeding which may result in a claim for such
indemnification.
Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to directors, officers
and controlling persons of ours based on the foregoing provisions, or otherwise,
we have been advised that, in the opinion of the SEC, such indemnification is against
public policy and is, therefore, unenforceable.
59
Summary Compensation Table
Mr. Marvin Rosen has been reimbursed for certain
expenses, including approximately $2,000 per month for a portion of the monthly
rent for his apartment in Fort Lauderdale, Florida, which is used by certain of
our executives in lieu of such executives having to incur hotel expenses.
We have also entered into an employment
agreement with Mr. Roger Karam to be Chief Executive Officer of Efonica FZ-LLC and
our President of VoIP services. This agreement is effective on the effective date
of this registration statement and expires three years from such date, provided
that the term shall extend for an additional one year unless terminated by either
side on 90 days notice. The agreement provides for an annual salary of not less
than $225,000, with a minimum annual bonus equal to 25% of his annual salary. Roger
shall be entitled to participate in our stock option plans and shall receive 50,000
options with an exercise price equal to the price of a share of common in our public
offering. In the event that the employment is terminated without cause, including
by change in control, the agreement provides that Roger will receive unpaid base salary
accrued through the effective date of the termination plus any pro-rata bonus and 150% of his base
salary in cash within thirty (30) days plus his highest annual bonus for three years. The agreement
also provides for a one-year non-compete provison.
Option Grants in 2003
We did not grant any options to acquire
common stock to our named executive officers during fiscal 2003. However, in connection
with a loan made by Fusera, LLC, we granted certain warrants to all of the members.
As two of
60
the members, we granted Marvin S. Rosen and Philip D. Turits each
7,143 warrants to purchase our class A common stock at a price equal to $2.97 per
share which expire on July 1, 2005. The per share value of these warrants was $0.11
on the date of grant using the Black Scholes option pricing model. Input variables
used in the model included no expected dividend yield, an average risk free interest
rate of 1.77% and an estimated life of 2 years. Because the company was non-public
on the date of grant, no assumption as to the volatility of the stock price was
made. No other warrants were granted to any executive officer.
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Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal
Year End Option/SAR Values
The following table sets forth the information
with respect to the named executive officers set forth in the Summary Compensation
Table concerning the exercise of options during fiscal year 2003, the number of
securities underlying company-granted options as of December 31, 2003 and the year-end
value of all unexercised in-the-money options held by such individuals.
Stock Option Plan
The purposes of the option plan are: i) to enable
us to attract and retain qualified and competent employees and to enable such persons
to participate in our long-term success and growth by giving them an equity interest
in our company; ii) to enable us to use grants of stock options in lieu of all or
part of cash fees for directors who are not officers or employees, thereby aligning
the directors interests with that of the stockholders; and iii) to provide
consultants and advisors with options, thereby increasing their proprietary interest
in us. Employees and directors are eligible to be granted awards under the option
plan. Consultants and advisors to Fusion are eligible to be granted awards under
the option plan if their services are of a continuing nature or otherwise contribute
to our long-term success and growth.
The option plan is administered by our
compensation and nominating committee of the board of directors. The committee may
adopt, alter, or repeal any administrative rules, guidelines, and practices for
carrying out the purposes of the option plan, and its determination, interpretation,
and construction of any provision of the option plan are final and conclusive. The
committee has the right to determine, among other things, the persons to whom awards
are granted, the terms and conditions of any awards granted, the number of shares
of common stock covered by the awards, and the exercise prices and other terms thereof.
The exercise price, term, and exercise
period of each stock option is fixed by the committee at the time of grant. No incentive
stock option shall (i) have an exercise price that is less than 100% of the fair
market value of the common stock on the date of the grant, (ii) be exercisable more
than 10 years after the date such incentive stock option is granted, or (iii) be
granted more than 10 years after the option plan is adopted by the Board.
Most options held by employees vest over
four years. Options held by consultants and non-employee directors can vest immediately
in some cases. In certain cases, we have agreed to extend the duration of options
granted to non-employee directors. In April 2002, the board of directors reduced
the exercise price for all options to current employees with exercise prices above
$8.75 per share to $8.75 per share and the vesting period from five years to four
years.
In July 2004, the Companys stock
option committee approved the issuance of 446,057 options to employees who had been
previously granted stock options. Each employee would receive new options equal
to 50% of their existing options priced at $3.15 per share and 50% at $4.38 per
share, both with a four year vesting period and furthermore would receive credit
for the vesting time on previously issued options, and the original options will
be cancelled if not exer-
62
cised within six months and one day of the issuance of the new options.
In addition, during July 2004, the Companys stock option committee approved
the issuance of 667,686 options to employees, consultants and Board members at a
price of $4.38 per share.
We increased the amount of shares issuable
under the option plan to an amount equal to 13% of the shares outstanding immediately
prior to this offering. We have agreed with the representative of the underwriters
that we will not increase the number of shares subject to the Option Plan or adopt
any other stock award plan for two years after the date of this prospectus. The
options presently held by each option holder who were issued new options will be
cancelled or expire 6 months and one (1) day from July 14, 2004. The vesting schedule
varies by individual depending on the number of years employed with us.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Officer and Director Loans to Company
Over the last five years, several of our
senior officers and directors have made loans to us and our joint ventures to fund
their operations. These loans have taken the form of demand notes, term notes and
convertible notes. The interest rate on these notes has ranged from the prime rate
to 15%. All current balances below are as of November 30, 2004.
Since April 1999, Marvin Rosen, our Chairman
of the Board, has loaned us a total of $2,618,045. Of the aggregate amount loaned
to us, $565,349 has been repaid, $901,000 was converted into common stock at a conversion
price of $2.28 per share in December 2000, September 2002 and February 2003, $100,000
was converted into shares of series A preferred stock at a conversion price of $10
per share, which was subsequently converted into 28,572 shares of common stock at
a conversion price of $3.50 per share in September 2001, and $300,000 was converted
into shares of series C preferred stock at a conversion price of $90 per share in
December 2003. Currently, Mr. Rosen has total notes outstanding of $751,696 with
interest calculated at 4.75% on all but one convertible subordinated note, which
is for $125,000. That convertible note for $125,000 bears interest at an annual
rate of 9.25% (was 7.25% prior to April 2004). As of September 30, 2004, the demand,
promissory, and convertible notes have accrued unpaid interest in the amount of
$319,232. Our indebtedness to Mr. Rosen will be repaid out of the proceeds of this
offering. In April 2003, Mr. Rosen pledged 34,286 shares of his common stock as
collateral for the performance of a settlement agreement between us and Compania
De Telecommunications El Salvador S.A., D.E.C.V. We currently owe Compania De Telecommunications
approximately $50,000 under the terms of the settlement agreement, which we expect
to pay in full by February 2005.
Since April 1999, Philip Turits, our Treasurer,
has loaned us a total of $4,181,449. Of the aggregate amount loaned to us, $780,349
has been repaid, $2,499,563 has been converted into common stock at a conversion
price of $2.28 per share at various times between September 2002 and January 2003,
$165,000 has been converted into series A preferred stock at a conversion price
of $10 per share and subsequently converted into common stock at $8.75 per share
in July and September 2001, and $300,000 was converted into shares of series C preferred
stock at a conversion price of $90 per share in December 2003. Currently, Mr. Turits
has total notes outstanding of $436,538. The weighted average interest rate of these
demand notes is currently an interest rate of 4.75%, except for one $125,000 convertible
note, which has an interest rate of 9.25% (was 7.25% prior to April 2004). As of
September 30, 2004, these demand, promissory, and convertible notes had accrued
unpaid interest of $127,837. Our indebtedness to Mr. Turits will be repaid out of
the proceeds of this offering.
On January 25, 2001, a trust controlled
by Evelyn Langlieb Greer, loaned us $1,000,000. This loan was due on July 15, 2001
and bears interest at the rate of 13% per annum. In addition, the Trust received
85,715 warrants to purchase our common stock in connection with this and other loans.
In November 2004, all principal and interest owing to the Trust was repaid. In addition,
Ms. Greer personally loaned our Pakistan joint venture $250,000 which bears interest
at the rate of 15% per annum. In January 2004, $148,000 of this note was converted
into 1,644 shares of series C convertible Preferred stock at a conversion price
of $90 per share. This loan is due on demand. As of November 30, 2004, this loan
had accrued unpaid interest in the amount of $62,237. Our indebtedness to Ms. Greer
will be repaid out of the proceeds of this offering.
63
On May 22, 2001, World Capital Corporation (WCC), of
which Mr. Eric Ram, our Executive Vice President, International, is a managing director
and principal shareholder loaned us $400,000 for use in meeting our funding obligations
in Estel. The loan was due on February 16, 2002 and accrues interest at 12% per
annum. In December 2003, World Capital was paid $100,000 towards repayment of this
loan and converted the remaining principal into 1,111 shares of the series C preferred
stock at a conversion price of $90 per share.
In July 2002, Patrick Bello loaned our
Pakistan joint venture $25,000. This loan, which was payable on demand, was converted
into 277 shares of series C preferred stock at $90 per share. As security for repayment
of the loans to the Pakistan joint venture, we granted the lenders a second priority
lien on all of our equipment that was then owned. We also granted the lenders a
lien on our receivables subordinate to other existing liens on our receivables.
From August through December, 2002, and
again in April, 2003, Lisa Ornburg Turits, wife of Philip Turits, loaned us an aggregate
of $265,000. Of these loans, $175,000 was secured by a portion of our Letter of
Credit associated with the leasehold of our premises located at 75 Broad Street
and the remainder, are demand loans. Of these notes, $53,897 has been repaid, and
$9,313 was converted to a new note, transferred to Philip Turits and converted into
103 shares of series C preferred stock at $90 per share. In addition, Michael Turits,
son of Philip Turits, loaned the company $80,000 in April of 2001. The loan was
due on demand and bears interest at the rate of 12% per annum. In December 2001,
Michael Turits converted $40,000 into 4,000 shares of series A Preferred stock at
a conversion price of $10 per share in April 2001 and converted into 4,572 shares
of common stock at $8.75 per share. In February 2003, $10,000 of that loan was repaid.
In aggregate, the notes of Michael Turits had accrued interest of $18,410, and Lisa
Turits had accrued interest of $2,396 as of November 30, 2004. The principal and
interest balance of these loans that aggregated $252,596 as of November 30, 2004,
will be repaid out of the proceeds of this offering.
Other Transactions
We have an informal verbal agreement with
Mr. John H. Sununu, the Chairman of our Advisory Board, pursuant to which Mr. Sununu
will be compensated for any international business relationships, which Mr. Sununu
assists us in developing. The amount, form and terms of any such compensation will
depend on the business relationship developed and will be negotiated at the time
any such relationship is developed.
In January and February 2003, Mr. Sununu
loaned us $25,000 and Patrick Bello, a member of our Advisory Board, loaned us $50,000
to fund working capital for our Efonica joint venture. This investment was expected
to be paid back to these investors over 24 months from distributions from Efonica.
In addition, these lenders were to receive a portion of our profits in Efonica.
In February 2004, Mr. Sununu converted his entire loan to series C convertible preferred
stock at a conversion price of $90 per share. In January 2004, Mr. Bello converted
$25,000 of his loan to series C convertible preferred stock at $90 per share and
in September 2004 converted the remaining $25,000 into a new note due the earlier
of the closing of the offering or September 1, 2005, which bears interest at 4.5%
and eliminated any right to participate in any profits of Efonica.
During the fourth quarter of 2002, Evelyn
Greer loaned us $400,000, Patrick Bello loaned us $100,000 and Philip Turits loaned
us $100,000 in connection with the development of an opportunity to provide VoIP
services in Cambodia. These funds were intended to be used for license deposit fees
and working capital for the Cambodian venture. These funds were held in an escrow
account and have been repaid except for $10,000 from Patrick Bello which was converted
to 111 shares of series C preferred stock at $90 per share.
In July 2003, Marvin Rosen, Philip Turits and
John Sununu loaned us an aggregate of $100,000 to purchase certain equipment and
resolve a dispute with an equipment vendor. In exchange for this loan, they were
issued a promis-
64
sory note which bears interest at the rate of 8% per annum with monthly
payments for 21 months followed by a balloon payment due in June of 2005. Messrs.
Rosen, Turits and Sununu were part of a group which lent us an aggregate of $300,000.
The group has a security interest in the equipment.
In August 2003, in connection with a loan
made by Fusera, LLC, we granted certain warrants to all of the members. As two of
the members, we granted Marvin S. Rosen and Philip D. Turits each 7,413 warrants
to purchase our class A common stock at a price equal to $2.97 per share which expire
on July 1, 2005. The per share value of these warrants was $0.11 on the date of
grant.
During July 2002, an entity controlled
by Jose Vitienes Colubi, who was a member of our board, loaned our Pakistan joint
venture $20,000. This loan was due on demand and provided for interest at the rate
of 10% per annum. This loan, including interest, was subsequently converted into
9,242 shares of our common stock at a conversion rate of $2.28 per share.
In January 2005, we purchased the minority
interest in Efonica from Karamco, Inc., an entity controlled by Roger Karam, Efonicas
Chief Executive Officer and our President of VoIP Services. Mr. Karam is the former
President of Efonica. See Business-Joint Ventures - Efonica for a detailed description of the
acquisition of the minority interest in Efonica.
Policy Regarding Transactions Between the Company
and Affiliates
Although we believe the foregoing transactions
between the Company and affiliates were fair and in our best interests we did not
have any formal policy in place. Prior to closing of the offering, our Board of
Directors will adopt a policy providing that any future transactions with affiliates,
including without limitation, our officers, Directors, and principal stockholders,
will be on terms no less favorable to us than we could have obtained from unaffiliated
third parties. Any such transactions will be approved by a majority of our Board
of Directors, including a majority of the independent and disinterested members,
or, if required by law, a majority of our disinterested stockholders.
PRINCIPAL STOCKHOLDERS
Beneficial ownership is determined under the rules
of the SEC. These rules deem common stock subject to options currently exercisable,
or exercisable within sixty (60) days, to be outstanding for purposes of computing
the percentage ownership of the person holding the options or of a group of which
the person is a member, but these rules do not deem the stock to be outstanding
for purposes of computing the percentage ownership of any other person or group.
To our knowledge, the persons named in the table have sole voting and sole investment
control with regard to all shares beneficially owned.
65
66
DESCRIPTION OF SECURITIES
Prior to the effective date of this offering,
we effectuated a 3.5 for 1 reverse stock split and conversion of our outstanding
common stock into class A common stock. As a result of this capital transaction,
all of our outstanding common stock prior to this offering was reclassified as class
A common stock.
The following summary of the terms and
provisions of our capital stock does not purport to be complete. Reference should
be made to our Amended and Restated Certificate of Incorporation, Bylaws and to
applicable law, for the complete description of the terms and provisions of our
securities.
Subject to the rights of holders of preferred
stock, if any, holders of shares of our common stock are entitled to share equally
on a per share basis in such dividends as may be declared by the Board of Directors
out of funds legally available. There are presently no plans to pay dividends with
respect to the shares of common stock. Upon liquidation, dissolution or winding
up, after payment of creditors and the holders of any senior securities, including
preferred stock, if any, our assets will be divided pro rata on a per share basis
among the holders of the shares of common stock. The common stock is not subject
to any liability for further assessments. There are no conversion or redemption
privileges or any sinking fund provisions with respect to the common stock and the
common stock is not subject to call. The holders of common stock do not have any
pre-emptive or other rights.
Class A common stock.
Prior to the
date of this prospectus, we converted our outstanding common stock into class A
common stock. We are authorized to issue up to 21,000,000 shares of class A common
stock, $.01 par value per share. The holders of the class A common stock have identical
rights and privileges as our regular common stock, except that they will not be
able to transfer shares of class A common stock until the first anniversary of the
date of this prospectus. After the effective date of this prospectus, the class
A common stock may be converted at the option of the holder if the holder executes
and delivers a lock up agreement preventing the public sale of the common stock
until the first anniversary of the date of this prospectus without the consent of
the representative of the underwriters. The class A common stock automatically will
convert into the common stock on the first anniversary of the date of this prospectus.
Preferred Stock
Our Board of Directors is authorized to
issue up to 10,000,000 shares of preferred stock, par value $.01 per share, in one
or more series and to fix, by resolution, conditional, full, limited or no voting
powers, and the designations, preferences, the number of shares, dividend rates,
conversion or exchange rights, redemption provisions or other special rights of
the shares constituting any class or series as the board of directors may deem advisable
without any further vote
67
or action by the stockholders. Any shares of preferred stock issued
by us could have priority over our common stock and class A common stock with respect
to dividends or liquidation rights and could have voting and other rights of stockholders.
Any issuance of our preferred stock, depending upon the rights, preferences and
designations of these shares, may delay, deter or prevent a change in control or
could result in the dilution of the voting power of any of our authorized but unissued
shares of preferred stock and we have agreed not to issue any shares of preferred
stock for one year after the offering without our underwriters prior written
consent. In addition, certain anti-takeover provisions of Delaware law,
among other things, may restrict the ability of our stockholders to effect a merger
or business combination or to obtain control of us.
The Company has the following series of
preferred stock currently outstanding:
9
1
/
4
% Convertible
Notes
On April 9, 1999, we issued $300,000 of
our 7
1
/
4
% Convertible Notes (the Notes)
to Marvin Rosen, Philip Turits, and Patrick Bello, a former senior executive of
Fusion. (See CERTAIN TRANSACTIONS.) The proceeds from the Notes were
used by the Company to fund its operations. The principal of the Notes shall be
converted into shares of our common stock, at the closing of this offering if the
offering price equals or exceeds 125% of the conversion price, which is $18.66 per
share. There is also an optional conversion clause that the noteholders shall have
the right, at their option, at any time up to and including the maturity date, to
convert the outstanding principal at $18.66 per share. These notes had a $250,000
remaining balance in April 2004 at which point the interest rate was modified to
9
1
/
4
%.
Warrants
As part of various debt and other agreements,
we have issued warrants to purchase our common stock. As of September 30, 2004,
we have issued a total of 286,567 warrants with per share warrant prices of between
$0.04 to $8.75. The exercise period for these warrants range between twenty months
and 106 months. The weighted average exercise price of these warrants at September
30, 2004 was $3.61.
Purchase Warrant
Each purchase warrant will entitle you
to purchase one share of our common stock for $____ (100% of the
offering price of one share of our common stock) at any time during the four-year
period beginning on the first anniversary of the date of this prospectus. The purchase
warrant exercise price will increase to $___ (133% of the offering price
of one share of our common stock) on the eighteen month anniversary of the date
of this prospectus, provided that the registration statement covering the shares,
of common stock underlying the purchase warrants has been effective for at least
sixty (60) days prior to the exercise price reset date.
Unless we extend the terms of the purchase
warrants in our sole discretion, the purchase warrants will expire at 5:00 p.m.,
New York time, five years from the date of this prospectus.
We may redeem any outstanding purchase
warrants you hold, once they become exercisable, at a price of $.01 per purchase
warrant on not less than 30 days prior written notice to you if the last sale
price of our common stock has been
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at least 200% of the then-current exercise price of the purchase
warrants (initially $____) for the 20 consecutive trading days ending
on the third day prior to the date on which we provide you with such notice. The
purchase warrants will be exercisable until the redemption date.
The purchase warrants will be issued in
registered form under a warrant agreement between us and Continental Stock Transfer
& Trust Company, as warrant agent. Please refer to the warrant agreement (which
has been filed as an exhibit to the registration statement of which this prospectus
is a part) for a complete description of the terms and conditions of the purchase
warrants, as this description is qualified in its entirety by our reference to such
warrant agreement.
The exercise price and number of shares
of our common stock or other securities issuable on exercise of the purchase warrants
are subject to adjustment to protect against dilution if we issue a stock dividend,
or we conduct a stock split, recapitalization, reorganization, merger or consolidation
or other similar event. We cannot assure you that the market price of our common
stock will exceed the exercise price of the purchase warrants at any time during
the period in which they are exercisable.
You cannot exercise any of your purchase
warrants unless at the time of exercise we have filed with the SEC a prospectus
covering the shares of our common stock issuable upon exercise of the purchase warrants
you wish to exercise and such shares have been registered or qualified to be exempt
under the securities laws of your state of residence. Although we have undertaken
and intend to have all shares of our common stock qualified for sale in the states
where our securities are being offered and to maintain a current prospectus relating
to our common stock until the expiration or redemption of the purchase warrants,
subject to the terms of the warrant agreement, we cannot assure you that we will
be able to do so.
The purchase warrants do not give you any
dividend, voting, preemptive or any other rights our stockholders may have.
Upon conversion of the Class C preferred
stock, we will issue an additional 3,141,838 purchase warrants. These warrants and
the underlying common stock will be registered for resale by the holders thereof.
American Stock Exchange Listing
We have applied to list our common stock
and purchase warrants on the American Stock Exchange under the trading symbols FSN
and FSNW, respectively.
Transfer Agent, Warrant Agent & Registrar
Continental Stock Transfer & Trust
Company will act as our transfer agent, our warrant agent and as registrar for our
common stock and purchase warrants.
Delaware Anti-Takeover Law
The following discussion concerns certain
provisions of Delaware law that may delay, deter or prevent a tender offer or takeover
attempt that you might consider to be in your best interest, including offers or
attempts that might result in a premium being paid to you over the market price
of our securities.
Delaware Anti-Takeover Law.
We are
subject to the provisions of Section 203 of the Delaware General Corporation Law.
In general, Section 203 prohibits a publicly held Delaware corporation from engaging
in a business combination with an interested stockholder for a period of three years
after the date of the transaction in which the person became an interested stockholder,
unless:
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A business combination includes a merger, asset
sale or other transaction resulting in a financial benefit to the stockholder. An
interested stockholder is a person who, together with affiliates and associates,
owns (or within three years did own) 15% or more of the corporations vesting
stock.
SHARES ELIGIBLE FOR FUTURE SALE
Shares Eligible and lock-ups of existing
securityholders
Rule 144
In general, under Rule 144 as currently
in effect, a person who has owned restricted shares of common stock beneficially
for at least one year is entitled to sell, within any three-month period, a number
of shares that does not exceed the greater of the then average weekly trading volume
or 1% of the total number of outstanding shares of the same class. Sales under Rule
144 are also subject to manner of sale provisions, notice requirements and the availability
of current public information about us. A person who has not been one of our affiliates
for at least the three months immediately preceding the sale and who has beneficially
owned shares of common stock for at least two years is entitled to sell the shares
under Rule 144 without regard to any of the limitations described above.
Effect Of Sales Of Shares
70
UNDERWRITING
Subject to the terms and conditions of the underwriting
agreement, the underwriters named below, for which Kirlin Securities, Inc. is acting
as the representative, are committed to severally take and pay for the respective
number of our securities set forth opposite their names, if any are taken, other
than the securities covered by the over-allotment option described below unless
and until this option is exercised.
Our underwriters have qualified their several
obligations under the underwriting agreement to the approval of legal matters by
our counsel and various other conditions, and subject to these conditions, our underwriters
are obligated to severally purchase all of the shares of our common stock and purchase
warrants offered by this prospectus (other than the shares of our common stock and
purchase warrants covered by the over-allotment option described below).
The underwriters, through the representative,
have advised us that they propose to offer our securities to the public at the initial
public offering prices set forth on the cover page of this prospectus and to certain
dealers at that price less a concession not in excess of $_____
per share of our common stock and $______ per purchase warrant.
The underwriters may allow, and such dealers may re-allow, a concession not in excess
of $_____ per share of common stock and $_____
per purchase warrant to certain other dealers. After the offering, our underwriters
may change the offering price and other selling terms without our consent.
The following table shows the public offering
price, underwriting discount to be paid by us to the underwriters and the proceeds,
before expenses, to us. This information assumes either no exercise or full exercise
by the underwriters of their over-allotment option.
We have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act. We also have
agreed to pay to the underwriters an expense allowance on a non-accountable basis
equal to 3% of the gross proceeds derived from the sale of the securities offered
by this prospectus, $100,000 of which has been paid to date. We also have agreed
to pay all expenses in connection with qualifying our securities offered hereby
for sale under the laws of such states as our underwriters, through their representatives,
may designate and registering the offering with the National Association of Securities
Dealers, Inc., or NASD, including fees and expenses of counsel retained for these
purposes by our underwriter in connection with this registration.
We have granted to the underwriters an
option, exercisable within 45 business days from the date of this prospectus, to
purchase at the offering price, less underwriting discounts and the non-accountable
expense allowance, up to an aggregate of 498,750 additional shares of our common
stock and/or 498,750 additional purchase warrants for the sole purpose of covering
over allotments, if any.
We have engaged the representative of the
underwriters on a non-exclusive basis as our agent for the solicitation of the exercise
of the purchase warrants. To the extent consistent with NASD guidelines and SEC
rules and regulations,
71
we have agreed to pay the representative of the underwriters for
bona fide services rendered a commission equal to 5% of the exercise price for each
purchase warrant exercised after one year from the date of this prospectus if the
exercise was solicited by the representative. In addition to soliciting, either
orally or in writing, the exercise of the purchase warrants, these services also
may include disseminating information, either orally or in writing, to our warrantholders
about us or the market for our securities, and assisting in the processing of the
exercise of the purchase warrants. We will not pay the representative any fee connection
with the exercise of the purchase warrants if the purchase warrants are exercised
within one year from the date of this prospectus, if the market price of the underlying
shares of our common stock is lower than the exercise price, the purchase warrants
are held in a discretionary account, the purchase warrants are exercised in an unsolicited
transaction, the warrantholder has not confirmed in writing that the representative
solicited such exercise or the arrangement to pay the commission is not disclosed
in the prospectus provided to warrantholders at the time of exercise. In addition,
unless granted an exemption by the SEC from Regulation M under the Exchange Act,
while soliciting the exercise of the purchase warrants, the representative will
be prohibited from engaging in any market-making activities or solicited brokerage
activities with regard to our securities unless the representative has waived its
right to receive a fee for the exercise of the purchase warrants.
Pursuant to the underwriting agreement, all of
our officers and directors, and all holders of our capital stock immediately prior
to this offering either by the terms of the class A common stock or by agreement
may not to sell any shares of our common stock for either 12 or 18 months from the
date of this prospectus without the consent of the representative of the underwriters.
In addition, the underwriting agreement provides that, for a period of five years
from the date of this prospectus, the representative will have the right to send
a representative to observe each meeting of our board of directors.
If, within five years of the date of this
prospectus, we complete a merger, acquisition, joint venture or other transaction
with a party that the representative introduces to us, the representative will receive
a finders fee equal to 5% of the consideration.
Prior to the offering, there has been no
public market for any of our securities. Accordingly, the offering prices of our
securities and the terms of the purchase warrants have been determined by negotiation
between us and the underwriters and do not bear any relation to established valuation
criteria. Factors considered in determining such prices and terms, in addition to
prevailing market conditions, included an assessment of the prospects for the industry
in which we will compete, our management and our capital structure.
In connection with the offering, the underwriters
may engage in stabilizing transactions, over-allotment transactions, syndicate covering
transactions and penalty bids in accordance with Regulation M under the Exchange
Act.
72
On October 22, 2003, the representative loaned
the Company $200,000. The loan did not bear interest and was repaid on December
11, 2003.
LEGAL MATTERS
Gersten, Savage, Kaplowitz, Wolf &
Marcus LLP, New York, New York, will opine as to the validity of the common stock
and purchase warrants offered by this prospectus and to certain legal matters for
us. Certain members of Gersten, Savage, Kaplowitz, Wolf & Marcus LLP own an
aggregate of 35,714 shares of our common stock. They did not receive such shares
for legal services rendered. Graubard Miller, New York, New York, has served as
counsel to the several underwriters in connection with this offering.
EXPERTS
Our consolidated financial statements as
of December 31, 2002 and 2003, and for each of the three years in the period ended
December 31, 2003, have been audited by Rothstein, Kass & Company, P.C., an
independent registered public accounting firm, as set forth in their report thereon
appearing elsewhere herein, are so included in reliance upon such reports given
on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE
INFORMATION
We have filed with the SEC a registration
statement on Form S-1 relating to the securities being offered through this prospectus.
As permitted by the rules and regulations of the SEC, this prospectus does not contain
all the information described in the registration statement. For further information
about us and our securities, you should read our registration statement, including
the exhibits and schedules. In addition, we will be subject to the requirements
of the Securities Exchange Act of 1934, as amended, following the offering and thus
will file annual, quarterly and special reports, proxy statements and other information
with the SEC. These SEC filings and the registration statement are available to
you over the Internet at the SECs web site at
http://www.sec.gov
. You
may also read and copy any document we file with the SEC at the SECs public
reference room in 450 Fifth Street, N.W., Washington, D.C. Please call the SEC at
1-800-SEC-0330 for further information about the public reference room. Statements
contained in this prospectus as to the contents of any agreement or other document
are not necessarily complete and, in each instance, you should review the agreement
or document which has been filed as an exhibit to the registration statement.
73
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
See accompanying notes to consolidated financial statements.
F-1
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
See accompanying notes to consolidated financial statements.
F-2
See
accompanying notes to consolidated financial statements.
F-3
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
See accompanying notes to consolidated financial statements.
F-4
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
See accompanying notes to consolidated financial statements.
F-5
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Fusion Telecommunications International,
Inc. and Subsidiaries (collectively the Company) is a Delaware corporation,
incorporated in September 1997. The Company is an international communications carrier
delivering Voice over Internet Protocol (VoIP), Private Networks, Internet
Access, IP Video Conferencing and other advanced services to, from and within emerging
markets in Asia, the Middle East, Africa, the Caribbean, and Latin America. With
its lead product, VoIP, the Company provides a full suite of communications solutions
to corporations, Postal Telephones and Telegraphs, Internet Service Providers, government
entities, consumers and cable operators.
2. Summary of significant accounting
policies
Principles of Consolidation
The consolidated financial statements include
the accounts of Fusion Telecommunications International, Inc. and its wholly owned,
majority owned, and voting controlled subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue when persuasive
evidence of a sales arrangement exists, delivery has occurred or services have been
rendered, the sales price is fixed and determinable and collectibility is reasonably
assured. The Company records provisions against revenue for billing adjustments,
which are based upon estimates derived from factors that include, but are not limited
to, historical results, analysis of credits issued, current economic trends and
changes in demand. The provisions for revenue adjustments are recorded as a reduction
of revenue when incurred or ratably over a contract period, as applicable.
The Company derives revenue principally
from international voice, including VoIP, private networks and Internet services.
Variable revenue derived from international voice services is recognized upon completion
of a call and is based upon the number of minutes of traffic carried. Revenue from
monthly recurring service from long distance, private networks and Internet services
are fixed and recurring in nature and are contracted over a specific period of time.
Advanced billings for monthly fees are reflected as deferred revenues and are recognized
as revenue at the time the service is provided. VoIP services enables customers,
typically international corporations or cable operators, to place voice calls anywhere
in the world using their personal computer. The majority of our VoIP services to
consumers are prepaid which is initially recorded as deferred revenue. Revenues
from VoIP services are recognized based upon the usage of minutes by the consumer.
Cash and Cash Equivalents
The Company considers all highly-liquid
debt instruments purchased with maturities of three months or less to be cash equivalents.
Accounts Receivable
The Company values its accounts receivable
net of an allowance for doubtful accounts. On a periodic basis, the Company evaluates
its accounts receivable and establishes an allowance for doubtful accounts, based
on a history of past write-offs and collections and current credit conditions. Specific
customer accounts are written off as uncollectible if the probability of a future
loss has been established and payments are not expected to be received.
Fair Value of Financial Instruments
The fair value of the Companys assets
and liabilities which qualify as financial instruments under Statement of Financial
Accounting Standards (SFAS) No. 107, Disclosures About Fair Value
of Financial Instruments, approximate the carrying amounts presented in the
accompanying consolidated balances sheets.
F-6
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Impairment of Long-Lived Assets and Impairment Charges
The Company complies with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
which requires impairment losses to be recorded on long-lived assets used in operations
when indicators of impairment are present and undiscounted cash flows estimated
to be generated by those assets are less than the assets carrying amount.
The Company continually evaluates whether events and circumstances have occurred
that indicates the remaining estimated useful life of long-lived assets, such as
property, and equipment may warrant revision, or the remaining balance may not be
recoverable.
During the first nine months of 2003, the Company
recorded an impairment totaling approximately $281,000. The impairment is related
to the adjustment of equipment being used by the Companys joint venture in
India (see Note 4) to its fair value based on estimated future cash flows from these
assets in accordance with SFAS No. 144.
Property and Equipment
Property and equipment are stated at cost
and are depreciated or amortized on the straight-line method over the estimated
useful lives of the assets as follows:
Maintenance and repairs are charged to operations,
while betterments and improvements are capitalized.
Advertising
Advertising costs are charged to operations
as incurred and were approximately $39,000, and $46,000 during the nine months ended
September 30, 2004 and 2003, respectively.
Income Taxes
The Company complies with SFAS No. 109,
Accounting for Income Taxes, which requires an asset and liability approach
to financial reporting for income taxes. Deferred income tax assets and liabilities
are computed for differences between the financial statement and tax bases of assets
and liabilities that will result in future taxable or deductible amounts, based
on enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred income tax assets to the amount expected to be realized.
Comprehensive Income
The Company complies with SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes
rules for the reporting and display of comprehensive income and its components.
SFAS No. 130 requires the Companys change in the foreign currency
translation adjustment to be included in other comprehensive income. At
September 30, 2004 and 2003, comprehensive income (loss) for the period then
ended was $(2,218,802) and $(4,057,617) and accumulated comprehensive income was
$100,938 and $114,045, respectively.
F-7
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Earnings Per Share
SFAS No. 128, Earnings Per Share
requires dual presentation of basic and diluted income per share for all periods
presented. Basic income per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted income per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the income of the Company.
Unexercised stock options to purchase 1,696,706
and 805,457 shares of the Companys common stock as of September 30, 2004 and
2003, respectively, were not included in the computation of diluted earnings per
share because the exercise of the stock options would be anti-dilutive to earnings
per share.
Unexercised warrants to purchase 286,567,
and 250,071 shares of the Companys common stock as of September 30, 2004 and
2003, respectively, were not included in the computation of diluted earnings per
share because the exercise of the warrants would be anti-dilutive to earnings per
share.
Non-converted debt to purchase 8,929 and
39,286 shares of the Companys common stock as of September 30, 2004 and 2003,
respectively were not included in the computation of diluted earnings per share
because the conversion of the debt would be anti-dilutive to earnings per share.
Had the debt been converted interest expense would have been reduced by approximately
$15,000 and $22,000 during the nine months ended September 30, 2004 and 2003, respectively.
Stock-Based Compensation
The Company follows SFAS No. 123, Accounting
for Stock-Based Compensation. The provisions of SFAS No. 123 allow companies
to either expense the estimated fair value of stock options or to continue to follow
the intrinsic value method set forth in Accounting Principles Board Opinion 25,
Accounting for Stock Issued to Employees (APB 25) but disclose
the pro forma effect on net income (loss) had the fair value of the options been
expensed. The Company has elected to continue to apply APB 25 in accounting for
its stock option incentive plans.
The Company provides the disclosure only
requirements of SFAS No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosure, an amendment of FASB Statement No. 123. If compensation expense
for the Companys stock-based compensation plan had been determined based on
the fair value at the grant dates as calculated in accordance with SFAS No. 123,
the Companys net loss attributable to common stockholders and net loss per
common share would approximate the pro forma amounts below:
F-8
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Stock-Based Compensation (continued)
The Company calculated the fair value of
each common stock option grant on the date of grant using the black scholes option
pricing model method with the following assumptions: dividend yield of 0%; weighted
average option term of four years; volatility of $0; average risk free interest
rate of 4.35% and 4.43% during the nine months ended September 30, 2004 and 2003,
respectively. The weighted average fair value of common stock options granted was
$0.00 and $0.00 during the nine months ended September 30, 2004 and 2003, respectively.
Recently Issued Accounting Pronouncements
In December 2004, the Financial
Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004)(123R),
Share-Based Payment. Statement 123(R) will provide investors and other
users of financial statements with more complete and neutral financial information
by requiring that the compensation cost relating to share based payment transactions
be recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. SFAS No. 123(R) covers a wide
range of share-based compensation arrangements including share options, restricted
share plans, performance-based awards, share appreciation rights and employee share
purchase plans. SFAS No. 123(R) replaces SFAS No. 123, Accounting for Stock
Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. SFAS No. 123, as originally issued in 1995, established
as preferable a fair-value-based method of accounting for share-based payment transactions
with employees. However, that Statement permitted entities the option of continuing
to apply the guidance in APB Opinion No. 25, as long as the footnotes to financial
statements disclosed what net income would have been had the preferable fair-value
based method been used. Public entities (other than those filing as small business
issuers) will be required to apply SFAS No. 123(R) as of the first interim or annual
reporting period that begins after June 15, 2005. The Company is in the process
of evaluating whether the adoption of SFAS No. 123(R) will have a significant
impact on the Companys overall results of operations or financial position.
In December 2004, the FASB issued SFAS
No. 152, Accounting for Real Estate Time-Sharing Transactions - an amendment
of SFAS No. 66 and 67. This Statement amends SFAS No. 66, Accounting
for Sales of Real Estate to reference the financial accounting and reporting
guidance for real estate time-sharing transactions that is provided in Statement
of Position (SOP) No. 04-02. This Statement also amends SFAS No. 67,
Accounting for Costs and Initial Rental Operations of Real Estate Projects
to state that the guidance for (a) incidental operations and (b) costs incurred
to sell real estate projects does not apply to real estate time-sharing transactions.
The accounting for those operations and costs is subject to the guidance of SOP
No. 04-02. This statement is effective for financial statements for fiscal years
beginning after June 15, 2005 with earlier application encouraged. The adoption
of SFAS No. 152 will not have a material impact on the Companys overall results
of operation or financial position.
In December 2004, the FASB issued SFAS
No. 153, Exchange of Nonmonetary Assets an amendment of APB Opinion
No. 29, Accounting for Nonmonetary Transactions. The amendments made
by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. Further, the
amendments eliminate the narrow exception for nonmonetary exchanges of similar productive
assets and replace it with a broader exception for exchanges of nonmonetary assets
that do not have commercial substance. SFAS No. 153 is effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal periods
after the date of issuance. The provisions of SFAS No. 153 shall be applied prospectively.
The Company is in the process of evaluating whether the adoption of SFAS No. 153
will have a significant impact on the Companys overall results of operations
or financial position.
In November 2004, FASB Statement No. 151,
Inventory Costs, an Amendment of ARB No. 43, Chapter 4
(SFAS
No. 151), was issued. The amendments made by SFAS No. 151 clarify that abnormal
amounts of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and require the allocation
of fixed production overheads to inventory based on the normal capacity of the production
facilities. SFAS No. 151 will become effective beginning in fiscal 2006. The adoption
of this Statement will not have a significant impact on the Companys financial
condition or results of operations.
F-9
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2. Summary
of significant accounting policies (continued)
In
January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Inte rest Entities (FIN 46).
In December 2003, FIN 46 was replaced by FASB interpretation No. 46(R)
Consolidation of Variable Interest Entities. FIN 46(R) clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46(R) requires an
enterprise to consolidate a variable interest entity if that enterprise will
absorb a majority of the entitys expected losses, is entitled to receive a
majority of the entitys expected residual returns, or both. FIN 46(R) is
effective for entities being evaluated under FIN 46(R) for consolidation no
later than the end of the first reporting period that ends after March 15, 2004.
Management does not believe the adoption of FIN 46(R) will have a material
impact on the Companys financial position or results of operations, as the
Company consolidates its joint ventures as required by this FIN 46.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the year. Actual results could differ from
those estimates.
3. Liquidity
At September 30, 2004, the Company has
a working capital deficit of approximately $6,612,000 and a stockholders deficit
of approximately $10,614,000. The Company has continued to sustain losses from operations
and for the nine months ended September 30, 2004 and 2003 has incurred a net loss
of approximately $2,227,000 and $4,105,000, respectively. In addition, the Company
has not generated positive cash flow from operations for the nine months ended September
30, 2004 and 2003. During the nine months ended September 30, 2004, the Company
has raised approximately $4,631,000 of additional proceeds, net of offering costs,
through the issuance of Series C Preferred Stock (see Note 15) and intends to raise
additional future capital through equity financing. The Company also converted approximately
$583,000 of long-term debt into shares of the Companys Series C Preferred
Stock. In addition, during the nine months ended September 30, 2004, the Company
has been able to increase its revenues and renegotiate and pay down certain obligations,
which have resulted in reduced losses and reduced outstanding debt. While management
believes that its current cash resources should be adequate to fund its operations
for the foreseeable future, the Companys long-term liquidity is dependent
on its ability to attain future profitable operations. The Company cannot make any
guarantees if and when it will be able to attain future profitability.
4. Joint ventures, acquisitions and
divestitures
In March, 2000, the Company entered into
a joint venture agreement with Communications Ventures India Pvt. Ltd. to form an
entity named Estel Communication Pvt. Ltd. (Estel). Estel is organized
and exists under the laws of India and has its office in New Delhi, India. The Company
directly owns 49% of the joint venture and has voting rights in another 1.01%, which
in turn gives the Company a 50.01% voting control in the joint venture. Estel was
established to engage in the business of selling and supporting internet service
protocol operations. Basically, Estel is in business as an Internet service provider
in India. The joint venture has been funded primarily by the Company which has also
provided certain equipment for the establishment of the required technology platforms.
In July 2002, the Company acquired a 75%
equity interest in a joint venture with Turner Hill Investments, L.P. (Turner
Hill) to provide VoIP services for calls terminating in Pakistan. During 2003
and 2002, the Company contributed certain telecommunications equipment and advances
to the joint venture in exchange for its equity interest in the new joint venture.
This joint venture operates out of facilities provided by Turner Hill and began
providing VoIP service in November 2002. In connection with this joint venture agreement,
the Company entered into a service agreement with a Pakistan telecommunications
company to provide termination services for calls terminating in Pakistan (see Note
12 for additional details).
F-10
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
4. Joint
ventures, acquisitions and divestitures (continued)
In December 2002,
the Company acquired a 50.2% equity interest in a joint venture with Karamco, Inc.
(Karamco) to provide various VoIP services throughout the emerging markets.
As of December 31, 2003 and September 30, 2004, no capital has been contributed
to the joint venture by either partner, but rather working capital loans have been
provided for operating purposes. Operations of the joint venture began during 2003.
In considering, EITF No. 96-16, Investors
Accounting for an Investee When the Investor Has a Majority of the Voting Interest
but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights,
management has evaluated the facts and circumstances underlying each joint venture
relationship such as the financial dependence of the minority shareholders on the
Company and corporate governance of each joint venture. Based upon these facts and
circumstances, the Company has determined that the minority shareholders of the
joint ventures do not have substantive rights that would prohibit the consolidation
of its joint ventures within its consolidated financial statements.
All joint ventures identified above have
been accounted for under the consolidation method of accounting as the Company maintained
either a majority equity ownership or a controlling voting interest in the aforementioned
joint ventures.
Since the Company maintains operations
in foreign countries through its joint ventures, the Company may be subject to exchange
control regulations or other impediments to convert foreign currencies into US dollars.
In addition, the Company may generate earnings which may be unable to be repatriated
outside the country in which they are earned. As of December 31, 2004, the Companys
joint ventures have not generated profits that would be subject to such restrictions.
5. Discontinued operations
During 2001, management of the Company
decided to cease the operations of its domestic retail telecommunication services
business lines. In connection with this decision, the Company opted out of a capital
lease under which it was leasing switching equipment located in Miami, Florida and
returned all of the switching equipment covered under the lease to the lessor. The
Company also abandoned an office located in Miami, which was being used to house
the switching equipment. The office was being leased under a non-cancelable operating
lease agreement.
As of September 30, 2004, liabilities of
discontinued operations included approximately $670,000 from the cancellation of
the operating lease obligation and approximately $984,000 of trade payables reclassified
from accounts payable and accrued expenses.
6. Property and equipment
At September 30, 2004, property and equipment
is comprised of the following:
7. Restricted cash
As of September 30, 2004, the Company had
approximately $509,000 of cash restricted from withdrawal and held by banks as certificates
of deposit securing letters of credit (equal to the amount of the certificates of
deposit). A significant portion of this restricted cash is required as security
deposits for certain of the Companys non-cancelable operating leases for office
facilities.
F-11
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Accounts payable and accrued expenses consist
of the following at September 30, 2004:
The deferred revenue balance at September
30, 2004 includes approximately $500,000 related to a debt settlement agreement
with a domestic carrier. The provisions of the agreement noted $555,000 due to the
carrier would be resolved with a service agreement whereby the carrier will receive
a reduced rate for every minute of traffic that is passed through the Companys
network for a period of 24 months beginning in December 2003. During the nine months
ended September 30, 2004, approximately $85,000 of deferred revenue was recognized
in connection with this service agreement.
9. Long-term debt and capital lease obligations
At September 30, 2004 components of long-term
debt and capital lease obligations of the Company is comprised of the following:
(a) Three stockholders of the Company each entered
into convertible subordinated note agreements aggregating $300,000, which mature
in five years (or April 9, 2004), at an interest rate of 7.25% per annum (modified
to 9.25% in April 2004). Interest shall be paid semi-annually on January 31 and
July 31. At the sole discretion of the Company, the principal of the note shall
automatically be converted into shares of common stock of the Company, at the closing
of a qualified initial public offering (IPO), if the IPO price equals
or exceeds 125% of the conversion price, which is $18.66 per share. There is also
an optional conversion clause that the note holders shall have the right, at their
option, at any time up to and including the maturity date, to convert the outstanding
principal. In February 2004, one stockholder converted $33,750 of its notes into
375 shares of Preferred C Stock at $90 per share. The remaining $16,250 note balance
was paid in April 2004. Consequently, the September 30, 2004 balance includes two
convertible subordinated note agreements aggregating $250,000, both of which are
covered under forbearance agreements (see below for further details).
(b) Two officers of the Company each entered
into various loan agreements with the Company in exchange for demand notes payable.
The outstanding balance of these notes were $898,931 as of September 30, 2004. The
notes bear interest at rates ranging from 4%4.75% per annum and are due on
demand.
F-12
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
9. Long-term
debt and capital lease obligations (continued)
(c) Between March
2001 and September 2002, the Company issued promissory notes to three stockholders.
The balance outstanding at September 30, 2004 was $81,790. The notes bear interest
at rates ranging from 4.75% to 12% per annum and are due on demand. In addition,
during February 2004, the Company entered into a settlement agreement for $600,000.
In the same month the Company paid $450,000 and agreed to make 12 monthly payments
for the remaining $150,000.
(d) In January 2001, the Company issued a promissory
note in the amount of $1,000,000, with monthly payments of interest only at 13%
per annum, with principal to be paid in full December 2001. This promissory note
is secured by certain of the Companys accounts receivables. At September 30,
2004, this note was in default and, accordingly, has been classified as currently
due. Subsequent to September 30, 2004, this note was refinanced. See note 20 for
further discussion.
Between September 2002
and April 2003, the Company entered into various promissory note payable agreements
for which $150,000 is outstanding as of September 30, 2004. Interest at 8% per annum
was to be paid in full through May 2003. At September 30, 2004, these notes were
in default and, accordingly, have been classified as currently due.
(e) Between December 2002 and February
2003, the Company entered into loan agreements with various stockholders, for the
purpose of generating funds to initiate a joint venture project in the United Arab
Emirates. During January and February 2004, all but one stockholder converted the
outstanding notes to 277 shares of Preferred C stock at $90 per share. The remaining
stockholder converted his $25,000 note into a new promissory note, which bears interest
at 4.5% per annum. Principal and interest are payable in one lump sum on the earlier
of 15 days from the completion of an IPO or September 1, 2005.
(f) In July 2002, the Company entered into loan
agreements with various stockholders, aggregating $500,000 for the purpose of generating
funds to initiate the Pakistan service project with Pakistan Telecommunications
Company Limited (Pakistan) (See Note 12). The loans were to be repaid
by the Company with funds it receives from PTCL in equal monthly installments, immediately
upon available funds or February 2003, and continuing through August 2003, bearing
interest at 15% per annum. In 2003, a portion of these loan agreements, aggregating
$250,000, was converted into shares of the Companys Series C Preferred and
common stock. During January 2004, $148,000 of the loans were converted to 1,644
shares of Series C Preferred stock at $90 per share.
(g) In September 2003, the
Company issued promissory notes payable aggregating $300,000 to various stockholders
for the purpose of resolving the Companys capital lease debt service contract
with the lessor of the equipment. The notes were to accrue interest at 8% per annum
and be paid in equal monthly installments of approximately $500 to $2,000 per month
with the outstanding principal due in June 2005. The Company also issued warrants
to these investors to purchase the aggregate of 85,714 shares of the Companys
common stock at a purchase price of $2.98 per share. The warrants are to expire
July 1, 2005. At the date of grant, these warrants had a nominal value assigned
to them that was immaterial to the consolidated financial statements. As of September
30, 2004, the outstanding balance of the various note payables aggregated $244,747.
(h) During the nine months ended September 30,
2004, approximately $193,000 of capital lease obligations had been forgiven and
recorded to forgiveness of debt (See Note 16).
At September 30, 2004, approximately $720,000
of the capital lease obligations were in default and accordingly have been classified
as currently due.
The following summarizes additional debt
activity during the nine months ended September 30, 2004:
Between October and November
2003, the Company issued two convertible notes payables, aggregating $140,000, to
two stockholders for the purposes of an Asian venture. The notes were to accrue
interest at prime rate, were payable monthly on the first of every month, and were
due on January 15, 2004 and October 31, 2004, respectively. In the event, the Asian
venture materialized, the principal of the notes, at the option of the stockholders,
could have been converted into shares of common stock of the Company. The conversion
price per share would be in proportion to the overall initial capitalization. During
the nine months ended September 30, 2004, the Asian venture had not materialized.
Consequently one of the notes was repaid in full and the other was converted to
1,111 shares of Preferred C Stock at $90 per share.
F-13
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
9. Long-term
debt and capital lease obligations (continued)
In December 2000, the Company
entered into a promissory note payable agreement of $200,000 with a stockholder,
calling for monthly payments of approximately $4,500, including interest at 12%
per annum, through January 2006. On September 1, 2002, the Company added an additional
agreement for the option to convert $65,000 of the note into 28,571 shares of the
Companys common stock at $2.28 per share. In February 2004, the remainder
of this note, including interest was repaid. In September 2003, the Company entered
into a promissory note payable agreement with the same stockholder of $100,000 including
interest at 11% per annum. This note called for 3 months of interest only payments
and 3 months of principal and interest payments with the note being due by March
2004. The promissory note was repaid in full during March 2004.
During the nine months ended September
30, 2004, the Company entered into an equipment financing agreement in connection
with the purchase of the Companys new soft switch. The balance at September
30, 2004 was approximately $435,000 and is payable every 90 days over the next 18
months. The Company has imputed an interest rate of 10% related to this agreement.
In May 2001, the Company issued a promissory
note payable agreement for the sum of $400,000, including interest at 12% per annum,
and due in full February 2002. In connection with the private placement offering
for Series C Preferred Stock (see Note 13), the Company provided the stockholder
with the option to convert the promissory note into 3,334 shares of the Companys
Series C preferred stock at an exchange price of $90 per share. As of September
30, 2004, the stockholder was paid a portion of the remaining balance and exercised
his option to convert the remaining promissory note payable balance into the Companys
Series C preferred stock.
Future aggregate principal payments on long-term
debt and capital leases in the years subsequent to September 30, 2004 are as follows:
2005
In December 2003, two officers of the Company
signed forbearance agreements, providing the officers would not call due approximately
$1,829,000 of long-term debt and accrued interest until such time the Company completed
a successful IPO, or December 19, 2004, whichever occurs first. During December
2004 the date of their forbearance agreements were extended from December 19, 2004
to March 31, 2005.
10. Short-term borrowing obligations
Short-term borrowing obligations of the
Company represent a revolving line of credit agreement between an Indian bank and
the Companys Estel joint venture. The line of credit provides for borrowings
up to $600,000 at an interest rate at the banks prime rate (approximately
2% at September 30, 2004) and was initially due in August 2004, but was extended
to August 2005. The line of credit is collateralized by substantially all of the
assets of the Estel joint venture. As of September 30, 2004, drawings on the line
of credit amounted to approximately $531,000.
F-14
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Due to the operating losses incurred, the
Company has no current income tax provision for the nine months ended September
30, 2004 and 2003. The provision for income taxes consists of the following:
The following reconciles the Federal
statutory tax rate to the effective income tax rate for the nine months ended September
30, 2004 and 2003:
The components of the Companys deferred
tax assets and liability consist of approximately the following at September 30,
2004:
The Company has available at September 30, 2004,
approximately $71,097,000, of unused net operating loss carryforwards that may be
applied against future taxable income, which expire in various years from 2013 to
2024. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating
loss carryforwards and credits may be impaired or limited in certain circumstances.
Events which cause limitations in the amount of net operating losses that the Company
may utilize in any one year include, but are not limited to, a cumulative ownership
change of more than 50%, as defined, over a three year period. The amount of such
limitation, if any, has not been determined.
Management of the Company had decided to
fully reserve for its net deferred tax assets, as it is more likely than not that
the Company will not be able to utilize these deferred tax assets against future
taxable income, coupled with certain limitations on the utilization of the net operating
losses due to various changes in ownership over the past several years.
F-15
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
The Company has various non-cancelable
operating lease agreements for office facilities. A summary of the lease commitments
under non-cancelable leases at September 30, 2004 is approximately as follows:
Rent expense for all operating leases
was approximately $881,000 and $988,000 during the nine months ended September 30,
2004 and 2003, respectively.
In May 2002, the Company entered into a Service
Agreement (the Agreement) with Pakistan Telecommunications Company,
Ltd (PTCL), under which PTCL would provide for the termination of incoming
international traffic into Pakistan focusing on VoIP services from the United States
and Europe. The Agreement provides for an initial term of one year, with additional
one year extensions terms. The Company has exercised its option to extend the agreement,
which is in effect through May 2005. The Agreement provides for the Company to place
all necessary switching equipment in Pakistan, the United States and Europe (which
it has done so through the Pakistan joint venture formed with Turner HillSee
Note 4). Under the terms of the Agreement PTCL will provide the Company with voice
termination services within Pakistan, for which the Company will pay PTCL a maximum
service charge of $0.19 per minute for all calls terminating in Pakistan using the
Companys VolP platform. The Agreement also requires the Company to guarantee
a minimum of three million minutes a month to terminate to Pakistan.
The Company is required to keep on deposit
with PTCL, a one month rolling advance equal to the number of minutes terminated
during the preceding month, times the prevailing termination rate charged by PTCL
to the Company. For the nine months ended September 30, 2004 and 2003, the Company
has incurred approximately $6,660,000 and $6,820,000, respectively of termination
charges under this agreement.
In connection with the joint venture agreement
with Turner Hill (
See Note 4
), the joint venture entity is required to pay
a management fee to Turner Hill equal to the number of minutes terminating in Pakistan
on a monthly basis times a fixed rate per minute. During the nine months ended September
30, 2004 and 2003, the joint venture incurred management fees to Turner Hill for
approximately $239,000 and $263,000, respectively.
Legal Matters
The Company is a defendant in an employment
claim that management believes has no merit. The claim is filed in the State of
New York before an administrative agency. The administrative department is currently
reviewing the case and management believes it will be dismissed. Regardless, management
believes that this claim will not have a material effect on the Companys business
or results of operations.
In April 2003, a former customer of the
Company brought an action against the Company for recovery of preferential transfers
and other claims under the Bankruptcy Code. The suit, brought in the United States
Bankruptcy Court for the Northern District of Illinois Eastern Division, seeks damages
in the amount of approximately $335,000. The Company and management plan to defend
this suit vigorously and do not expect the outcome to have an adverse effect on
the Companys financial condition.
F-16
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
12. Commitments
and contingencies (continued)
Legal Matters (continued)
In May 2003, a shareholder
of the Company brought an action in the District Court in and for the City and County
of Denver and the State of Colorado. The action is seeking damages in the amount
of $400,000. The Company and management plan to defend this suit vigorously and
do not expect the outcome to have an adverse effect on the Companys financial
condition. This action was dismissed in August 2004. The plaintiff has filed an
appeal for the motion, which is pending.
In 1999, the Company guaranteed a real property
lease on behalf of a joint venture. The joint venture subsequently defaulted on
the lease and in July 2003 the landlord brought an action in the Circuit Court,
Miami, Florida. The Company is also being sued for back rent and costs of approximately
$1.1 million. The Company believes that this dispute will be resolved amicably,
but if the Company and management are unable to amicably resolve the action, the
Company can make no assurance that the outcome will not have an adverse effect on
the Companys financial condition.
The Company is involved in
other claims and legal actions arising in the normal course of business. Management
does not expect that the outcome of these cases will have a material effect on the
Companys financial position or results of operations. Due to the regulatory
nature of the industry, the Company is periodically involved in various correspondence
and inquiries from state and federal regulatory agencies. Management does not expect
the outcome of these inquiries to have a material impact on the operations or the
financial condition of the Company.
13. Preferred stock
The Company has authorized 10,000,000 shares
of its stock for the issuance of Preferred Stock. The Company has designated 1,100,000,
1,500,000 and 110,000 shares of $10 Series A Convertible Redeemable Preferred Stock
(Series A Preferred Stock), $10 Series B Convertible Redeemable Preferred
Stock (Series B Preferred Stock) and $90 Series C Convertible Redeemable
Preferred Stock (Series C Preferred Stock), respectively (collectively
Preferred Stock).
During May 2004, each outstanding
share of Series A and Series B Preferred Stock was converted to common stock at
a conversion rate of $3.50 per share, consequently as of September 30, 2004, there
were no shares outstanding of series A and B preferred stock and 109,962 shares
outstanding of series C preferred stock.
Dividends
The holders of Series A Preferred Stock
were entitled to receive cumulative dividends of 12% per share per annum, which
were payable annually in arrears beginning on August 31, 2002 and were payable (at
the Companys option) in cash or shares of the Companys common stock
at a rate equal to the conversion rate in effect at the date of declaration of the
dividend. The holders of Series B Preferred Stock were entitled to a cumulative
dividend of 11.5% per share per annum, which was payable annually in arrears beginning
on March 31, 2003 and was payable (at the Companys option) in cash or shares
of the Companys common stock at a rate equal to the conversion rate in effect
at the date of declaration of the dividend. The holders of Series C Preferred Stock
are entitled to receive cumulative dividends of 8% per share per annum which are
payable annually beginning on December 18, 2004 and are payable in cash, unless
the Company completes a successful IPO before December 18, 2004. As of December
22, 2004, approximately $673,000 of dividends of Series C preferred stock which
was due on December 18, 2004 remains unpaid.
No dividends can be paid on any outstanding
shares of common stock, or Series A and B Preferred Stock, unless all then accrued,
but unpaid dividends have been paid with respect to all outstanding shares of Series
C Preferred Stock.
F-17
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
13. Preferred
stock (continued)
Dividends (continued)
In December 2003, the Companys
Board of Directors (the Board) declared a stock dividend payable on
the outstanding shares of Series A and B Preferred Stock (due on August 31, 2003
and March 31, 2004, respectively). The Board elected to issue shares of the Companys
common stock in lieu of cash at a conversion rate equal to $2.98 per share times
the aggregate dividends due to the holders of both Series A and B Preferred Stock
at date of record (August 15, 2003 and March 15, 2004, respectively). At December
31, 2003, the Company recorded a stock dividend distributable of approximately $553,000
for the issuance of 185,962 shares of common stock to the holders of the Companys
Series A and Series B Preferred Stock. These shares were issued during the nine
months ended September 30, 2004, along with an additional 6,708 shares of common
stock for unredeemed dividends on Series B Preferred Stock totaling approximately
$20,000.
In connection with the conversion of the Series
A and Series B Preferred Stock into common stock, accrued dividends from September
1, 2003 and April 1, 2004 to the date of the respective conversions were issued
in the form of common stock. These common stock dividends aggregated 123,012 additional
shares of common stock and were issued during September 2004.
Liquidation
In the event of any liquidation, dissolution,
or winding up of the Company either voluntary or involuntary or a merger or consolidation
with any other corporation, or a sale or other transfer of substantially all the
assets of the Company, the holders of Series C Preferred Stock shall be entitled
to receive, in preference to holders of common stock, an amount equal to $90 per
each outstanding share plus an amount equal to all accrued but unpaid dividends.
Following the Series C Preferred Stock
liquidation payment, the remaining assets and funds of the Company legally available
for distribution, if any, shall be distributed ratably among the holders of common
stock and Series C Preferred Stock in proportion to the number of shares of common
stock held on as as-if converted basis.
Redemption
The Company had the right to redeem the
outstanding shares of Series A and B Preferred Stock at any time (with 30 days prior
notice) for a redemption price of $10 per share plus accrued, but unpaid dividends.
As discussed previously, this right was exercised during the first nine months of
September 2004. The Company has the right to redeem the outstanding shares of Series
C Preferred Stock, commencing on the first anniversary of the first issuance of
Series C Preferred Stock, at a price per share equal to 115% of the stated value,
plus pro rata accrued and unpaid dividends due through the date of redemption.
After the second anniversary of the first
issuance of the Companys Series C Preferred Stock (December 18, 2005) and
so long as all classes of the Companys stock are not publicly traded and a
liquidation has not occurred, each holder of Series C Preferred Stock may, at its
option, require the Company to redeem its shares at a price equal to 112% of the
stated value of the stock, plus pro rata accrued and unpaid dividends due. In accordance
with SFAS 150, the Series C Preferred Stock has been classified as a liability and
the initial carrying amount of this stock has been recorded at is fair value at
the date of issuance. The carrying amount is being increased by periodic accretions,
using the interest method, so that the carrying amount will equal the mandatory
redemption amount at the mandatory redemption date. Accretion during the nine months
ended September 30, 2004 was approximately $1,181,000 which is included in interest
expense for the nine months ended September 30, 2004 in the accompanying statement
of operations. At September 30, 2004, the redemption value of the Series C Preferred
Stock was approximately $11,077,000.
F-18
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
13. Preferred
stock (continued)
Conversion
Each share of Series A and B Preferred Stock was
convertible, at the option of the stockholder, at any time after the issuance date
of such share into a number of shares of common stock as determined by the conversion
rate in effect at the time of conversion, plus all accrued and unpaid dividends
payable (at the Companys option) in either cash or common stock. (See conversion
table below).
Each share of Series C Preferred Stock
is convertible, at the option of the stockholder, at any time after the issuance
date of such shares into a number of shares of common stock, based upon a conversion
price of $3.15 per common share.
Voting
No holders of Preferred Stock have voting
rights, except as provided by law.
14. Stock options and warrants
Under the Companys 1998 stock option
plan (as amended), the Company has reserved 1,714,286 shares of common stock for
issuance to employees at exercise prices determined by the Board. In November 2004,
the Board approved an increase in the number options available for grant under the
Companys 1998 stock option plan to 2,680,857. Options under the plan vest
in annual increments over a four year period, expire ten years from the date of
grant and are issued at exercise prices no less than 100% of the fair market value
at the time of grant. As reported in Note 2, the Company has elected to adopt the
disclosureonly provisions of SFAS No. 123 and will account for stock-based
employee compensation plans in accordance with APB 25. As a result, no compensation
cost for its stock option plan has been recognized in the periods presented.
In July 2004, the Companys Stock
Option Committee approved a recommendation to issue 446,057 options to its employees
who had been previously granted stock options. Each employee would receive new options
equal to 50% of their existing options priced at $3.15 per share and 50% at $4.38
per share, both with a four year vesting period and furthermore would receive credit
for the vesting time on previously issued options, and the original options will
be cancelled if not exercised within six months and one day of the issuance of the
new options. In addition, during July 2004, the Stock Option Committee also approved
the issuance of 667,686 options to employees, consultants and Board members at a
price of $4.38 per share.
F-19
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
A summary of the Companys stock option
plan as of September 30, 2004 and 2003 and changes during the nine months then ended
on those dates is as follows:
The following table summarizes information about
stock options outstanding at September 30, 2004:
The Company, as part of various debt and other
agreements, have issued warrants to purchase the Companys common stock. The
following summarizes the information relating to warrants issued and the activity
during the first nine months of 2004 and 2003:
All warrants are fully exercisable upon
issuance.
F-20
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
In June 2003, the Company commenced
a private placement for the purpose of raising working capital for the Companys
operations. The private placement provided for the issuance of a maximum of 5,714,286
shares of the Companys $0.01 par value common stock at $2.98 per share. The
private placement was valid through September 15, 2003, but was extended for an
additional 90 days. The total number of shares of common stock issued in this private
placement in 2003 was 1,342,844 shares for which proceeds of approximately $3,774,000
were received, net of expenses of approximately $247,000. During the nine months
ended September 30, 2004, an additional 430,252 shares were issued in this private
placement for which proceeds of approximately $1,277,000 were received, net of expenses
of approximately $3,000.
In November 2003, the Company commenced
a private placement for the purpose of raising working capital for the Companys
operations. The private placement provided for the issuance of a maximum of 110,000
shares of the Companys Series C Preferred Stock at $90 per share. The private
placement was valid through December 15, 2003, but was extended for an additional
107 days. The total number of shares of Series C Preferred Stock issued in this
private placement during 2003 was 33,542 shares for which proceeds of approximately
$2,526,000 were received, net of expenses of approximately $492,000. During the
first quarter of 2004, an additional 59,492 shares of Series C Preferred Stock were
issued in this private placement. The proceeds were approximately $4,637,000, net
of expenses of approximately $723,000.
During March 2004, certain note holders
elected to convert approximately $584,000 of their notes into shares of the Companys
Series C Preferred Stock at a conversion rate of $90 a share. The conversion resulted
in the issuance of 6,504 additional shares of Series C Preferred Stock.
In May 2004, the shareholders of all the outstanding
series A and B Preferred Stock, elected to convert all their shares into shares
of the Companys common stock at a conversion rate of $3.50 per share. This
resulted in the issuance of 1,373,546 shares of common stock.
In October 2004, the Company issued 19,048
shares of common stock at $5.25 per share in lieu of cash to the Saif Telecom (Pvt)
Ltd for management fees related to the Pakistan JV.
16. Forgiveness of debt
During the nine months ended September
30, 2004, the Company recorded approximately $2,175,000 related to forgiveness of
debt. As of December 31, 2003, the Company had an outstanding capital lease obligation
aggregating approximately $238,000. In January 2004, the Company entered into an
agreement whereas the Company agreed to pay the sum of $45,000 resulting in a $193,000
forgiveness of debt. In addition, during the nine months ended September 2004, the
Company recorded approximately $1,982,000 of additional forgiveness of debt primarily
related to settled accounts payable disputes.
17. Profit sharing plan
The Company has a defined contribution
profit sharing plan, which covers all employees who meet certain eligibility requirements.
Contributions to the plan are made at the discretion of the Board. No contributions
to the profit sharing plan were made during the nine months ended September 30,
2004 and 2003.
18. Related party transactions
At September 30, 2004 and 2003, the Company
had an aggregate of approximately $2.8 million and $5.3 million of long-term debt
due to stockholders of the Company. The repayment, conversion terms, and interest
rates are outlined in Note 9. In addition, the Company had approximately $643,000
and $560,000 of accrued interest on this related debt as of September 30, 2004 and
2003, respectively. Interest expense related to this debt was approximately $196,000
and $313,000 for the nine months ended September 30, 2004 and 2003, respectively.
F-21
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Major Customers
During the nine months ended September
30, 2004, three customers of the Company accounted for revenues exceeding 32% in
total and at least 5% individually of the Companys total revenues during this
period. During the nine months ended September 30, 2003, eight customers of the
Company accounted for revenues exceeding 58% in total and at least 5% individually
of the Companys total revenues during this period. Revenues earned from these
customers were approximately $12,719,000 and $14,354,000 during the nine months
ended September 30, 2004 and 2003, respectively. At September 30, 2004 the amounts
owed to the Company by these customers were approximately $2,131,000.
Geographic Concentrations
The Companys operations are significantly
influenced by economic factors and risks inherent in conducting business in foreign
countries, including government regulations, currency restrictions and other factors
that may significantly affect managements estimates and the Companys
performance.
During the nine months ended September
30, 2004 and 2003, the Company generated revenue from customers in the following
countries.
At September 30, 2004, the Company had foreign
long lived assets as follows:
Revenues by geographic area are based upon the
location of the Companys customers. The foreign long lived assets by geographic
area represent those assets physically used in the operations in each geographic
area.
The Company adopted Statement of Financial
Accounting Standards No. 131 (SFAS No. 131), Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 requires disclosures of
segment information on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments.
We have four reportable segments, that
we operate and manage which are organized by products and services. We measure and
evaluate our reportable segments based on revenues and cost of revenues. This segment
income excludes unallocated corporate expenses and other adjustments arising during
each period. The other adjustments include transactions that the chief operating
decision makers exclude in assessing business unit performance due primarily to
their non-operational and/or non-recurring nature. Although such transactions are
excluded from the business segment results, they are included in reported consolidated
earnings. Each segment is managed according to the products, which are provided
to the respective customers, and information is reported on the basis of reporting
to the Companys Chief Operating Decision Maker.
F-22
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Our segments and their principal activities
consist of the following:
Traditional Voice This segment includes
the termination of voice telephony minutes to the countries served by us,
utilizing traditional Time Division Multiplexing (TDM) and circuit-switched
technology. Typically, this will include interconnection with traditional telecommunications
carriers either located internationally or those carriers that interconnect with
Fusion at its US Points of Presence (POP) and provide service to other destinations.
VoIP (Voice over Internet Protocol) to
Carriers VoIP includes the termination of voice telephony minutes through the
internet rather than older circuit-switched technology. This permits far less costly
and more rapid interconnection between Fusion and international telecommunications
carriers.
VoIP (Voice over Internet Protocol) to
Consumers and Corporations Primarily through our Efonica and Estel entities,
we provide VoIP services targeted to end-users and corporations. PC-to-phone connectivity
utilizing the Internet allows consumers to use their personal computers to originate
calls that reach the telephone of their destination party. The Company also offers
services that permit consumers or corporations to originate calls via IP telephones
or telephone systems that use the Internet for completion to standard telephone
lines anywhere in the world.
Internet, Private Networks & Other
We provide Internet connectivity to telecommunications carriers, Internet
Service Providers, government entitites, and multinational customers via our POPs
in the US, India, and through our partners elsewhere. We also offer point-to-point
private lines, virtual private networking, and call center communications services
to customers in our target markets. Lastly, we offer the Interview desktop-to-desktop
video conferencing service to customers anywhere in the world.
Operating segment information for 2003,
2002, and 2001 is summarized as follows:
F-23
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
21. Subsequent events
On November 1, 2004, the Board of Directors, upon
approval of the stockholders, authorized the increase of the amount of eligible
stock under the Companys employee stock option plan from 1,714,286 to 2,680,857.
This was approved by the shareholders on December 10, 2004.
On November 1, 2004, the Board of Directors,
upon approval of the stockholders, authorized a 3.5 to 1 reverse stock-split applicable
to all outstanding shares of the Companys common stock. This was approved
by the shareholders on December 10, 2004. All transactions and disclosures in the
consolidated financial statements, related to the Companys common stock have
been restated to reflect the effect of the reverse stock-split.
On November 1, 2004, the Board
of Directors, upon approval of the stockholders, increased the authorized number
of shares to 136,000,000 which includes 105,000,000 shares of common stock,
10,000,00 shares of preferred stock and 21,000,000 shares of Class A common
stock. This increase was approved by the stockholders on December 10, 2004. On
December 10, 2004, the stockholders approved the amendment to the Companys
Certificate of Incorporation to automatically convert each share of the
Companys outstanding common stock (except for shares of common stock
issuable upon conversion of Series C preferred stock) into one share of Class A
common stock. The Class A common stock may not be converted into common stock
until one year after the successful completion of an initial public offering
unless the holder agrees to exercise a one year lock up agreement. The rights of
a Class A shareholder are identical in all respects to the common stock other
than the shares of Class A common stock are not transferable for a period of one
year following the closing of the IPO.
In November 2004, the Company received net cash
proceeds of $1,330,000 ($1,400,000 for a convertible note net of a $70,000 advisory
fee) and refinanced $1,108,333 of existing notes payable and accrued interest in
exchange for a convertible promissory note. These two notes aggregate $2,508,333
bear interest at 6.5% per annum and are due in November 2006. The notes would automatically
convert into common shares at a conversion price of $3.85 per share upon successful
registration from an initial public offering. The common stock is subject to a one
year lock up provision. The beneficial conversion feature will
result in a charge to interest expense of approximately $228,000 in the fourth
quarter of 2004.
F-24
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
21. Subsequent events (continued)
In December 2004, the Company entered into an
agreement to acquire 51% of the common stock of a Jamaican telecommunications
company in exchange for $150,000. The approximate amounts of net assets acquired
are as follows:
Current assets $ 49,000
The intangible assets represent contractual
assets consisting of international and domestic carrier license agreements with
the Jamaican government which expire in 2013 and 2018, respectively. The intangible
assets will be amortized over a weighted average life of 12 years.
In January 2005, we entered into an agreement
to acquire the 49.8% minority interest in one of our joint ventures, Efonica from
Karamco, Inc., contingent upon the successful completion of an initial public offering
by March 1, 2005. The purchase price will be a minimum of $5.5 million and a maximum
of $14.3 million, as adjusted for the approximate $175,000 representing Karamcos
portion of Efonicas debt owed to us and the $500,000 to be paid in cash based
upon a multiple of earnings achieved by Efonica during the 12-month period ending
February 28, 2006 (4.5 x Efonicas net income as adjusted for certain intracompany
and other expenses). Karamco will receive cash of $500,000, with the balance paid
in shares of common stock. The number of shares to be issued to Karamco will be
determined by the initial price of the common stock at the date of the IPO. On the
date of the transaction, approximately $4.4 million worth of such shares of common
stock, based upon the IPO price, will be issued to Karamco and held in escrow until
the final valuation of the joint venture is determined after the year ending February
28, 2006. In the event that the purchase price would be lower (based upon Efonicas
net income for that one year period) than $10 million, the excess of the common
shares based upon the IPO price will be returned to us for cancellation out of the
$4.4 million worth of stock held in escrow. In the event that the purchase price
would be higher than the $10 million (based upon Efonicas net income), we
will issue Karamco additional shares of our common stock (based on the IPO price),
subject to the $14.3 million maximum.
Out of the shares to be issued to the Seller,
150,000 shares of common stock are being registered for resale herein. We have an
option to repurchase the shares from Karamco at the higher of the IPO price or the
closing price on the day Karamco seeks to sell. In addition, Karamco is subject
to a leak-out agreement whereby they are restricted from selling any of their shares
for 45 days and then may sell up to 75,000 shares during the 45 day period beginning
after 45 days and the remaining 75,000 shares may be sold thereafter. Karamco may
not sell more than $1,000,000 of stock during the one-year period following the
effective date. If the sale of the 150,000 shares that are being registered results
in less than $1 million of gross proceeds we will purchase additional shares owned
by Karamco, at a price equal to the higher of the IPO price or the closing price
30 days after the last sale, so that they receive $1 million in gross proceeds.
If we purchase additional shares from Karamco they will be returned for cancellation.
The balance of Karamcos shares will be subject to a one-year lock-up with
the Representative. Karamco is owned by Roger Karam, who will become the CEO of
Efonica and our President of VoIP Services upon the effective date.
In the event that the IPO does not occur
on or before March 1, 2005, the Seller has the option of maintaining its minority
interest in Efonica. The excess of the purchase price over the book value of the
minority interest acquired, based upon the minimum purchase price of approximately
$5.5 million, will primarily be allocated to intangible assets in the amount of
approximately $5.5 million.
F-25
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
We have audited the accompanying consolidated balance sheets of Fusion Telecommunications International, Inc. and Subsidiaries (the Company) as of December 31, 2003 and 2002, and the related consolidated
statements of operations, changes in stockholders deficit and cash flows for the three years ended December 31, 2003. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2002, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.
/s/ Rothstein, Kass & Company, P.C.
F-26
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
See accompanying notes to consolidated financial
statements.
F-27
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
See accompanying notes to consolidated financial statements.
F-28
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
See accompanying notes to consolidated financial
statements.
F-29
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
See accompanying notes to consolidated financial statements.
F-30
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
F-31
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Fusion Telecommunications International,
Inc. and Subsidiaries (collectively the Company) is a Delaware corporation,
incorporated in September 1997. The Company is an international communications carrier
delivering Voice over Internet Protocol (VoIP), Private Networks, Internet
Access, IP Video Conferencing and other advanced services to, from and within emerging
markets in Asia, the Middle East, Africa, the Caribbean, and Latin America. With
its lead product, VoIP, the Company provides a full suite of communications solutions
to corporations, Postal Telephones and Telegraphs, Internet Service Providers, government
entities, consumers and cable operators.
2. Summary of significant accounting
policies
Principles of Consolidation
The consolidated financial statements include
the accounts of Fusion Telecommunications International, Inc. and its wholly owned,
majority owned, and voting controlled subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue when persuasive
evidence of a sales arrangement exists, delivery has occurred or services have been
rendered, the sales price is fixed and determinable and collectibility is reasonably
assured. The Company records provisions against revenue for billing adjustments,
which are based upon estimates derived from factors that include, but are not limited
to, historical results, analysis of credits issued, current economic trends and
changes in demand. The provisions for revenue adjustments are recorded as a reduction
of revenue when incurred or ratably over a contract period, as applicable.
The Company derives revenue principally
from international voice, including VoIP, private networks and Internet services.
Variable revenue derived from international voice services is recognized upon completion
of a call and is based upon the number of minutes of traffic carried. Revenue from
monthly recurring service from long distance, private networks and Internet services
are fixed and recurring in nature and are contracted over a specific period of time.
Advanced billings for monthly fees are reflected as deferred revenues and are recognized
as revenue at the time the service is provided. VoIP serices enables customers,
typically international corporations or cable operators, to place voice calls anywhere
in the world using their personal computer. The majority of our VoIP services to
consumers are prepaid which is initially recorded as deferred revenue. Revenues
from VoIP services are recognized based upon the usage of minutes by the consumer.
Cash and Cash Equivalents
The Company considers all highly-liquid
debt instruments purchased with maturities of three months or less to be cash equivalents.
Accounts Receivable
The Company values its accounts receivable
net of an allowance for doubtful accounts. On a periodic basis, the Company evaluates
its accounts receivable and establishes an allowance for doubtful accounts, based
on a history of past write-offs and collections and current credit conditions. Specific
customer accounts are written off as uncollectible if the probability of a future
loss has been established and payments are not expected to be received.
F-32
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Fair Value of Financial Instruments
The fair value of the Companys assets
and liabilities which qualify as financial instruments under Statement of Financial
Accounting Standards (SFAS) No. 107, Disclosures About Fair Value
of Financial Instruments, approximate the carrying amounts presented in the
accompanying consolidated balance sheets.
Impairment of Long-Lived Assets and Impairment Charges
The Company complies with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which
requires impairment losses to be recorded on long-lived assets used in operations
when indicators of impairment are present and undiscounted cash flows estimated
to be generated by those assets are less than the assets carrying amount.
The Company continually evaluates whether events and circumstances have occurred
that indicates the remaining estimated useful life of long-lived assets, such as
property and equipment may warrant revision, or the remaining balance may not be
recoverable.
Impairment of Long-Lived Assets and Impairment Charges
(continued)
During 2003, the Company recorded two impairments
totaling approximately $735,000. The first impairment of $375,000 related to managements
decision to sell (to a third-party) certain switching equipment, which will be replaced
by upgraded equipment. The Company continued to utilize the switching equipment
in 2003, and in 2004, the Company entered into an agreement to sell the equipment
under a sales-type capital lease. In accordance with the provisions of SFAS No.
144, the Company evaluated the present value of the future cash flows to be generated
from this lease and determined that the present value of the future cash flows were
less than the carrying value of the equipment, thus there was an impairment on the
switching equipment. The remaining impairment of approximately $360,000 was related
to the adjustment of equipment being used by the Companys joint venture in
India (see Note 4) to their fair value based on estimated future cash flows from
these assets in accordance with SFAS No. 144.
During 2002, the Company recorded an impairment
on equipment for approximately $468,000. This impairment was due to the termination
and abandonment of a voice network to a route in the Caribbean, which during 2002,
was deactivated and no longer generating revenues for the Company. The impairment
was equal to the net book value of the equipment at the date this Caribbean voice
network was deactivated.
During 2001, the Company recorded three
impairments totaling approximately $2,825,000, primarily relating to goodwill acquired
through various joint ventures (see Note 4). These joint ventures could not sustain
profitable operations and based upon the fair value of estimated future cash flows,
the Company determined that the goodwill relating to these joint ventures had no
value.
Property and Equipment
Property and equipment are stated at cost
and are depreciated or amortized on the straight-line method over the estimated
useful lives of the assets as follows:
Maintenance and repairs are charged to operations,
while betterments and improvements are capitalized.
F-33
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Advertising
Advertising costs are charged to operations
as incurred and were approximately $32,000, $19,000 and $5,000, for 2003, 2002 and
2001, respectively.
Income Taxes
The Company complies with SFAS No. 109,
Accounting for Income Taxes, which requires an asset and liability approach
to financial reporting for income taxes. Deferred income tax assets and liabilities
are computed for differences between the financial statement and tax bases of assets
and liabilities that will result in future taxable or deductible amounts, based
on enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred income tax assets to the amount expected to be realized.
Comprehensive Income
The Company complies with SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes rules for the
reporting and display of comprehensive income and its components. SFAS No. 130 requires
the Companys change in the foreign currency translation adjustment to be included
in other comprehensive income.
Earnings Per Share
SFAS No. 128, Earnings Per Share,
requires dual presentation of basic and diluted income per share for all periods
presented. Basic income per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted income per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the income of the Company.
Unexercised stock options to purchase 656,207,
1,009,771 and 937,314 shares of the Companys common stock as of December 31,
2003, 2002 and 2001, respectively, were not included in the computation of diluted
earnings per share because the exercise of the stock options would be anti-dilutive
to earnings per share.
Unexercised warrants to purchase 252,751,
159,214, and 59,214 shares of the Companys common stock as of December 31,
2003, 2002 and 2001, respectively, were not included in the computation of diluted
earnings per share because the exercise of the warrants would be anti-dilutive to
earnings per share.
Non-converted debt to purchase 47,215,
39,286 and 39,286 shares of the Companys common stock as of December 31, 2003,
2002 and 2001, respectively were not included in the computation of diluted earnings
per share because the conversion of the debt would be anti-dilutive to earnings
per share. Had the debt been converted interest expense would have been reduced
by approximately $30,000 in each of the years ended December 31, 2003, 2002 and
2001.
Stock-Based Compensation
The Company follows SFAS No. 123, Accounting
for Stock-Based Compensation. The provisions of SFAS No. 123 allow companies
to either expense the estimated fair value of stock options or to continue to follow
the intrinsic value method set forth in Accounting Principles Board Opinion 25,
Accounting for Stock Issued to Employees (APB 25) but disclose
the pro forma effect on net income (loss) had the fair value of the options been
expensed. The Company has elected to continue to apply APB 25 in accounting for
its stock option incentive plans.
F-34
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Stock-Based Compensation (continued)
The Company provides the disclosure only
requirements of SFAS No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosure, an amendment of FASB Statement No. 123. If compensation expense
for the Companys stock-based compensation plan had been determined based on
the fair value at the grant dates as calculated in accordance with SFAS No. 123,
the Companys net loss attributable to common stockholders and net loss per
common share would approximate the pro forma amounts below:
The Company calculated the fair value of each
common stock option grant on the date of grant using the black scholes option pricing
model method with the following assumptions: dividend yield of 0%; weighted average
option term of four years; average risk free interest rate of 4.43%, 5.61%, and
5.81%, in 2003, 2002, and 2001, respectively. The weighted-average fair value of
common stock options granted was $0.00, $0.00 and $1.24 in 2003, 2002 and 2001,
respectively.
Recently Issued Accounting Pronouncements
In May 2003, the Financial Accounting Standards
Board (FASB) issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No.
150 requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. The financial
instruments affected include mandatory redeemable stock, certain financial instruments
that require or may require the issuer to buy back some of its shares in exchange
for cash or other assets and certain obligations that can be settled with shares
of stock. SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003 and must be applied to existing financial instruments
the beginning of the first fiscal period after June 15, 2003. At December 31, 2003,
the Companys Series C Preferred Stock qualifies under the provisions of SFAS
No. 150 (see Note 13), and has accordingly been classified as a liability. In the
event the Company completes a successful qualified public offering for its stock,
the Series C Preferred Stock will be converted into shares of the Companys
common stock and will be reclassified from a liability to equity.
In April 2003, the FASB issued SFAS No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
SFAS No. 149 amends and clarifies the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 149 is generally effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003. The
Company does not have any such derivative instruments as of December 31, 2003.
F-35
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Recently Issued Accounting Pronouncements (continued)
In April 2002, the FASB issued SFAS No.
145, Rescission of FASB Statements No. 4, (Reporting Gains and Losses from
Extinguishment of Debt), No. 44 (Accounting for Intangible Assets of Motor Carriers),
No. 64, (Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements), Amendment
of FASB Statement No. 13 (Accounting for Leases) and Technical Corrections.
This statement eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income statement.
In July 2002, the FASB issued SFAS No. 146 Accounting
for Costs Associated with Exit or Disposal Activities. SFAS No. 146 applies
to costs associated with an exit activity (including restructuring). Those activities
can include eliminating or reducing product lines, terminating employees and contracts,
and relocating plant facilities or personnel. Under SFAS No. 146, a company will
record a liability for a cost associated with an exit or disposal activity when
that liability is incurred and can be measured at fair value. SFAS No. 146 will
require a company to disclose information about its exit and disposal activities,
the related costs, and changes in those costs in the notes to the interim and annual
financial statements that include the period in which an exit activity is initiated
and in any subsequent period until the activity is completed. SFAS No. 146 is effective
prospectively for exit or disposal activities initiated after December 31, 2002,
with earlier adoption encouraged. Under SFAS No. 146, a company may not restate
its previously issued financial statements and the new Statement grandfathers the
accounting for liabilities that a company had previously recorded under EITF Issue
94-3.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the year. Actual results could differ from
those estimates.
3. Liquidity
At December 31, 2003, the Company has a working capital
deficit of approximately $12,884,000 and a stockholders deficit of approximately
$9,774,000. The Company has continued to sustain losses from operations and for
the years ended December 31, 2003, 2002 and 2001 has incurred a net loss of approximately
$4,177,000, $9,359,000 and $19,142,000, respectively. In addition, the Company has
not generated positive cash flow from operations for the years ended December 31,
2003, 2002 and 2001. Subsequent to December 31, 2003, the Company has raised approximately
$4,629,000 of additional proceeds, net of offering costs, through the issuance of
Series C Preferred Stock (see Note 21) and intends to raise additional future capital
through equity financing. The Company also converted approximately $585,000 of long-term
debt into shares of the Companys Series C Preferred Stock. In addition, subsequent
to December 31, 2003, the Company has been able to increase its revenues and renegotiate
and pay down certain obligations, which
F-36
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
have resulted in reduced losses and reduced
outstanding debt. While management believes that its current cash resources should
be adequate to fund its operations for the year ending December 31, 2004, the Companys
long-term liquidity is dependent on its ability to attain future profitable operations.
The Company cannot make any guarantees if and when it will be able to attain future
profitability.
4. Joint ventures, acquisitions and
divestitures
In April 1999, the Company entered into
a joint venture agreement with Terremark World Wide Corporation to form an entity
named IP.Com to engage in the international long distance telecommunications business,
initially to and from Asia. The Company owned 50% of the joint venture and was the
controlling party. This joint venture was terminated in 2000 due to recurring losses.
In June 1999, the Company entered into
a joint venture agreement with Clarion Global Network, Inc. (Clarion)
to form an entity named C&F Switching to combine their efforts in building gateway
telecommunications switches in New York City, Miami, Florida and Los Angeles, California.
The Company owned 50% of the joint venture and was the controlling party. The Company
and Clarion contributed $1,000 each to the capital account. In February 2001, the
Company purchased Clarions half of the joint venture for $2,500,000. Payment
was made to Clarion by the Company issuing 142,857 shares of common stock of the
Company at a price of $17.50 per share. The Company accounted for the transaction
under the purchase method of accounting, whereby the Company allocated the purchase
price of $2,500,000 to goodwill and property and equipment. At December 31, 2001,
the Company recorded an impairment for the full amount of the goodwill (see Note
2).
In March 2000, the Company entered into
a joint venture agreement with Communications Ventures India Pvt. Ltd. to form an
entity named Estel Communication Pvt. Ltd. (Estel). Estel is organized
and exists under the laws of India and has its office in New Delhi, India. The Company
directly owns 49% of the joint venture and has voting rights in another 1.01%, which
in turn gives the Company a 50.01% voting control in the joint venture. Estel was
established to engage in the business of selling and supporting internet service
protocol operations. Basically, Estel is in business as an Internet service provider
in India. The joint venture has been funded primarily by the Company, which has
also provided certain equipment for the establishment of the required technology
platforms.
In May 2000, the Company acquired 100%
of the outstanding stock of Integrated Telemanagement Solutions, Inc. (ITS),
which was a Georgia corporation. The transaction was recorded under the purchase
method of accounting. ITS was a consulting and management service company that specialized
in the global hospitality market. In November 2001, the Company sold its interest
in ITS. The operations of ITS are reflected in loss from discontinued operations
for the year ended December 31, 2001. In addition, the Company accrued for 50% of
the Atlanta location five year lease which the Company was still obligated under,
which was settled in October 2003.
In July 2002, the Company acquired a 75%
equity interest in a joint venture with Turner Hill Investments, L.P. (Turner
Hill) to provide VoIP services for calls terminating in Pakistan. During 2003
and 2002, the Company contributed certain telecommunications equipment and advances
to the joint venture in exchange for its equity interest in the new joint venture.
This joint venture operates out of facilities provided by Turner Hill and began
providing VoIP service in November 2002. In connection with this joint venture agreement,
the Company entered into a service agreement with a Pakistan telecommunications
company to provide termination services for calls terminating in Pakistan (see Note
12 for additional details).
F-37
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
In December 2002, the Company acquired
a 50.2% equity interest in a joint venture with Karamco, Inc. (Karamco)
to provide various VoIP services throughout the emerging markets. As of December
31, 2003 no capital has been contributed to the joint venture by either partner,
but rather working capital loans have been provided for operating purposes. Operations
of the joint venture began during 2003.
All joint ventures identified above have
been accounted for under the consolidation method of accounting as the Company maintained
either a majority equity ownership or a controlling voting interest in the aforementioned
joint ventures.
5. Discontinued operations
During 2001, management of the Company decided
to cease the operations of its domestic retail telecommunication services business
lines. In connection with this decision, the Company opted out of a capital lease
under which it was leasing switching equipment located in Miami, Florida and returned
all of the switching equipment covered under the lease to the lessor. The Company
also abandoned an office located in Miami, which was being used to house the switching
equipment. The office was being leased under a non-cancelable operating lease agreement.
The principal costs of the discontinuation
of the retail services includes the remaining unpaid operating lease obligations
on the Miami office space, which aggregated approximately $811,000 (this amount
includes a draw down application on a letter of credit securing the lease of approximately
$111,000). The costs also include the write-off of the remaining net book value
of leasehold improvements made to the Miami location of approximately $291,000.
In accordance with the provisions of SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, the Company has not included the results
of operations of its retail telecommunication services in the results from continuing
operations. The results of operations for these services have been reflected in
discontinued operations for the year ended December 31, 2001.
The loss from discontinued operations,
representing retail telecommunication services, as well as the operations of ITS
(See Note 4) for the year ended December 31, 2001, consists of approximately the
following:
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
5. Discontinued
operations (continued)
During the year
ended December 31, 2003, certain trade payables, associated with the discontinuation
of the Companys retail services, were determined to be not payable to a vendor,
which resulted in a gain on trade payable reductions of approximately $209,000.
As of December 31, 2002, liabilities of discontinued
operations included the approximate $831,000 from the cancellation of the operating
lease obligations and approximately $1,258,000 of trade payables reclassified from
accounts payable and accrued expenses.
6. Property and equipment
At December 31, 2003 and 2002, property
and equipment is comprised of the following:
7. Restricted cash
As of December 31, 2003 and 2002, the Company
had approximately $962,000 and $1,251,000, respectively, of cash restricted from
withdrawal and held by banks as certificates of deposit securing letters of credit
(equal to the amount of the certificates of deposit). A significant portion of this
restricted cash is required as security deposits for certain of the Companys
non-cancelable operating leases for office facilities.
8. Accounts payable and accrued expenses
Accounts payable and accrued expenses consist
of the following at December 31, 2003 and 2002:
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
At December 31, 2003 and 2002 components
of long-term debt and capital lease obligations of the Company is comprised of the
following:
(a) Three stockholders of the Company each entered
into convertible subordinated note agreements aggregating $300,000, which mature
in five years (or April 9, 2004), at an interest rate of 7.25% per annum (modified
to 9.25% in April 2004). Interest shall be paid semi-annually on January 31 and
July 31. At the sole discretion of the Company, the principal of the note shall
be automatically converted into shares of common stock of the Company, at the closing
of a qualified initial public offering (IPO) if the IPO price equals
or exceeds 125% of the conversion price, which is $18.66 per share. There is also
an optional conversion clause that the note holders shall have the right, at their
option, at any time up to and including the maturity date, to convert the outstanding
principal. In 2004, $50,000 of these notes were settled, with the payment of the
remaining $250,000 of the notes being deferred under forbearance agreements (see
below for further detail).
(b) Two officers of the Company each entered
into various loan agreements with the Company in exchange for demand notes payable
aggregating $898,931 and $1,830,749 in 2003 and 2002, respectively. In 2003, a portion
of these demand notes, aggregating $761,313, were converted into 6,677 shares and
70,467 shares, respectively of the Companys Series C Preferred stock and common
stock at conversion rates of $90 and $2.28, respectively, which approximated the
fair market value of the stock at the conversion date. The notes bear interest at
rates ranging from 4%4.75% per annum and are due on demand.
(c) In connection with the development
of an Asian venture opportunity to provide VoIP services, the Company raised $1,675,000
from certain existing shareholders, officers and directors during the months of
October, November and December 2002. During August and November 2003, the Company
issued two convertible notes payable, aggregating $140,000, related to a portion
of these funds (the remaining portion of $1,535,000 was either held in escrow at
December 31, 2003, repaid to investors, or converted to Series C Convertible Preferred
Stock). The notes accrue interest at the prime rate, are payable monthly on the
first of every month, and were and are due on January 15, 2004 and October 31, 2004,
respectively. In the event this Asian venture materialized, the principal of the
notes, at the option of the stockholders, are convertible into shares of common
stock of the Company. The conversion price per share would be in proportion to the
overall initial capitalization. As of December 31, 2003, the Asian venture had not
materialized and these convertible notes remain outstanding.
F-40
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
In December 2000, the Company issued a
promissory note in the principal amount of $200,000, to a stockholder, calling for
monthly payments of approximately $4,500, including interest at 12% per annum, through
January 2006. On September 1, 2002, the Company added an additional agreement providing
for the option to convert a portion of the promissory note into 28,571 shares of
the Companys common stock at $2.28 per share. In September 2003, the Company
revised the promissory note agreement for an additional principal amount of $100,000
with monthly payments of approximately $2,500, including interest at 12% per annum.
At December 31, 2003 and 2002, the outstanding promissory note payable balance aggregated
$159,079 and $82,622, respectively.
In May 2001, the Company issued a promissory
note in the principal amount of $400,000 to a stockholder. The promissory note was
due in full February 2002, with interest at 12% per annum. In connection with the
private placement offering of Series C Preferred Stock (see Note 15), the Company
provided the stockholder with the option to convert the promissory note into 3,334
shares of the Companys Series C Preferred Stock at an exchange price of $90
per share. As of December 31, 2003, the stockholder was paid $100,000 of the remaining
balance and exercised his option to convert the remaining promissory note payable
balance of $300,000 into the Companys Series C Preferred Stock.
In October 2002, the Company issued a promissory
note in the principal amount of $350,000, with interest at 8% per annum with principal
and interest due June 30, 2003. In December 2003, the Company entered into an agreement
for the purpose of disposing the October 2002 note, which had not been paid at maturity.
The agreement called for a payoff of $150,000 with monthly payments of approximately
$20,000, including interest of 4.75% through December 2004. There was also an option
to the stockholder to convert the remaining portion of $200,000 of the note into
67,227 shares of the Companys common stock at an exchange price of $2.98 per
share. At December 31, 2003, the stockholder exercised his option to convert the
remaining portion of the note, which resulted in a zero outstanding note payable
balance.
(d) On September 20, 2001, the Company
issued a promissory note to a telecommunications company for the sum of $1,750,000,
with monthly payments of approximately $55,000, including interest of 9% per annum,
through September 2004. In December 2003, the Company entered into a new promissory
note and settlement agreement, whereas both parties would satisfy and resolve all
claims they may have against each other. The Company made available to the note
holder, 246,667 shares of the Companys common stock at a price of $5.25 per
share in lieu of a portion of the outstanding note payable. The remaining indebtedness
of $555,000 shall be resolved with a service agreement, where the note holder will
receive a reduced rate for every minute of traffic that is passed through the Companys
network for a period of 24 months through December 2005. At December 31, 2003, the
$555,000, related to the service agreement, is no longer classified as debt, but
reclassified to deferred revenue. As of December 31, 2003 and 2002, the outstanding
promissory note payable balance aggregated nil and $1,515,000, respectively.
(e) Between March 2001 and September 2002,
the Company issued promissory notes to three stockholders, aggregating $110,688
and $180,000 in 2003 and 2002, respectively. The notes bear interest at rates ranging
from 8% to 12% per annum and are due on demand.
(f) In January 2001, the Company issued
a promissory note in the amount of $1,000,000, with monthly payments of interest
only at 13% per annum, with principal to be paid in full December 2001. This promissory
note is secured by certain of the Companys accounts receivables. At December
31, 2003, this note was in default and, accordingly, has been classified as currently
due.
Between September 2002 and April 2003,
the Company issued various promissory notes aggregating $150,000 and $218,000 in
2003 and 2002, respectively. Interest at 8% per annum is to be paid in full through
May 2003. At December 31, 2003, these notes were in default and, accordingly, have
been classified as currently due.
F-41
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
(g) Between December 2002 and February
2003, the Company entered into loan agreements with various stockholders, for the
purpose of generating funds to initiate a joint venture project in the United Arab
Emirates (see Note 4), aggregating $100,000 and $50,000 in 2003 and 2002, respectively.
The Company, a 50.2% equity interest holder in the joint venture, agreed as consideration,
to give these stockholders 2% of the 50% profit distributions that the Company receives
from the joint venture for a period of three years. The loans are to be repaid by
the Company with funds it receives from the joint venture in twenty-four equal monthly
installments, starting on the earlier of the first business day following the first
month the joint venture generates a profit or July 1, 2003. As of December 31, 2003
and 2002, these loans have not been paid and remain outstanding. During January
and February 2004, all but one stockholder converted the outstanding notes to 277
shares of Preferred C stock at $90 per share. During September 2004, the remaining
stockholder converted his $25,000 note into a new promissory note, which bears interest
at 4.5% per annum. Principal and interest are payable in one lump sum on the earlier
of 15 days from the completion of an IPO or September 1, 2005.
(h) In July 2002, the Company entered into
loan agreements with various stockholders, aggregating $500,000 for the purpose
of generating funds to initiate the Pakistan service project with Pakistan Telecommunications
Company Limited (PTCL) (See Note 12). The loans were to be repaid by
the Company with funds it receives from PTCL in equal monthly installments, immediately
upon available funds or February 2003, and continuing through August 2003, bearing
interest at 15% per annum. In 2003, a portion of these loan agreements, aggregating
$250,000, was converted into shares of the Companys Series C Preferred Stock
and common stock. As of December 31, 2003 and 2002, these loan agreements have outstanding
balances of $250,000 and $500,000, respectively.
(i) In September 2003, the Company issued
promissory notes aggregating $300,000 to various stockholders for the purpose of
resolving the Companys capital lease debt service contract with the lessor
of the equipment under lease. The notes were to accrue interest at 8% per annum
and be paid in equal monthly installments of approximately $500 to $2,000 per month
with the outstanding principal due on October 31, 2004. The Company also issued
warrants to these investors to purchase the aggregate of 85,714 shares of the Companys
common stock at a purchase price of $2.98 per share. The warrants are to expire
July 1, 2005. At the date of grant, these warrants had a nominal value assigned
to them that was immaterial to the consolidated financial statements. As of December
31, 2003 the outstanding balance of the various notes payable aggregated $283,504.
(j) As of December 31, 2003 and 2002, approximately
$1,247,000 and $1,260,000, respectively of capital lease obligations had been forgiven
and recorded to forgiveness of debt (see Note 16).
In June 2002, the Company issued warrants
to one of the capital lease note holders to purchase 14,286 shares of the Companys
common stock at a purchase price of $0.04 per share. At the date of grant, these
warrants had a nominal value (as calculated using the Black-Scholes option pricing
model) assigned to them that was immaterial to the consolidated financial statements.
At December 31, 2003 and 2002, approximately
$900,000 and $2,700,000 of the capital lease obligations were in default and accordingly
have been classified as currently due.
F-42
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Future aggregate principal payments on
long-term debt and capital leases in the years subsequent to December 31, 2003 are
as follows:
In December 2003, two officers of the Company
signed forbearance agreements, providing the officers would not call due approximately
$1,829,000 of long-term debt and accrued interest until such time the Company completed
a successful IPO, or December 19, 2004, whichever occurs first.
10. Short-term borrowing obligations
Short-term borrowing obligations of the
Company represent a revolving line of credit agreement between an Indian bank and
the Companys Estel joint venture. The line of credit provides for borrowings
up to $600,000 at an interest rate at the banks prime rate (approximately
2% at December 31, 2003 and 2002, respectively) and was initially due in August
2003, but was extended to August 2005. The line of credit is collateralized by substantially
all of the assets of the Estel joint venture. As of December 31, 2003 and 2002 drawings
on the line of credit amounted to approximately $532,000 and $489,000, respectively.
11. Income taxes
Due to the operating losses incurred, the
Company has no current income tax provision for the years ended December 31, 2003,
2002 and 2001. The provision for income taxes consists of the following:
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
The following reconciles the Federal statutory
tax rate to the effective income tax rate:
The components of the Companys deferred
tax assets and liability consist of approximately the following at December 31,
2003 and 2002, respectively:
The Company has available at December 31, 2003
and 2002, approximately $69,320,000 and $64,559,000, respectively, of unused net
operating loss carryforwards that may be applied against future taxable income,
which expire in various years from 2012 to 2023. Under the Tax Reform Act of 1986,
the amounts of and benefits from net operating loss carryforwards and credits may
be impaired or limited in certain circumstances. Events which cause limitations
in the amount of net operating losses that the Company may utilize in any one year
include, but are not limited to, a cumulative ownership change of more than 50%,
as defined, over a three year period. The amount of such limitation, if any, has
not been determined.
Management of the Company had decided to
fully reserve for its net deferred tax assets, as it is more likely than not that
the Company will not be able to utilize these deferred tax assets against future
taxable income, coupled with certain limitations on the utilization of the net operating
losses due to various changes in ownership over the past several years.
F-44
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
The Company has various non-cancelable
operating lease agreements for office facilities. A summary of the lease commitments
under non-cancelable leases at December 31, 2003 is approximately as follows:
Rent expense for all operating leases was approximately
$1,238,000, $1,033,000 and $1,189,000 for the years ended December 31, 2003, 2002
and 2001, respectively.
In May 2002, the Company entered into a
Service Agreement (the Agreement) with Pakistan Telecommunications Company,
Ltd (PTCL), under which PTCL would provide for the termination of incoming
international traffic into Pakistan focusing on VoIP services from the United States
and Europe. The Agreement provides for an initial term of one year, with additional
one year extensions terms. The Company has exercised its option to extend
the agreement, which is in effect through May 2005. The Agreement provides for the
Company to place all necessary switching equipment in Pakistan, the United States
and Europe (which it has done so through the Pakistan joint venture formed with
Turner Hillsee Note 4). Under the terms of the Agreement PTCL will provide
the Company with voice termination services within Pakistan, for which the Company
will pay PTCL a maximum service charge of $0.19 per minute for all calls terminating
in Pakistan using the Companys VolP platform. The Agreement also requires
the Company to guarantee a minimum of three million minutes a month to terminate
to Pakistan. The Company is required to keep on deposit with PTCL, a one month rolling
advance equal to the number of minutes terminated during the preceding month, times
the prevailing termination rate charged by PTCL to the Company. For the years ended
December 31, 2003 and 2002 the Company has incurred approximately $9,327,000 and
$783,000, respectively of termination charges under this agreement.
In connection with the joint venture agreement
with Turner Hill (See Note 4), the joint venture entity is required to pay a management
fee to Turner Hill equal to the number of minutes terminating in Pakistan on a monthly
basis times a fixed rate per minute. For the years ended December 31, 2003 and 2002,
the joint venture incurred management fees to Turner Hill for approximately $361,000
and $36,000, respectively.
Legal Matters
The Company is a defendant in an employment
claim that management believes has no merit. The claim is filed in the State of
New York before an administrative agency. The administrative department is currently
reviewing the case and management believes it will be dismissed. Regardless, management
believes that this claim will not have a material effect on the Companys business
or results of operations.
In April 2003, a former customer of the
Company brought an action against the Company for recovery of preferential transfers
and other claims under the Bankruptcy Code. The suit, brought in the United States
Bankruptcy Court for the Northern District of Illinois Eastern Division, seeks damages
in the amount of approximately $335,000. The Company and management plan to defend
this suit vigorously and do not expect the outcome to have an adverse effect on
the Companys financial condition.
F-45
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Legal Matters (continued)
In May 2003, a shareholder of the Company
brought an action in the District Court in and for the City and County of Denver
and the State of Colorado. The action is seeking damages in the amount of $400,000.
The Company and management plan to defend this suit vigorously and do not expect
the outcome to have an adverse effect on the Companys financial condition.
This action was dismissed in August 2004. The plaintiff has filed an appeal for
the motion, which is pending.
In 1999, the Company guaranteed a real
property lease on behalf of a joint venture. The joint venture subsequently defaulted
on the lease and in July 2003 the landlord brought an action in the Circuit Court,
Miami, Florida. The Company is also being sued for back rent and costs of approximately
$1.1 million. The Company believes that this dispute will be resolved amicably,
but if the Company and management are unable to amicably resolve the action, the
Company believes it can sustain the impact of the judgement.
The Company is involved in other claims
and legal actions arising in the normal course of business. Management does not
expect that the outcome of these cases will have a material effect on the Companys
financial position or results of operations. Due to the regulatory nature of the
industry, the Company is periodically involved in various correspondence and inquiries
from state and federal regulatory agencies. Management does not expect the outcome
of these inquiries to have a material impact on the operations or the financial
condition of the Company.
13. Preferred stock
The Company has authorized 10,000,000 shares
of its stock for the issuance of Preferred Stock. The Company has designated 1,100,000,
1,500,000 and 110,000 shares of $10 Series A Convertible Redeemable Preferred Stock
(Series A Preferred Stock), $10 Series B Convertible Redeemable Preferred
Stock (Series B Preferred Stock) and $90 Series C Convertible Redeemable
Preferred Stock (Series C Preferred Stock), respectively (collectively
Preferred Stock).
Dividends
The holders of Series A Preferred Stock
are entitled to receive cumulative dividends of 12% per share per annum, which are
payable annually in arrears beginning on August 31, 2002 and are payable (at the
Companys option) in cash or shares of the Companys common stock at a
rate equal to the conversion rate in effect at the date of declaration of the dividend.
The holders of Series B Preferred Stock are entitled to a cumulative dividend of
11.5% per share per annum, which are payable annually in arrears beginning on March
31, 2003 and are payable (at the Companys option) in cash or shares of the
Companys common stock at a rate equal to the conversion rate in effect at
the date of declaration of the dividend. The holders of Series C Preferred Stock
are entitled to receive cumulative dividends of 8% per share per annum which are
payable annually beginning on December 18, 2004 and are payable in cash, unless
the Company completes a successful IPO before December 18, 2004. As of December
22, 2004, approximately $673,000 of dividends of Series C Preferred Stock which
was due on December 18, 2004 remains unpaid.
No dividends shall be paid on any outstanding
shares of common stock, or Series A and B Preferred Stock, unless all then accrued,
but unpaid dividends have been paid with respect to all outstanding shares of Series
C Preferred Stock.
Dividends in arrears at December 31, 2002
on the Companys Series A Preferred Stock were approximately $643,000.
F-46
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Dividends (continued)
In January 2003, the Companys Board
of Directors (the Board) declared a stock dividend payable on the outstanding
shares of Series A and B Preferred Stock (due on August 31, 2002 and March 31, 2003,
respectively). The Board elected to issue shares of the Companys common stock
in lieu of cash at a conversion rate equal to $2.28 per share times the aggregate
dividends due to the holders of both Series A and B preferred Stock at the date
of record (August 15, 2002 and March 15, 2003, respectively). During the year ended
December 31, 2003, 318,491 shares of the Companys common stock valued at approximately
$725,000 have been recorded and issued as a dividend to the Series A and Series
B Preferred shareholders.
In December 2003, the Board declared a
stock dividend payable on the outstanding shares of Series A and B Preferred Stock
(due on August 31, 2003 and March 31, 2004, respectively). The Board elected to
issue shares of the Companys common stock in lieu of cash at a conversion
rate equal to $2.98 per share times the aggregate dividends due to the holders of
both Series A and B Preferred Stock at date of record (August 15, 2003 and March
15, 2004, respectively). At December 31, 2003, the Company recorded a stock dividend
distributable of approximately $553,000 for the issuance of 185,962 shares of common
stock to the holders of the Companys Series A and Series B Preferred Stock.
Liquidation
In the event of any liquidation, dissolution,
or winding up of the Company either voluntary or involuntary or a merger or consolidation
with any other corporation, or a sale or other transfer of substantially all the
assets of the Company, the holders of Series C Preferred Stock shall be entitled
to receive, in preference to holders of Series A and B Preferred Stock and common
stock, an amount equal to $90 per each outstanding share plus an amount equal to
all accrued but unpaid dividends. Upon completion of the required distribution for
Series C Preferred Stock, the holders of Series B Preferred Stock shall be entitled
to receive, in preference to Series A Preferred Stock and common stock an amount
equal to one and one half (1
1
/
2
)
times their initial investment, plus accrued and unpaid dividends.
If the assets and funds of the Company
available for payment to the holders of the Series B and C Preferred Stock are insufficient
to pay the liquidation preference described above, the entire remaining assets and
property of the Company will be paid ratably to the holders of the Series B and
C Preferred Stock in proportion to their aggregate liquidation preferences. Following
the above payments, the remaining assets and funds of the Company legally available
for distribution, if any, shall be distributed ratably among the holders of common
stock, Series A, B and C Preferred Stock in proportion to the number of shares of
common stock held on an as-if converted basis.
Redemption
The Company has the right to redeem the
outstanding shares of Series A and B Preferred Stock at any time (with 30 days prior
notice) for a redemption price of $10 per share plus accrued, but unpaid dividends.
The Company has the right to redeem the outstanding shares of Series C Preferred
Stock, commencing on the first anniversary of the first issuance of Series C Preferred
Stock, at a price per share equal to 115% of the stated value of $90, plus pro rata
accrued and unpaid dividends due through the date of redemption.
After the second anniversary of the first
issuance of the Companys Series C Preferred Stock (December 18, 2005) and
so long as all classes of the Companys stock are not publicly traded and a
liquidation has not occurred, each holder of Series C Preferred Stock may, at its
option, require the Company to redeem its shares at a price equal to 112% of the
stated value of the stock, plus pro rata accrued and unpaid dividends due through
the date of redemption. At December 31, 2003, the redemption value of the Series
C Preferred Stock was approximately $4,434,000.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Conversion
Each share of Series A and B Preferred
Stock is convertible, at the option of the stockholder, at any time after the issuance
date of such share into a number of shares of common stock as determined by the
conversion rate in effect at the time of conversion, plus all accrued and unpaid
dividends payable in either cash or common stock (at the Companys option)
(See conversion table below).
Each share of Series C Preferred Stock is convertible,
at the option of the stockholder, at any time after the issuance date of such shares
into a number of shares of common stock, based upon a conversion price of $3.15
per common share.
At various times through the first six
months of 2004, all the holders of the Companys Series A & B Preferred
Stock, elected to convert their shares into common stock (See Note 21).
Voting
No holders of Preferred Stock have voting
rights, except as provided by law.
14. Stock options and warrants
Under the Companys 1998 stock option
plan (as amended), the Company has reserved 1,714,286 shares of common stock for
issuance to employees at exercise prices determined by the Board. Options under
the plan vest in annual increments over a four year period, expire ten years from
the date of grant and are issued at exercise prices no less than 100% of the fair
market value at the time of grant. As reported in Note 2, the Company has elected
to adopt the disclosure-only provisions of SFAS No. 123 and will account for stock-based
employee compensation plans in accordance with APB 25. As a result, no compensation
cost for its stock option plan has been recognized in the periods presented. In
November 2004, the Board approved an increase in the number options available for
grant under the Companys 1998 stock option plan to 2,680,857.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
14. Stock
options and warrants (continued)
A summary of the Companys stock option
plan as of December 31, 2003, 2002 and 2001 and changes during the years ended on
those dates is as follows:
The following table summarizes information about
stock options outstanding at December 31, 2003:
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
The Company, as part of various debt and
other agreements, have issued warrants to purchase the Companys common stock.
The following summarizes the information relating to warrants issued and the activity
during 2003, 2002 and 2001:
All warrants are fully exercisable upon issuance.
15. Equity transactions
In November 2000, the Company commenced
a private placement for the purpose of raising working capital for the Companys
operations. The private placement provided for the issuance of a maximum of 2,571,429
shares of the Companys $0.01 par value common stock at a purchase price of
$17.50 per share. The private placement was open through March 1, 2001, but was
extended for an additional 90 days. The total number of shares of common stock issued
in this private placement during 2001 was 46,286 (189,143 in the aggregate between
2001 and 2000) shares for which proceeds of $810,000 (approximately $3,310,000 in
the aggregate between 2001 and 2000) were received.
In June 2001, the Company commenced a private
placement for the purpose of raising working capital for the Companys operations.
The private placement provided for the issuance of a maximum of 1,100,000 shares
of the Companys Series A Preferred Stock at a purchase price of $10 per share.
The private placement was valid through September 30, 2001, but was extended for
an additional 60 days. The total number of shares of Series A Preferred Stock issued
in this private placement was 443,225 shares for which proceeds of approximately
$4,243,000 were received, net of expenses of approximately $189,000.
In March 2002, the Company commenced a
private placement for the purpose of raising working capital for the Companys
operations. The private placement provided for the issuance of a maximum of 1,500,000
shares of Series B Preferred Stock at $10 per share. The private placement was valid
through June 30, 2002, but was extended for an additional 90 days. The total number
of shares of Series B Preferred Stock issued in this private placement was 83,500
shares for which proceeds of approximately $705,000 were received, net of expenses
of approximately $130,000.
In July 2002, the Company commenced a private
placement for the purpose of raising working capital for the Companys operations.
The private placement provided for the issuance of a maximum of 8,000,000 shares
of common stock at $2.28 per share. The private placement was valid through September
21, 2002 but was extended for an additional 135 days. The total number of shares
of common stock issued in this private placement during 2002 was 719,106 shares
for which proceeds of approximately $1,636,000 were received. The total number of
shares of common stock issued in this private placement during 2003 was 1,353,508
shares for which proceeds of approximately $3,084,000 were received.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
In June 2003, the Company commenced a private
placement for the purpose of raising working capital for the Companys operations.
The private placement provided for the issuance of a maximum of 5,714,286 shares
of the Companys $0.01 par value common stock at $2.98 per share. The private
placement was valid through September 15, 2003, but was extended for an additional
90 days. The total number of shares of common stock issued in this private placement
was 1,342,844 shares for which proceeds of approximately $3,763,000 were received,
net of expenses of approximately $232,000.
In November 2003, the Company commenced
a private placement for the purpose of raising working capital for the Companys
operations. The private placement provided for the issuance of a maximum of 110,000
shares of the Companys Series C Preferred Stock at $90 per share. The private
placement was valid through December 15, 2003, but was extended for an additional
107 days. The total number of shares of Series C Preferred Stock issued in this
private placement during 2003 was 33,542 shares for which proceeds of approximately
$2,526,000 were received, net of expenses of approximately $492,000.
In December 2003, certain note holders
elected to convert their notes and related accrued interest, totaling approximately
$930,000, into shares of the Companys Series C Preferred Stock at a conversion
rate of $90 per share, resulting in the issuance of 10,336 shares of Series C Preferred
Stock. Also during December 2003, a $10,000 advance from a potential investor in
a proposed Asian joint venture (which did not materialize) was converted into 111
shares of Series C Preferred Stock at a conversion rate of $90 per share.
At various times during the year ended
December 31, 2003, certain note holders elected to convert approximately $2,280,000
(in the aggregate) of their notes and accrued interest into common stock at conversion
rates ranging between $2.28 and $5.25 per share. The conversions resulted in the
issuance of an additional 623,234 shares of common stock. Also during 2003, the
Company issued 16,807 shares of its common stock, at $2.98 per share for the assumption
of a $50,000 letter of credit in the name of and secured by a shareholder of the
Company.
At various times during the year ended
December 31, 2002, certain note holders elected to convert approximately $3,731,000
(in the aggregate) of their notes into common stock at a conversion rate of $2.28.
The conversion resulted in the issuance of an additional 1,639,850 shares of common
stock.
During 2002 holders of Series A and B Preferred
Stock elected to convert 112,250 and 10,000 shares, respectively, of their stock
into common stock at conversion rates of $8.75 and $8.23, respectively. The conversion
resulted in the issuance of 140,444 shares of common stock.
During 2001, a shareholder of common stock
elected to convert 12,857 shares of common stock to Series A Preferred Stock at
a conversion rate of $35 per Series A Preferred Stock. The conversion resulted in
the issuance of 13,250 additional shares of Series A Preferred Stock valued at approximately
$133,000.
At various times during the year ended
December 31, 2001, certain note holders elected to convert $630,000 (in the aggregate)
of their notes into Series A Preferred Stock at a conversion rate of $10 per share.
The conversions resulted in the issuance of 63,000 additional shares of Series A
Preferred Stock for a total of $630,000.
During the year ended December 31, 2000,
an officer of the Company relinquished 371,429 shares of his common stock back to
the Company (at no cost) for the purpose of the Company utilizing this stock for
reissuance in subsequent private placements and the settlement of certain debt.
During the years ended December 31, 2000 and 2001, the Company reissued 42,857 and
218,857 shares, respectively. During the year ended December 31, 2002, the Company
issued the remaining 109,714 shares of this stock in connection with the conversion
of long-term debt into common stock.
F-51
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
During 2002, the Company had an outstanding
capital lease obligation with a lessor, aggregating approximately $1,814,000. In
June 2002, the Company entered into a settlement agreement with the lessor whereas
the Company agreed to pay the sum of $175,000, and the lessor would receive 166,571
shares of the Companys common stock at $2.28 per share, resulting in a $1,260,000
forgiveness of debt. The settlement agreement also granted the lessor warrants to
purchase 14,286 shares of the Companys common stock at a purchase price of
$.04 per share (See Note 9). For the year ended December 31, 2002, the Company recorded
approximately $1,812,000 forgiveness of debt, including approximately $552,000 of
settled accounts payable disputes.
During 2003, the Company had three outstanding
capital lease obligations with lessors, aggregating approximately $1,974,000. During
2003, the Company entered into settlement agreements whereas the Company agreed
to pay the sum of $695,000 and agreed to issue 14,286 shares of common stock at
$2.28 per share, resulting in approximately $1,247,000 forgiveness of debt. For
the year ended December 31, 2003, the Company recorded approximately $3,918,000
of forgiveness of debt, including approximately $2,671,000 of settled accounts payable
disputes.
17. Profit sharing plan
The Company has a defined contribution
profit sharing plan, which covers all employees who meet certain eligibility requirements.
Contributions to the plan are made at the discretion of the Board. No contributions
to the profit sharing plan were made for the years ended December 31, 2003, 2002
and 2001, respectively.
18. Related party transactions
At December 31, 2003 and 2002, the Company
had an aggregate of approximately $3.4 million and $5.0 million of long-term debt
due to stockholders of the Company. The repayment, conversion terms and interest
rates are outlined in Footnote 9. In addition, the Company had approximately $564,000
and $392,000 of accrued interest outstanding on this related debt as of December
31, 2003 and 2002, respectively. Interest expense related to this debt was approximately
$416,000, $680,029 and $765,000 for the years ended December 31, 2003, 2002, and
2001, respectively.
During 2003 and 2002, the Company generated
funds from certain investors for the purposes of potential joint ventures and projects.
These funds were put into escrow accounts, whereby if the projects are successful,
the investors receive additional issuances of stock at the prevailing fair value
of the stock or if unsuccessful are to be refunded to these investors. For the years
ended December 31, 2003 and 2002, accounts payable and accrued expenses included
$250,000 and $1,380,500, respectively, of amounts due to investors (See Note 8).
19. Concentrations
Major Customers
During 2003, eight customers of the Company
accounted for revenues exceeding 56% in total and at least 5% individually of the
Companys total revenues for 2003. During 2002, five customers of the Company
accounted for revenues exceeding 43% in total and at least 5% individually of the
Companys total revenues for 2002. During 2001, five customers of the Company
accounted for revenues exceeding 38% in total and at least 5% individually of the
Companys total revenues for 2001. Revenues earned from these customers were
approximately $18,816,000 in 2003, $12,169,000 in 2002 and $11,228,000 in 2001.
At December 31, 2003, 2002 and 2001, the amounts owed to the Company by these customers
were approximately $1,004,000, $474,000 and $661,000, respectively.
F-52
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Geographic Concentrations
The Companys operations are significantly
influenced by economic factors and risks inherent in conducting business in foreign
countries, including government regulations, currency restrictions and other factors
that may significantly affect managements estimates and the Companys
performance.
During 2003, 2002 and 2001, the Company
generated revenue from continuing operations from customers in the following countries.
At December 31, 2003 and 2002, the Company had
foreign long-lived assets as follows:
Revenues by geographic area are based upon the
location of the customers. The foreign long lived assets by geographic area represent
those assets physically used in the operations in each geographic area
20. Selected quarterly results (unaudited)
F-53
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
The Company adopted Statement
of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 requires disclosures
of segment information on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments.
We have four reportable segments, that
we operate and manage which are organized by products and services. We measure and
evaluate our reportable segments based on revenues and cost of revenues. This segment
income excludes unallocated corporate expenses and other adjustments arising during
each period. The other adjustments include transactions that the chief operating
decision makers exclude in assessing business unit performance due primarily to
their non-operational and/or non-recurring nature. Although such transactions are
excluded from the business segment results, they are included in reported consolidated
earnings. Each segment is managed according to the products, which are provided
to the respective customers, and information is reported on the basis of reporting
to the Companys Chief Operating Decision Maker.
Our segments and their principal activities
consist of the following:
Traditional Voice This segment includes
the termination of voice telephony minutes from or to the countries served by us,
utilizing traditional Time Division Multiplexing (TDM) and circuit-switched
technology. Typically, this will include interconnection with traditional telecommunications
carriers either located internationally or those carriers that interconnect with
Fusion at its US Points of Presence (POP) and provide service to other destinations.
VoIP (Voice over Internet Protocol) to
Carriers VoIP includes the termination of voice telephony minutes by the
internet rather than older circuit-switched technology. This permits far less costly
and more rapid interconnection between Fusion and international telecommunications
carriers.
VoIP (Voice over Internet Protocol) to
Consumers and Corporations Primarily through our Efonica and Estel entities,
we provide VoIP services targeted to end-users and corporations. PC-to-phone connectivity
utilizing the Internet allows consumers to use their personal computers to originate
calls that reach the telephone of their destination party. The Company also offers
services that permit consumers or corporations to originate calls via IP telephones
or telephone systems that use the Internet for completion to standard telephone
lines anywhere in the world.
Internet, Private Networks & Other
We provide Internet connectivity to telecommunications carriers, Internet
Service Providers, government entitites, and multinational customers via its POPs
in the US, India, and through our partners elsewhere. We also offer point-to-point
private lines, virtual private networking, and call center communications services
to customers in our target markets. Lastly, we offer the Interview desktop-to-desktop
video conferencing service to customers anywhere in the world.
F-54
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
21. Segment Information (continued)
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
The Company employs engineering and operations resources that service across multiple product lines. Depreciation and indirect operating expenses were allocated to each product line based upon their respective revenues. The amounts reflected as Corporate and unallocated represent those expenses that were not appropriate to allocate to each product line.
22. Subsequent events
At various times through the first six months
of 2004, all the shareholders of the Companys Series A Preferred Stock, elected
to convert their shares into common stock at a conversion rate of $3.50 per share.
This conversion resulted in the issuance of 1,163,500 shares of common stock. In
connection with this conversion accrued dividends from September 1, 2003 to the
date of the respective conversions were issued in the form of common stock. These
common stock dividends resulted in the issuance of 119,479 additional shares of
common stock.
At various times through the first six
months of 2004, all the shareholders of the Companys Series B Preferred Stock,
elected to convert their shares into common stock at a conversion rate of $3.50
per share. This conversion resulted in the issuance of 210,000 shares of common
stock. In connection with this conversion accrued dividends from April 1, 2004 to
the date of the respective conversions were issued in the form of common stock.
These common stock dividends resulted in the issuance of 3,533 additional shares
of common stock.
In March 2004, certain note holders elected
to convert approximately $585,000 of their notes into shares of the Companys
Series C Preferred Stock at a conversion rate of $90 a share. The conversion resulted
in the issuance of 6,504 additional shares of Series C Preferred Stock.
In March 2004, the Board of Directors
approved an increase of the authorized number of shares of the Companys stock
to be issued to 40,000,000. Of the total shares authorized to be issued, 30,000,000
are designated for the issuance of common stock and 10,000,000 are designated for
the issuance of preferred stock.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
22. Subsequent
events (continued)
On December 11, 2004, the Company
entered into an agreement to acquire 51% of the common stock of a Jamaican
company in exchange for $150,000. Substantially all of the net assets of the company
consist of international and domestic carrier license agreements with the Jamaican
government which expire in 2013 and 2018, respectively.
On November 1, 2004, the Board of Directors, upon
approval of the stockholders, authorized the increase of the amount of eligible
stock under the Companys employee stock option plan from 1,714,286 to 2,680,857.
On November 1, 2004, the Board
of Directors, upon approval of the stockholders, authorized a 3.5 to 1 reverse stock-split
applicable to all outstanding shares of the Companys common stock. All transactions
and disclosures in the consolidated financial statements, related to the Companys
common stock have been restated to reflect the effect of the reverse stock-split.
On November 1, 2004, the Board of Directors,
upon approval of the stockholders, increased the authorized number of shares to
136,000,000 which includes 105,000,000 shares of common stock, 10,000,000 shares
of preferred stock and 21,000,000 shares of Class A common stock. On or about December
15, 2004, each share of the Companys outstanding common stock will automatically
be converted into one share of Class A common stock. The Class A common stock may
not be converted into common stock until one year after the successful completion
of an initial public offering unless the holder agrees to exercise a one year lock
up agreement. The rights of a Class A shareholder are identical in all respects
to the common stock other than the shares of Class A common stock are not transferable
for a period of one year following the closing of the IPO.
In November 2004, the Company received net cash
proceeds of $1,330,000 ($1,400,000 for a convertible note net with a $70,000 advisory
fee) and refinanced $1,108,333 of existing notes payable and accrued interest in
exchange for a convertible promissory note. These two notes aggregate $2,508,333,
bear interest at 6.5% per annum and are due in November 2006. The notes would automatically
convert into common shares at a conversion price of $3.85 per share upon successful
registration from an initial public offering. The common stock is subject to a one
year lock up provision. The beneficial conversion feature
will result in a charge to interest expense of approximately $228,000 in the fourth quarter
of 2004.
In January 2005, we entered into an agreement to acquire the 49.8% minority interest in one of our joint ventures, Efonica from Karamco, Inc., contingent upon the successful completion of an initial public offering by March 1, 2005. The purchase price will be a minimum of $5.5 million and a maximum of $14.3 million, as adjusted for the approximate $175,000 representing Karamcos portion of Efonicas debt owed to us and the $500,000 to be paid in cash based upon a multiple of earnings achieved by Efonica during the 12-month period ending February 28, 2006 (4.5 x Efonicas net income as adjusted for certain intracompany and other expenses). Karamco will receive cash of $500,000, with the balance paid in shares of common stock. The number of shares to be issued to Karamco will be determined by the initial price of the common stock at the date of the IPO. On the date of the transaction, approximately $4.4 million worth of such shares of common stock, based upon th
e IPO price, will be issued to Karamco and held in escrow until the final valuation of the joint venture is determined after the year ending February 28, 2006. In the event that the purchase price would be lower (based upon Efonicas net income for that one year period) than $10 million, the excess of the common shares based upon the IPO price will be returned to us for cancellation out of the $4.4 million worth of stock held in escrow. In the event that the purchase price would be higher than the $10 million (based upon Efonicas net income), we will issue Karamco additional shares of our common stock (based on the IPO price), subject to the $14.3 million maximum.
Out of the shares to be issued to the Seller, 150,000 shares of common stock are being registered for resale herein. We have an option to repurchase the shares from Karamco at the higher of the IPO price or the closing price on the day Karamco seeks to sell. In addition, Karamco is subject to a leak-out agreement whereby they are restricted from selling any of their shares for 45 days and then may sell up to 75,000 shares during the 45 day period beginning after 45 days and the remaining 75,000 shares may be sold thereafter. Karamco may not sell more than $1,000,000 of stock during the one-year period following the effective date. If the sale of the 150,000 shares that are being registered results in less than $1 million of gross proceeds we will purchase additional shares owned by Karamco, at a price equal to the higher of the IPO price or the closing price 30 days after the last sale, so that they receive $1 million in gross proceeds. If we purchase additional shares from
Karamco they will be returned for cancellation. The balance of Karamcos shares will be subject to a one-year lock-up with the Representative. Karamco is owned by Roger Karam, who will become the CEO of Efonica and our President of VoIP Services upon the effective date.
F-57
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
In the event that the IPO does not
occur on or before March 1, 2005, the Seller has the option of maintaining its
minority interest in Efonica. The excess of the purchase price over the book
value of the minority interest acquired, based upon the minimum purchase price
of approximately $5.5 million, will primarily be allocated to intangible assets
in the amount of approximately $5.5 million.
On July 14, 2004, the Companys Stock Option
Committee approved a recommendation to issue 446,057 options to its employees
who had been previously granted stock options. Each employee would receive new
options equal to 50% of their existing options priced at $3.15 per share and 50%
at $4.38 per share, both with a four year vesting period and furthermore would
receive credit for the vesting time on previously issued options, and the
original options will be cancelled if not exercised within six months and one
day of the issuance of the new options. In addition, during July 2004, the Stock
Option Committee also approved the issuance of 667,686 options to employees,
consultants and Board members at a price of $4.38 per share.
The options issued under the Companys stock option
plan subsequent to December 31, 2003 are as follows:
F-58
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
We seek to become a leading
provider of VoIP and other Internet services to, from and within emerging markets
in Asia, the Middle East, Africa, the Caribbean, and Latin America. With our lead
product, VoIP, we currently provide a full suite of communications services to corporations,
postal telephone and telegraph companies, other licensed carriers, Internet service
providers, government entities, and consumers. Beginning in the third quarter of
2005, we intend to market these services to cable operators. We expect to continue
to increase our international business throughout 2005 as illustrated by our
acquisition of a Jamaican carrier which is expected to deliver services by the second
quarter of 2005. Our packet based network infrastructure includes
the latest Softswitch technology which technology allows us to deliver Internet
protocol services around the world with quality and reliability.
VoIP:
Our VoIP
services have accounted for the majority of our revenues in 2004. For the nine months
ended September 2004, our VoIP service accounted for 68.3% of our consolidated revenue.
VoIP enables customers, typically for a lower cost than traditional telephony, to
place voice calls anywhere in the world using their personal computer, Internet
protocol phone or regular telephone when accompanied by a hardware device. VoIP
services utilize the Internet as opposed to circuit switching (traditional telephony
technology), thereby offering cost savings to customers. These services are offered
directly to corporations around the world, on a private label, co-branded or wholesale
basis to Internet service providers, postal telephone and telegraph companies and
cable operators who wish to market to corporations and consumers under their own
brand name, or through our retail services company, Efonica. Efonica offers PC-to-Phone
and Internet protocol Phone-to-Phone services to customers located in Asia, the
Middle East and Africa, and is currently expanding into Latin America. Advanced
services that are expected to be available in 2005 to customers include voicemail,
call waiting and call forwarding.
Additionally, we enter into VoIP
interconnect agreements with postal telephone and telegraph companies or other carriers
in our target markets. These agreements enable us to terminate traffic into a country
and in some cases originate traffic from that country through the postal telephone
and telegraph company or other carrier. We use capacity on these networks to carry
our own retail traffic in addition to selling capacity to other carriers desiring
voice termination to that destination. As we grow, we intend to use an increasing
percentage of our capacity for higher margin retail traffic.
Managed private networks:
We
offer managed end-to-end networks that typically connect multinational corporations
or government facilities in emerging markets with locations in other countries.
We also market this service to software developers, call centers, and telemarketing
facilities, all of which rely on high quality, reliable service. In markets where
we do not have network facilities deployed, we utilize other carriers networks,
allowing us to provide an integrated global network that can connect a customer
to virtually anywhere in the world. We also offer services on a private label basis
as a subcontractor for other communication carriers that are seeking network connectivity
to countries that they do not otherwise service.
Internet Access:
We
offer peering with multiple tier-one Internet backbone providers utilizing an intelligent
routing capability. This ensures efficiency, speed and reliability. The tier-one
providers we utilize own or control a national network that trades traffic with
other national providers. This traffic trading is referred to as peering.
A tier-one provider can carry its own Internet traffic across the country and hand
it off at any one of the public or private hand-off locations known as peering
points, metropolitan access points or national access points. In select locations
such as India, we have established Internet points of presence that are then connected
to our New York facility. This, in turn, provides interconnectivity with the Internet
and peering with the top Internet backbone networks. In regions where we do not
own network facilities, we utilize other carriers facilities. We also provide
services on a private label basis as a subcontractor for other communication carriers
that are seeking Internet access in countries that they do not otherwise service.
Internet video conferencing:
We offer an Internet-based video conferencing service that can be initiated
instantly on a personal computer (similar to popular instant messaging services)
and can handle from two to two hundred participants per conference, of which six
can be visually displayed. The service can be installed in a matter of minutes and
only requires a standard camera and headset to operate. We are marketing our desktop
video conferencing service directly to multinational corporations seeking to enhance
face-to-face communications without the costly inefficiencies of business travel,
and to our international partners to distribute within their country.
Co-location:
We offer
facility co-location services to other communication service providers, enabling
them to co-locate their equipment within our facility, or lease a portion of our
equipment. Often, we provide wholesale services to the parties who co-locate with
us.
Establish Local Partners for In-Country
Distribution and Support.
Deploy Internet Protocol Infrastructure.
Establish Market Position in VoIP
Business.
We employ an Internet protocol
network that consists of Company-owned and partner-owned points of presence and
usage based or leased transmission facilities. Our network has several key attributes,
including: open standard compliance; distributed architecture; centralized management;
a wide array of signaling support; and policy based routing. With just one network
point of presence, our partners have acces to all of the products and services that
we offer, as well as to certain back office systems required to manage services
being delivered.
Target Enterprise, including Government
Market Segment.
Exploit Communication Patterns
Among and Between Our Markets.
We deliver multi-product communications
solutions to targeted market segments requiring quality, reliability, flexibility
and scalability. VoIP services are offered on a private label or co-branded basis
to postal telephone and telegraph companies, other licensed carriers, Internet service
providers, cable companies and wireless operators. VoIP is also marketed to corporations,
government agencies and consumers through direct sale, in-country partners or third
party distribution. Private network solutions, including international point to
point private lines, IPVPN, IP-IPLs, ATM and Frame Relay are offered directly or
though in-country partners and third party distribution to postal telephone and
telegraph companies, other licensed carriers, ISPs, government agencies and corporations.
Internet Access is marketed through direct and alternate channels to postal telephone
and telegraph companies and other licensed carriers, Internet service providers,
cable companies, wireless operations, corporations and government agencies. Our
Internet protocol videoconferencing services, InterView, is marketed to small, medium
and large corporate customers through postal telephone and telegraph companies and
other licensed carriers, Internet service providers, in-countrty partners and other
distribution channels on a private label or re-sale basis. InterView is also offered
on a direct sale basis to corporations and government agencies.
Direct Sales and Regional Management
We have a direct sales force that sells our products and services
to corporations and carriers. We also have regional sales management that focus
on Latin America, Asia, Africa, the Middle East and the Caribbean. The regional
executives manage and grow existing revenue streams from partners and defined strategic
accounts; identify and develop new partnerships; develop strategies for market penetration;
identify new market opportunities; and coordinate internal support activities.
Agents
We use
independent sales agents to sell our services. Our sales agents are compensated
on a commission-based structure. We typically control the product, pricing, branding,
technical and secondary level customer support, billing and collections.
Partnerships
We seek to develop partnership arrangements in each of our markets with companies
that are able to distribute and support our services. These partners can be postal
telephone and telegraph companies, newly licensed carriers, Internet service providers,
cable operators or other distribution companies. We seek to develop partnership
arrangements in each of our significant markets. In addition to local distribution
and support, our partners typically provide or arrange for last mile connectivity
required for the delivery of local Internet access and private networks.
Strategic Ventures
We enter into agreements with other companies to market and distribute each others
products and services to the customer and prospect base of the other. The providing
party usually will support and bill its own products. Depending on the strategic
venture, we may pay or receive a commission, share revenue and/or profits with each
other.
The terms of each non-joint venture
partnership or distribution agreement are different by partner but in general provide
for a revenue or profit sharing arrangement.
Efonica
Efonica was incorporated in the Technology,
Electronic Commerce and Media Free Zone in Dubai, United Arab Emirates.
In January 2005, we entered into
an agreement to acquire the 49.8% minority interest in one of our joint ventures,
Efonica from Karamco, Inc., contingent upon the successful completion of an initial
public offering by March 1, 2005. The purchase price will be a minimum of $5.5 million
and a maximum of $14.3 million, as adjusted for the approximate $175,000 representing
Karamcos portion of Efonicas debt owed to
us and the $500,000 to be paid in cash based upon a multiple of earnings achieved
by Efonica during the 12-month period ending February 28, 2006 (4.5 x
Efonicas net income as adjusted for certain intracompany and other expenses).
Karamco will receive cash of $500,000, with the balance paid in shares of common
stock. The number of shares to be issued to Karamco will be determined by the initial
price of the common stock at the date of the IPO. On the date of the transaction,
approximately $4.4 million worth of such shares of common stock, based upon the IPO price, will
be issued to Karamco and held in escrow until the final valuation of the joint venture
is determined after the year ending February 28, 2006. In the event that the purchase
price would be lower (based upon Efonicas net income for that one year period) than $10
million, the excess of the common shares based upon the IPO price will be returned
to us for cancellation out of the $4.4 million worth of stock held in escrow. In the event that the purchase price would
be higher than the $10 million (based upon Efonicas net income), we will issue Karamco
additional shares of our common stock (based on the IPO price), subject to the $14.3
million maximum.
Out of the shares to be issued to
the Seller, 150,000 shares of common stock are being registered for resale herein.
We have an option to repurchase the shares from Karamco at the higher of the IPO
price or the closing price on the day Karamco seeks to sell. In addition, Karamco
is subject to a leak-out agreement whereby they are restricted from selling any
of their shares for 45 days and then may sell up to 75,000 shares during the 45
day period beginning after 45 days and the remaining 75,000 shares may be
sold thereafter. Karamco may not sell more than $1,000,000 of stock during the one-year
period following the effective date. If the sale of the 150,000 shares that are
being registered results in less than $1 million of gross proceeds we will purchase
additional shares owned by Karamco, at a price equal to the higher of the IPO price
or the closing price 30 days after the last sale, so that they receive $1 million
in gross proceeds. If we purchase additional shares from Karamco they will be returned
for cancellation. The balance of Karamcos shares will be subject to a one-year
lock-up with the Representative. Karamco is owned by Roger Karam, who will become
the CEO of Efonica and our President of VoIP Services upon the effective date.
In the event that the IPO does not
occur on or before March 1, 2005, the Seller has the option of maintaining its minority
interest in Efonica. The excess of the purchase price over the book value of the
minority interest acquired, based upon the minimum purchase price of approximately
$5.5 million, will primarily be allocated to intangible assets in the amount of
approximately $5.5 million.
India
In March 2000, we entered into a
joint venture agreement with Communications Ventures India Pvt. Ltd. to form an
entity named Estel Communication Pvt. Ltd. Estel is organized and existing under
the laws of India and has its office in New Delhi, India. We own 49% of the joint
venture and have voting rights in another 1.01%, which in turn gives us an indirect
50.01% voting control in the joint venture. Estel is in the business
of selling and supporting VoIP, private networks and Internet access in India. The joint venture has been funded primarily by us. Our joint venture partner has had a lack of resources necessary to make investments to grow our operations or fund its committments to us. They currently owe us approximately $750,000.
Pakistan
In July 2002, we acquired a 75% equity
interest in a joint venture with Turner Hill Investments, L.P. (Turner Hill),
a non-US limited partnership, to provide VoIP services for calls terminating to
the dominant telecommunications carrier in Pakistan. Turner Hill subsequently assigned
its interest to Braddon Corporate Holdings Limited. During 2003 and 2002, we contributed
certain telecommunications equipment and advances aggregating approximately $500,000
to the joint venture in exchange for its equity interest in the new joint venture.
The joint venture operates out of facilities provided by Braddon and began providing
VoIP service in November 2002.
In connection with the joint venture
agreement, we entered into a non-exclusive service agreement with Pakistan Telecommunications
Ltd. (PTCL), a public limited company incorporated under the laws of
Pakistan, under which PTCL would provide for the termination of incoming international
traffic into Pakistan focusing on VoIP services from the United States and Europe.
The agreement provides for us to place all necessary switching equipment in Pakistan,
the United States and Europe, which we have done through the Pakistan joint venture.
The joint venture entity is required
to pay a management fee to Braddon equal to the number of minutes terminating in
Pakistan on a monthly basis times a fixed rate per minute. For the years ended December
31, 2003 and 2002, the joint venture incurred management fees to Turner Hill and
Braddon, its successor for approximately $361,000 and $36,000, respectively.
Our network strategy incorporates
a packet switched platform capable of interfacing with Internet protocols and other
platforms including Time Division Multiplexing (TDM). This is key to providing the
flexibility needed to accommodate the many protocols used to transport voice and
data today. We continually evaluate, and where appropriate, deploy additional communications
technologies such as Multi-Label Protocol Switching (MPLS) and Any Transport over
MPLS, which handle information transport in a more efficient fashion than other
earlier technologies such as frame relay and ATM.
Open standards compliance:
Our infrastructure interoperates with a wide range of third-party products,
which gives us the ability to grow the network and expand service offerings. We
seek system components that incorporate open standards in order to maintain
flexibility in our systems evolution. Additionally open standards ensure a
cost efficient expansion path as there is no need to replace the entire switch once
expansion opportunities have been exhausted as was required in the past.
Distributed Architecture:
Unlike
traditional telephony which relies mainly on centralized systems, our Softswitch
system has a modular structure with its intelligence spread out across various system
components. Due to this distributed environment, we maintain the ability to provide
services to at least some locations in the event a system failure prevents us from
providing services to other locations.
Centralized Management:
Web-based
tools and reporting capabilities enable efficient management, including the troubleshooting
and diagnostics of a global distributed network from a single location.
Wide Array of Signaling Support:
An ability to support a large number of signaling systems or protocols,
providing an integrated platform for both traditional and advanced products and
services, including, but not limited to DS-O, T-1, E-1, DS-3, STM-1/CC3/(C), SS7/ISUP,
ISDN, PRI, SIP, H323, MGCP, G.711, G.723 and G.729.
Policy Based Routing:
An
ability to create complex, multi-tiered and predetermined sets of routing policies.
This is a more powerful and effective way to determine the least costly and most
effective paths for voice communications traffic.
As we continue to penetrate
emerging markets, we will seek to establish regional points of presence that are
then connected to our New York facility. To facilitate this, we have created a standard
concept for the deployment of a point of presence in a remote region. These regional
points of presence will enable our VoIP services set to be offered and delivered
from remote locations while the intelligence and management of the services are
in our New York facility. We currently maintain one point of presence in the Caribbean,
Latin America and the Middle East, two points of presence in the United States and
five points of presence in Asia. We are generally required to establish additional
points of pres-
VoIP has emerged from an obscure
technological term into a major communications driver. Until recently, the traditional
world of voice communications consisted of millions of circuit connections established
between two points by the use of physical wires or wireless systems and a vast number
of switching systems throughout the world. These circuits remain connected for the
duration of a telephone call. VoIP, however, uses the Internet protocol to break
up communications, including voice, into small packets. These packets
travel across Internet systems without having a dedicated point-to-point connection,
and are thus much more efficient in the use of network transmission facilities.
VoIP dramatically reduces the wasted capacity that is inherent within circuit-switched
networks. This substantially enhanced efficiency, reduced overall cost, and ease
of deployment are driving carriers to implement VoIP. The following data points
evidence this and management believes are significant because of our emphasis on
VoIP:
According to Gartner Inc., the market
for consumer VoIP is projected to increase from $517 million in 2004 to $1.92 billion
in 2005 and to $9.5 billion by 2008.
According to the Radicati Groups
July 2004 report, the number of corporate telephone lines that use VoIP is expected
to grow from 4 percent in July 2004 to 44 percent by 2008.
According to the Radicati Groups
July 2004 report, corporate spending on VoIP is projected to rise from an expected
$1 billion in 2004 to $5.5 billion by 2008. By 2008, installation should cost corporations
only about $75 to $600 per line, down from the current $375 to $1,000 per line.
Private Networks and Virtual Private Networks
Internet access services have
rapidly moved from entertainment to a required tool for businesses and consumers
alike. Although Internet connectivity has technically been available since the advent
of the US Defense Advanced Research Projects Agency (DARPA) network ARPAnet
in the late 1960s, it did not begin to achieve widespread popularity and ubiquity
until the mid-1990s. Since then, the Internet has changed the way people conduct
business, entertain themselves, and communicate throughout the world. People can
connect to the Internet in the following ways: using a modem and dialing into an
Internet service provider, via a dedicated connection to the Internet service provider
such as a cable modem, digital subscriber line, or leased circuit, or via a wireless
connection.
% of
Region
% Growth
Global Users
Middle East
2.1%
Latin America/Caribbean
6.9%
Africa
1.6%
Europe
28.4%
Asia
31.7%
North America
27.3%
Oceana
1.9%
Source:
www.internetworldstats.com
The number of Internet users in Asia
increased from 114 million as of December 2000 to 175 million in November 2002 (www.internetstats.com),
and had been expected to rise to 188 million by 2004, according to Gartner Group
Asia 2002. The actual number of users as of May 31, 2004 was 243.7 million users
(www.internetstats.com). It is clear that these forecasts underestimated the actual
demand. We provide services in Asia and expect that this will be a growth area for
us.
The number of Internet users in Latin
America was projected to reach 43.4 million by the end of 2003 and 60.6 million
by the end of 2004, according to eMarketer, October 2002. As of May 2004, the number
was estimated at 51.18 million (www.internetstats.com). In this instance, it is
likely that the forecasts are on target, and perhaps slightly low. We provide services
in Latin America and the Caribbean.
The number of Internet users in the
Middle East and Africa is expected to grow from approximately 13.9 million in November
2002 to approximately 34 million users in 2005 (www.internetstats.com). The estimated
number of users as of May 2004 was 29 million (www.internetstats.com). We believe
these forecasts appear to be accurate. We provide services in the Middle East and
Africa.
As part of our decision process, we evaluate growth of Internet
users in our potential markets.
The deregulation of monopoly
telecommunications and Internet environments in emerging markets has allowed carriers
such as Fusion to deliver competitive and innovative Internet protocol communications
services. Monopoly limitations on alternative international long distance carriers
have historically constrained competition and provided little incentive or ability
for competitors to build facilities in developing countries. Incumbent carriers
in the country are suddenly having to compete in their markets by having to provide
more Internet services and improved customer service. We believe deregulation and
the resultant competition from new entrants facilitate improved communications infrastructure,
additional service offerings, lower prices, and increased demand. However, we also
believe that to obtain the most profitable and enduring relationships, it is important
to have an understanding of the sensitivities of the local postal telephone and
telegraph companies, which have been the former monopoly carriers in their respective
markets, and regulatory authorities in these countries. Accordingly, we seek to
develop these relationships and gain expertise in these markets early in the deregulation
process.
The continued trend of multinational
corporations to locate offices and factories in emerging markets is playing an increasingly
important role in the economic development of these regions. Management believes
that as the globalization of business increases, the need for high quality and cost
effective data and voice Internet protocol services will grow. Many American and
other developed country information technology executives are believed by Management
to be adjusting budgets to support international growth and reduce operating expenditures
by deploying resources in developing countries in an attempt to improve customer
service, upgrade Web-site performance, and enhance network security. At the same
time, many countries, notably China, India, Pakistan, Philippines, Singapore, and
Vietnam, are encouraging the development of information technology and communications
intensive industries to spur economic growth. Several emerging markets are focused
on building themselves as centers for information technology industries, such as
software development, call centers and customer relationship management, where the
relatively low cost but highly skilled labor force becomes extremely attractive
to multinational corporations from the developed world.
Fixed and, to a lesser extent, wireless
markets are at saturation point
New technologies like Internet protocol
and VoIP are eroding margins
Competition is increasing in scale
and intensity
The lack of a strategy beyond broadband
The loss of wireline voice traffic
to mobile operators.
Telecom Asias survey found likely
areas of growth included broadband services. In addition to broadband are Internet
protocol-based next-generation networks and digital subscriber line.
Many countries are undergoing
communications reform, and foreign investment is being actively encouraged as privatization
and liberalization are introduced. More than one-third of all state telephone companies
(postal telephone and telegraph companies) have already privatized and several more
are set to be privatized in the near future.
The Caribbean markets have
gone through a major transition over the past twenty-four months. The most significant
changes have been instigated by the onset of deregulation of the Caribbean telecommunications
industry, and the economic downturn in the U.S. after the September 11, 2001 terrorist
attacks. According to Forrester Research, 2004, the Caribbean mainstay industries
(tourism, hospitality, manufacturing and offshore finance) saw gross margins fall
from the end of third quarter in 2001 through mid-second quarter 2002, with tourism
experiencing the greatest decline. As a result, many Caribbean governments began
to seek economic diversification and most turned to their technology and telecommunications
sectors to make the shift. With the help of foreign regulatory agencies similar
to the Federal Communications Commission, a number of Caribbean governments developed
economic strategies that included the enacted legislative frameworks to regulate
and ensure the security of e-business and e-commerce transactions; and some countries
promoted significant tax exemptions to attract international service providers,
and to raise additional revenue.
Broadband in Latin America,
for the most part, means digital subscriber line, as indicated in an October 2003
Telecommagazine article. Throughout the region, ADSL services - in most cases provided
by the incumbent providers - dominate, capturing 85 percent of broadband subscribers.
ADSL services refer to the ability to provide fiber or copper-based direct connectivity
to an end user with speeds that differ between upload and download. Throughout Latin
America, there were 685,000 cable modem subscribers in 2002, a number expected to
grow to 805,000 by the end of 2003, and to 1.06 million by the end of 2004. Mexico,
the largest cable modem market in Latin America, had only 141,000 cable modem subscribers
in 2002, or 0.6 percent of households. By the end of 2003, that number was expected
to grow to 218,000 subscribers, or one percent of households. Argentina, another
cable modem stronghold, had about 110,000 cable modem subscribers by year-end 2002,
compared to 55,000 residential digital subscriber line subscribers, according to
the Yankee Group.
A full suite of services that compliment
our VoIP service offerings as opposed to a single offering;
Our focus on emerging markets in
Latin America, Asia, the Middle East, Africa and the Caribbean;
An international partnership and
distribution model which provides for faster service deployment reduced capital
requirements and cost efficient service delivery; and
A strategy of using local partners
to enable us to access new markets, enhance distribution and provide local customer
support.
On April 24, 2004, the FCC
rendered a decision on the AT&T Petition for Declaratory Ruling (WC Docket No.
02-361) pending before them. The FCC determined that, where 1+ calls were made from
regular telephones, converted into an Internet protocol format, transported over
AT&T Internet backbone, and then converted back from IP format and delivered
to the called party through the local exchange carrier local business lines (not
Feature Group D trunks), the service was a telecommunications service
for which terminating access charges were due the local exchange carrier. In its
decision, the Commission stated that, under the current rules, the service provided
by AT&T is a telecommunications service upon which interstate access
charges may be assessed against AT&T. The FCC limited its decision to the specific
facts of the AT&T case where the type of service involved ordinary Customer
Premise Equipment with no enhanced functionality, the calls originated and terminated
on the public switched telephone network, and the calls underwent no net protocol
conversion and provided no enhanced functionality to the end user due to the providers
use of Internet protocol technology. In fact, in the AT&T case the customer
was completely unaware of AT&Ts use of IP technology in transporting the
call.
It is uncertain when or how
the effects of such regulation would affect us, nor is it understood if other countries
will seek to follow suit. If additional regulation does occur, the FCC, any state
or any country may impose surcharges, taxes or additional regulations upon providers
of VoIP. The imposition of any such additional fees, charges, taxes and regulations
on Internet protocol service providers could materially increase our costs and may
limit or eliminate the competitive pricing we currently enjoy.
1.
Fusion Telecommunications International
2.
FTI
3.
Diamond / Block Logo
4.
Diamond Logo
5.
Fusion
1.
O Efonica (logo)
2.
Efonica
3.
Fusion Tel
4.
Fusion Telecom
As of December 31, 2004, we
had 58 employees in Fusion Telecommunications International, Inc., Efonica F-Z LLC
had 13 employees and Estel Communications Pvt. Ltd. had 60 employees. None of our
employees is represented by a labor union. We consider our employee relations to
be good.
Location
Lease expiration
Purpose
Approx. sq. ft
Annual Rent
420
Lexington Avenue, Suite 518
January 2010
Lease of principal
8,100
$314,496 (1)
New York, New York 10170
executive offices
75
Broad Street
March 2010
Lease of network
15,000
$507,600 (2)
New York, New York 10007
facilities
1475
W. Cypress Creek Road,
July 2009
Lease of network
9,700
$111,734 (3)
Suite 204
facilities and office
Fort Lauderdale,
Florida 33309
space
This lease is subject to increase
to $330,624 for years 2006 to 2010.
(2)
This lease is subject to gradual
increase to $672,702 from years 2005 to 2010.
(3)
This lease is subject to gradual
increase to $130,712 from years 2005 to 2009.
condition. We have filed a
counterclaim and have asserted several affirmative defenses including, among other
things, plaintiffs failure to mitigate damages. The action is currently in
the discovery phase and the plaintiff filed an amended motion to dismiss and/or
strike defendants second amended counterclaim and affirmative defenses, along
with a motion for sanctions on October 28, 2004. No hearing with respect to the
motion to dismiss has been set to date.
Name
Age
Position
Marvin S. Rosen
64
Chief Executive Officer, Chairman
of
the Board of Directors
Matthew D. Rosen
32
President and Chief Operating Officer
Joel H. Maloff
54
Executive Vice President & Chief
Technology Officer
Eric D. Ram
54
Executive Vice President
Barbara Hughes
51
Vice President of Finance
Jan Sarro
50
Vice President of Sales and Marketing
Philip D. Turits
71
Treasurer, Secretary and Director
Roger Karam
36
President of VoIP Services
Cesar A. Baez
49
Director
E. Alan Brumberger
64
Director
Julius Erving
54
Director
Evelyn Langlieb Greer
54
Director
Raymond E. Mabus
55
Director
Manuel D. Medina
52
Director
Paul C. OBrien
65
Director
Kenneth I. Starr
55
Director
Michael J. Del Giudice
61
Director
Fred P. Hochberg
52
Director
Philip D. Turits
has
served as a director since September 1997 and as our Secretary since October 1997,
Treasurer since March 1998, co-founded the Company in September 1997 and served
as Vice Chairman from March 1998 to December 1998. From September 1991 to February
1996, Mr. Turits served as Treasurer and Chief Operating Officer for Larry Stuart,
Ltd., a consumer products company and prior to 1991, he served as President and
Chief Executive Officer of Continental Chemical Company.
Alan M. Braverman
Mr.
Braverman is an executive advisor and merchant banker. He has been an Institutional
Investor and Wall Street Journal ranked analyst and Managing Director in the Technology,
Media and Telecommunications sectors for several investment banks, as well as a
Managing Director for US Trust where he was responsible for private equity investments
in the communications industry. Previously, he served as President at NBC Internet,
majority owned and later acquired by General Electric. Prior to that, Mr. Braverman
was also a senior manager at US West (Qwest) where he founded and ran the companys
first Internet business and launched its Russian cellular telephone company.
Kenneth I. Starr
has
served as a director from March 1998 to December 2004. Since its founding in 1989,
Mr. Starr has served as the Chairman and Chief Executive Officer of Starr &
Company, a New York City-based accounting and business management firm. From April,
2000 to May, 2003, Mr. Starr served as a member of the board of directors of Terremark
Worldwide, Inc.
annually reviewing and reassessing
the adequacy of the committees formal charter;
reviewing our annual audited financial
statements with our management and our independent auditors and the adequacy of
our internal accounting controls;
reviewing analyses prepared by our
management and independent auditors concerning significant financial reporting issues
and judgments made in connection with the preparation of our financial statements;
reviewing the independence of the
independent auditors;
reviewing our auditing and accounting
principles and practices with the independent auditors and reviewing major changes
to our auditing and accounting principles and practices as suggested by the independent
auditor or our management;
selecting and recommending the appointment
of the independent auditor to the board of directors, which firm is ultimately accountable
to the audit committee and the board of directors; and
approving professional services provided
by the independent auditors, including the range of audit and nonaudit fees.
Long-Term
Annual Compensation
Compensation Awards
All Other
Bonus
Securities Underlying
Compen-
Name and Principal Position
Year
Salary ($)
($)
Option/SARs
sation ($)
Marvin S. Rosen,
Chief Executive Officer
2003
0
0
7,143
0
2002
0
0
0
0
2001
0
0
0
0
Matthew D. Rosen, President and
2003
170,000
0
0
0
Chief Operating Officer
2002
170,000
0
85,715
0
2001
170,000
0
0
0
Joel H. Maloff, Executive Vice President
2003
175,000
0
0
0
& Chief Technology Officer
2002
175,000
0
0
0
2001
175,000
0
0
0
Eric D. Ram, Executive Vice President
2003
175,000
0
0
0
2002
175,000
0
0
0
2001
175,000
0
0
0
Jan Sarro, Vice President of Sales
2003
135,000
0
0
0
and Marketing
2002
135,000
0
35,715
0
We have entered into an employment
agreement with Mr. Matthew Rosen, our President and Chief Operating Officer. This
agreement is effective on November 11, 2004 and expires on January 31, 2007, provided
that the term shall extend for an additional one year unless terminated by either
side on 90 days notice. The agreement provides for an annual salary of not less
than $250,000, with a minimum annual bonus equal to 25% of his annual salary. In
the event that we achieve a positive EBITDA for two successive quarters, he will
be paid a one-time bonus equal to 50% of his annual salary then in effect. In addition,
he will be entitled to a bonus of $25,000 upon the successful completion of an initial
public offering. In the event that the employment is terminated without cause, including
by change of control, the agreement provides that Matthew will receive unpaid base
salary accrued through the effective date of the termination plus any pro-rata bonus
and a lump sum of 150% of his base salary and 150% of his highest annual bonus for
the three years preceding his termination. The agreement also provides for a one
year non-compete provision.
Numbers of Securities Underlying
Shares
Value
Unexercised Options/SARs
Value of Unexercised In The Money
Acquired on
Realized
At Fiscal Year End
Options/SARs at Fiscal Year End
($)
Name
Exercise (#)
($)
Exercisable/Unexercisable
Exercisable/Unexercisable
Marvin
S. Rosen
0
0
7,143/0
0/0
Matthew D.
Rosen
0
0
50,358/73,929
0/0
Eric D. Ram
0
0
96,429/0
0/0
Joel H. Maloff
0
0
48,215/16,072
0/0
Jan Sarro
0
0
8,929/26,786
0/0
Our Board of Directors adopted
the 1998 Stock Option Plan in May 1998, re-approved the option plan in November
1999, and in February 2000, our stockholders approved the option plan. Currently
2,680,857 shares of our class A common stock have been reserved for issuance under
the option plan. As of the date of this prospectus, options to purchase an aggregate
of 3,553,490 shares have been granted (88,857 of these options have been exercised
and 1,631,974 have been cancelled prior to the date of this Prospectus) under the
option plan. Accordingly, an aggregate of 1,832,659 options are currently outstanding.
In May 2003, we were awarded
a subcontractor role to provide Internet protocol services for embassies and
consulates of the U.S. Department of State and are providing service to 16 U.S.
embassies and consulates in Asia and the Middle East with another one scheduled
to be installed. Terremark Worldwide, Inc., is serving as the primary
contractor. Our Chief Executive Officer, Marvin Rosen is a director of
Terremark. Our former Chairman, Joel Schleicher and Kenneth Starr, one of our
directors, formerly served on Terremarks board. Manuel Medina,
Terremarks Chairman and Chief Executive Officer, is one of our
directors.
In December 2004, Philip Turits
sold 28,571 shares of common stock to Dennis Mehiel at $2.48 per share. Mr. Mehiel
is a lender to us. In December 2004, he also sold 28,571 shares to a non-affiliated
party at $2.48 per share. In December 2004, Marvin Rosen sold 28,571 shares of common
stock to Dennis Mehiel at $2.48 per share. In December 2004, Michael Del Giudice,
a Director of ours purchased an aggregate of 35,754 shares from two non-affiliated
parties for $2.48 per share.
The following table presents
information regarding the beneficial ownership of both classes of our common stock,
treated as one, as of December 31, 2004, and as adjusted to reflect the sale of
the new common stock in this offering:
each person who beneficially owns
more than 5% of both classes of our common stock;
each of our directors and named executive
officers; and
all current executive officers and
directors as a group.
Number of Shares
Beneficially
Percentage of outstanding shares
to be owned
Name**
Owned
Before the offering
After the offering
Cesar
A. Baez(1)
29,908
*
*
E. Alan Brumberger(2)
237,524
1.0%
*
Michael Del
Giudice(3)
35,715
*
*
Evelyn L. Greer(4)
203,086
*
*
Roger Karam(14)
1,547,617
6.7%
5.7%
Joel H. Maloff(6)
71,143
*
*
Manuel D. Medina(7)
469,303
2.0%
1.8%
Paul C. OBrien(8)
65,715
*
*
Eric D. Ram(9)
191,658
*
*
Marvin S. Rosen(10)
2,222,617
9.6%
8.4%
Matthew D. Rosen(11)
138,000
*
*
Kenneth I.
Starr(12)
194,858
*
*
Philip D. Turits(13)
1,883,245
8.1%
7.1%
Sandy Beach
Investments(14)
1,430,299
6.7%
5.8%
Executive Officers
& Directors as a
group (13 persons)
7,290,389
31.4%
27.5%
*
less than 1%
**
Unless otherwise indicated (i) all
addresses are c/o Fusion Telecommunications International, Inc. 420 Lexington Avenue,
Suite 518 New York, NY 10170, and (ii) all persons own class A common stock.
(1)
Does not include 21,429 shares of
common stock issuable upon the exercise of options that are not exercisable in the
next 60 days.
(2)
Includes (i) 10,715 shares of common
stock held by trusts for which his wife serves as trustee; and (ii) 8,572 shares
of common stock issuable upon conversion of 300 shares of series C preferred stock.
Does not include 21,429 shares of common stock issuable upon the exercise of options
that are not exercisable in the next 60 days.
(3)
Does not include 21,429 shares of
common stock issuable upon the exercise of options that are not exercisable in the
next 60 days.
(4)
Includes (i) 70,400 of common stock
held by a trust for which she serves as trustee; (ii) 46,972 shares of common stock
held by same trust issuable upon conversion of 1,644 shares of series C preferred
stock; and (iii) presently exercisable warrants to purchase 85,715 shares of stock.
Does not include 21,429 shares of common stock issuable upon the exercise of options
that are not exercisable in the next 60 days.
(5)
Does not include 90,000 options to purchase common stock which are not exercisable in the next 60 days. Assumes that no additional shares will be issued or shares returned pursuant to the earn-out provisions of the Purchase Agreement between us and Mr. Karam. See Business-Joint VenturesEfonica.
(6)
Includes 64,286 shares of common
stock issuable upon exercise of presently exerciseable options, which expire in
January 2005. Does not include 71,429 shares of common stock issuable upon the exercise
of options that are not exercisable in the next 60 days.
(7)
Represents 469,303 shares of common
stock owned by Communications Investors Group, a partnership controlled by Mr. Medina.
Does not include 21,429 shares of common stock issuable upon the exercise of options
that are not exercisable in the next 60 days.
(8)
Includes 21,429 shares of common
stock issuable upon exercise of presently exerciseable options. Does not include
21,429 shares of common stock issuable upon the exercise of options that are not
exercisable in the next 60 days.
(9)
Includes (i) 96,429 shares of common
stock issuable upon exercise of presently exerciseable options, which expire in
January 2005; (ii) 95,229 shares of common stock issuable upon conversion of 3,333
shares of series C preferred stock held by World Capital Corp of which Eric Ram
serves as managing director and principal shareholder. Does not include 96,429 shares
of common stock issuable upon the exercise of options that are not exercisable in
the next 60 days. Does not include 178,572 options which Marvin Rosen granted Mr.
Ram and does not include 42,857 options Philip Turits has granted Mr. Ram, both
transactions were in reliance upon an exemption from registration afforded by section
4(i) of the Securities Act of 1933, as amended.
(10)
Includes (i) 6,701 shares of common
stock issuable upon conversion of 9
1
/
4
%
Convertible Notes (interest rate was 7
1
/
4
%
prior to April 2004), which are convertible at the option of the holder at $18.66
per share; (ii) 95,229 shares of common stock issuable upon conversion of 3,333
shares of series C preferred stock; and (iii) 7,143 shares of common stock issuable
upon exercise of a presently exercisable warrant. Mr. Rosen has granted certain
individuals options to purchase an aggregate of 392,857 shares of the common stock.
(11)
Includes 81,429 shares of common
stock issuable upon exercise of presently exerciseable underlying immediately exercisable
options. Does not include 385,714 shares of common stock issuable upon the exercise
of options that are not exercisable in the next 60 days, which expire in January
2005. Does not include a 37,143 stock option, which Philip Turits granted to Matthew
Rosen.
(12)
Includes (i) 186,286 shares of common
stock held by his wife; and (ii) 8,572 shares of common stock issuable upon conversion
of 300 shares of series C preferred stock held by his wife. Does not include 21,429
shares of common stock issuable upon the exercise of options that are not exercisable
in the next 60 days.
(13)
Includes (i) 257,143 shares of common
stock held by Sagaponack Group, L.P., of which Mr. Turits serves as general partner;
(ii) 6,701 shares of common stock underlying 9
1
/
4
%
Convertible Notes (interest rate was 7
1
/
4
%
prior to April 2004), which are convertible at the option of the holder assuming
such at $18.66 per share; (iii) 10,715 shares of common stock held by a trust for
which he serves as trustee; (iv) 95,229 shares of common stock issuable upon conversion
of 3,333 shares of series C preferred stock; and (v) 7,143 shares of common stock
issuable upon exercise of presently exercisable warrants and (vi) 4,286 shares of
common stock held by his wife. Mr. Turits has granted certain individuals options
to purchase an aggregate of 157,143 shares of his common stock. Does not include
21,429 shares of common stock issuable upon the exercise of options that are not
exercisable in the next 60 days.
(14)
The beneficial owners of Sandy Beach
Investments are Don A. Stubbs, Baldwin L. Rigby, Peter N. Turnquest and Iris P.
Sherman.
Our authorized capital stock
is 136,000,000 shares, consisting of 105,000,000 shares of common stock, $.01 par
value; 21,000,000 shares of class A common stock, $.01 par value and; 10,000,000
shares of preferred stock, $.01 par value, of which 110,000 have been designated
as series C preferred stock. The previously designated and issued series A preferred
stock and series B preferred stock have been retired and the shares returned to
the status of authorized and unissued preferred stock. Upon the closing of the offering,
all shares of series C preferred stock currently outstanding will be converted into
3,141,838 shares of our common stock at the conversion price equal to the lesser
of (i) 75% of the initial public offering price of the common stock, or (ii) $3.15
per share. Also, upon the closing of the offering, $2,508,333 in convertible notes
(which were issued in a transaction that occurred during November 2004 whereby the
Company received net cash proceeds of $1,330,000 and refinanced $1,108,333 of existing
notes payable and accrued interest) will automatically convert into 651,515 shares
of common stock based upon a conversion price of $3.85 per share. In addition, upon
closing of this offering, 1,547,617 shares of common stock will be issued in connection
with a January 2005 agreement whereby the Company will be acquiring the 49.8% minority
interest in its Efonica joint venture contingent upon successful completion of this
offering by March 1, 2005.
Common Stock
Holders of shares of common
stock are entitled to cast one vote for each share held at all stockholders
meetings, for all purposes, including the election of directors. The common stock
does not have cumulative voting rights. We have approximately 450 common stockholders.
Series C preferred stock.
We have 109,962 shares of series C preferred stock outstanding with a stated
value of $90.00 per share. The rights, designations, preferences, privileges, qualifications
of our series C preferred stock are described in our certificate of designation.
The document has been filed as an exhibit to the registration statement of which
this prospectus is a part. The mandatory conversion feature of the certificate of
designation provides that in the event we complete an initial public offering of
our common stock, our series C preferred will immediately convert into shares of
our common stock. Accordingly, upon the closing of the offering, all shares of series
C preferred stock currently outstanding will be converted into shares of our common
stock at a conversion price equal to the lesser of (i) 75% of the initial public
offering price of the common stock, or (ii) $3.15 per share. Holders of the series
C preferred stock will also receive a purchase warrant for each share of common
stock that they receive upon conversion and the terms of these purchase warrants
are identical to the terms of the purchase warrants offered by this registration
statement. We have approximately 178 series C preferred stockholders.
prior to the business combination
the corporations board of directors approved either the business combination
or the transaction which resulted in the stockholder becoming an interested stockholder;
or
upon the consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the stockholder
owned at least 85% of the outstanding voting stock of the corporation at the time
the transaction commenced, excluding for the purpose of determining the number of
shares outstanding those shares owned by the corporations officers and directors
and by employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will be tendered
in a tender or exchange offer; or
at or subsequent to the time the
business combination is approved by the corporations board of directors and
authorized at an annual or special meeting of its stockholders, and not by written
consent, by the affirmative vote of at least 66
2
/
3
%
of its outstanding voting stock, which is not owned by the interested stockholder.
After the offering, 26,034,032
shares of both classes of our common stock will be outstanding, including
17,480,562 shares of our class A common stock. All of the 3,325,000 shares of
our common stock sold in the offering will be freely tradable, except for shares
purchased by holders subject to lock-up agreements or by any of our existing
affiliates, as that term is defined in Rule 144 under the Securities
Act, which generally includes officers, directors or 10% stockholders. In
addition, the 150,000 shares registered on behalf of the selling stockholder
will be freely tradable, except that the selling stockholder may not sell any
shares for 45 days and then may sell up to 75,000 shares during the 45 day
period beginning after 45 days and the remaining 75,000 shares may be sold
thereafter. The class A common stock may not be converted into common stock until
one year after the offering unless the holder executes and delivers, after the
effective date of this prospectus, a one year lock up agreement from the
effective date of the prospectus. The remaining 5,190,970 shares of of our
common stock outstanding after the offering and the 17,480,562 shares of class A
common stock outstanding will be restricted as a result of its terms or lock-up
agreements from transfer for 12 months after the date of this prospectus. Our
underwriter in its sole discretion, however, may waive or permit us to waive the
lock-up at any time for common stockholders. Sales of a substantial number of
shares of our common stock could cause the price of our securities to fall. The
representative of the underwriters has advised us that in deciding whether to
consent to any sale within the applicable lock-up period, it will consider
whether the sale would have an adverse effect on the market for our common
stock. The representative of the underwriter has advised us that it does not
have any present intention or understanding to release any of the shares subject
to the lock-up agreements prior to the expiration of the shares subject to
lock-up agreements prior to the expiration of the lock-ups
periods.
Before the offering, there
has been no market for our common stock, and no precise prediction can be made about
any effect that market sales of our common stock or the availability for sale of
our common stock will have on the market price of the common stock. Nevertheless,
sales of substantial amounts of our common stock in the public market could adversely
affect the market price for our securities and could impair our future ability to
raise additional capital through the sale of our securities.
Number
Number
Underwriters
of Shares
of Warrants
Kirlin
Securities, Inc.
Total
Without
Per Share
Per Warrant
option
With Option
Public offering
price
$
$
$
$
Discount
$
$
$
$
Non-accountable Expense
Allowance
(1)
$
$
$
$
Proceeds before expenses (2)
(1)
The non-accountable expense allowance
is not payable with respect to the securities sold upon exercise of the underwriters
over-allotment option.
(2)
The offering expenses are estimated
at $625,000.
In connection with the offering,
we have agreed to sell to the representative for an aggregate of $100, a purchase
option, consisting of the right to purchase up to an aggregate of 332,500 shares
of our common stock and 332,500 purchase warrants. The representative purchase option
is exercisable initially at a price of $ per share and $ per warrant
(125% of the offering price to investors) for a period of four years commencing
one year from the date of this prospectus. The representative purchase option may
not be transferred, sold assigned or hypothecated during the one-year period following
the date of this prospectus except to officers or partners of the representative,
underwriters and the selected dealers and their officers or partners. The representative
purchase option grants to the holders thereof certain piggyback and
demand rights for periods of seven and five years, respectively, from the date of
this prospectus with respect to the registration under the Securities Act of the
securities directly and indirectly issuable upon exercise of the underwriter purchase
option.
Stabilizing transactions permit bids
to purchase the underlying security so long as the stabilizing bids do not exceed
a specified maximum.
Over-allotment involves sales by
the underwriters of our securities in excess of the number of securities the underwriters
are obligated to purchase, which creates a syndicate short position. The short position
may be either a covered short position or a naked short position. In a covered short
position, the number of our securities over-allotted by the underwriters is not
greater than the number of our securities they may purchase in the over-allotment
option. In a naked short position, the number of our securities involved is greater
than the number of securities in the over-allotment option. Our underwriters may
close out any covered short posi-
tion by either exercising through their representative the over-allotment option and/or purchasing our securities in the open market.
Syndicate covering transactions involve
purchases of our securities in the open market after the distribution has been completed
in order to cover syndicate short positions. In determining the source of securities
to close out the short position, our underwriters will consider, among other things,
the price of securities available for purchase in the open market as compared to
the price at which it may purchase securities through the over-allotment option.
If our underwriters sell more securities than could be covered by the over-allotment
option, a naked short position, the position only can be closed out by buying our
securities in the open market. A naked short position is more likely to be created
if our underwriters are concerned that there could be downward pressure on the price
of our securities in the open market after pricing that could adversely affect investors
who purchase in the offering.
Penalty bids permit our underwriters
to reclaim a selling concession from a selling group member when the securities
originally sold by the selling group member are purchased in a stabilizing or syndicate
covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate
covering transactions and penalty bids may have the effect of raising or maintaining
the market price of our securities or preventing or retarding a decline in the market
price of our securities. As a result, the price of our securities may be higher
than the price that might otherwise exist in the open market. The underwriters may
distribute copies of this prospectus in pdf or similar format. Receipt of this prospectus
by electronic means does not obligate any investor in the offering to receive in
the future periodic reports or proxy material from us.
AND SUBSIDIARIES
Contents
Consolidated
Financial StatementsSeptember 30, 2004
Consolidated
Balance Sheet
F-1
Consolidated
Statements of Operations
F-2
Consolidated
Statement of Changes in Stockholders Deficit
F-3
Consolidated
Statements of Cash Flows
F-4
Notes
to Consolidated Financial Statements
F-6
Consolidated
Financial StatementsDecember 31, 2003 and 2002
Independent
Auditors Report
F-26
Consolidated
Balance Sheets
F-27
Consolidated
Statements of Operations
F-28
Consolidated
Statement of Changes in Stockholders Deficit
F-29
Consolidated
Statements of Cash Flows
F-30
Notes
to Consolidated Financial Statements
F-32
AND SUBSIDIARIES
Consolidated
Balance Sheet
AND SUBSIDIARIES
Consolidated
Statements of Operations
2004
2003
(unaudited)
(unaudited)
Revenues
$40,499,353
$24,840,556
Operating expenses:
Cost
of revenues, exclusive of depreciation and amortization
shown
separately below
34,517,162
21,432,409
Depreciation
and amortization
1,484,418
1,616,607
Loss
on impairment
280,683
Selling,
general and administrative expenses
7,474,425
6,800,712
Operating
loss
(2,976,652)
(5,289,855)
Other
income (expense)
Interest
expense, net
(1,433,849)
(671,364)
Forgiveness
of debt
2,174,530
1,779,033
Other
49,899
Minority
interests
(40,743)
76,950
749,837
1,184,619
Net
loss
(2,226,815)
(4,105,236)
Preferred
stock dividends
(385,918)
(570,685)
Net
loss applicable to common stockholders
$(2,612,733)
$(4,675,921)
Basic
and diluted net loss applicable to per
common
stockholders per common share:
Net
loss
$ (0.16)
$ (0.35)
Weighted
average shares outstanding
Basic
and diluted
16,444,858
13,209,897
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders Deficit
Nine months ended September 30, 2004 (unaudited)
Accumulated
Redeemable
Compre-
Other
Preferred
Preferred
Preferred
Capital in
Stock
hensive
Compre-
Stock
Stock
Stock
Common
Excess of
Dividend
Income
hensive
Accumulated
Series C
Series A
Series B
Stock
Par Value
Distributable
(Loss)
Income
Deficit
Total
Balances,
January
1, 2004
$3,466,538
$ 4,072
$ 735
$153,412
$62,597,546
$ 553,238
$ 92,925
$(73,175,930)
$(9,774,002)
Proceeds from
sales of
common stock,
net
of investment
expenses
4,305
1,272,765
1,277,070
Proceeds from sales of
Series
C preferred
stock, net of investment
expenses
4,630,803
Conversion
of long-term
debt to Series C
preferred
stock
583,360
Common stock issued in
settlement
of accounts
payable
197
101,873
102,070
Conversion
of Series
A & B preferred stock
to
common stock
(4,072)
(735)
13,735
(8,928)
Stock dividend declared
385,918
(385,918)
Stock dividend
issued
3,157
935,999
(939,156)
Foreign currency
translation
adjustment
$ 8,013
8,013
8,013
Accretion of
interest and
dividends on Series C
preferred
stock
1,180,730
Net loss
(2,226,815)
(2,226,815)
(2,226,815)
Total
comprehensive loss
$(2,218,802)
Balances,
September 30,
2004
$9,861,431
$
$
$174,806
$64,899,255
$
$100,938
$(75,788,663)
$(10,613,664)
AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
Cash
flows from operating activities
Net
loss
$(2,226,815)
$(4,105,236)
Adjustments
to reconcile net loss to net cash
used
in operating activities:
Loss
on impairment
280,683
Gain
from sale of property and equipment
(19,230)
(6,000)
Depreciation
and amortization
1,484,418
1,616,608
Bad
debt expense
204,989
84,929
Gain
on forgiveness of debt
(2,174,529)
(1,779,033)
Minority
interest
40,743
(76,950)
Interest
and dividends accreted on Series C preferred stock
1,180,730
Increase
(decrease) in cash attributable to
changes
in operating assets and liabilities:
Accounts
receivable
(1,714,440)
(327,847)
Prepaid
expenses and other current assets
(99,756)
(267,216)
Other
assets
9,689
25,353
Accounts
payable and accrued expenses
(546,671)
963,023
Liabilities
of discontinued operations
(24,953)
(134,542)
Net
cash used in operating activities
(3,885,825)
(3,726,228)
Cash
flows from investing activities
Purchase
of property and equipment
(578,888)
(55,242)
Repayments
of (payments for) security deposits
303,988
(248,294)
Repayments
of restricted cash
452,560
266,367
Net
cash provided by (used in) investing activities
177,660
(37,169)
Cash
flows from financing activities
Proceeds
from sale of common stock, net
1,277,070
3,773,928
Proceeds
from sale of Series C preferred stock, net
4,630,803
Proceeds
from (repayments of) short-term borrowings
(570)
14,730
Proceeds
from long-term debt
1,049,641
Payments
of long-term debt and capital lease obligations
(738,185)
(634,576)
Repayments
of escrow advances
(73,060)
(1,130,500)
Contributions
from (to) minority stockholders of joint ventures
(9,297)
29,455
Net
cash provided by financing activities
5,086,761
3,102,678
Net
increase (decrease) in cash and cash equivalents
1,378,596
(660,719)
Cash and
cash equivalents,
beginning of period
3,240,652
768,898
Cash
and cash equivalents,
end of period
$ 4,619,248
$ 108,179
AND SUBSIDIARIES
Consolidated
Statements of Cash Flows (Continued)
2004
2003
(unaudited)
(unaudited)
Supplemental
disclosure of cash flow information:
Cash
paid during the period for interest
$102,438
$129,930
Supplemental
disclosure of noncash investing and financing activities:
Acquisition
of capital lease
$760,417
$373,200
Conversion
of accounts payable to common stock
$102,070
$
Conversion
of long-term debt to common stock
$
$271,333
Conversion
of capital lease obligations to common stock
$
$ 32,500
Conversion
of Series A and B preferred stock to common stock
$ 13,735
$
Conversion
of long-term debt to Series C preferred stock
$583,360
$135,313
Stock
dividends issued
$939,156
$721,383
Stock
dividends declared
$385,918
$724,568
Note
issued in settlement agreement
$150,000
$
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
1. Nature
of operations
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
2. Summary
of significant accounting policies (continued)
Estimated
Asset
Useful Lives
Network
equipment
5-7 Years
Furniture and
fixtures
3-7 Years
Computer equipment and software
3-5 Years
Leasehold improvements
Lease terms
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
2. Summary
of significant accounting policies (continued)
Nine Months Ended
September 30, 2004
September 30, 2003
Net
loss applicable to common stockholders, as reported
$(2,612,733)
$(4,675,921)
Deduct: total
stock-based compensation expense under fair value method
for
awards, net of related tax effect
(559,344)
(74,933)
Net
loss applicable to common stockholders,
pro
forma
$(3,172,077)
$(4,750,854)
Earnings
per share:
Basic
and diluted net loss applicable to common
stockholders,
as reported
$ (0.16)
$ (0.35)
Basic
and diluted net loss applicable to common
stockholders,
pro forma
$ (0.19)
$ (0.36)
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
2. Summary
of significant accounting policies (continued)
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Network
equipment, including $1,530,905 under capital leases
$ 9,654,673
Furniture and
fixtures
112,016
Computer equipment and software
698,279
Leasehold improvements
2,708,648
13,173,616
Less accumulated
depreciation and amortization, including $615,261
under
capital leases
(8,244,526)
$ 4,929,090
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
8. Accounts
payable and accrued expenses
Trade
accounts payable
$5,463,848
Accrued expenses
1,709,786
Interest payable
868,639
Deferred revenue
1,044,928
Other
168,607
$9,255,808
Convertible
notes payable
(a)
$ 250,000
Demand notes
payable
(b)
898,931
Demand notes payable
(c)
235,147
Promissory
notes payable
(d)
1,150,000
Promissory notes payable
(e)
25,000
Promissory
notes payable
(f)
102,000
Promissory notes payable
(g)
244,747
Capital lease
obligations
(h)
1,371,380
Total
long-term debt and capital lease obligations
4,277,205
Less
current portion
4,020,069
$ 257,136
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
2006
262,797
Total
minimum payments
4,547,329
Less amount
representing interest
(270,124)
Present
value of minumum payments
Less
current portion
(4,020,069)
$ 257,136
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
11. Income
taxes
Deferred
Federal
$(773,000)
$(1,394,000)
State
(30,000)
(32,000)
(803,000)
(1,426,000)
Change in valuation
allowance
803,000
1,426,000
$
$
2004
2003
%
Federal
statutory rate
34.0
34.0
State, net
of federal tax
1.3
0.7
Other
0.8
Change
in valuation allowance
(36.1)
(34.7)
Effective
income tax rate
Deferred
tax assets
Net
operating losses
$ 24,173,000
Allowance
for doubtful accounts
240,000
Accrued
liabilities and other
662,000
25,075,000
Deferred
tax liability
Property
and equipment
(308,000)
Deferred
tax asset, net
24,767,000
Less
valuation allowance
(24,767,000)
$
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
12. Commitments
and contingencies
Year
ending September 30,
2005
$1,028,000
2006
1,053,000
2007
1,075,000
2008
1,099,000
2009
1,101,000
Thereafter
391,000
$5,747,000
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Series
A
Conversion
Conversion
Conversion
Conversion
Price
Date
Price
$2.50
Up to 8/30/02
$2.50
Up
to 3/30/03
$3.50
Up to 8/30/03
$3.50
Up
to 3/30/04
$5.00
Up to 8/30/04
$5.00
Up
to 3/30/05
$6.00
Up to 8/30/05
$6.00
Up
to 3/30/06
$7.00
After 8/31/05
$7.00
After
3/31/07
Upon the closing of an initial public offering
of common stock by the Company, the Series C preferred stock shall automatically
convert into shares of the Companys common stock at the lesser of the voluntary
conversion price then in effect or 75% of the offering price of the common stock.
In accordance with paragraph 23 of EITF 00-27, the Company will wait until this
contingent event to occur and compute the resulting number of shares that would
be received upon conversion based upon the adjusted conversion price. At that point
in time the beneficial conversion amount, if any, would be recognized in the period
in which the successful initial public offering occurs.
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
14. Stock
options and warrants (continued)
Number
Average
of
Per Share
Option
Shares
Option Price
Price
Shares
under options at January 1, 2003
1,009,771
$2.35
$14.00
$ 8.96
Granted
in 2003
16,972
8.75
8.85
8.75
Expired
in 2003
(221,286)
2.35
8.75
5.65
Shares
under options at September 30, 2003
805,457
2.35
14.00
7.18
Shares
under options at January 1, 2004
656,207
2.35
11.66
8.72
Granted
in 1st quarter of 2004
11,071
8.75
8.75
8.75
Granted
in 2nd quarter of 2004
7,071
8.75
8.75
8.75
Granted
in 3rd quarter of 2004
1,151,056
3.15
8.75
4.12
Expired
in 2004
(128,699)
2.35
11.66
9.62
Shares
under options at September 30, 2004
1,696,706
$2.35
$ 8.75
$ 5.53
Options
exercisable at September 30, 2004
440,246
$2.35
$ 8.75
$ 8.43
Options
exercisable at September 30, 2003
676,366
$2.35
$11.66
$ 6.57
Number
Weighted-Average
Number
Outstanding
Remaining
Weighted-Average
Exercisable
Weighted-Average
at 9/30/04
Contractual Life
Exercise Price
at 9/30/04
Exercise Price
$ 2.35
21,429
3.9 years
$ 2.35
21,429
$ 2.35
3.15
220,886
9.8 years
3.15
4.38
935,912
9.8 years
4.38
8.75
518,479
7.5 years
8.75
418,817
8.75
1,696,706
440,246
Weighted
Number
Average
of
Per Share
Warrant
Shares
Warrant Price
Shares
under warrants at January 1, 2003
159,214
$0.04
$8.75
$3.57
Issued
in 2003
90,857
2.98
2.98
2.98
Shares
under warrants at September 30, 2003
250,071
0.04
8.75
3.35
Shares
under warrants at January 1, 2004
252,752
0.04
8.75
3.92
Issued
in 2004
33,815
2.28
8.75
5.53
Shares
under warrants at September 30, 2004
286,567
$0.04
$8.75
$3.61
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
15. Equity
transactions
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
19. Concentrations
2004
2003
India
$ 1,513,000
$ 1,651,000
United States
37,278,000
23,096,000
Other
1,708,000
94,000
$40,499,000
$24,841,000
India
$1,183,780
Pakistan
144,726
United Arab
Emirates
106,397
$1,434,903
20. Segment Information
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
20. Segment
Information (continued)
NINE MONTHS ENDED SEPTEMBER 30, 2004
VoIP to Internet, Managed
Traditional VoIP to Consumers and Private Networks Corporate &
Voice Carriers Corporations & Other Unallocated Consolidated
Net Revenues ....................... $ 9,822,904 $ 26,044,614 $ 1,720,323 $ 2,911,512 $ 40,499,353
------------ ------------ ------------ ------------ ------------ ------------
Cost of Sales (exclusive of
depreciation and amortization) ... $ (8,628,480) $(22,727,637) $ (1,166,302) $ (1,994,743) $(34,517,162)
------------ ------------ ------------ ------------ ------------ ------------
Depreciation and amortization ...... $ (269,081) $ (837,934) $ (34,057) $ (190,071) $ (153,275) $ (1,484,418)
------------ ------------ ------------ ------------ ------------ ------------
Selling, general
and administrative ............... $ (817,855) $ (3,152,147) $ (492,144) $ (796,039) $ (2,216,240) $ (7,474,425)
------------ ------------ ------------ ------------ ------------ ------------
Other income (expense) ............. $ 1,589,242 $ 330,236 $ (16,147) $ (20,696) $ (1,132,798) $ 749,837
------------ ------------ ------------ ------------ ------------ ------------
Net loss ........................... $ 1,696,730 $ (342,868) $ 11,673 $ (90,037) $ (3,502,313) $ (2,226,815)
------------ ------------ ------------ ------------ ------------ ------------
Assets ............................. $ 1,714,812 $ 5,461,216 $ 691,640 $ 2,023,608 $ 5,155,395 $ 15,046,671
------------ ------------ ------------ ------------ ------------ ------------
Capital Expenditures ............... $ 126,366 $ 335,048 $ 22,131 $ 37,455 $ 57,889 $ 578,888
------------ ------------ ------------ ------------ ------------ ------------
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
20. Segment
Reporting (continued)
NINE MONTHS ENDED SEPTEMBER 30, 2003
VoIP to Internet, Managed
Traditional VoIP to Consumers and Private Networks Corporate &
Voice Carriers Corporations & Other Unallocated Consolidated
Net Revenues ....................... $ 6,643,246 $ 15,911,164 $ 315,263 $ 1,970,883 $ 24,840,556
------------ ------------ ------------ ------------ ------------ ------------
Cost of Sales (exclusive of
depreciation and amortization) ... $ (5,740,143) $(13,877,632) $ (184,729) $ (1,629,905) $(21,432,409)
------------ ------------ ------------ ------------ ------------ ------------
Depreciation and amortization ...... $ (544,296) $ (743,840) $ (22,661) $ (163,845) $ (141,965) $ (1,616,607)
------------ ------------ ------------ ------------ ------------ ------------
Loss on impairment ................. $ (280,683) $ (280,683)
------------ ------------ ------------ ------------ ------------ ------------
Selling, general
and administrative ............... $ (1,337,607) $ (1,949,341) $ (206,431) $ (484,972) $ (2,822,361) $ (6,800,712)
------------ ------------ ------------ ------------ ------------ ------------
Other income (expense) ............. $ 258,934 $ 332,162 $ 55,212 $ (16,053) $ 554,364 $ 1,184,619
------------ ------------ ------------ ------------ ------------ ------------
Net loss ........................... $ (719,866) $ (327,487) $ (43,346) $ (604,575) $ (2,409,962) $ (4,105,236)
------------ ------------ ------------ ------------ ------------ ------------
Assets ............................. $ 1,651,264 $ 3,574,042 $ 148,747 $ 1,721,339 $ 3,535,278 $ 10,630,670
------------ ------------ ------------ ------------ ------------ ------------
Capital Expenditures ............... $ 13,296 $ 31,846 $ 631 $ 3,945 $ 5,524 $ 55,242
------------ ------------ ------------ ------------ ------------ ------------
The Company employs engineering and operations resources that service across multiple product lines. Depreciation and indirect operating expenses were allocated to each product line based upon their respective revenues. The amounts reflected as Corporate and unallocated represent those expenses that were not appropriate to allocate to each product line.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Restricted
assets 85,000
Fixed assets 156,000
Intangible
assets 89,000
Current liabilities (85,000)
Minority
Net assets $150,000
Fusion Telecommunications International, Inc.
Roseland, New Jersey
April 23, 2004, except for paragraph 7 of Note 12
which is as of August 24, 2004, paragraph 2 of
Note 13 as to which the date is December 22, 2004,
except for paragraph 6 of Note 22 as to which the date is
December 11,
2004, except for paragraphs 7, 8, and 9
of Note 22 which is as of November 1, 2004, except for
paragraph 10 of Note 22 which is as of November 10, 2004, except
for paragraphs 11, 12, 13 and 14 of Note 22 which is as of
January 11, 2005, except for paragraph 15 which is as of July 14, 2004
AND SUBSIDIARIES
Consolidated
Balance Sheets
December
31,
2003
2002
ASSETS
Current
assets
Cash and
cash equivalents
$ 3,240,652
$ 768,898
Accounts
receivable, net of allowance for doubtful accounts of
approximately
$688,000 and $517,000, in 2003 and 2002, respectively
2,015,647
1,356,374
Restricted
cash
611,261
199,611
Prepaid
expenses and other current assets
330,671
421,677
Total
current assets
6,198,231
2,746,560
Property
and equipment, net
5,054,973
7,429,433
Other
assets
Security
deposits
1,230,909
959,357
Restricted
cash
350,275
1,051,182
Other
199,525
101,000
Total
other assets
1,780,709
2,111,539
$ 13,033,913
$ 12,287,532
LIABILITIES
AND STOCKHOLDERS DEFICIT
Current
liabilities
Long-term
debt, related parties, current portion
$ 3,423,452
$ 4,468,371
Long-term
debt, current portion
1,028,000
Short-term
borrowing obligations
531,957
489,030
Capital
lease obligations, related party, current portion
110,000
Capital
lease obligations, current portion
1,011,280
2,615,554
Accounts
payable and accrued expenses
12,428,492
15,256,072
Liabilities
of discontinued operations
1,686,617
2,088,618
Total
current liabilities
19,081,798
26,055,645
Long-term
liabilities
Long-term
debt, related parties, net of current portion
18,750
375,000
Long-term
debt, net of current portion
555,000
Capital
lease obligations, net of current portion
191,422
Preferred
stock, Series C, subject to mandatory redemption
(liquidation
preference in the aggregate of approximately $3,959,000)
3,466,538
Total
long-term liabilities
3,676,710
930,000
Minority
interests
49,407
102,868
Commitments
and contingencies
Stockholders
deficit
Preferred
stock, Series A, $.01 par value, authorized 1,100,000 shares,
407,225
shares issued and outstanding
4,072
4,072
Preferred
stock, Series B, $.01 par value, authorized 1,500,000 shares,
73,500
shares issued and outstanding (liquidation preference, in the
aggregate,
of approximately $1,167,000 and $1,163,000 in 2003 and
2002,
respectively)
735
735
Common
stock, $.01 par value, authorized 105,000,000 shares,
issued
and outstanding 15,341,193 shares and 11,686,309 shares
in
2003 and 2002, respectively
153,412
116,863
Capital
in excess of par value
62,597,546
52,732,476
Stock
dividend distributable
553,238
Accumulated
other comprehensive income
92,925
66,426
Accumulated
deficit
(73,175,930)
(67,721,553)
Total
stockholders deficit
(9,774,002)
(14,800,981)
$ 13,033,913
$ 12,287,532
AND SUBSIDIARIES
Consolidated
Statements of Operations
Revenues
$33,725,275
$ 28,422,149
$ 29,614,565
Operating
expenses:
Cost
of revenues, exclusive of depreciation
and
amortization shown separately below
29,246,014
25,443,863
24,591,188
Depreciation
and amortization
2,128,610
2,546,869
2,069,361
Loss
on impairment
735,354
467,765
2,825,149
Selling,
general and administrative expenses
9,156,810
9,977,994
11,758,451
Operating
loss
(7,541,513)
(10,014,342)
(11,629,584)
Other
income (expense)
Interest
expense, net
(919,590)
(1,175,714)
(595,116)
Forgiveness
of debt
3,918,295
1,812,092
Minority
interests
157,617
19,440
112,472
3,156,322
655,818
(482,644)
Loss
from continuing operations
(4,385,191)
(9,358,524)
(12,112,228)
Discontinued
operations:
Income
(loss) from discontinued operations
208,620
(7,029,511)
Net
loss
$ (4,176,571)
$ (9,358,524)
$(19,141,739)
Losses
applicable to common stockholders:
Loss
from continuing operations
$ (4,385,191)
$ (9,358,524)
$(12,112,228)
Preferred
stock dividends
(635,254)
(642,552)
Net
loss applicable to common stockholders from
continuing
operations
(5,020,445)
(10,001,076)
(12,112,228)
Income
(loss) from discontinued operations
208,620
(7,029,511)
Net
loss applicable to common stockholders
$ (4,811,825)
$(10,001,076)
$(19,141,739)
Basic
and diluted net loss per common share:
Loss
from continuing operations
$ (0.37)
$ (1.01)
$ (1.30)
Income
(loss) from discontinued operations
0.02
(0.76)
Net
loss applicable to common stockholders
$ (0.35)
$ (1.01)
$ (2.06)
Weighted
average shares outstanding
Basic
and diluted
13,616,803
9,885,901
9,305,857
AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders Deficit
Years Ended December 31, 2003, 2002, and 2001
Preferred
Preferred
Stock
Stock
Stock
Dividend
Series A
Series B
Deficit
Total
$ 93,097
$38,462,863
$
$(39,221,290)
$ (665,330)
Proceeds from sale of
common stock
810,000
810,000
Proceeds from sale of
Series A preferred
stock, net of investment
expenses
4,238,952
4,243,384
the acquisition of
C&F Switching
2,500,000
2,500,000
Conversion of common
stock to Series A
preferred stock
133
(129)
(4)
debt to Series A
preferred stock
630
629,370
630,000
of stock options
42,680
42,680
Foreign currency
translation adjustment .
$ 43,346
43,346
43,346
Net loss
(19,141,739)
(19,141,739)
(19,141,739)
$(19,098,393)
5,195
92,968
46,683,861
43,346
(58,363,029)
(11,537,659)
Proceeds from sale of
common stock
7,188
1,628,779
1,635,967
Proceeds from sale of
Series B preferred
stock, net of investment
expenses
835
704,662
705,497
preferred stock to
common stock
(1,123)
(100)
1,405
(182)
debt to common stock
15,302
3,715,356
3,730,658
Foreign currency
translation adjustment
$ 23,080
23,080
23,080
Net loss
(9,358,524)
(9,358,524)
(9,358,524)
$ (9,335,444)
116,863
52,732,476
66,426
(67,721,553)
(14,800,981)
Proceeds from sale of
common stock, net of
investment expenses
26,964
6,819,923
6,846,887
Proceeds from sale of
Series C preferred
stock, net of investment
expenses
2,526,299
debt to common stock
6,232
2,273,932
2,280,164
debt to Series C
preferred stock
930,239
the assumption of letter
of credit
168
49,832
50,000
Series C preferred stock
10,000
(1,277,806)
Stock dividends issued
3,185
721,383
Foreign currency
translation adjustment
$26,499
26,499
26,499
Net loss
(4,176,571)
(4,176,571)
(4,176,571)
$ (4,150,072)
$3,466,538
$153,412
$62,597,546
$92,925
$(9,774,002)
AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
Cash
flows from operating activities
Net
loss
$(4,176,571)
$(9,358,524)
$(19,141,739)
Adjustments
to reconcile net loss to net cash
used
in operating activities:
Loss
on impairment
735,354
467,765
2,825,149
Loss
(gain) from sale of assets
125,836
(98,627)
Depreciation
and amortization
2,128,610
2,546,869
2,493,429
Bad
debt expense
183,735
231,088
1,526,927
Gain
on forgiveness of debt
(3,918,295)
(1,812,092)
Minority
interest
(157,617)
(19,440)
(112,472)
Increase
(decrease) in cash attributable to
changes
in operating assets and liabilities:
Accounts
receivable
(843,008)
98,403
182,986
Prepaid
expenses and other current assets
91,006
(121,479)
(1,543)
Other
assets
(98,525)
1,198,439
279,276
Accounts
payable and accrued expenses
1,248,607
2,864,007
2,490,207
Liabilities
of discontinued operations
(375,502)
(318,640)
(103,419)
Net
cash used in operating activities
(5,056,370)
(4,322,231)
(9,561,199)
Cash
flows from investing activities
Purchase
of property and equipment
(645,340)
(533,610)
(501,882)
Proceeds
from sale of property and equipment
15,000
215,570
Repayments
of (payments for) security deposits
(271,552)
(116,223)
14,250
Repayments
of (payments for) restricted cash
289,257
(466,793)
(784,000)
Net
cash used in investing activities
(612,635)
(901,056)
(1,271,632)
Cash
flows from financing activities
Proceeds
from sale of common stock, net
6,846,887
1,635,967
810,000
Proceeds
from sale of Series A preferred stock, net
4,243,384
Proceeds
from sale of Series B preferred stock, net
705,497
Proceeds
from sale of Series C preferred stock, net
2,526,299
Proceeds
from exercise of stock options
42,680
Proceeds
from (repayments of) escrow advances
(1,130,500)
1,380,500
Proceeds
from short-term borrowings
42,927
6,805
421,969
Proceeds
from long-term debt
2,091,696
3,854,749
6,724,470
Payments
of long-term debt and capital lease obligations
(2,340,706)
(1,713,641)
(1,736,129)
Proceeds
from contributions from minority
stockholders
of joint ventures
104,156
122,308
112,472
Net
cash provided by financing activities
8,140,759
5,992,185
10,618,846
Net
increase (decrease) in cash and cash equivalents
2,471,754
768,898
(213,985)
Cash and cash equivalents,
beginning of year
768,898
213,985
Cash
and cash equivalents,
end of year
$ 3,240,652
$ 768,898
$
AND SUBSIDIARIES
Consolidated
Statements of Cash Flows (continued)
Supplemental
disclosure of cash flow information:
Cash
paid during the years for interest
$ 187,600
$ 250,932
$ 462,888
Supplemental
disclosure of noncash investing and
financing
activities:
Acquistion
of capital leases
$ 373,200
$ 193,963
$ 1,070,952
Credits
received from sale of property and equipment
$ 15,000
$
$
Common
stock issued for the acquisition of
C&F
Switching
$
$
$ 2,500,000
Conversion
of long-term debt to common stock
$ 2,280,164
$ 3,730,658
$
Common
stock issued for the assumption of a
letter
of credit
$ 50,000
$
$
Conversion
of long-term debt to Series A preferred stock
$
$
$ 630,000
Conversion
of long-term debt to Series C preferred stock
$ 930,239
$
$
Conversion
of escrow advances to Series C preferred stock
$ 10,000
$
$
Stock
dividends issued
$ 724,568
$
$
Stock
dividends declared
$ 1,277,806
$
$
Conversion
of long-term debt to deferred revenue
$ 555,000
$
$
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
1. Nature
of operations
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
2. Summary
of significant accounting policies (continued)
Estimated
Asset
Useful Lives
Network
equipment
5-7 Years
Furniture and
fixtures
3-7 Years
Computer equipment and software
3-5 Years
Leasehold improvements
Lease terms
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
2. Summary
of significant accounting policies (continued)
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
2. Summary
of significant accounting policies (continued)
Net
loss applicable to common stockholders,
as
reported
Deduct: total stock-based compensation
expense
under fair value method for awards,
net of related
tax effect
(99,911)
(345,221)
(521,069)
Net
loss applicable to common stockholders,
pro
forma
$(4,911,736)
$(10,346,297)
$(19,662,808)
Earnings
per share:
Basic
and diluted net loss applicable to common
stockholders,
as reported
$ (0.35)
$ (1.01)
$ (2.06)
Basic
and diluted net loss applicable to common
stockholders,
pro forma
$ (0.36)
$ (1.05)
$ (2.11)
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
2. Summary
of significant accounting policies (continued)
In January 2003, the FASB issued
FASB Interpretation No. (FIN) 46, Consolidation of Variable Interest
Entities (FIN 46). In December 2003, FIN 46 was replaced
by FASB interpretation No. 46(R) Consolidation of Variable Interest Entities.
FIN 46(R) clarifies the application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to certain entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional subordinated
financial support from other parties. FIN 46(R) requires an enterprise to consolidate
a variable interest entity if that enterprise will absorb a majority of the entitys
expected losses, is entitled to receive a majority of the entitys expected
residual returns, or both. FIN 46(R) is effective for entities being evaluated under
FIN 46(R) for consolidation no later than the end of the first reporting period
that ends after March 15, 2004. Management does not believe the adoption of FIN
46(R) will have a material impact on the Companys financial position or results
of operations, as the Company consolidates its joint ventures as required by this FIN 46.
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
3. Liquidity
(continued)
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
4. Joint
ventures, acquisitions and divestitures (continued)
In considering, EITF No. 96-16,
Investors Accounting for an Investee When the Investor Has a Majority
of the Voting Interest but the Minority Shareholder or Shareholders Have Certain
Approval or Veto Rights, management has evaluated the facts and circumstances
underlying each joint venture relationship such as the financial dependence of the
minority shareholders on the Company and corporate governance of each joint venture.
Based upon these facts and circumstances, the Company has determined that the minority
shareholders of the joint ventures do not have substantive rights that would prohibit
the consolidation of its joint ventures within its consolidated financial statements.
Since the Company maintains operations
in foreign countries through its joint ventures, the Company may be subject to exchange
control regulations or other impediments to convert foreign currencies into US dollars.
In addition, the Company may generate earnings which may be unable to be repatriated
outside the country in which they are earned. As of December 31, 2004, the Companys
joint ventures have not generated profits that would be subject to such restrictions.
Revenues
$ 4,274,000
Cost of revenues
(4,407,000)
Depreciation and amortization
(424,000)
Selling, general
and administrative expenses
(5,049,000)
Interest expense
(60,000)
Accrual of
office lease expenses
(1,073,000)
Write-off of leasehold improvements
(291,000)
Net
loss
$(7,030,000)
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Network
equipment, including $982,852 and $3,966,805
under
capital leases in 2003 and 2002, respectively
$ 8,539,925
$ 8,873,921
Furniture and fixtures
101,991
82,273
Computer equipment
and software
579,815
1,157,913
Leasehold improvements
2,637,200
2,586,290
11,858,931
12,700,397
Less accumulated depreciation
and amortization, including $721,158
and
$1,478,338 under capital leases in 2003 and 2002, respectively
6,803,958
5,270,964
$5,054,973
$7,429,433
Trade
accounts payable
$ 6,643,313
$ 9,791,968
Accrued expenses
3,155,552
2,585,440
Interest payable
795,662
836,028
Deferred revenue
1,135,896
308,007
Amounts due
to investors
250,000
1,380,500
Other
448,069
354,129
$12,428,492
$15,256,072
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
9. Long-term
debt and capital lease obligations
Convertible
notes payable
(a)
$ 300,000
$ 300,000
Demand notes payable
(b)
898,931
1,830,749
Convertible
notes payable
(c)
299,079
832,622
Promissory notes payable
(d)
1,515,000
Demand notes
payable
(e)
110,688
180,000
Promissory notes payable
(f)
1,150,000
1,218,000
Promissory
notes payable
(g)
150,000
50,000
Promissory notes payable
(h)
250,000
500,000
Promissory
notes payable
(i)
283,504
Capital lease
obligations
(j)
1,202,702
2,725,554
Total
long-term debt and capital lease obligations
4,644,904
9,151,925
Less current portion
4,434,732
8,221,925
$ 210,172
$ 930,000
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
9. Long-term
debt and capital lease obligations (continued)
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
9. Long-term
debt and capital lease obligations (continued)
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
9. Long-term
debt and capital lease obligations (continued)
Year ending December
31,
2004
$4,667,315
2005
129,220
2006
81,000
Total
minimum payments
4,877,535
Less amount
representing interest
232,631
Present
value of minumum payments
4,644,904
Less current
portion
4,434,732
$ 210,172
Deferred
Federal
$(1,728,000)
$(3,174,000)
$(6,485,000)
State
(19,000)
20,000
(97,000)
(1,747,000)
(3,154,000)
(6,582,000)
Change in valuation
allowance
1,747,000
3,154,000
6,582,000
$
$
$
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
11. Income
taxes (continued)
2003
2002
2001
Federal
statutory rate
34.0
34.0
34.0
State, net
of federal tax
0.3
(0.2)
0.3
Other
7.5
(0.1)
0.1
Change in valuation
allowance
(41.8)
(33.7)
(34.4)
Effective
income tax rate
2003
2002
Deferred
tax assets
Net
operating losses
$ 23,569,000
$ 21,950,000
Allowance
for doubtful accounts
257,000
207,000
Accrued
liabilities and other
677,000
951,000
24,503,000
23,108,000
Deferred tax liability
Property
and equipment
(539,000)
(891,000)
Deferred
tax asset, net
23,964,000
22,217,000
Less
valuation allowance
(23,964,000)
(22,217,000)
$
$
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
12. Commitments
and contingencies
Year
ending December 31,
2004
$1,030,000
2005
1,049,000
2006
1,072,000
2007
1,095,000
2008
1,119,000
Thereafter
1,230,000
$6,595,000
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
12. Commitments
and contingencies (continued)
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
13. Preferred
stock (continued)
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
13. Preferred
stock (continued)
Series A
Series B
Conversion
Conversion
Conversion
Conversion
Price
Date
Price
Date
$2.50
up to 8/30/02
$2.50
up to 3/30/03
$3.50
up to 8/30/03
$3.50
up to 3/30/04
$5.00
up to 8/30/04
$5.00
up to 3/30/05
$6.00
up to 8/30/05
$6.00
up to 3/30/06
$7.00
after 8/31/05
$7.00
after 8/31/07
Upon the closing of an initial
public offering of common stock by the Company, the Series C preferred stock shall
automatically convert into shares of the Companys common stock at the lesser
of the voluntary conversion price then in effect or 75% of the offering price of
the common stock. In accordance with paragraph 23 of EITF 00-27, the Company will
wait until this contingent event to occur and compute the resulting number of shares
that would be received upon conversion based upon the adjusted conversion price.
At that point in time the beneficial conversion amount, if any, would be recognized
in the period in which the successful initial public offering occurs.
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Number
Average
of
Per Share
Option
Shares
Option Price
Price
Shares
under options at January 1, 2001
1,127,814
$2.35
14.00
$ 8.54
Granted
in 2001
148,186
8.75
17.50
10.57
Exercised
in 2001
(1,143)
2.35
2.35
2.35
Expired
in 2001
(337,543)
2.35
17.50
6.55
Shares
under options at December 31, 2001
937,314
2.35
14.00
10.15
Granted
in 2002
184,757
8.23
17.50
8.96
Expired
in 2002
(112,300)
2.35
17.50
10.50
Shares
under options at December 31, 2002
1,009,771
2.35
14.00
7.39
Granted
in 2003
9,771
8.75
8.75
8.75
Expired
in 2003
(363,335)
2.35
14.00
5.11
Shares
under options at December 31, 2003
656,207
$2.35
$11.66
$ 8.72
Options
exercisable at December 31, 2003
452,315
$2.35
$11.66
$ 8.58
Options
exercisable at December 31, 2002
573,743
$3.35
$14.00
$ 6.44
Options
exercisable at December 31, 2001
402,510
$2.35
$14.00
$ 6.76
Options
Outstanding
Number
Weighted-Average
Outstanding
Remaining
Weighted-Average
Exercisable
Weighted-Average
at 12/31/03
Contractual Life
Exercise Price
at 12/31/03
Exercise Price
$ 2.35
42,857
4.8 years
$ 2.35
42,857
$ 2.35
8.23 8.75
527,636
7.7 years
8.75
340,887
8.75
11.66
85,714
5.8 years
11.66
68,571
11.66
656,207
452,315
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
14. Stock
options and warrants (continued)
Weighted
Number
Average
of
Per Share
Warrant
Shares
Warrant Price
Shares
under warrants at January 1, 2001
43,500
$2.98
$2.98
$2.98
Issued
in 2001
15,714
8.75
8.75
8.75
Shares
under warrants at December 31, 2001
59,214
2.98
8.75
4.52
Issued
in 2002
100,000
0.04
3.50
3.01
Shares
under warrants at December 31, 2002
159,214
0.04
8.75
3.57
Issued
in 2003
93,537
2.98
3.57
3.01
Shares
under warrants at December 31, 2003
252,751
$0.04
$8.75
$3.33
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
15. Equity
transactions (continued)
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
16. Forgiveness
of debt
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
19. Concentrations
(continued)
2003
2002
2001
India
$ 2,119,000
$ 3,290,000
$ 1,472,000
United States
31,350,000
25,132,000
28,143,000
Other
256,000
$33,725,000
$28,422,000
$29,615,000
2003
2002
India
$1,311,680
$1,779,646
Pakistan
229,522
286,648
$1,541,202
$2,066,294
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
Net
sales
$ 9,373,375
$ 7,572,457
$ 7,894,724
$ 8,884,719
Operating
loss
$(1,644,047)
$(1,879,022)
$(1,766,786)
$(2,251,658)
Forgiveness
of debt
12,206
1,184,088
582,739
2,139,262
Net
loss
$(1,825,083)
$ (904,620)
$(1,375,533)
$ (71,335)
Preferred
stock dividends
$ (82,015)
$
$ (488,670)
$ (64,569)
Net
loss applicable to common
stockholders
$(1,907,098)
$ (904,620)
$(1,864,203)
$ (135,904)
Basic
and diluted net loss per
common
share applicable to
common
stockholders
$ (0.14)
$ (0.07)
$ (0.14)
$
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
20. Selected
quarterly results (unaudited) (continued)
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
Net
sales
$ 9,104,339
$ 7,444,119
$ 5,517,079
$ 6,356,612
Operating
loss
$(2,433,700)
$(2,634,745)
$(2,597,212)
$(2,348,685)
Forgiveness
of debt
1,611,094
2,460
198,538
Net
loss
$(2,754,896)
$(1,339,780)
$(2,897,655)
$(2,366,193)
Preferred
stock dividends
$
$
$ (642,552)
$
Net
loss applicable to common
stockholders
$(2,754,896)
$(1,339,780)
$(3,540,207)
$(2,366,193)
Basic
and diluted net loss per
common
share applicable to
common
stockholders
$ (0.28)
$ (0.14)
$ (0.39)
$ (0.21)
21. Segment Reporting
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Operating segment information for 2003, 2002, and 2001 is summarized as follows:
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
21. Segment Information (continued)
In March 2004, the Company
issued 59,470 shares of its Series C Preferred Stock in a final closing of the private
placement commenced in November 2003. The total proceeds received from the issuance
of these shares amounted to approximately $4,629,000, net of investment expense
of approximately $723,000.
AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
22. Subsequent events (continued)
Weighted
Number
Average
of
Per Share
Option
Shares
Option Price
Price
Shares
under options at January 1, 2004
656, 207
$2.35 11.66
$8.72
Granted
in 1st quarter of 2004
11,071
8.75 8.75
8.75
Granted
in 2nd quarter of 2004
7,071
8.75 8.75
8.75
Granted
in 3rd quarter of 2004
1,150,970
3.15 8.75
4.12
Expired
in 2004
(128,811)
2.35 11.66
9.62
Shares
under options at September 30, 2004
1,696,508
$2.35 $8.75
$5.53
Options
exercisable at September 30, 2004
440,246
$2.35 8.75
$8.43
SCHEDULE II
VALUATION
AND QUALIFYING ACCOUNTS
Balance at
Additions
beginning of
charged to
Deductions
Balance at end
period
expense
from Reserves
of period
Allowance
for Doubtful Accounts for the Years Ended:
December 31, 2003
$ 517,409
$ 183,735
$ 13,654
$ 687,490
December 31,
2002
972,073
231,088
685,752
517,409
December 31, 2001
1,196,584
1,526,927
1,751,438
972,073
Tax Valuation
Account for the Years Ended:
December 31, 2003
$22,217,000
$1,747,000
$
$23,964,000
December 31,
2002
19,063,000
3,154,000
22,217,000
December 31, 2001
12,481,000
6,582,000
19,063,000
F-59
[Alternate Page for Selling Securityholder Prospectus]
PROSPECTUS
SUBJECT TO COMPLETION
DATED JANUARY 18, 2005
FUSION TELECOMMUNICATIONS INTERNATIONAL,
INC.
3,141,838 PURCHASE WARRANTS AND 150,000 SHARES OF
COMMON STOCK
This Prospectus relates to 3,141,838 redeemable common stock purchase warrants (the Selling Securityholders Warrants), of Fusion Telecommunications International, Inc., which are being offered for sale by certain selling Securityholders (the Selling Securityholders) and 150,000 shares of common stock which is being offered by Roger Karam (the Selling Stock Holder). Each Selling Securityholders Warrant expires on ___________, 2009, five years after the date of Prospectus, and entitles the holder thereof, commencing one year from the date of this Prospectus, to purchase one share of common stock at an exercise price of $____ (100% of the offering price of our common stock) during the four-year period beginning on the first anniversary of the date of our Prospectus. The warrant exercise price will increase to 133% of the then current exercise price (initially $____) of the purchase warrants on the eighteen month anniversary of the date of the prospectus provided that the registration statement covering the shares of common stock underlying the purchase warrants has been effective for at least sixty (60) days prior to the exercise price reset date. The Selling Securityholders received their Purchase Warrants upon conversion of the Class C Preferred Stock, at the closing of our initial public offering. The Selling Securityholders Warrants are sometimes hereinafter referred to as the Selling Securityholders Securities. The Selling Stock Holder received his 150,000 shares upon the closing of our initial public offering in connection with the sale of his minority interest in Efonica, which is a former joint venture of ours. See SELLING SECURITY HOLDERS AND PLAN OF DISTRIBUTION.
We will not receive any of the proceeds from the sales of the Selling Securityholders Securities by the Selling Securityholders or the 150,000 shares by the Selling Stock Holder. The Selling Securityholders Securities and the 150,000 shares by the Selling Stock Holder may be offered from time to time by the Selling Securityholders and the Selling Stock Holder, their pledgees and/or their donees, after the effective date of this Registration Statement through ordinary brokerage transactions in the over-the-counter market or exchange, in negotiated transactions or otherwise, at a fixed price of $0.05 per Purchase Warrant and $6.00 per share (assuming a $6.00 per share initial public offering price) until trading has commenced on the American Stock Exchange and thereafter at market prices prevailing at the time of sale or at negotiated prices. The Selling Securityholders and the Selling Stock Holder will not be selling until the distribution of the initial public offering is completed and the shares and warrants are trading on the American Stock Exchange.
The Selling Stock Holder may not sell any
of the 150,000 shares for 45 days after the date of this Prospectus and thereafter
may sell up to 75,000 shares during the 45 day period beginning after 45 days and the remaining
75,000 shares may be sold thereafter. No underwriting arrangements
have been entered into by the Selling Securityholders or the Selling Stock Holder.
The distribution of the Selling Securityholders Securities by the Selling
Securityholders and the 150,000 shares by the Selling Stock Holder, their pledgees
and/or their donees, may be effected in one or more transactions that may take place
on the over-the-counter market or exchange, including ordinary brokers transactions,
privately-negotiated transactions or through sales to one or more dealers for resale
of such Purchase Warrants as principals, at market prices prevailing at the time
of sale, at prices related to such prevailing market prices or negotiated prices.
Usual and customary or specifically negotiated brokerage fees or commissions may
be paid by the Selling Securityholders and the Selling Stock Holder, their pledgees
and/or their donees, in connection with sales of the Selling Securityholders
Securities and the 150,000 shares by the Selling Stock Holder. One of the Selling Securityholders, Performance Capital Group, LLC, is an NASD broker-dealer and is a statutory underwriter.
A-1
[Alternate Page for Selling Securityholder Prospectus]
On the date of this Prospectus, a registration statement under the Securities Act with respect to an underwritten public offering of 3,325,000 shares of Common Stock and 3,325,000 Purchase Warrants (without giving effect to the overallotment option (the Overallotment Option) granted to the underwriters to purchase an additional 498,750 shares of Common Stock and 498,750 Purchase Warrants), with each Purchase Warrant entitling the holder to purchase one share of Common Stock of the Company, was declared effective by the Securities and Exchange Commission. In connection with the offering of the Common Stock and Redeemable Warrants, the Company granted the representative of the underwriter a warrant to purchase 332,500 shares of Common Stock and 332,500 Redeemable Warrants (the Underwriters Warrants).
THE SECURITIES OFFERED HEREBY INVOLVE
A HIGH DEGREE OF RISK.
SEE RISK FACTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is January 18, 2005
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[Alternate Page for Selling Securityholder Prospectus]
THE OFFERING
Securities
Registered
3,141,838
Purchase Warrants, each warrant entitling
its holder to purchase one share of common stock. See DESCRIPTION OF SECURITIES
and SELLING SECURITY HOLDERS AND PLAN OF DISTRIBUTION.
150,000
Shares of Common Stock. See DESCRIPTION
OF SECURITIES and SELLING STOCK HOLDERS AND PLAN OF DISTRIBUTION.
Risk Factors
This Offering involves a high degree
of risk. See RISK FACTORS.
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[Alternate Page for Selling Securityholder Prospectus]
PLAN OF DISTRIBUTION
The Selling Securityholders and the Selling
Stock Holder have advised us that sales of Purchase Warrants and the 150,000 shares
may be effected from time to time in transactions (which may include block transactions)
after effectiveness of this Registration Statement, that may take place on the over-the-counter
market or an exchange including ordinary broker transactions, privately negotiated
transactions or through sales to one or more dealers for resale as principals, at
a fixed price of $____ per Purchase Warrant and $____ per share (assuming a $____
per share IPO price) until trading has commenced on the American Stock Exchange
and thereafter at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or negotiated prices. The Selling Securityholders
and the Selling Stock Holder may effect such transactions by selling Purchase Warrants
and the 150,000 shares directly to purchasers or to or through broker-dealers, which
may act as agents or principals. Such broker-dealers may receive compensation in
the form of discounts, concessions, or commissions from the Selling Securityholders,
the Selling Stock Holder and/or the purchasers of Purchase Warrants for whom such
broker-dealers may act as agents or to whom they sell as principal, or both (which
compensation as to a particular broker-dealer may be in excess of customary commissions).
The Selling Securityholders, the Selling Stock Holder and any broker-dealers that
act in connection with the sale of the Purchase Warrants and 150,000 shares of stock
might be deemed to be underwriters within the meaning of Section 2(11)
of the Securities Act, and any commissions received by them and any profit on the
resale of the Purchase Warrants and 150,000 shares of stock as principal might be
deemed to be underwriting discounts and commissions under the Securities Act. The
Selling Securityholders and the Selling Stock Holder may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the warrants or shares against certain liabilities, including liabilities arising
under the Securities Act.
Because Selling Securityholders and the
Selling Stock Holder may be deemed to be underwriters within the meaning
of Section 2(11) of the Securities Act, the Selling Securityholders and the Selling
Stock Holder will be subject to prospectus delivery requirements under the Securities
Act. If any broker-dealers are used by the Selling Securityholders or the Selling
Stock Holder, their pledgees and/or their donees, any commissions paid to broker-dealers
and, if broker-dealers purchase any Selling Securityholders Securities or
the 150,000 shares, as principals, any profits received by such broker-dealers on
the resale of the Selling Securityholders Securities or the 150,000 shares,
may be deemed to be underwriting discounts or commissions under the Securities Act.
In addition, any profits realized by the Selling Securityholders or the Selling
Stock Holder, their pledgees and/or their donees, may be deemed to be underwriting
commissions. All costs, expenses and fees in connection with the registration of
the Selling Securityholders Securities offered by Selling Securityholders
and the Selling Stock Holder will be borne by the Company. Brokerage commission,
if any, attributable to the sale of the Selling Securityholders Securities
or the 150,000 shares, will be borne by the Selling Securityholders, or the Selling
Stock Holder, their pledgees and/or their donees. Furthermore, in the event of a
distribution of shares, any Selling Securityholders, or the Selling
Stock Holder, any selling broker-dealer and any affiliated purchasers
may be subject to Regulation M under the Securities Exchange Act of 1934 which prohibits
any stabilizing bid or stabilizing purchase for the purpose
of pegging, fixing or stabilizing the price of shares or the Purchase Warrants in
connection with this offering.
Performance Capital Group, LLC is a
broker-dealer and is a statutory underwriter.
USE OF PROCEEDS
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[Alternate Page for Selling Securityholder Prospectus]
The following table sets forth certain information with respect to
persons for whom the Company is registering the Selling Securityholders Securities
and the 150,000 shares for resale to the public. The Company will not receive any
of the proceeds from the sale of the Selling Securityholders Securities or
the 150,000 shares. Beneficial ownership of the Selling Securityholders Securities
by such Selling Securityholders after the Offering will depend on the number of
Selling Securityholders Securities sold by each Selling Securityholder. The
Selling Securityholders Securities offered by the Selling Securityholders
and the 150,000 shares are not being underwritten by the Underwriter.
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[Alternate Page for Selling Securityholder Prospectus]
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[Alternate Page for Selling Securityholder Prospectus]
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[Alternate Page for Selling Securityholder Prospectus]
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[Alternate Page for Selling Securityholder Prospectus]
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[Alternate Page for Selling Securityholder Prospectus]
Where You Can Find More Information
We have filed with the SEC a registration
statement of Form S-1 relating to the securities being offered through this prospectus.
As permitted by the rules and regulations of the SEC, the prospectus does not contain
all the information described in the registration statement. For further information
about us and our securities, you should read our registration statement, including
the exhibits and schedules. In addition, we will be subject to the requirements
of the Securities Exchange Act of 1934, as amended, following the offering and thus
will file annual, quarterly and special reports, proxy statements and other information
with the SEC. These SEC filings and the registration statement are available to
you over the Internet at the SECs web site at
http://www.sec.gov/
.
You may also read and copy any document we file with the SEC at the SECs public
reference room in 450 Fifth Street, N.W., Washington, D.C. Please call the SEC at
1-800-SEC-0330 for further information about the public reference room. Statements
contained in this prospectus as to the contents of any agreement or other document
are not necessarily complete and, in each instance, you should review the agreement
or document which has been filed as an exhibit to the registration statement.
Following the offering, we intend to furnish
our stockholders with annual reports containing audited financial statements.
EXPERTS
Our consolidated financial statements as
of December 31, 2002 and 2003, and for each of the three years in the period ended
December 31, 2003, have been audited by Rothstein, Kass & Company, P.C., an
independent registered public accounting firm, as set forth in their report appearing
elsewhere herein, and are included in reliance upon such reports and given the authority
of such firm as experts in accounting and auditing.
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[Alternate Page for Selling Securityholder Prospectus]
FUSION TELECOMMUNICATIONS INTERNATIONAL
INC.
3,141,838 PURCHASE WARRANTS
A-11
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE
AND DISTRIBUTION
The following table sets forth an estimate
of the costs and expenses, other than the underwriting discounts and commissions,
payable by the registrant in connection with the issuance and distribution of the
Common stock being registered.
All amounts except the SEC registration, NASD
and AMEX fees are estimated. All of the expenses set forth above are being paid
by us.
ITEM 14. INDEMNIFICATION OF DIRECTORS
AND OFFICERS
Section 102(b)(7) of the Delaware General
Corporation Law, which we refer to as the DGCL, permits a provision
in the certificate of incorporation of each corporation organized under the DGCL
eliminating or limiting, with some exceptions, the personal liability of a director
to corporation the or its stockholders for monetary damages for some breaches of
fiduciary duty. Our Certificate of Incorporation eliminates the personal liability
of directors to the fullest extent permitted by the DGCL.
Section 145 of the DGCL, which we refer
to as Section 145, in summary, empowers a Delaware corporation to indemnify,
within limits, its officers, directors, employees and agents against expenses (including
attorneys fees), judgments, fines and amounts paid in settlement that they
actually and reasonably incur in connection with any suit or proceeding, other than
by or on behalf of the corporation, if they acted in good faith and in a manner
reasonably believed to be in, or not opposed to, the best interest of the corporation
and, with respect to a criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful.
With respect to any action by or on behalf
of the corporation, Section 145 permits a corporation to indemnify its officers,
directors, employees and agents against expenses (including attorneys' fees) they
actually and reasonably incur in connection with the defense or settlement of the
action or suit, provided that person meets the standard of conduct described in
the preceding paragraph. No indemnification is permitted, however, in respect of
any claim where that person has been found liable to the corporation, unless the
Court of Chancery or court in which the action or suit was brought approves the
indemnification and determines that the person is fairly and reasonably entitled
to be indemnified.
Our Certificate of Incorporation contains
a provision that eliminates the personal liability of our directors to us and our
stockholders for monetary damages for breach of a director's fiduciary duty to us.
This provision does not permit any limitation on, or elimination of the liability
of a director for, disloyalty to us or our stockholders, for failing to acting good
faith, for engaging in intentional misconduct or a knowing violation of law, for
obtaining an improper personal benefit or for paying a dividend or approving a stock
repurchase that would be illegal under the DGCL.
II-1
Our Certificate of Incorporation requires us to indemnify our directors
and officers against expenses (including attorneys fees), judgments, fines
and amounts paid in settlement in connection with specified actions, suits or proceedings,
whether civil, criminal, administrative or investigative, other than an action by
or in our right (a derivative action), if they acted in good faith and
in a manner they reasonably believed to be in or not opposed to our best interests,
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe their conduct was unlawful. A similar standard of care is applicable
in the case of derivative actions, except that indemnification only extends to expenses
(including attorneys fees) incurred in connection with defense or settlement
of such an action. Moreover, the DGCL requires court approval before there can be
any indemnification where the person seeking indemnification has been found liable
to the corporation.
Insofar as indemnification for liabilities
under the Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the provisions described above, or otherwise, we have been advised
that in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than
the payment by us of expenses incurred or paid by our director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the securities
being registered, we will, unless in the opinion of our counsel the matter as been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as expressed
in the Securities Act and will be governed by the final adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED
SECURITIES
The following is a list of our securities
that have been sold or issued by us during the past three years. Each of these securities
were sold without registration under the Securities Act in reliance on Section 4(2)
of the Securities Act. There were no underwriting discounts or commissions paid
in connection with the sale of these securities, except as noted.
In March 2002, we issued pursuant to a
private placement an aggregate of 83,500 shares of series B preferred stock at $10
per share for gross proceeds of $835,000. We did not pay commissions in connection
with the sale of these shares. The offering was made to 4 accredited investors pursuant
to Rule 506 of Regulation D of the Securities Act. We provided each purchaser with
a private placement memorandum and required each purchaser to represent that they
were accredited investors. In March of 2003 and 2004, dividends were issued in the
form of common stock in the amounts of $82,013 and $84,525 respectively. In May
of 2004, the series B Preferred shareholders elected to convert their preferred
stock to common stock at $3.50 per share, as authorized by the Board of Directors
in December of 2003. During September 2004, dividends from the period of March 2004
until the day of conversion were issued to shareholders, in the form of common stock
for a total amount of $10,510.
In July 2002, we issued 2,358,956 shares
of common stock at $2.28 per share pursuant to a rights offering to existing holders
of record as of July 31, 2002. We received gross proceeds of $5,366,625, including
$3,730,658 from the conversion of debt. In 2003, we issued an additional 1,546,540
shares for gross proceeds of $3,523,529, including $439,147 from the conversion
of debt. We paid commissions of $42,875 to Joseph Stevens & Co. in connection
with the sale of these shares. The offering was made to 83 accredited investors
pursuant to Rule 506 of Regulation D of the Securities Act. We required each purchaser
to represent that they were accredited investors.
At various times during the year ended
December 31, 2002, certain note holders elected to convert approximately $3,731,000
(in the aggregate) of their notes into common stock at a conversion rate of $2.28.
The conversion resulted in the issuance of an additional 1,639,850 shares of common
stock.
During 2002 holders of Series A and B Preferred
Stock elected to convert 112,250 and 10,000 shares, respectively, of their stock
into common stock at conversion rates of $8.75 and $8.23, respectively. The conversion
resulted in the issuance of 140,444 shares of common stock.
II-2
In June 2003, we issued pursuant to a private placement 1,543,187
shares of common stock at $2.98 per share for gross proceeds of $4,590,980 including
$596,000 from the conversion of debt. In 2004, we issued an additional 430,252 shares
for aggregate proceeds of $1,280,000. We paid commissions of $68,000 to Joseph Stevens
& Co. in connection with the sale of these shares. The offering was made to
29 accredited investors pursuant to Rule 506 of Regulation D of the Securities Act.
We provided each purchaser with a private placement memorandum and required each
purchaser to represent that they were accredited investors.
In November 2003, we issued pursuant to
a private placement 43,988 shares of series C convertible preferred stock at $90
per share for gross proceeds of $3,958,920, including $940,140 from the conversion
of debt. Approximately $930,140 was converted into shares of the Companys
series C preferred stock at a conversion rate of $90 per share, resulting in the
issuance of 10,336 shares of series C preferred stock. Also during December 2003,
a $10,000 advance from a potential investor in a proposed Asian joint venture (which
did not materialize) was converted into 111 shares of series C preferred stock at
a conversion rate of $90 per share. In February 2004, we issued an additional 65,974
shares of series C convertible preferred stock for gross proceeds of $5,937,660,
including $585,360 from the conversion of debt. The notes were converted into shares
of our series C preferred stock at the conversion rate of $90 per share. The conversion
resulted in the issuance of 6,504 additional shares of series C preferred stock.
We paid commissions of $1,151,186 to Kirlin Securities, Inc. in connection with
the sale of these shares. The offering was made to 178 accredited investors pursuant
to Rule 506 of Regulation D of the Securities Act. We provided each purchaser with
a private placement memorandum and required each purchaser to represent that they
were accredited investors.
On December 24, 2003, Fusion and a large
U.S. carrier entered into a settlement agreement, which included the issuance of
246,667 shares of common stock at $5.25 per share for the amount of $1,295,000 and
a note payable of $555,000. The note payable is being repaid through a service agreement
where the carrier is receiving a reduced rate for every minute of traffic that is
passed through our network for a period of twenty-four (24) months, which will be
through December 2005.
At various times during the year ended
December 31, 2003, certain note holders elected to convert approximately $985,165
of their notes and accrued interest into common stock at conversion rates ranging
between $2.28 and $5.25 per share. The conversions resulted in the issuance of an
additional 376,567 shares of common stock. Also during 2003, the Company issued
16,807 shares of its common stock, at $2.98 per share for the assumption of a $50,000
letter of credit in the name of and secured by a shareholder of the Company.
In October 2004, we issued 19,048 shares
of our common stock at $5.25 per share to the Saif Group in exchange for all outstanding
obligations owed to them as of July 1, 2004. In connection with the issuance of
such shares, we relied on Section 4(2) of the Securities Act.
On November 10, 2004, we issued convertible
promissory notes to one individual in the aggregate amount of $2,508,333, representing
$1,400,000 in cash and $1,108,333 to refinance certain debt and accrued interest
owed to an existing related party. The promissory notes bear interest at 6.5% per
annum and are due on November 2006. The notes will automatically convert into common
shares at a conversion price of $3.85 per share upon the closing of the offering. The
common stock is subject to a one-year lock up provision. We paid Kirlin Securities,
Inc. $70,000 as an advisory fee in connection with this issuance.
II-3
ITEM 16. EXHIBITS
(a) Exhibits
II-4
(1) Filed herewith.
(2) To be filed by Amendment
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes
that:
(1) It will file, during any period in
which it offers or sells securities, a post-effective amendment to this Registration
Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of the securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement; and
(iii) Include any additional or changed material information on the plan of distribution.
(2) For determining liability
under the Securities Act, it will treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the securities at that
time to be the initial bona fide offering; and
(3) It will file a post-effective amendment
to remove from registration any of the securities that remain unsold at the end
of the offering.
(4) For determining any liability under
the Securities Act, it will treat the information omitted from the form of prospectus
filed as part of this registration statement, in reliance upon Rule 430A and contained
in a form of prospectus filed by the small business issuer under Rule 424(b)(1)
or (4) or 497(h) under the Securities Act as part of this registration statement
as of the time the Commission declared it effective.
(5) For determining any liability under
the Securities Act, it will treat each post-effective amendment that contains a
form of prospectus as a new registration statement for the securities offered in
the registration statement, and that offering of the securities at that time as
the initial bona fide offering of those securities.
II-5
Signatures
In accordance with the requirements of
the Securities Act of 1933, as amended, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York, State of New York, on January 18, 2005.
Fusion Telecommunications International, Inc.
Power Of Attorney
Each person whose signature appears below
hereby constitutes and appoints Marvin S. Rosen, his true and lawful attorney-in-fact
and agent, with full power of substitution, to sign on his behalf, individually
and in each capacity stated below, all amendments and post-effective amendments
to this registration statements and to file the same, with all exhibits thereto
and any other documents in connection therewith, with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, granting into said attorney-in-fact
and agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to all
intends and purposes as each might or could do in person, hereby ratifying and confirming
each act that said attorney-in-fact and agent may lawfully do or cause to be done
by virtue thereof.
Pursuant to the requirements of the Securities
Act of 1933, as amended, this amended registration statement has been signed below
by the following persons in the capacities and on the dates indicated.
II-6
II-7
Each Selling Securityholder
is free to offer and sell his or her Purchase Warrants at such times, in such manner
and at such prices as he or she shall determine. The Selling Stock Holder is permitted
to sell his 150,000 shares at such times, in such manner and at such prices as he
determines. Such Purchase Warrants and 150,000 shares may be offered by the Selling
Securityholders and the Selling Stock Holder 45 days after the effective date, in
one or more types of transactions, which may or may not involve brokers, dealers
or cash transactions. In this regard the Selling Stock Holder, after this initial 45 day period,
may only sell 75,000 shares during the next 45 day period and then thereafter, may sell the remaining 75,000 shares. The Selling Securityholders and the Selling Stock Holder may
also use Rule 144 under the Securities Act, to sell such securities, if they meet
the criteria and conform to the requirements of such rule. There is no underwriter
or coordinating broker acting in connection with the proposed sales of Purchase
Warrants by the Selling Securityholders or the 150,000 shares by the Selling Stock
Holder. The selling securityholders acquired the Purchase Warrants upon the automatic
conversion of their series C preferred stock upon the completion of the Companys
initial public offering of this Registration Statement which will occur three days
after effectiveness and the Selling Stock Holder received his shares upon the completion
of the Companys initial public offering.
We will not receive any proceeds
upon the sale of any of the Purchase Warrants registered on behalf of the Selling
Securityholders or the 150,000 shares registered on behalf of the Selling Stock
Holder.
Selling Securityholder (1)
David
Abel
14,286
7,143
7,143
0
Michael I. Abrams
3,430
1,715
1,715
0
Russell Abrams
22,172
11,086
11,086
0
Scott Adams
15,830
7,915
7,915
0
Adventure Seekers
LLC
57,144
28,572
28,572
0
AFA Private Equity Fund I
114,286
57,143
57,143
0
Dick Alaimo
Jr
14,286
7,143
7,143
0
Gary Alderman
14,286
7,143
7,143
0
William B.
Alsup III
51,430
25,715
25,715
0
Vijay Anand & Nanda Anand
17,144
8,572
8,572
0
David Anderson
28,572
14,286
14,286
0
Robert F. & Susan L. Arnold
JTWROS
11,430
5,715
5,715
0
Howard Baron
15,830
7,915
7,915
0
Patrick A. Bello &
Sheila
M. Bello JTWROS*
62,804
31,402
31,402
0
Marc E. Bengualid
11,430
5,715
5,715
0
Anthony Beninato Sr &
Johanne
Beninato JTWROS
14,286
7,143
7,143
0
Mark Berkowitz
& Lois Berkowitz
20,000
10,000
10,000
0
Berkowitz & Garfinkel DDS
PA
Employee Pension Plan
20,000
10,000
10,000
0
Berryman Global
Holdings LLC
31,772
15,886
15,886
0
William Blake
28,572
14,286
14,286
0
Patrick Boyce
& Sonja Boyce JTWROS
28,572
14,286
14,286
0
Thomas P. Broderick
28,572
14,286
14,286
0
Gregory Brotzman
28,572
14,286
14,286
0
James A. Brownell
31,716
15,858
15,858
0
Carl T. Brozek
28,572
14,286
14,286
0
E. Alan Brumberger*/**
17,144
8,572
8,572
0
Mark A. Bruno
31,716
15,858
15,858
0
Daniel Burstein
9,486
4,743
4,743
0
Bruce Buyers
28,572
14,286
14,286
0
John Buyers
28,572
14,286
14,286
0
Lawrence V.
Carra
14,286
7,143
7,143
0
Nicholas Centola
14,286
7,143
7,143
0
Louis Centola
Jr.
14,286
7,143
7,143
0
John Chaffins
31,716
15,858
15,858
0
Dennis Codon
28,572
14,286
14,286
0
Stephen Cohen
9,486
4,743
4,743
0
William W.
Collins & Ann Y. Collins
JTWROS
8,572
4,286
4,286
0
Continental Screen Printing Corporation
Profit Sharing Plan & Trust
6,344
3,172
3,172
0
Stephen M. Cumbie
17,144
8,572
8,572
Selling Securityholder (1)
John Curtin
14,286
7,143
7,143
0
Rameshahandra
Dabhi &
Nila Dabhi JTWROS
11,430
5,715
5,715
0
Davis Family Investments Limited
Partnership
126,972
63,486
63,486
0
David W DeFisher
14,286
7,143
7,143
0
John DeFrancesco & Paula
DeFrancesco
JTWROS
31,716
15,858
15,858
0
Richard Della
Porta
14,286
7,143
7,143
0
Jeffrey B. & Tamara S. Dierman
TEN ENT
17,144
8,572
8,572
0
Nuala Drescher
14,286
7,143
7,143
0
Jonathan Ellman
15,830
7,915
7,915
0
James A. Enright
& Judith A. Enright,
Trustees of The
Enright Family Trust
UDT 5/3/02
14,286
7,143
7,143
0
Briggs Ferguson
28,572
14,286
14,286
0
Anita Frankel
15,830
7,915
7,915
0
Andrew Gamba & Wen Gamba
JTWROS
14,286
7,143
7,143
0
Kumar Ganapathy
64,000
32,000
32,000
0
Alex Garfield
5,716
2,858
2,858
0
Eric Garfinkel
& Cindy Garfinkel JTWROS
17,144
8,572
8,572
0
Marshall Geller
95,200
47,600
47,600
0
Greg Gentling
62,858
31,429
31,429
0
Gilcy Partners Ltd., LP
14,286
7,143
7,143
0
Peter J. Giroux
19,430
9,715
9,715
0
Global ePoint, Inc.
15,830
7,915
7,915
0
David Goldberg
28,572
14,286
14,286
0
Howard Goldberg
28,572
14,286
14,286
0
Roy Goldberg
28,572
14,286
14,286
0
George H. Gordon Trust
14,286
7,143
7,143
0
Patricia A
Gordon Trust
14,286
7,143
7,143
0
Michael Graves
57,144
28,572
28,572
0
Randall M.
Griffin
28,572
14,286
14,286
0
E. John Helmon
31,716
15,858
15,858
0
Joanne C. Himmel
17,144
8,572
8,572
0
Fred P. Hochberg *
14,286
7,143
7,143
0
Martin Hodas
57,144
28,572
28,572
0
Marc Honigfeld & Rona Honigfeld
JT TEN
28,572
14,286
14,286
0
Paul Horowitz
7,144
3,572
3,572
0
John Houston
14,286
7,143
7,143
0
James E. Hutchinson
14,286
7,143
7,143
0
Insiders Trend Fund, LP**
74,286
37,143
37,143
0
Miles Jaffe
63,486
31,743
31,743
0
Dr. Rajammal Jayakumar &
Arumugam Jayakumar JTTEN
28,572
14,286
14,286
0
Jorel Management
Corp.
17,144
8,572
8,572
0
Michael Karpoff &
Patricia
Rothbardt JTWROS
28,572
14,286
14,286
0
Allan J. Katz
2,858
1,429
1,429
0
Dr. Louis Katz & Irene Katz
JTTEN
28,572
14,286
14,286
0
Alan &
Amy Dean Kluger JTROS
22,858
11,429
11,429
0
Alain Krakirian
14,286
7,143
7,143
0
Selling Securityholder (1)
Martin D. & Ruth F.
Krall JTROS
17,144
8,572
8,572
0
Nathaniel Kramer**
28,572
14,286
14,286
0
Denise Labella & Vito Labella
JTWROS
14,286
7,143
7,143
0
Bruce Lamchick
& Eileen Lamchick JTWROS
5,716
2,858
2,858
0
The Larsen 2000 Revocable Trust
28,572
14,286
14,286
0
James G. Lawrence
19,030
9,515
9,515
0
Richard Kurt Lee
28,572
14,286
14,286
0
Mark Lieb**
12,686
6,343
6,343
0
Jeff Lippert
14,286
7,143
7,143
0
Arthur R. Lubojasky
&
Gaynor L. Lubojasky JTWROS
28,572
14,286
14,286
0
David Macchia Sr.**
28,572
14,286
14,286
0
Jay Macchitelli
57,144
28,572
28,572
0
Margui Family Partners Ltd.
17,144
8,572
8,572
0
Markan Inc.
28,572
14,286
14,286
0
Peter Markovics
15,830
7,915
7,915
0
Paine Webber
Group, Inc Senior Officer
Deferred
Comp Plan DCA Trust FBO
Donald B. Marron
158,686
79,343
79,343
0
Allan Marshall
28,572
14,286
14,286
0
Dee L. Martinez,
MD
28,572
14,286
14,286
0
Michael M. Matluck &
Karen
S. Matluck JTWROS
47,546
23,773
23,773
0
Rachel L. Mellon
185,716
92,858
92,858
0
Robert A. Melnick
42,858
21,429
21,429
0
Joseph P. Metz
& Catherine Metz JTWROS
20,000
10,000
10,000
0
Richard Milazzo
28,572
14,286
14,286
0
Joseph E. Miller,
Jr.**
126,972
63,486
63,486
0
Leo E. Mindel Non-Gst Exempt
Family Trust II**
74,286
37,143
37,143
0
Richard Molinsky
57,144
28,572
28,572
0
John Morton & Lorraine Morton
JTWROS
14,286
7,143
7,143
0
Peter S Morton
& Kathleen M Morton JTWROS
14,286
7,143
7,143
0
MRL Trust
93,944
46,972
46,972
0
Frank Musacchio
14,286
7,143
7,143
0
James Nation
14,286
7,143
7,143
0
Jerome Oksiuta
28,572
14,286
14,286
0
Terry R. Otton IRA Charles Schwab
& Co.,
Inc. Custodian
45,716
22,858
22,858
0
Jang S. Park
28,572
14,286
14,286
0
Frank J. Pearl, M.D. and
Suzanne
F. Pearl JT TEN
17,144
8,572
8,572
0
Performance
Capital Group LLC**
14,286
7,143
7,143
0
Robert L. Plummer
342,858
171,429
171,429
0
Walter Pollack
& Barbara Pollack JTWROS
28,572
14,286
14,286
0
Michael F. Power
28,572
14,286
14,286
0
Preminger Family
Trust
17,144
8,572
8,572
0
David Price
28,572
14,286
14,286
0
Tracy Price
28,572
14,286
14,286
0
Carl Priest & Katherine Priest
JTWROS
14,286
7,143
7,143
0
Donald H. Putnam**
28,572
14,286
14,286
0
Barry Rabkin
31,716
15,858
15,858
0
Selling Securityholder (1)
6,283,676
3,141,838
3,141,838
0
Beneficial Ownership of
Beneficial Ownership after
Selling
Stock Holder
Shares Prior to Sale
offering if all 150,000 Shares are sold
Roger
Karam*
1,547,617
1,397,617
(1)
Except as indicated by an *, no Selling Securityholder is an officer, director, affiliate or 5% shareholder of ours.
(2)
Includes shares issuable upon exercise
of the Selling Securityholder Warrants.
*
Mr. Rosen beneficially owns an agreggate
of 2,222,617 shares, Mr. Turits beneficially owns an aggregate of 1,883,245 shares,
Mr. Bello beneficially owns an agreggate of 235,436 shares, Mr. Sununu beneficially
owns an agreggate of 165,686 shares, Mr. Brumberger beneficially owns an aggregate
of 237,524 shares, Mr. Hochberg beneficially owns an aggregate of 7,143 shares and Mr. Karam
beneficially owns 1,547,617 shares. Messrs. Rosen and Turits are officers and directors of our company and Messrs. Brumberger
and Hochberg are directors. Mr. Karam is also an officer of our Company. Messrs. Bello and Sununu are members of our Advisory
Board. Mr. Eric Ram, our Executive Vice President, is the managing director and
principal shareholder of World Capital Corporation and beneficially owns an aggregate
of 96,429 shares.
**
Each of these Selling Security Holders
is an NASD member or affiliate of an NASD member. The securities which are being
registered were acquired as an investment by each person in a private placement
by Fusion in late 2003 and early 2004. At the time of investment, there were no
agreements or understandings, direct or indirect, with any person to distribute
the registered securities.
150,000
SHARES OF COMMON STOCK
INFORMATION NOT REQUIRED IN PROSPECTUS
SEC
registration fee
$ 11,225.00
NASD filing
fee
9,360.00
American Stock Exchange
70,000.00
Legal fees
and expenses
250,000.00
Accountants fees and expenses
225,000.00
Printing and
Engraving expenses
50,000.00
Blue Sky Fees and Expenses
2,500.00
Transfer Agent
and Registration Fees
2,500.00
Miscellaneous
4,415.00
Total
$625,000.00
In January 2005, we entered into an agreement to acquire the
49.8% minority interest in one of our Efonica joint venture. Pursuant to this
agreement, we agreed to issue an aggregate of 1,547,647 shares to one individual
who is an officer of ours, in connection with the purchase of this minority
interest. We relied on Section 4(2) of the Securities Act in connection with
such issuance.
Document
1.1
Form of Underwriting Agreement (*)
1.2
Form of Selected Dealer Agreement
(*)
1.3
Form of Merger Fee Agreement (*)
1.4
Form of Agreement Among Underwriters
(*)
1.5
Form of Warrant Agreement with Continental
Stock Transfer & Trust Company (*)
1.6
Form of Common Stock Certificate
(2)
1.7
Form of Redeemable Common Stock Purchase
Warrant Certificate (2)
1.8
Form of Underwriter Warrant (*)
3.1
Certificate of Incorporation, as
amended (*)
3.1(a)
Certificate of Designation of Series
C Convertible Redeemable Preferred Stock (*)
3.3
Bylaws (1)
5.1
Opinion of Gersten, Savage, Kaplowitz,
Wolf & Marcus, LLP (1)
10.1
1998 Stock Option Plan (*)
10.2
Employment Agreement between registrant
and Matthew Rosen (*)
10.3
Master Service Agreement between
registrant and Terremark Worldwide, Inc., dated May 29, 2003 (*)
10.4
Agreement between registrant and
Pakistan Telecommunications Company, Ltd, dated May 20, 2002 (*)
10.5
Joint Venture Agreement between registrant
and Karamco, Inc., dated December 12, 2002 (*)
10.6
Agreement between Fusion registrant
and Communications Ventures PVT. LTD, dated May 13, 2004 (*)
10.7
Form of Warrant to Purchase Common
Stock (2)
10.8
Lease Agreement between registrant
and SLG Graybar Sublease, LLC for the 420 Lexington Avenue, New York, NY office
(*)
10.9
Lease Agreement between registrant
and 67 Broad Street LLC for the 75 Broad Street, New York, NY office (*)
10.10
Lease Agreement between registrant
and Fort Lauderdale Crown Center, Inc. for the Fort Lauderdale, Florida office,
as amended (*)
10.11
Agreement between registrant and
Dennis Mehiel, dated November 10, 2004 and attached promissory note of even date
therewith (*)
10.12
Shareholders Joint Venture Agreement
between registrant and Communications Ventures Index Pvt. Ltd., dated March 11,
2000 (*)
10.13
Convertible Subordinated Note issued
by registrant to Marvin Rosen, dated April 9, 1999 (*)
10.14
Demand note issued by registrant
to Marvin Rosen, dated March 28, 2001 (*)
10.15
Demand note issued by registrant
to Marvin Rosen, dated April 13, 2001 (*)
10.16
Demand note issued by registrant
to Marvin Rosen, dated December 4, 2000 (*)
10.17
Demand note issued by registrant
to Marvin Rosen, dated May 24, 2001 (*)
10.18
Warrant to Purchase Common Stock
issued by registrant to Marvin Rosen, dated July 31, 2002 (*)
10.19
Convertible Subordinated Note issued
by registrant to Philip Turits, dated April 9, 1999 (*)
10.20
Demand note issued by registrant
to Philip Turits, dated January 31, 2003 (*)
10.21
Demand note issued by registrant
to Philip Turits, dated October 14, 2002 (*)
10.22
Demand note issued by registrant
to Philip Turits, dated December 31, 2002 (*)
10.23
Demand note issued by registrant
to Philip Turits, dated July 31, 2002 (*)
10.24
Demand note issued by registrant
to Philip Turits, dated September 24, 2002 (*)
10.25
Demand note issued by registrant
to Evelyn Langlieb Greer, dated July 10, 2002 (*)
10.26
Non-Competition Agreement between
registrant and Marvin Rosen (1)
10.27
Stock Purchase Agreement between
registrant, Convergent Technologies, Ltd. and the stockholders listed on Schedule
1 Attached thereto, dated December 16, 2004, as amended and restated, dated January
11, 2005 (1)
10.28
International VoIP Agreement, dated
April 25, 2002, as amended (*)
10.29
Employment Agreement between registrant
and Roger Karam (1)
10.30
Stock Purchase Agreement between
registrant, Efonica FZ-LLC and Karamco, Inc., dated January 11, 2005 (1)
10.31
Carrier Service Agreement for International
Terminating Traffic between the registrant and Quest Communications Corporation,
dated May 17, 2000 (1)
10.32
Agreement between registrant and
Telco Group, Inc. dated April 3, 2001, as amended (1)(2)
10.33
Colocation License Agreement between the registrant and TELCO Group, dated January 28, 2002(1)
21.1
List of Subsidiaries (*)
23.1
Consent of Rothstein, Kass &
Company, P.C (1)
23.2
Consent of Gersten, Savage, Kaplowitz,
Wolf & Marcus, LLP (Contained in Exhibit (J)(2)
24.1
Powers of Attorney (included on signature
page)
Insofar as indemnification
for liabilities arising under the Securities Act of 1933, as amended, may be permitted
to directors, officers and controlling persons of the registrant pursuant to any
provision of the certificate of incorporation, bylaw, contract arrangements, statute,
or otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant issuer will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act of 1933, as amended, and will be
governed by the final adjudication of such issue.
By:
/s/ Marvin S. Rosen
Marvin S. Rosen
Chief Executive Officer
Name
Title
Date
/s/
Marvin S. Rosen
Chief Executive Officer and Chairman
of the Board
Marvin
S. Rosen
/s/ Joel Maloff
Executive Vice President and Chief
Technology
Officer
Joel
Maloff
/s/ Eric D.
Ram
Executive Vice President
Eric
D. Ram
/s/ Matthew D. Rosen
President and Chief Operating Officer
Matthew
D. Rosen
/s/ Barbara
Hughes
Vice President of Finance and Principal
Accounting
and Financial Officer
Barbara
Hughes
/s/ Philip Turits
Treasurer, Secretary and Director
Philip
Turits
/s/ Roger Karam
President of VoIP Services
Roger
Karam
/s/ Cesar A. Baez
Director
Cesar
A. Baez
/s/ E. Alan
Brumberger
Director
E.
Alan Brumberger
/s/ Evelyn Langlieb Greer
Director
Evelyn
Langlieb Greer
/s/ Raymond E. Mabus
Director
Raymond
E. Mabus
/s/ Manuel
D. Medina
Director
Manuel
D. Medina
/s/ Paul C. OBrien
Director
Paul
C. OBrien
/s/ Kenneth
I. Starr
Director
Kenneth
I. Starr
/s/ Julius Erving
Director
Julius
Erving
/s/ Michael
J. Del Giudice
Director
Michael
J. Del Giudice
/s/ Fred P. Hochberg
Director
Fred
P. Hochberg
EXHIBIT 5.1
GSKW&M Letterhead
__________, 2005
Fusion Telecommunications International, Inc.
420 Lexington Avenue, Suite 518
New York, NY 10170
Ladies and Gentlemen:
We have acted as counsel to Fusion Telecommunications International, Inc. (the "Company") in connection with its filing of a registration statement on Form S-1 (Registration No. 333-120412, the "Registration Statement") covering 7,115,588 shares of common stock, $.01 par value (the "Common Stock"), including 498,750 shares of Common Stock subject to an over-allotment option granted to the underwriters, and 3,141,838 shares of Common Stock issuable upon the exercise of 3,141,838 purchase warrants registered for the benefit of the Selling Security Holders, and 6,965,588 redeemable common stock purchase warrants (the "Warrants", and 150,000 shares registered for the benefit of the Selling Stock Holder together with the Common Stock, the "Securities"), including 498,750 Warrants subject to an over-allotment option granted to the underwriters, and 3,141,838 Warrants registered for the benefit of the Selling Shareholders, all as more particularly described in the Registration Statement.
In our capacity as counsel to the Company, we have examined the Company's Certificate of Incorporation and By-laws, as the same exist on the date hereof, including any amendments thereto, and the minutes and other corporate proceedings of the Company.
With respect to factual matters, we have relied upon statements and certificates of officers of the Company. We have also reviewed such other matters of law and examined and relied upon such other documents, records and certificates as we have deemed relevant hereto. In all such examinations we have assumed conformity with the original documents of all documents submitted to us as conformed or photostatic copies, the authenticity of all documents submitted to us as originals and the genuineness of all signature on all documents submitted to us.
On the basis of the foregoing, we are of the opinion that the shares of Securities covered by the Registration Statement have been validly authorized and will, when sold as contemplated by the Registration Statement, be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference made to us under the caption "Legal Matters" in the prospectus constituting part of the Registration Statement.
Very truly yours,
/s/ Gersten, Savage, Kaplowitz, Wolf & Marcus GERSTEN, SAVAGE, KAPLOWITZ, WOLF & MARCUS LLP |
EXHIBIT 10.26
NON-COMPETITION AGREEMENT
AGREEMENT made this ____ day of January, 2005 by and between Fusion Telecommunications International, Inc., a Delaware corporation ("Fusion") and Marvin Rosen ("Marvin").
WHEREAS, Marvin Rosen is the Chief Executive Officer of Fusion but does not receive any compensation from the Company for his services in such capacity;
WHEREAS, Marvin Rosen is not a party to an employment agreement and is not committed to devote any specific portion of his time working for Fusion; and
WHEREAS, Fusion is engaged in the provision of traditional voice services, voice over Internet protocol services, private network services, Internet access services are Internet-based video conferencing services (the "Business");
WHEREAS, Kirlin Securities has required the execution of this Agreement as a condition to acting as the underwriter for the Company's initial public offering;
NOW, THEREFORE, in consideration of the premises and of the mutual covenants set forth in this Agreement, the parties hereto agree as follows:
1. Non-competition.
(a) DURATION AND EXTENT OF RESTRICTION. Marvin shall not, for a period ending January __, 2007, two (2) years after the date hereof (the "Closing Date"), within the geographic regions where Fusion is currently or is planning to operate its Business, engage in the Business the same as, similar to or in general competition with the Business being conducted by Fusion at or prior to the Closing Date; provided, however, that in the event Fusion
consummates an initial public offering of its securities, the Closing Date shall be the two (2) year anniversary from the effective date of the registration statement. The term "engage in" shall include, but shall not be limited to, activities, whether direct or indirect, as proprietor, partner, stockholder, director, officer, principal, agent, employee, consultant or lender; provided, however, that the ownership of not more than three percent (3%) in the aggregate by Marvin of the stock of a publicly held corporation shall not be included in such term.
(b) RESTRICTIONS WITH RESPECT TO CUSTOMERS. In furtherance of, and without in any way limiting the restriction in subparagraph (a) above, for the period specified in subparagraph (a) above, Marvin shall not, directly or indirectly:
(i) request any present or future customers of Fusion to curtail or cancel their business with Fusion;
(ii) disclose the identity of any past, present or future customers of Fusion to any other person, firm or corporation engaged in a business the same as, similar to or in general competition with the Business being conducted by Fusion within the territorial limits described in subparagraph (a) above;
(iii) solicit, canvas or accept, or authorize any person to solicit, canvas or accept, from any past, present or future customers of Fusion any business for any other person, firm or corporation engaged in a business the same as, similar to or in general competition with the Business being conducted by Fusion within the territorial limits described in subparagraph (a) above; or
(iv) induce or attempt to influence any employee of Fusion to terminate his employment.
As used in this subparagraph (b), "future customer" shall mean a customer with whom business will have been transacted between the date hereof and the end of the term specified in subparagraph (a) above.
(c) REMEDIES FOR BREACH. Marvin acknowledges that the restrictions contained in this paragraph 1, in view of the nature of the Business in which Fusion is engaged, are reasonable and necessary to protect the legitimate interests of Fusion and that any violation of these restrictions would result in irreparable injury to Fusion. Marvin agrees that, in the event of a violation of any of such restrictions, Fusion shall be entitled to preliminary and permanent injunctive relief as well as an equitable accounting of all earnings, profits and other benefits arising from such violation, which rights shall be cumulative and in addition to any other rights or remedies to which Fusion may be entitled. In the event of a violation, the period of non-competition referred to in subparagraph (a) above shall be extended by a period of time equal to that period beginning when such violation commenced and ending when the activities constituting such violation shall have been finally terminated in good faith.
2. MISCELLANEOUS.
(a) NOTICES. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when delivered against receipt or when deposited in the United States mails, first class postage prepaid, addressed as set forth below:
(i) If to Marvin:
Marvin Rosen
c/o Fusion Telecommunications International, Inc.
420 Lexington Avenue, Suite 518
New York, New York 10170
(ii) If to Fusion:
Fusion Telecommunications International, Inc.
420 Lexington Avenue, Suite 518
New York, New York 10170
Attention: Matthew Rosen
with a copy, given in the manner prescribed above, to:
Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP
101 East 52nd Street
New York, NY 10022
Attention: Arthur Marcus, Esq.
Either party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this paragraph for the giving of notice.
(b) INDULGENCES. Neither any failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence.
(c) CONTROLLING LAW. This Agreement and all questions relating to its validity, interpretation, performance and enforcement, shall be governed by and construed in accordance with the laws of the State of New York, notwithstanding any New York or other conflict-of-interest provisions to the contrary.
(d) BINDING NATURE OF AGREEMENT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns except that no party may assign or transfer such party's rights or obligations under this Agreement without the prior written consent of the other party.
(e) EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of the parties reflected hereon as the signatories.
(f) PROVISIONS SEPARABLE. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part.
(g) ENTIRE AGREEMENT. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements and conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing.
(h) PARAGRAPH HEADINGS. The paragraph headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation.
(i) GENDER. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context requires.
(j) NUMBER OF DAYS. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or holiday, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or holiday.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written.
Fusion Telecommunications International, Inc.
EX-10.27
Amended and Restated
STOCK PURCHASE AGREEMENT
among
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.,
CONVERGENT TECHNOLOGIES, LTD.
AND
THE STOCKHOLDERS LISTED ON SCHEDULE 1 ATTACHED HERETO
December 16, 2004
Amended and Restated
On January 11, 2005
STOCK PURCHASE AGREEMENT
THIS AGREEMENT dated as of December 16, 2004, is among Fusion Telecommunications International, Inc., a Delaware corporation ("Buyer"), Convergent Technologies, Ltd., a company organized under the laws of the country of Jamaica (the "Company"), and the undersigned Vonciel Turner ("Turner"), individually, and Patrick Dallas ("Dallas"), individually, both as listed on Schedule 1 hereto (collectively, the "Stockholders" and each a "Stockholder").
WITNESSETH
WHEREAS each of the Stockholders owns the number of the issued and outstanding shares (collectively, the "Shares") of the common stock, no par value per share (the "Common Stock"), of the Company set forth opposite such Stockholder's name on Schedule 1 attached hereto, which Shares in the aggregate represent all of the authorized, issued and outstanding shares of the capital stock of the Company;
WHEREAS Buyer desires to acquire all of the Shares from Dallas, and Dallas desires to sell all of his Shares to Buyer, upon the terms and subject to the conditions hereinafter set forth.
NOW THEREFORE, in consideration of the foregoing and of the covenants set forth below, the parties hereby agree as follows:
SECTION
PURCHASE AND SALE OF THE SHARES
1.1 Purchase and Sale. Upon the terms and subject to the conditions
of this Agreement, at the Closing (as defined below), Dallas agrees to sell to
Buyer, and Buyer agrees to purchase from Dallas, the number of Shares owned by
Dallas, as set forth opposite his name on Schedule 1 hereto (255,000 Shares).
The aggregate purchase price for the Shares (the "Purchase Price") shall be One
Hundred Fifty Thousand Dollars (US $150,000.00) and is payable as set forth in
Section 1.
1.2 Closing. The closing (the "Closing") of the purchase and sale of the Shares hereunder shall take place at the Buyer's office located at 420 Lexington Avenue, Suite 518, New York, New York 10170, at 2:00 p.m. (EST) on January 11, 2005, or at such other time or place as Buyer and the Stockholders agree (the "Closing Date").
(a) Upon execution of this Agreement, Buyer shall deliver to Dallas the sum of Seventy Five Thousand Dollars (US $75,000.00) in cash, by cashier's or certified check, or by wire transfer of immediately available funds to an account designated by Dallas as an advance towards the Purchase Price. Should this Agreement fail to close for any reason, Dallas shall promptly return the advance to Buyer.
(b) At the Closing, Buyer shall deliver to Dallas the sum of Seventy Five Thousand Dollars (US $75,000.00) in cash, by cashier's or certified check, or by wire transfer of immediately available funds to an account designated by Dallas.
(c) At the Closing, Dallas shall deliver to Buyer the certificate or certificates for the Shares owned by such Stockholder, duly endorsed or accompanied by stock powers duly endorsed in blank, satisfactory to the Buyer in all respects.
(d) At the Closing, there shall be delivered to the respective parties the certificates and instruments provided to be delivered at the closing under Sections 6 and 7 hereof.
(e) Prior to Closing, the Company shall only make such payments as required to pay its employees and interconnect charges, unless the Buyer provides prior written approval otherwise.
SECTION 2
REPRESENTATIONS AND WARRANTIES OF THE
STOCKHOLDERS WITH RESPECT TO THE COMPANY
Each of the Stockholders, jointly and severally, represents and warrants to Buyer as of the date hereof and on and as of the Closing Date as follows:
2.1 Organization and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the country of Jamaica and has all requisite corporate power and lawful authority to own, lease and operate its assets, properties and business and to conduct its business as and in the places where such properties are now owned, leased or operated or such business is now conducted or proposed to be conducted.
2.2 Capitalization; Voting Rights. The authorized capital of the
Company consists of 500,000 shares of Common Stock, of which 500,000 shares have
been validly subscribed and issued, are outstanding as fully paid and
non-assessable shares as of the date hereof, and represent all of the issued and
outstanding shares of capital stock of the Company, as set forth on Schedule 1.
There is no: (i) outstanding security of the Company convertible into or
exchangeable for any share or shares of the capital of the Company; (ii)
outstanding subscription, option, warrant, call, commitment, agreement or
understanding (oral or written) obligating the Company to issue any share or
shares of its capital stock or any security or securities of any class or kind
which in any way relate to the authorized or issued capital stock of the Company
or any interest therein; (iii) agreement or understanding (oral or written)
(other than this Agreement) which grants to any Person (as hereinafter defined)
the right to purchase or otherwise acquire any share or shares of the issued and
outstanding shares of the capital stock of the Company or any interest therein,
including without limitation any preemptive right, right of first refusal or
co-sale right; (iv) voting trust or voting agreement or pooling agreement or
proxy (oral or written) with respect to any issued and outstanding shares of the
capital stock of the Company; or (v) obligation of the Company (oral or written)
to purchase, redeem, or otherwise acquire any shares of its capital stock or any
interest therein or to pay any dividend or distribution with respect thereto.
2.3 Consents. Other than the Minister or Telecommunications or the Registrar of Companies, no consent, approval, waiver or other action by any individual, corporation, company, partnership, association, trust or other entity or organization, including any government or political subdivision or agency or instrumentality thereof (each, a "Person"), under any contract, agreement, understanding, indenture, lease, instrument or other document (oral or written) to which the Company is a party or by which it or any of the assets of the Company is bound, is required or necessary for (i) the execution, delivery and performance of this Agreement or any Related Agreement by the Stockholders or the Company or the consummation of the transactions contemplated hereby or thereby or (ii) the continuation after the consummation of the transactions contemplated hereby or thereby of any contract, agreement, indenture, lease, instrument or other document to which the Company is a party or by which it or its assets are bound.
2.4 Authorization; No Breach. The execution and delivery by the Company of this Agreement and all the agreements contemplated herein (the "Related Agreements"), and the consummation by the Company of all transactions contemplated hereunder and thereunder by the Company, have been duly authorized by all requisite corporate action. This Agreement and the Related Agreements have been duly executed by the Company and each of the Stockholders (where applicable) and each other party thereto. This Agreement and the Related Agreements and all other agreements and obligations entered into and undertaken in connection with the transactions contemplated hereby or
thereby to which the Company or any of the Stockholders is a party constitute the valid and legally binding obligations of the Company and each of the Stockholders, enforceable against each of them in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights; and (ii) general principles of equity that restrict the availability of equitable remedies. The execution, delivery and performance of this Agreement and the Related Agreements and the consummation of the transactions contemplated hereby and thereby will not: (i) violate, contravene or breach any provision of the Articles of Incorporation or By-laws of the Company; (ii) violate, conflict with, contravene, or result in the breach of any of the terms or conditions of, result in modification of the effect of, or otherwise give any other contracting party the right to terminate, accelerate or cancel any right or obligation of the Company or constitute (or with notice or lapse of time or both constitute) a default under, any instrument, contract or other agreement to which the Company is a party or by which it or its assets or properties may be bound or subject; (iii) violate, contravene or breach any constitution, treaty, law, statute, code, ordinance, decree, rule, regulation, or municipal by-law, whether domestic, foreign or international, any judgment, order, writ, injunction, decision, ruling, decree or award of any governmental authority or body, or any provision of any of the foregoing applicable to or binding upon, the Company or its properties, assets or business (each, a "Law," and collectively, "Laws"); (iv) violate any license, permit, franchise, or order or other approval of any federal, provincial, state, local or foreign governmental or regulatory body (each, a "Permit", and collectively, "Permits"); or (v) result in the creation of any mortgage, pledge, charge, security interest, lien or other encumbrance (each, a "Lien") on the Shares or on any of the assets or properties of the Company.
2.5 Subsidiaries and Other Affiliates. The Company has no subsidiaries. The Company does not directly or indirectly own or have any investment in any shares of the capital stock of, or any other proprietary interest in (including without limitation, any partnership or joint venture interest), any other Person. For this purpose, "joint venture" means any entity or contractual relationship (written or oral) pursuant to which the Company shares with any Person the profits and/or losses of any undertaking or pursuant to which the Company may be liable for the acts or undertakings of any Person.
2.6 Corporate Records. The Company has previously delivered to Buyer true and complete copies of its Articles of Incorporation, as amended, and By-laws as currently in effect. The minute books of the Company, which have been furnished to Buyer, are complete and accurate, and contain copies of all by-laws and resolutions passed by the shareholders and directors of the Company since the date of its incorporation, all of which by-laws and resolutions have been duly passed. The share certificate books, register of shareholders, register of transfers and register of directors of the Company are complete and accurate. The financial books and records of the Company have been maintained in accordance with sound business practices and fairly, accurately and completely present and disclose the financial position of the Company, and (ii) all transactions of the Company.
2.7 Financial Statements. The Company has delivered to Buyer dated November 15, 2004 of the unaudited financial statements of the Company for the fiscal year ended October 31, 2004 (the "Unaudited Financial Statements"), the unaudited balance sheet (the "Current Balance Sheet") of the Company as of November 15, 2004 (the "Current Balance Sheet Date") and the unaudited interim financial statements of the Company for the one-month period ended October 31, 2004(the "Interim Financial Statements" and, collectively with the Unudited Financial Statements and the Current Balance Sheet, the "Financial Statements"). The Interim Financial Statements together with the notes thereto have been prepared on a cash basis in accordance with past practices, and the Unaudited Financial Statements together with the notes thereto have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout such period. Such Financial Statements are true, correct and complete, and present fairly and accurately the financial condition and position of the Company as of the dates indicated.
2.8 Absence of Undisclosed Liabilities. The Company has no liabilities of any nature, whether direct, indirect, accrued, absolute, contingent or otherwise(including, without limitation, liabilities as guarantor or otherwise with respect to obligations of others or liabilities for Taxes due or then accrued or to become due), that were not fully and adequately reflected or reserved against on the Financial Statements of the Company. There is no existing condition, situation or set of circumstances (excluding possible changes in the Tax laws of any jurisdiction) that could reasonably be expected to result in any such liability, other than liabilities (i) fully and adequately reflected or reserved against on the Financial Statements or (ii) incurred since the Current Balance Sheet Date in the ordinary course of business consistent with past practice, which in the aggregate are not material to the Company. For purposes of this Section 2.8, "material" shall mean any amount in excess of $5,000.
2.9 No Material Adverse Change. To the best knowledge of the Company, since the Current Balance Sheet Date (November 15, 2004), there have been no changes in the assets,properties, business, operations, prospects or condition (financial or otherwise) of the Company that, individually or in the aggregate, materially and adversely affect the Company, nor does any Stockholder or executive of the Company know of any such change that is reasonably likely to occur, nor has there been any damage, destruction or loss materially and adversely affecting the assets, properties, business, operations, prospects or condition (financial or otherwise) of the Company, whether or not covered by insurance. Without limiting the generality of the foregoing since the Current Balance Sheet Date, the Company has not:
(i) incurred any indebtedness for borrowed money, assumed or guaranteed or otherwise become responsible for the obligations of any Person, or otherwise made or assumed any commitment, obligation or liability outside the ordinary course of business;
(ii) declared or paid any dividend or declared or made any other distribution of any kind to its shareholders, or made any direct or indirect redemption, retirement, purchase or other acquisition of any shares of its capital stock or entered into any agreement or made any commitment with respect to the same;
(iii) made any loan, advance or capital contribution to or investment in any Person;
(iv) made any payment or commitment to pay any severance or termination pay to any of its officers, directors, shareholders, employees, consultants, agents or other representatives;
(v) entered into any lease (as lessor or lessee), sold, abandoned or made any other disposition of any of its assets, properties or rights, granted or suffered any Lien or other encumbrance on any of its assets or properties, or entered into or amended any contract or other arrangement to do any of the foregoing or pursuant to which the Company agreed to indemnify any party or to refrain from competing with any party;
(vi) except for inventory or equipment acquired in the ordinary course of business, made any acquisition of all or any part of the assets, properties, capital stock or business of any other Person or entered into or amended any contract or other arrangement to do the same;
(vii) made any change in any method of accounting or accounting practice, waived or cancelled any material claim, account receivable, or right, or changed its pricing, credit, or payment policies;
(viii) paid any long-term liability otherwise than in accordance with its terms;
(ix) (A) entered into any employment, deferred compensation or other similar agreement (or any amendment to any such existing agreement)with any director, officer, shareholder, consultant, agent or employee of the Company, (B)
increased the benefits payable under any existing severance or termination pay policies or employment agreement or (C) increased the compensation, bonus or other benefits payable to directors, officers or employees of the Company;
(x) suffered any labor dispute, other than routine individual grievances, or any activity or proceeding by a labor union or representative thereof to organize any employees of the Company, which employees were not subject to a collective bargaining agreement at the Current Balance Sheet Date, or any lockouts, strikes, slowdowns, work stoppages or threats thereof by or with respect to any employees of the Company; or
(xi) failed to comply with any Law in any respect that, individually or in the aggregate, has had or is reasonably likely to have a material adverse effect on the assets, properties, business, operations, prospects or conditions (financial or otherwise) of the Company.
2.10 Accounts and Notes Receivable. All accounts and notes receivable reflected in the Financial Statements and all accounts receivable arising after the Current Balance Sheet Date (collectively, the "Accounts Receivable") have arisen in the ordinary course of business of the Company, represent valid and enforceable obligations due to the Company, and are not subject to any discount, set-off or counter-claim. All such Accounts Receivable have been collected or, to the best knowledge of the Company, are fully collectible in the ordinary course of business of the Company in the aggregate recorded amounts thereof in accordance with their terms.
2.11 Tax Matters.
(a) As used in this Agreement, "Taxes" shall mean all taxes, including without limitation income taxes, corporation taxes, capital taxes, excise taxes, value added and sales taxes, use taxes, gross receipts taxes, franchise taxes, employment and payroll related taxes, goods and services taxes, stamp taxes, transfer taxes, withholding taxes, property taxes and import duties, whether or not measured in whole or in part by net income, all imposts, levies, duties, deductions, withholdings, charges, public and private pension plan contributions, social security contributions, workmen's compensation, medicare and public health contributions, regulatory fees and taxes, assessments, reassessments or fees of any nature, and all deficiencies or other additions to tax, interest and penalties owed by it; and "Tax" shall mean any one of them. The Company has paid all Taxes required to be paid by it through the date hereof (other than Taxes not yet due and payable the liability for which is adequately reserved for by the Company in the Financial Statements). The provisions for Taxes reflected in the Financial Statements are adequate to cover any and all Tax liabilities of the Company in respect of their respective assets, properties, business and operations during the periods covered by said Financial Statements and all prior periods.
(b) The Company has timely filed all Tax returns required to be filed by it through the date hereof. Each of the Tax returns filed by the Company completely, correctly and accurately reflects the amount of the Company's Tax liability for the period covered thereby.
(c) There has not been any audit of any Tax return filed by the Company, no audit of any Tax return of the Company is in progress, and the Company has not been notified by any Tax authority that any such audit is contemplated or pending. Neither the Internal Revenue Service nor any other taxing authority is now asserting or, to the best knowledge of any Stockholder, threatening to assert any Tax deficiency or claim for additional Taxes or interest thereon or penalties in connection therewith. All Tax returns of the Company have been assessed through and including the date hereof, and there are no outstanding waivers of any limitation periods or agreements providing for an extension of time for the filing of any Tax return or the payment of any Tax or for the issue of an assessment or reassessment against the Company. All deficiencies proposed as a result of such assessments of the Tax returns have been paid and settled.
(d) The Company has withheld from each payment made to any of its
past and present shareholders, directors, officers, employees and agents the amount of all Taxes and other deductions required to be withheld and has paid or made adequate provision for the payment of such amounts to the proper receiving authorities.
(e) The Company is not subject to and shall not be subject after the Closing Date to any assessments, levies, penalties or interest with respect to Taxes which shall result in any liability on its part in respect of any period ending on or prior to the Closing Date in excess of the amount provided for and reserved against in the Financial Statements.
2.12 Compliance with Laws; Permits.
(a) The Company is not in violation or default of any term of its Articles of Incorporation or Bylaws, or of any provision of any mortgage, indenture, contract, agreement, instrument or contract to which it is party or by which it is bound or of any judgment, decree, order, writ or, to its knowledge, any Law applicable to the Company which would materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of the Company.
(b) Schedule 2.12 sets forth a complete list of (i) all Permits and Licenses (collectively referred to as "Permits") that are material to the conduct of the Company's business.
(c) The Company has, is in full compliance with, and is entitled to all the benefits under, all Permits that are material to the conduct of its business and the uses of its assets; such Permits have been validly issued and are in full force and effect and will continue in full force and effect upon consummation of the transactions contemplated hereunder; no violations are or have been recorded with any governmental or regulatory body in respect of any Permit; and no proceeding is pending or, to the best knowledge of the Stockholders threatened to revoke or limit any Permit.
2.13 Actions and Proceedings. There are no outstanding orders, judgments, injunctions, awards or decrees of any court, governmental or regulatory body or arbitration tribunal against or involving the Company or any of its securities, assets, or properties or any Stockholder or Employee of the Company. There are no actions, proceedings (or any basis therefor), suits or claims or legal, administrative or arbitral proceedings pending against or, to the best knowledge of the Company, threatened against or affecting (whether or not the defense thereof or liabilities in respect thereof are covered by insurance) the Company or any of its securities, assets or properties, or any Stockholder or Employee of the Company, nor, to the best knowledge of the Company, is there any investigation pending or threatened against or affecting the Company or any Stockholder or Employee of the Company, that questions the validity of this Agreement, or any of the Related Agreements or any of the Schedules or Exhibits attached hereto or the right of the Company or any Stockholder or other party to enter into any of such agreements, or to consummate the transactions contemplated hereby or thereby, or which might result, either individually or in the aggregate, in any material adverse change in the business, assets, intellectual property rights, liabilities, financial condition, operations, affairs or prospects of the Company, financially or otherwise, or any change in the current equity ownership of the Company. To the best knowledge of the Company, there is no fact, event or circumstance that may give rise to any suit, action, claim, investigation or proceeding that individually or in the aggregate could have a material adverse effect on the transactions contemplated hereby or on the assets, properties, business, operations, prospects or condition (financial or otherwise) of the Company.
2.14 Contracts and Other Agreements.
(a) Schedule 2.14 sets forth a list of all of the following contracts and other agreements (oral or written) to which the Company is a party or by or to which it or its assets or properties are bound or subject (collectively, the "Material
Contracts"): (i) contracts and other agreements with any current or former officer, director, shareholder, employee, consultant, agent or other representative of the Company and contracts and other agreements for the payment of fees or other consideration to any entity in which any officer or director of the Company has an interest; (ii) contracts and other agreements with any labor union or association representing any employee of the Company or otherwise providing for any form of collective bargaining; (iii) contracts and other agreements for the purchase or sale of materials, supplies, equipment, merchandise, products or services providing in each instance for a purchase or sale price exceeding $10,000; (iv) contracts and other agreements for the sale of any of the assets or properties of the Company other than in the ordinary course of business or for the grant to any person of any options, rights of first refusal, or referential or similar rights to purchase any of such assets or properties; (v) partnership or joint venture agreements; (vi) contracts or other agreements under which the Company agrees to indemnify any party or to share the tax liability of any party; (vii) contracts, options and other agreements for the purchase of any asset, tangible or intangible, calling for an aggregate purchase price or payments in any one year of more than $25,000 in any one case (or in the aggregate, in the case of any related series of contracts and other agreements; (viii) contracts and other agreements that cannot by their terms be canceled by the Company and any successor or assignee of the Company without liability, premium or penalty on no less than thirty (30) days' notice and which provide for payments in any one year in excess of $5,000 and $10,000 in the aggregate; (ix) contracts and other agreements with customers or suppliers for the sharing of fees, the rebating of charges or other similar arrangements; (x) contracts and other agreements containing obligations or liabilities of any kind to holders of the securities of the Company as such (including, without limitation, an obligation to register any of such securities under any federal or state securities laws); (xi) contracts and other agreements containing covenants of the Company not to compete in any line of business or with any person or covenants of any other person not to compete with the Company in any line of business; (xii) contracts and other agreements relating to the acquisition by the Company of any operating business or the capital stock of any other person; (xiii) contracts and other agreements requiring the payment to any person of a commission or fee, including contracts or other agreements with consultants which provide for aggregate payments in excess of $10,000; (xiv) contracts, indentures, mortgages, promissory notes, loan agreements, guaranties, security agreements, pledge agreements, and other agreements relating to the borrowing of money or securing any such liability; (xv) distributorship or licensing agreements; (xvi) contracts under which the Company will acquire or has acquired ownership of, or license to, intangible property, including software (other than software licensed by the Company as an end user for less than $10,000 and not distributed by it); (xvii) leases, subleases or other agreements under which the Company is lessor or lessee of any real property or personal property and which provide for payments in any one year in excess of $5,000 and $10,000 in the aggregate; or (xviii) any other material contracts or other agreements whether or not made in the ordinary course of business that are in each instance material to the Company or the terms of which in each instance would have a material adverse effect on the Company's business or prospects, condition, financial or otherwise, or any of its assets or properties of the Company.
(b) There have been delivered or made available to Buyer true and complete copies of all such Material Contracts (and all amendments, waivers or other modifications thereto) and, with respect to any oral Material Contracts, complete and accurate summaries thereof. Except as set forth on Schedule 2.14, making specific reference to the Material Contract as to which exception is taken and explaining the exception, all of such Material Contracts are valid, subsisting, in full force and effect, binding upon the Company, and to the best knowledge of the Company, binding upon the other parties thereto in accordance with their terms. The Company, and to the best knowledge of each employee of the Company each other party thereto has in all material respects performed all the obligations required to be performed by them to date, has received no notice of default and is not in default under any such Material Contracts. The Company has no present expectation or intention of not fully performing all its obligations under each Material Contract, and no employee of the Company has any knowledge of any breach or anticipated breach by the Company or any other party to any such Material Contract.
(c) Except for this Agreement and the Related Agreements none of the officers, directors or employees of the Company, nor any person directly or indirectly controlled by, or any relative of, one or more of such officers, directors or employees (each, an "Insider" and collectively, the "Insiders"), is presently a party to any transaction or agreement with the Company (other than agreements and transactions in the ordinary course of business disclosed hereunder for services as officers, directors and employees) in connection with the business of the Company, including, without limitation, any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from, any officer, director, any such employee, any relative of any officer, director or such employee or any corporation, partnership, trust or other entity in which any officer, director or any such employee has a substantial interest or of which he or she is an officer, director, trustee or partner.
(d) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities or mortgaged or pledged, or otherwise placed or agreed to place a lien or security interest on any asset of the Company individually in excess of $10,000 or in excess of $20,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel or other expenses, or (iv) sold, exchanged, licensed, encumbered, mortgaged, pledged or otherwise disposed of any of its assets or rights, other than in the ordinary course of business.
2.15 Real Estate. The Company does not own any real property or any buildings or other structures and does not have any options or any contractual obligations to purchase or acquire any interest in real property. The leasehold interests of the Company set forth in Schedule 2.15 are subject to no Lien (other than Liens on the interests of the respective lessors that indirectly burden such leasehold interests). All such leases are in good standing and in full force and effect without amendment thereto, and the Company is entitled to all benefits under such leases.
2.16 Personal Property. Schedule 2.16 attached hereto sets forth (i) a true, correct and complete list of all items of tangible personal property (A) owned by the Company as of the date hereof having either a net book value per unit or an estimated fair market value per unit in excess of $10,000 or (B) not owned by the Company but in the possession of or used or useful in the business of the Company and having rental payments therefor in excess of $250 per month or $3,000 per year (collectively, the "Personal Property") as well as other assets (i.e. cash, etc.); and (ii) a description of the owner of, and any agreement relating to the use of, each item of Personal Property not owned by the Company and the circumstances under which such Personal Property is used. Except as disclosed in Schedule 2.16:
(a) no officer, director, stockholder or employee of the Company, nor any spouse, child or other relative or affiliate thereof, owns directly or indirectly, in whole or in part, any of the Personal Property;
(b) each item of Personal Property not owned by the Company is in such condition that upon the return of such Personal Property to its owner in its present condition at the end of the relevant lease term or as otherwise contemplated by the applicable agreement between the Company and the owner or lessor thereof, the obligations of the Company to such owner or lessor will be discharged;
(c) the Personal Property is in good operating condition and repair, normal wear and tear excepted, is currently used by the Company in the ordinary course of its business and normal maintenance has been consistently performed with respect to the Personal Property; and
(d) the Company owns or otherwise has the right to use all of the
Personal Property now used or useful in the operation of its business or the use of which is necessary for or useful in the performance of any material contract, letter of intent or proposal to which the Company is a party.
2.17 Proprietary Rights.
(a)(i) As used in this Agreement, the term "Proprietary Rights" means all:
(A) trademarks, service marks, trade names, franchises and copyrights and all registrations and applications to register any of the foregoing with any agency or authority;
(B) patents, patent applications, inventions and designs, and any registration thereof with any agency or authority;
(C) trade secrets, including all processes, know-how, technical data, shop rights, and any media or other tangible embodiment thereof and all descriptions thereof; and
(D) other technology and intangible property, including without limitation computer programs, databases, and documentation and flow charts.
(ii) The Company does not have any Proprietary Rights.
(b)(i) None of the present activities or, to the best
knowledge of the Company, the proposed activities, of the Company or its
products or assets infringe on any Proprietary Rights of others, (ii) the
Company has not received any claim or notice of any claim to that effect, and
(iii) to the best knowledge of the Company, there is no existing or threatened
infringement or violation by others of the Proprietary Rights of the Company.
(c) To the best knowledge of the Company, there is no existing or threatened violation of the confidentiality of the Company's confidential information or trade secrets. The Company is not making unauthorized use of any confidential information or trade secrets of any Person, including without limitation any former employer of any past or present employees or consultants of the Company.
(d) To the best knowledge of the Company, none of the activities of the employees or consultants of the Company on behalf of the Company violates or has violated any agreements or arrangements that any such employees or consultants have or have had with former employers. Each of the employees and consultants who contributed to the discovery or development of any of the Proprietary Rights (other than Proprietary Rights licensed to the Company by any party other than a consultant to the Company) did so in each case within the scope of his or her employment or contractual relationship with the Company.
2.18 Title to Assets; Liens. The Company owns outright and has good,
valid and marketable title to all of its assets and properties of every nature
whatsoever, including Proprietary Rights and Personal Property, used in the
business, including, without limitation, all of the assets and properties
reflected in the Financial Statements, free and clear of any Lien, except for
(i) assets and properties disposed of, or subject to purchase or sales orders,
in the ordinary course of business consistent with past practice since the
Current Balance Sheet Date or (ii) liens or other encumbrances securing the
claims of materialmen, carriers, landlords and like persons, all of which are
not yet due and payable. There are no developments affecting any of such
properties or assets pending or, to the best knowledge of the Company,
threatened, that might materially detract from the value of such property or
assets, materially interfere with any present or intended use of any such
property or assets or materially and adversely affect the marketability of such
properties or assets.
2.19 Customers and Distributors. Schedule 2.19 sets forth all representatives and distributors of the Company's products (whether pursuant to commission, royalty or other arrangement) and the four (4) customers who account for the largest sales of the Company (collectively, the "Customers and Distributors"). To the best knowledge of the Company, the relationships of the Company with its Customers and Distributors and its suppliers are generally good commercial working relationships. No Stockholder knows of any plan or intention of any such Customer, Distributor, or supplier, and the Company has not received any written or oral threat from any Customer, Distributor or supplier, to terminate, cancel or otherwise adversely modify its relationship with the Company or to decrease materially or limit its services, supplies or materials to the Company or its usage, purchase or distribution of the services or products of the Company.
2.20 Employee Benefit Plans. The Company does not maintain, and has not maintained, any pension, profit sharing, retirement, deferred compensation, stock purchase, stock option, incentive, bonus, sales commission, vacation, severance, disability, life insurance, group insurance, multi-employer or other employee benefit plans, programs or other contractual arrangements, in respect of, or that otherwise cover, any of the current or former officers or employees of the Company, or their heirs or beneficiaries (collectively, the "Plans").
2.21 Employees and Consultants. Set forth on Schedule 2.21 is a complete list of the Company's (i) employees, (ii) consultants and (iii) independent contractors who spend at least fifty percent (50%) of their professional time working for the Company, with names, current salaries and, with respect to employees, current positions with the Company. The Company generally enjoys a good employer-employee relationship with its employees. The Company is not delinquent in payments to any of its employees or consultants for any wages, salaries, commissions, bonuses or other direct compensation for any services performed by them to the date hereof or amounts required to be reimbursed to such employees.
2.22 Labor Relations; Compliance. The Company is not, and has never been, a party to any collective bargaining or other labor agreement.
2.23 Certain Transactions. The Company is not indebted to any Insiders, in any amount whatsoever, other than for payment of salary for services rendered and reasonable expenses; none of said Insiders are indebted to the Company or, to the best knowledge of the Company, after due inquiry, have any direct or indirect ownership interest in, or any contractual relationship with, any firm, corporation, or other Person with which the Company is or was affiliated or with which the Company has a business relationship, or any firm, corporation, or other Person which, directly or indirectly, competes with the Company; and no Insider is, directly or indirectly, a party to or otherwise an interested party with respect to any contract with the Company.
2.24 Insurance. Schedule 2.24 sets forth a list of all policies or binders of fire, liability, product liability, workmen's compensation, vehicular, directors and officers and other insurance held by or on behalf of the Company. Such policies and binders are in full force and effect, are reasonably believed to be adequate for the businesses engaged in by the Company and are in conformity with the requirements of all leases to which the Company is a party and, to the best knowledge of the Company, are valid and enforceable in accordance with their terms. The Company is not in default with respect to any provision contained in any such policy or binder, nor has the Company failed to give any notice or present any claim under any such policy or binder in due and timely fashion. There are no outstanding unpaid claims in excess of $10,000 in the aggregate under all such policies and binders. The Company has not received notice of cancellation or non-renewal of any such policy or binder. The Company does not have notice, and does not have any reason to believe that it will receive notice, of cancellation or non-renewal of its policy number SG10032625896E held by Solid General Insurance Brokers Limited.
2.25 Banks, Brokers and Proxies. Schedule 2.25 sets forth (i) the name of each bank, trust company, securities or other broker or other financial institution with which the Company has an account, credit line, or safe deposit box or vault or
otherwise maintains relations; (ii) the name of each person authorized by the Company to draw on any such account or credit line, to transfer securities, or to have access to any safe deposit box or vault; (iii) the purpose of each such account, safe deposit box or vault; and (iv) the names of all persons authorized by proxies, powers of attorney or other like instruments to act on behalf of the Company in matters concerning its business or affairs. All such accounts, credit lines, safe deposit boxes and vaults are maintained by the Company for normal business purposes, and no such proxies, powers of attorney or other like instruments are irrevocable.
2.26 Brokerage. No broker, finder, agent or similar intermediary has acted on behalf of the Company in connection with this Agreement or the transactions contemplated hereby, and there are no brokerage commissions, finders' fees or similar fees or commissions payable by the Company, Buyer or any subsidiary that acquires the Shares in connection therewith based on any agreement, arrangement or understanding with the Company or any Stockholder or any action taken by it or any of them.
2.27 FCPA. The Stockholders represent and warrant to Buyer that they are familiar with the U.S. Foreign Corrupt Practices Act, as amended, and the regulations adopted thereunder (the "Act"), and that the Company has conducted all of its activities in full compliance with such Act and regulations. The Company, nor anyone acting on its behalf, has made or offered any payment or given anything of value directly or indirectly to any government official or to any official of a political party or candidate for public office in violation of the Act.
2.28 Full Disclosure. The Schedules hereto and all documents and other papers listed therein or required to be delivered pursuant to this Agreement and the Related Agreements are true, complete, correct and authentic. No representation or warranty of any Stockholder contained in this Agreement, and, to the best knowledge of the Company and each Stockholder or executive of the Company, no document or other paper furnished by or on behalf of the Company to Buyer (or any of its agents) pursuant to this Agreement or in connection with the transactions contemplated hereby, taken as a whole, contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements made, in the context in which made, not false or misleading. There is no fact known to any Stockholder or executive of the Company that has not been disclosed to Buyer in this Agreement and the Related Agreements or the Schedules hereto and thereto that has or will have a material adverse effect on the Company or its assets, properties, business, operations, prospects or condition (financial or otherwise), or is reasonably likely to have such an effect.
2.29 Best Knowledge. As used herein, an individual will be deemed to have "best knowledge" of a particular fact or other matter if:
(a) such individual is actually aware of such fact or other matter;
(b) a prudent individual could be expected to discover or otherwise become aware of such fact or other matter in the course of conducting a reasonably comprehensive investigation concerning the existence of such fact or other matter; or
(c) it relates to any matter of Law.
A corporation or entity (other than an individual) will be deemed to have "best knowledge" of a particular fact or other matter if any individual who is serving, or who has at any time served, as a director, officer, employee, agent, partner, executor, or trustee of such corporation or entity (or in any similar capacity) has, or at any time had, knowledge of such fact or other matter. Without limiting the generality of the foregoing, each individual listed on Schedule 1 hereto shall be deemed to have knowledge of any fact or matter of which the Company has knowledge as provided above.
SECTION 3
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
Each of the Stockholders, jointly and severally, represents and warrants to Buyer as of the date hereof and on and as of the Closing Date as follows:
3.1 Title to Shares.
(a) Each Stockholder is and will be at the Closing the holder of record and the owner of the entire beneficial interest in the Shares set forth opposite such Stockholder's name on Schedule 1 hereto, free and clear of any Lien whatsoever and without any exception whatsoever.
(b) Each Stockholder will transfer and deliver to Buyer or its designee at the Closing a good and valid title to all of the Shares set forth opposite his or her or its name on Schedule 1, free and clear of any Lien or claim of any kind, and the entire beneficial interest therein without any exception whatsoever.
3.2 Authority to Execute and Perform Agreements. Each Stockholder has full legal right and power to enter into, execute and deliver this Agreement and to perform in full such Stockholder's obligations hereunder. The execution, delivery and performance of this Agreement or any Related Agreement (where applicable) by each Stockholder requires no consent, approval, waiver or other action by or in respect of, or filing with, any governmental body, agency, official or authority, the landlord or any other Person. This Agreement or any Related Agreement (where applicable) has been duly executed and delivered and is the valid and binding obligation of each Stockholder, enforceable against each Stockholder in accordance with its terms.
3.3 No Breach. The execution, delivery and performance of this Agreement and the Related Agreements and the consummation of the transactions contemplated hereby and thereby will not violate, conflict with, contravene, or result in the breach of or constitute (or with notice or lapse of time or both constitute) a default under, any instrument, contract or other agreement to which each Stockholder is a party or to which each Stockholder or each Stockholder's Shares may be bound or subject; or violate, conflict with or contravene any order, judgment, injunction, award or decree or other requirement of any court, arbitrator or governmental or regulatory body against, or binding upon, each Stockholder or each Stockholder's Shares; or violate, contravene or conflict with any statute, law, ordinance or regulation of any jurisdiction binding upon or applicable to each Stockholder or each Stockholder's Shares.
3.4 Actions and Proceedings. There are no actions, investigations, proceedings (or any basis therefor), suits or claims or legal, administrative or arbitral proceedings pending against or, to the best knowledge of each Stockholder, threatened against or affecting each Stockholder or each Stockholder's Shares that have or may have (a) the effect of restraining, modifying or preventing the consummation of the transactions contemplated hereby or (b) a materially adverse effect on the assets, properties, business, operations, prospects, or condition (financial or otherwise) of the Company or Buyer.
3.5 Brokerage. There are no brokerage commissions, finders' fees or similar fees or commissions payable in connection therewith based on any agreement, arrangement or understanding with such Stockholder or any action taken by such Stockholder, the liability for which is or will be on the Company or Buyer.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to the Stockholders as follows:
4.1 Organization. Buyer is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has the corporate
power and lawful authority to own, lease and operate its assets, properties and business and to carry on its business as now being and as heretofore conducted.
4.2 Authority to Execute and Perform Agreements. Buyer has the full legal right and power and all authority required to enter into, execute and deliver this Agreement and to perform fully its respective obligations hereunder, and this Agreement has been duly executed and delivered and is the valid and binding obligation of Buyer enforceable in accordance with its terms except, (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights; and (ii) general principles of equity that restrict the availability of equitable remedies.
4.3 No Breach. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby will not
(i) violate any provision of the respective charter or By-laws of Buyer; (ii)
violate any order, judgment, injunction, award or decree of any court,
arbitrator or governmental or regulatory body against, or binding upon, Buyer or
upon the securities, properties, assets or business of Buyer; (iii) violate any
Law which relates to Buyer or to the securities, properties, assets or business
of Buyer; (iv) violate any Permit of the Buyer; or (v) except as set forth on
Schedule 4.3, require any filing with, notice to, or permit, approval or consent
of any foreign, federal, state, local or other governmental or regulatory body
or of any other person.
SECTION 5
COVENANTS AND AGREEMENTS
The parties covenant and agree as follows:
5.1 Consummation of Agreement. Each of Buyer and the Stockholders shall use their best efforts to perform and fulfill all conditions and obligations to be performed and fulfilled by it under this Agreement and the Stockholders shall use their best efforts further to ensure that to the extent within the Stockholders' control, no breach of any of the Stockholder's representations, warranties, and agreements hereunder or contemplated hereby occurs or exists on or before the Closing Date to the end that the transactions contemplated by this Agreement shall be fully carried out.
5.2 Further Assurances. Each of the parties shall execute such documents, further instruments and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated hereby.
5.3 Survival. Each of the parties agrees that following or at Closing, the following action shall be taken:
(i) The Company will be renamed Fusion Jamaica Limited and the Company and its shareholders shall take such action as to cause the name change to be filed with the applicable government authorities.
(ii) Satellite Dish. (i) The Company, via a loan from Buyer, will purchase a satellite dish ("Dish"). Dallas shall pay Buyer the full amount of the purchase and installation price of the Dish either from, in whole or in part and in the Company's discretion, (i) insurance proceeds which are received from the Company's claim with Solid Life & General Insurance Brokers Ltd., claim number SG2004-2625-423E, in cash, or through dividends that would otherwise be made to him by the due date set forth in the promissory note ("Secured Dish Note") which is attached to and incorporated herein as Exhibit A. The Secured Dish Note shall be secured by all equipment, accounts and other assets of the Company. In the event the Company receives insurance proceeds as set forth above, Dallas shall accept the proceeds in trust on behalf of the Buyer and immediately forward the proceeds to Buyer. The Company will cause Buyer to be named a loss payee on the insurance policy. (ii) In the event the Company determines after Closing that a Dish is not needed for industry standard
connectivity to conduct business, Dallas shall accept the insurance proceeds in trust on behalf of the Buyer and immediately forward the proceeds to Buyer.
(iii) Equipment Purchase. Buyer will loan the Company such amount as reasonably necessary, as the Buyer shall determine following Closing, to purchase the equipment required for deployment of services in Jamaica ("Secured Equipment Note"). A copy of a form of the Equipment Note is attached as Exhibit "B". The Secured Equipment Note shall be secured by all equipment, accounts and other assets of the Company.
(iv) Working Capital. Buyer will loan the Company an amount to be mutually agreed, for working capital purposes (the "Secured Working Capital Note"). The loan will bear interest at the lowest amount required by law (the imputed interest rate). A copy of a form of Secured Working Capital Note is attached as Exhibit "C". The Secured Working Capital Note shall be secured by all equipment, accounts and other assets of the Company.
(v) Repayment of the Secured Equipment Note and Secured Working Capital Note. 80% of the Company's net profits each month will be used to repay the Buyer and applied to the Secured Equipment Note and Secured Working Capital Note. 20% of the Company's net profits each month will be distributed to the shareholders, on a pro-rata basis, unless the Company determines otherwise. A copy of a Form of Security Agreement is attached as Exhibit "G".
(vi) Financials. The Company shall provide, notwithstanding whether prior to or post Closing, (i) unaudited financial statements within 5 days after the end of each month; (ii) audited financial statements within 15 days after the end of each quarter and (iii) audited financial statements within 15 days after the end of each fiscal year in accordance with U.S. GAAP in U.S. dollars. The Company's accountant, shall be accountable to the accounting department of the Buyer, and will follow all of the Buyers corporate processes, procedures and compliance regulations. The Stockholders shall take such action as necessary to provide information regarding the Company prior to the date of this Agreement as necessary for the accountants to prepare the financial statements identified herein. The Company will use auditors appointed by Buyer. All costs and fees associated with an audit(s) shall be the Company's obligation.
(vii) The Company shall reimburse Buyer, in an amount to be determined between the parties, for its costs and expenses associated with the provision of legal, financial, operations, engineering and other services to the Company.
(viii) Dallas Employment. Dallas's employment shall be "at-will" and follow the terms as set forth on Exhibit "D". (ix) Right of First Refusal. The parties shall enter |
into a Right of First Refusal Agreement. A copy of a form of Right of First Refusal is attached as Exhibit "E".
(x) Share Restriction. The Shares owned by Shareholders post Closing shall be restricted from trade for a period of two (2) years following Closing, or as the Company shall otherwise require.
(xi) Drag Along
If the Majority Shareholders propose to enter into a Drag-Along Sale (as defined below), upon delivery by such Majority Shareholders of a written notice to the Minority Shareholders containing the terms of the Drag-Along Sale (the "Drag-Along Notice") each Minority Shareholder shall be deemed to have consented to and waived any objection to, and shall sell all of such Minority Shareholder's Shares in the Drag-Along Sale on the same terms and for the same price per Share as the Majority Shareholder's Shares as set forth in the Drag-Along Notice. Each Minority Shareholder shall bear a proportionate share of any expenses attributable to the sale of the Shares in connection with the Drag-Along Sale and shall take all necessary or desirable actions, as requested by the Majority Shareholders in connection with the
sale of his or their Shares. A "Drag-Along Sale" shall mean a bona fide offer from an Offeror unrelated to the Majority Shareholders to purchase or otherwise acquire for value one hundred percent (100%) of the Shares at a price per Share equal to or greater than $5.00 (so long as the current capital structure is not changed).
(xii) Non-compete. The Shareholders agree not to compete with the Company in Jamaica, West Indies, for a period of not less than two (2) years from the date they leave employment with the Company or have sold all of their shares (which ever is later). A copy of a form of non-compete is attached as Exhibit "F".
(xiii) Nothing herein shall be deemed to restrict Turner from selling a portion of her Shares to Dallas post Closing under terms and conditions as they shall agree upon.
(xiv) Board of Directors. Until the next annual meeting of the Company's Shareholders, the following directors shall serve on the board of directors: Patrick S. Dallas, Vonciel Turner, and Matthew D. Rosen and two additional persons to be designated by Buyer.
(xv) Transfer of Shares. Dallas and Buyer shall split 50%/50% of the stamp duty and transfer tax and any other taxes or fees associated with the sale and transfer of the Shares. This tax is estimated to be $4,000.00.
(xvi) Service Agreements. At Closing the parties agree to execute (i) a standard buy/sell carrier agreement which will contain standard industry terms and allow for Buyer to terminate traffic in Jamaica at a price no less than its first route in its LCR; and (ii) a service agreement for other products and services which will include an administrative cost to be paid to Buyer in an amount to be determined.
SECTION 6
CONDITIONS PRECEDENT TO THE OBLIGATION OF BUYER TO CLOSE
The obligations of Buyer to enter into and complete the Closing is subject, at the option of Buyer acting in accordance with the provisions of this Agreement with respect to termination hereof, to the fulfillment of the following conditions, each of which is for the exclusive benefit of Buyer and not of any of the Stockholders and any one or more of which may be waived by Buyer alone:
6.1 Representations, Warranties and Covenants. The representations and warranties of the Company and each Stockholder contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. The Company and each Stockholder shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by it on or before the Closing Date. The Company and each Stockholder shall have delivered to Buyer a certificate, dated the Closing Date, to the foregoing effect and stating that all conditions to Buyer's obligations hereunder have been satisfied.
6.2 Consents and Approvals. All consents, Permits and approvals from all Persons, including without limitation all governmental authorities and all parties to contracts or other agreements with any Stockholder or the Company, that may be required in connection with the performance by each Stockholder of his or her obligations under this Agreement, the continuance (without modification, amendment, variation or renegotiation) after the Closing of such contracts or other agreements with the Company or Buyer or any subsidiary of Buyer that acquires the Shares, and/or the acquisition and ownership of the Shares by Buyer or its subsidiary shall have been obtained.
6.3 Litigation. No action, suit or proceeding shall have been instituted before any court or governmental or regulatory body or instituted or threatened by any governmental or regulatory body to restrain, modify or prevent the consummation of the transactions contemplated hereby, or to seek damages or a discovery order in
connection with such transactions, or that has or may have, in the reasonable opinion of the Buyer, (a) the effect of restraining, modifying or preventing the consummation of such transactions or (b) a materially adverse effect on the assets, properties, business, operations or condition (financial or otherwise) of the Company or Buyer.
6.4 Delivery of Share Certificates. The Stockholders shall have delivered or caused to be delivered to Buyer or its designee the certificates for all of the Shares, which shall be all of the issued and outstanding capital shares of the Company, duly endorsed for transfer to Buyer or its designee, free and clear of any Liens or beneficial interests of any party.
6.5 Releases. Each Stockholder shall, in form satisfactory to Buyer's counsel, have released and discharged the Company from any and all claims, demands and liabilities whatsoever arising or accruing before the Closing under each and every agreement, arrangement, Law or other state of facts.
6.6 Certificates as to Representations and Warranties. Each of the Stockholders shall have delivered to Buyer a certificate in form and substance reasonably satisfactory to Buyer certifying as to his or her knowledge of certain representations and warranties of the Company.
6.7 Documents. The Stockholders shall have delivered or caused the Company to deliver such documents as are set forth in Section 5.
6.8 Additional Action. The Stockholders shall have delivered or caused the Company to deliver such additional certificates, and shall have taken such additional actions, as Buyer shall reasonably require to evidence and confirm the authorization and approval of the sale of the Shares, their assignment and transfer to Buyer or its designee, and their registration in the name of the Buyer or its designee.
6.9 Board Approval. This Agreement and the transactions contemplated hereby shall have been approved by the Board of Directors of Buyer.
6.10 Government Approval. The Registrar of Companies and Minister shall have provided Buyer counsel with approval of the transactions contemplated herein.
6.11 Attorney Approval. The Buyer receives approval from its Jamaican counsel that this Agreement meets the requirements of the Registrar of Companies and contains the necessary terms and conditions of similar stock sales transactions within Jamaica.
SECTION 7
CONDITIONS PRECEDENT TO THE OBLIGATION OF THE STOCKHOLDERS TO CLOSE
The obligation of the Stockholders to enter into and complete the Closing is subject to the fulfillment of the following conditions, each of which is for the exclusive benefit of the Stockholders and not of Buyer and any one or more of which may be waived by the Stockholders:
7.1 Representations, Warranties and Covenants. The representations and warranties of Buyer contained in this Agreement shall be true in all material respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. Buyer shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by it on or before the Closing Date. Buyer shall have delivered to the Stockholders a certificate, dated the Closing Date and signed by an officer of the Buyer, to the foregoing effect and stating that all conditions to the obligations of the Stockholders hereunder have been satisfied.
7.2 Litigation. No action, suit or proceeding shall have been instituted before any court or governmental or regulatory body, or instituted by any governmental or regulatory body, to restrain, modify or prevent the carrying out of the
transactions contemplated hereby, which such action, suit or proceeding shall not have been stayed.
7.3 Consents and Approvals. All consents, permits and approvals from parties to contracts or other agreements with Buyer that may be required in connection with the performance by Buyer of its obligations under this Agreement shall have been obtained.
7.4 Board Approval. This Agreement and the transactions contemplated hereby shall have been approved by the Board of Directors of Convergent Technologies, Ltd.
SECTION 8
INDEMNIFICATION
8.1 Survival. Notwithstanding any right of any party to investigate fully the affairs of the other party and notwithstanding any knowledge of facts determined or determinable by such party pursuant to such investigation or right of investigation, each party has the right to rely fully upon the representations, warranties, covenants and agreements of each other party in this Agreement or in any Schedule, certificate or financial statement delivered by any party pursuant hereto. All such representations, warranties, covenants and agreements shall survive the execution and delivery hereof and the Closing hereunder and be indemnified in accordance with this Section 8, and, except as otherwise specifically provided in this Agreement, shall thereafter:
(a) except as provided in clauses (b) and (c) hereof, terminate and expire at the end of the thirty-sixth (36th) full calendar month after the Closing Date with respect to any claim based upon, arising out of or otherwise in respect of any inaccuracy in or any breach of any representation or warranty of any of the Stockholders contained in Sections 2 or 3 hereof or of Buyer contained in Section 4 hereof, of which the party asserting such claim shall have given no notice on or before the end of such thirty-sixth (36th) month, except for any claim based upon fraud or wilful misconduct by any of the Stockholders or the Company, which shall survive until the end of the eighty- fourth (84th) full calendar month after the Closing Date;
(b) survive forever, with respect to the representations and warranties of the Stockholders contained in Section 2.28 hereof and the representations and warranties of the Stockholders contained in Sections 3.1 through 3.4 hereof; and
(c) terminate and expire, with respect to any Tax Claim (as
hereinafter defined), on the later of (i) the date upon which the assessment of
any taxes to which any such Tax Claim may relate is barred by all applicable
statutes of limitations and (ii) the date upon which any claim for refund or
credit related to such Tax Claim is barred by all applicable statutes of
limitations. As used herein, "Tax Claim" means any claim based upon, arising out
of or otherwise in respect of (A) issues raised on audit of the Company by
taxing authorities with respect to any period ending on or before the Closing
Date, (B) any inaccuracy in or any breach of any representation, warranty,
covenant or agreement of any of the Stockholders contained in this Agreement
related to Taxes or (C) any other Tax liabilities of the Company other than
Taxes of the Company that are properly allocable to periods of time beginning
after the Closing Date; provided that "Tax Claim" shall exclude any such claim
arising out of any Tax return filed by the Company after the Closing which claim
(x) is not based on incorrect or incomplete information compiled by the Company
before the Closing and (y) does not result from any misconduct or bad faith of
any of the Stockholders or of the Company prior to the Closing.
8.2 Obligation of the Stockholders to Indemnify. Subject to the
limitations set forth below and to the termination provisions set forth in
Section 8.1, each Stockholder agrees, jointly and severally, to indemnify,
defend and hold harmless Buyer (and its subsidiaries, directors, officers,
employees, affiliates and assigns) from and against all losses, liabilities,
damages, costs or expenses (including
interest and penalties imposed or assessed by any judicial or administrative body and reasonable attorneys fees ("Losses") based upon, arising out of or otherwise in respect of:
(i) any inaccuracy in or any breach of any representation, warranty, covenant or agreement of any Stockholder contained in this Agreement or in any Schedule delivered pursuant hereto;
(ii) any Tax Claim, whether or not included in clause
(i); compensation by any broker, finder, agent or similar intermediary claiming
to have been employed or retained by or on behalf of the Company or any of the
Stockholders; or any claim based upon any fraud or willful misconduct by any of
the Stockholders or the Company, and
(iii) any claim relating to the terms and conditions of employment of any of the Company's employees before the Closing, whether first asserted before or after the Closing. While claims based on the fact or manner of termination of any employee terminated after the Closing shall not be indemnifiable under this clause (iii), any claim made by any such employee that otherwise falls within this clause (iii) shall be subject to this Section 8.
The liability of the Stockholders with respect to indemnification hereunder shall be joint and several.
8.3 Obligation of Buyer to Indemnify. Subject to the limitations set
forth below and in Section 8.5 hereof and to the termination provisions set
forth in Section 8.1, Buyer agrees to indemnify, defend and hold harmless each
Stockholder from and against any Losses based upon, arising out of or otherwise
in respect of (i) any material inaccuracy in or breach of any representation,
warranty, covenant or agreement of Buyer contained in this Agreement or in any
Schedule, certificate, document or other papers delivered pursuant hereto, or
(ii) any claim or demand for commission or other compensation by any broker,
finder, agent or similar intermediary claiming to have been employed by or on
behalf of Buyer.
8.4 Notice and Opportunity to Defend.
(a) Notice of Asserted Liability. Promptly after receipt by any party entitled to indemnification (the "Indemnitee") of notice of any demand, claim or circumstances that, with or without the lapse of time, would give rise to a claim or the commencement (or threatened commencement) of any action, proceeding or investigation (an "Asserted Liability") that may result in a Loss, the Indemnitee shall give notice thereof (the "Claims Notice") to any other party or parties obligated to provide indemnification pursuant to Sections 8.2 or 8.3 hereof (the "Indemnifying Party"). The Claims Notice shall describe the Asserted Liability in reasonable detail, and shall indicate the amount (estimated, if necessary) of the Loss that has been or may be suffered by the Indemnitee. If the Indemnitee fails to give the Indemnifying Party timely and reasonable notice of an Asserted Liability that might result in a Loss, such failure to so notify Indemnitee shall relieve the Indemnifying Party from liability hereunder with respect to such claim if such failure to so notify the Indemnifying Party results in the forfeiture by the Indemnifying Party of any material rights and defenses otherwise available to the Indemnifying Party with respect to such Asserted Liability.
(b) Opportunity to Defend. The Indemnifying Party may elect to compromise or defend, and control the defense of, at its own expense and by counsel reasonably satisfactory to the Indemnitee, any Asserted Liability,provided that the Indemnitee shall have no liability or obligation, and shall be subject to no restriction, under any compromise or settlement agreed to by the Indemnifying Party that it has not approved in writing.
SECTION 9
MISCELLANEOUS
9.1 Publicity. Neither the Company nor the Stockholders shall make any public release or announcement concerning this Agreement or the transactions contemplated hereby without advance approval thereof by the Buyer.
9.2 Expenses. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such cost or expense.
9.3 Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission or, if mailed, two days after the date of deposit in the mails, as follows:
(a) if to Buyer:
Fusion Telecommunications International, Inc.
c/o Matthew D. Rosen
420 Lexington Avenue
Suite 520
New York, New York 10170
Telephone: 212-972-2000
Facsimile: 212-972-7884
with a copy to:
Heitz & Associates, P.C.
345 Woodcliff Drive
Fairport, New York 14450
Telephone: 585-387-0000
Facsimile: 585-387-0130
(b) if to any Stockholder before the Closing:
Convergent Technologies, Ltd.
c/o Vonciel Turner
10 Timber Green Court
Medford, New Jersey 08055
Telephone: 609-654-5961
Facsimile: 609-654-0657
with a copy to:
Dickson, Ashenfelter, Slous, Tanner & Trevenen LLP
250 Bellevue Avenue
Upper Montclair, New Jersey 07043-1394
Telephone: 973-744-2100
Facsimile: 973-509-9521
(c) if to any Stockholder after the Closing, to such Stockholder's address as set forth on the signature page hereof.
Any party may by notice given in accordance with this Section 9.3 to the other parties designate another address or person for receipt of notices hereunder.
9.4 Entire Agreement. This Agreement (including the Related Agreements, Exhibits and Schedules) contain the entire agreement among the parties with respect to the transactions contemplated hereby, and supersedes all prior agreements, written or oral, with respect thereto.
9.5 Waivers and Amendments; Non-Contractual Remedies; Preservation of Remedies. This Agreement may be amended, superseded, cancelled, renewed or extended, and any term hereof may be waived, only by a written instrument signed by Buyer and the Stockholders or, in the case of a waiver, by Buyer or the Stockholder, as the case may be, waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any waiver on the part of any party of any such right, power or privilege, nor any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any other such right, power or privilege. The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies that any party may otherwise have at law or in equity. The rights and remedies of any party based upon, arising out of or otherwise in respect of any inaccuracy in or breach of any representation, warranty, covenant or agreement contained in this Agreement shall in no way be limited by the fact that the act, omission, occurrence or other state of facts upon which any claim of any such inaccuracy or breach is based may also be the subject matter of any other representation, warranty, covenant or agreement contained in this Agreement (or in any other agreement between the parties) as to which there is no inaccuracy or breach.
9.6 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York without regard to its conflict of laws provisions. The parties hereto specifically attorn to the exclusive jurisdiction of the courts of the State of New York in respect of any litigation arising out of this Agreement or the nonperformance hereof. The prevailing party of any litigation shall be entitled to receive from the losing party reasonable attorneys' fees and costs.
9.7 Binding Effect; No Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and legal representatives. This Agreement is not assignable except by operation of law or by Buyer to any of its affiliates.
9.8 Variations in Pronouns. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require.
9.9 Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto.
9.10 Exhibits and Schedules. The Exhibits and Schedules are a part of this Agreement as if fully set forth herein. All references herein to Sections, subsections, clauses, Exhibits and Schedules shall be deemed references to such parts of this Agreement, unless the context shall otherwise require.
9.11 Headings. The headings in this Agreement are for reference only, and shall not affect the interpretation of this Agreement.
9.12 Severability. Any Section, subsection or other subdivision of this Agreement or any other provision of this Agreement which is, or becomes, illegal, invalid or unenforceable shall be severed herefrom and shall be ineffective to the extent of such illegality, invalidity or unenforceability and shall not affect or impair the remaining provisions hereof, which provisions shall (a) be severed from any illegal, invalid or unenforceable Section or other subdivision of this Agreement, and (b) otherwise remain in full force and effect.
[signature page follows]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
Fusion Telecommunications International, Inc.
By:
STOCKHOLDERS:
VONCIEL TURNER
PATRICK DALLAS
By:
CONVERGENT TECHNOLOGIES, LTD.
SCHEDULE 1 PRE-CLOSING SHAREHOLDER NUMBER OF SHARES -------------------------------------------------------------------------------- Vonciel Turner 245,000 Patrick Dallas 255,000 -------------------------------------------------------------------------------- Total 500,000 POST CLOSING SHAREHOLDER NUMBER OF SHARES -------------------------------------------------------------------------------- Vonciel Turner 245,000 Fusion Telecommunications International, Inc. 255,000 -------------------------------------------------------------------------------- Total 500,000 |
SCHEDULE 2.12
Convergent Technologies, Limited
Licenses
SUMMARY OF CONVERGENT AUTHORITY LICENSES EFFECTIVE EXPIRES GRANTED ---------- --------- ------- ---------- Own and operate the following facilities: Cable Landing Stations, Satellite Earth Station including VSATS, International Gateway Switches, Transmission Towers, etc. such facilities comprising of a public network for the INTERNATIONAL provision of specified services to the public to and from (a) anywhere in VOICE/DATA/TRANSIT Jamaica and/or anywhere outside Jamaica, provide that such foreign CARRIER LICENSE 4/7/2003 4/6/2018 locations have not been proscribed by the government ------------------------------------------------------------------------------------------------------------------------------------ Own and operate the following licensed facilities: "Telecommunications DOMESTIC CARRIER transmission, switching and subscriber LICENSE 4/7/2003 4/6/2013 Own and operate the following licensed ------------------------------------------------------------------------------------------------------------------------------------ Sell to the public SERVICE PROVIDER domestic switched LICENSE 4/7/2003 4/6/2013 minutes ------------------------------------------------------------------------------------------------------------------------------------ Provide telecommunications services (excluding voice INTERNET SERVICE service) only in relation to PROVIDER LICENSE 1/1/2001 12/31/2003 internet access ------------------------------------------------------------------------------------------------------------------------------------ Provide only DATA SERVICE data PROVIDER LICENSE 1/1/2001 12/31/2003 services ------------------------------------------------------------------------------------------------------------------------------------ INTERNATIONAL VOICE SERVICE Resell to the public, international switched minutes obtained PROVIDER* 3/1/2001 12/31/2003 from the existing telecommunications carrier (C&W) ------------------------------------------------------------------------------------------------------------------------------------ |
Convergent Technologies, Limited also represent and warrant that the Company holds all rights to the above listed licenses, and that although some are presently expired, each license is duly recognized and honored by the government of Jamaica and all service providers within Jamaica, West Indies until such time that the government of Jamaica reissues each license.
SCHEDULE 2.14
Convergent Technologies, Ltd. and CaribTel Convergent Technologies, Ltd. and Inra Global Communications, Inc. Convergent Technologies, Ltd. and WorldTalk Convergent Technologies, Ltd. and Rubicon Convergent Technologies, Ltd. and C&WJ
SCHEDULE 2.16
Convergent Technologies, Limited
Equipment List and Other Assets
We, the officers of Convergent Technologies, Limited represent and warrant that the following list accurately describes the company's existing equipment.
1 - Nuera ORCA GX-8 (Switch)]
1 - Cisco 3640 Router
1 - APC Smart-UPS 3000
1 - Coleman Vantage 3500 Generator
We, the officers of Convergent Technologies, Limited represent and warrant that as of December 15, 2004, the Company's total assets include:
o the equipment listed above
o the licenses mentioned on Schedule 2.06
o a letter of credit for interconnection services held by Cable & Wireless Jamaica in the amount of US$85,000
o US$121,163.46 cash
Schedule 2.19
Customers and Distributors
Convergent Technologies, Ltd. and CaribTel Convergent Technologies, Ltd. and Inra Global Communications, Inc. Convergent Technologies, Ltd. and WorldTalk Convergent Technologies, Ltd. and Rubicon Convergent Technologies, Ltd. and C&WJ
SCHEDULE 2.21
Convergent Technologies, Limited
Employee List
We, the officers of Convergent Technologies, Limited represent and warrant that the following list accurately depicts the Company's current employees, and associated salaries.
1. Earl Anderson, Network Engineer - Salary US$4000 per month
2. Gopala Rao Gottumukkala, Billing Administrator/Systems Programmer - Salary US$3000 per month
*See Attached Resumes
SCHEDULE 2.24
We, the officers of Convergent Technologies, Limited represent and warrant that to the best of our knowledge the insurance claim for the satellite dish referenced in Section 5.3 (iii) of the agreement is as presented below.
Name of Insurance Company: Solid Life & General Insurance Brokers Ltd. 61 Half Way Tree Road, Kingston 10 Jamaica, West Indies Insurance Policy Number: SG10032625896E Insurance Policy Premium: J$945,900 (US$15,765) per annum Insurance Claim Number: SG2004/2625/423E Satellite Antenna Replacement Value: J$359,100 (US$5,985) Electronics Replacement Value: J$684,000 (US$11,400) Equipment description attached Date claim was filed: September 30, 2004 Status of claim: Under review |
Schedule 2.25
Banks Brokers and Proxies
National Commercial Bank of Jamaica
Matilda Corners Branch
Old Oak Road
Kingston 6, Jamaica
Schedule 4.3
Minister of Telecommunications
Registrar of Companies
EXHIBIT LIST
Exhibit A Dish Note Exhibit B Equipment Note Exhibit C Working Capital Note Exhibit D Dallas Employment Exhibit E Right of First Refusal Exhibit F Form of Non-compete Exhibit G Form of Security Agreement |
EXHIBIT A
FORM OF SECURED DISH NOTE
New York, New York
[__, 2004]
$[ ]
ON DEMAND, for value received, PATRICK DALLAS, an individual, ("Dallas"), whose principal place of business is A201 Dunrobin Acres, Kingston 10, Kingston, Jamaica, promises to pay Fusion Telecommunications International, Inc., ("Lender"), the sum of DOLLARS ($) in lawful money of the United States of America or such lesser sum as may be demanded hereunder.
Dallas shall pay interest on the amount due under this Demand
Note and on overdue interest payments hereunder at a rate equal to the lesser of
(a) 6.25% per annum and (b) the maximum rate permissible under applicable usury
or similar laws limiting interest rates, said interest to be payable quarterly,
beginning [ ]. This payment rate shall be computed on the
basis of the actual number of days elapsed over a year of 360 days.
If the indebtedness represented by this Demand Note, or any part thereof, is collected at law or in equity or in bankruptcy, receivership or other court proceedings, or this Demand Note is placed in the hands of attorneys for collection, Dallas agrees to pay, in addition to the principal and interest (if any) due under this Demand Note, reasonable attorneys' and collection fees.
The undersigned waives demand, presentment for payment, notice of nonpayment, protest, notice of dishonor and protest, notice of intention to accelerate, notice of acceleration, and all other notices, filing of suit and diligence in collecting this Demand Note and agrees to any substitution, exchange or release of any such security or the release of any party liable hereon and further agrees that it will not be necessary for any holder hereof, in order to enforce payment of this Demand Note by it, to first institute suit or exhaust its remedies against Dallas, and consents to any extension or postponement of time of payment of this Demand Note or any other indulgence with respect hereto, without notice thereof.
The undersigned hereby irrevocably submits to the jurisdiction of any court in the State of New York located in the City of New York and the County of New York, and any appellate court from any thereof, in any action, suit or proceeding brought against it in connection with this Demand Note or for the recognition or enforcement of any judgment. The undersigned hereto agrees that a final judgment in any such action, suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. To the extent permitted by applicable law, the undersigned hereby waives and agrees not to assert by way of motion, as a defense or otherwise in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such courts, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that the Demand Note may not be litigated in or by such courts.
To the extent permitted by applicable law, the undersigned agrees that it shall not seek and hereby waives the right to seek any review of the judgment of any such court by any court of any other nation or jurisdiction which may be called upon to grant an enforcement of such judgment.
The undersigned hereby irrevocably agrees that the summons and complaint or any other process in connection with this Demand Note may be served by mailing to the address set forth below or by hand delivery to a person of suitable age and discretion at the address set forth below. Such service will be complete on the date such process is so mailed or delivered, and the undersigned will have thirty days from such completion of service in which to respond in the manner provided by law. The
undersigned may also be served in any other manner permitted by law, in which event the undersigned's time to respond shall be the time provided by law.
The amounts hereunder shall not be subject in any way whatsoever to offset, setoff, counterclaim or other deduction of any kind whatsoever.
THE UNDERSIGNED HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING DIRECTLY OR INDIRECTLY OUT OF, UNDER OR IN CONNECTION WITH THIS DEMAND NOTE. THE UNDERSIGNED HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT IT WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY LENDER THAT LENDER HAS BEEN INDUCED TO ACCEPT THIS DEMAND NOTE BY, AMONG OTHER THINGS, THIS WAIVER.
This Demand Note shall be governed by, and for all purposes construed in accordance with, the laws of the State of New York (except for its conflict of laws rules).
PATRICK DALLAS
[ADDRESS]
Title:
EXHIBIT B
FORM OF SECURED EQUIPMENT NOTE
New York, New York
[DATE]
$[AMOUNT]
ON DEMAND, for value received, CONVERGENT TECHNOLOGIES, LTD., a company organized under the laws of the country of Jamaica ("Convergent"), whose principal place of business is [ ], promises to pay Fusion Telecommunications International, Inc., ("Lender"), the sum of [ ] DOLLARS ($[ ]) in lawful money of the United States of America or such lesser sum as may be demanded hereunder.
Convergent shall pay interest on the amount due under this Demand Note and on overdue interest payments hereunder at a rate equal to the lesser of (a) 6.25% per annum and (b) the maximum rate permissible under applicable usury or similar laws limiting interest rates, said interest to be payable quarterly, beginning [ ]. This payment rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days.
If the indebtedness represented by this Demand Note, or any part thereof, is collected at law or in equity or in bankruptcy, receivership or other court proceedings, or this Demand Note is placed in the hands of attorneys for collection, Convergent agrees to pay, in addition to the principal and interest (if any) due under this Demand Note, reasonable attorneys' and collection fees.
The undersigned waives demand, presentment for payment, notice of nonpayment, protest, notice of dishonor and protest, notice of intention to accelerate, notice of acceleration, and all other notices, filing of suit and diligence in collecting this Demand Note and agrees to any substitution, exchange or release of any such security or the release of any party liable hereon and further agrees that it will not be necessary for any holder hereof, in order to enforce payment of this Demand Note by it, to first institute suit or exhaust its remedies against Convergent, and consents to any extension or postponement of time of payment of this Demand Note or any other indulgence with respect hereto, without notice thereof.
The undersigned hereby irrevocably submits to the jurisdiction of any court in the State of New York located in the City of New York and the County of New York, and any appellate court from any thereof, in any action, suit or proceeding brought against it in connection with this Demand Note or for the recognition or enforcement of any judgment. The undersigned hereto agrees that a final judgment in any such action, suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. To the extent permitted by applicable law, the undersigned hereby waives and agrees not to assert by way of motion, as a defense or otherwise in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such courts, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that the Demand Note may not be litigated in or by such courts.
To the extent permitted by applicable law, the undersigned agrees that it shall not seek and hereby waives the right to seek any review of the judgment of any such court by any court of any other nation or jurisdiction which may be called upon to grant an enforcement of such judgment.
The undersigned hereby irrevocably agrees that the summons and complaint or any other process in connection with this Demand Note may be served by mailing to the address set forth below or by hand delivery to a person of suitable age and discretion at the address set forth below. Such service will be complete on the date such process is so mailed or delivered, and the undersigned will have thirty days from
such completion of service in which to respond in the manner provided by law. The undersigned may also be served in any other manner permitted by law, in which event the undersigned's time to respond shall be the time provided by law.
The amounts hereunder shall not be subject in any way whatsoever to offset, setoff, counterclaim or other deduction of any kind whatsoever.
THE UNDERSIGNED HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING DIRECTLY OR INDIRECTLY OUT OF, UNDER OR IN CONNECTION WITH THIS DEMAND NOTE. THE UNDERSIGNED HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT IT WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY LENDER THAT LENDER HAS BEEN INDUCED TO ACCEPT THIS DEMAND NOTE BY, AMONG OTHER THINGS, THIS WAIVER.
This Demand Note shall be governed by, and for all purposes construed in accordance with, the laws of the State of New York (except for its conflict of laws rules).
CONVERGENT TECHNOLOGIES, LTD.
[ADDRESS]
Title:
EXHIBIT C
FORM OF SECURED WORKING CAPITAL NOTE
New York, New York
[DATE]
$[AMOUNT]
ON DEMAND, for value received, CONVERGENT TECHNOLOGIES, LTD., a company organized under the laws of the country of Jamaica ("Convergent"), whose principal place of business is [ ], promises to pay Fusion Telecommunications International, Inc., ("Lender"), the sum of [ ] DOLLARS ($ ]) in lawful money of the United States of America or such lesser sum as may be demanded hereunder.
Convergent shall pay interest on the amount due under this Demand Note and on overdue interest payments hereunder at a rate equal to the lesser of (a) 6.25% per annum and (b) the maximum rate permissible under applicable usury or similar laws limiting interest rates, said interest to be payable quarterly, beginning [ ]. This payment rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days.
If the indebtedness represented by this Demand Note, or any part thereof, is collected at law or in equity or in bankruptcy, receivership or other court proceedings, or this Demand Note is placed in the hands of attorneys for collection, Convergent agrees to pay, in addition to the principal and interest (if any) due under this Demand Note, reasonable attorneys' and collection fees.
The undersigned waives demand, presentment for payment, notice of nonpayment, protest, notice of dishonor and protest, notice of intention to accelerate, notice of acceleration, and all other notices, filing of suit and diligence in collecting this Demand Note and agrees to any substitution, exchange or release of any such security or the release of any party liable hereon and further agrees that it will not be necessary for any holder hereof, in order to enforce payment of this Demand Note by it, to first institute suit or exhaust its remedies against Convergent, and consents to any extension or postponement of time of payment of this Demand Note or any other indulgence with respect hereto, without notice thereof.
The undersigned hereby irrevocably submits to the jurisdiction of any court in the State of New York located in the City of New York and the County of New York, and any appellate court from any thereof, in any action, suit or proceeding brought against it in connection with this Demand Note or for the recognition or enforcement of any judgment. The undersigned hereto agrees that a final judgment in any such action, suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. To the extent permitted by applicable law, the undersigned hereby waives and agrees not to assert by way of motion, as a defense or otherwise in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such courts, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that the Demand Note may not be litigated in or by such courts.
To the extent permitted by applicable law, the undersigned agrees that it shall not seek and hereby waives the right to seek any review of the judgment of any such court by any court of any other nation or jurisdiction which may be called upon to grant an enforcement of such judgment.
The undersigned hereby irrevocably agrees that the summons and complaint or any other process in connection with this Demand Note may be served by mailing to the address set forth below or by hand delivery to a person of suitable age and discretion at the address set forth below. Such service will be complete on the date such process is so mailed or delivered, and the undersigned will have thirty days from
such completion of service in which to respond in the manner provided by law. The undersigned may also be served in any other manner permitted by law, in which event the undersigned's time to respond shall be the time provided by law.
The amounts hereunder shall not be subject in any way whatsoever to offset, setoff, counterclaim or other deduction of any kind whatsoever.
THE UNDERSIGNED HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING DIRECTLY OR INDIRECTLY OUT OF, UNDER OR IN CONNECTION WITH THIS DEMAND NOTE. THE UNDERSIGNED HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT IT WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY LENDER THAT LENDER HAS BEEN INDUCED TO ACCEPT THIS DEMAND NOTE BY, AMONG OTHER THINGS, THIS WAIVER.
This Demand Note shall be governed by, and for all purposes construed in accordance with, the laws of the State of New York (except for its conflict of laws rules).
CONVERGENT TECHNOLOGIES, LTD.
[ADDRESS]
Title:
EXHIBIT D
GENERAL TERMS OF EMPLOYMENT FOR PATRICK DALLAS
1. JOB TITLE
o Managing Director, reporting to Vonciel Turner, Vice President, Managing Director Caribbean Operations of Fusion Telecommunications International, Inc.
o May be assigned other duties from time to time that are necessary to meet the needs of the Company's business and will be required to travel internationally.
2. JOB FUNCTION
o Assure the profitability of Fusion Jamaica Limited
o Manage all revenue based, day-to-day operations
o Assume responsibility for the hiring of staff and the assignment of responsibilities to all employees.
3. REMUNERATION
o Gross pay, not to exceed US$5000 per month for the first two (2) months of operations as an advance which will be repaid from the Company's dividend distribution over a period of six (6) months.
o Thereafter remuneration will be derived from company dividends (pro-rata based upon Dallas' ownership) paid monthly in arrears.
4. HOURS OF WORK
o Hours of work whilst working in Jamaica are determined according to the local job requirements.
o Required to adjust working hours accordingly without entitlement to additional remuneration.
5. ANNUAL LEAVE
o Entitled to 30 working days leave per annum. This is in addition to any normal public/national holidays in your host location.
o Entitlement to leave will be pro-rated for any incomplete years of service.
o On termination of employment, if annual leave entitlement was exceeded, the excess will be deducted from any payments due. If you have any unused leave then the Company may require you to take leave during the notice period.
EXHIBIT E
FORM OF RIGHT OF FIRST REFUSAL
AGREEMENT AMONG SHAREHOLDERS
OF FUSION JAMAICA LIMITED
THIS AGREEMENT made and entered into as of the _____ day of ____________, 2005, between and among Patrick Dallas ("Dallas"), Vonciel Turner ("Turner") and Fusion Telecommunications International, Inc. ("Fusion") (each a "Shareholder" and collectively the "Shareholders"), all of whom own shares of stock of Fusion Jamaica Limited, a Jamaican corporation (the "Company").
WITNESSETH:
WHEREAS, the Company has authorized 500,000 shares of common capital stock with a par value of $5.00 per share(the "Common Stock"); and
WHEREAS, the Shareholders have negotiated concerning the terms and conditions under which they hold their Common Stock and wish to reduce such negotiations to this writing;
NOW, THEREFORE, the Shareholders intending to be legally bound hereby, it is agreed:
1. Right Of First Refusal.
a. Limitation On Transfer. Neither Shareholder shall transfer his, her or its shares of Common Stock to any person, firm, or corporation other than the Company or an Affiliate (as defined in paragraph 3 below), unless the Shareholder desiring to transfer shall first have made an offer to sell as described below and such offer shall not have been accepted. Provided however, nothing herein shall limit Fusion from entering into any merger, acquisition, asset sale, or the like with a third party.
b. Offer To Sell. The offer to sell shall be given to the non-selling Shareholders and shall consist of a written offer to sell a designated number of the shares of Common Stock (the "Available Shares") owned by the Shareholder (the "Transferor") together with a statement of intention to transfer the Available Shares to a third party, the name and address of the prospective purchaser, and the terms and price of such intended transfer. The Transferor must have received from the third party a bona fide offer in writing to purchase all the Available Shares and must attach to the offer to sell a true copy of such offer.
c. Acceptance Of Offer To Sell. Within 30 days after receipt of the offer to sell, the non-selling Shareholders may elect to purchase all, but not less than all, of the Available Shares. The non-selling Shareholders shall exercise their election to purchase by giving notice to the Transferor. The notice of election to purchase Available Shares shall specify a date for the closing of the purchase that shall not be more than 30 days after the date of giving the notice.
d. Purchase Price. The purchase price and the terms of purchase of the Available Shares shall be the same price and terms contained in the third party written offer; provided that if the date for closing the purchase provided in this Agreement is later than that offered by the prospective purchaser, the closing date fixed herein shall control.
e. Place Of Closing. The closing of the purchase shall take place at the principal office of the Company.
f. Release From Restriction. If the non-selling Shareholders do not elect to purchase all the Available Shares, the Transferor may sell the Available Shares to the prospective purchaser named in the statement attached to the offer to sell, such sale to be made only in accordance with the terms therein stated and its attachments. If the Transferor fails to make such sale in accordance with each and every term
contained in the statement and the attachments, such shares shall remain subject to all the restrictions of this Agreement. Furthermore, notwithstanding anything herein contained to the contrary, no such transfer may be closed unless the transferee executes a counterpart of this Agreement and agrees to be bound by all the restrictions on the Shareholders hereunder. Notwithstanding anything herein, the Company is entitled, in its sole discretion, to restrict sale of the stock in any manner it deems appropriate.
2. Endorsement On Share Certificate. Each Certificate representing shares of Common Stock now or hereafter held by the Shareholders shall be stamped with a legend in substantially the following form:
"The transfer of the shares represented by the within Certificate is restricted under the terms of an Agreement dated [ ], a copy of which is on file and available for inspection at the office of the issuer."
3. Transfer To Affiliate. Any Shareholder may, notwithstanding the foregoing, freely transfer shares to an Affiliate of such Shareholder but only on the condition that the Affiliate executes a counterpart of this Agreement and agrees to be bound by all the restrictions on the Shareholders hereunder. For the purposes of this Agreement an Affiliate shall mean only the spouse, parents, and children of a Shareholder or a trustee or trustees and its or their successors for the benefit of a Shareholder or for the benefit of the spouse, parents, and children of a Shareholder, or any combination of the foregoing.
4. Specific Performance. The parties hereby declare that it is impossible to measure in money the damages that will accrue to a party hereto by reason of a failure of a Shareholder to perform any of the obligations under this Agreement. Therefore, if any party hereto shall institute any action or proceeding to specifically enforce any provisions hereof, any person against whom such action or proceeding is brought hereby waives a claim or defense that such party has an adequate remedy at law and shall not urge at such action or proceeding the claim or defense that such a remedy at law exists.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
STOCKHOLDERS:
VONCIEL TURNER
PATRICK DALLAS
By:
CONVERGENT TECHNOLOGIES, LTD.
EXHIBIT F
FORM OF NON-SOLICITATION AND NON-COMPETITION AGREEMENT
This Non-Solicitation and Non-Competition Agreement ("Agreement") is made and entered into as of the ___ day of [ ], 2005 by and between Fusion Jamaica Limited, a company organized under the laws of the country of Jamaica (the "Company"), and [ ], an individual who currently resides at the address set forth below his signature at the end of this Agreement ("Employee").
BACKGROUND
A. The Employee has been employed by Company for ____ years; and
B. On or about January 11, 2004, Fusion Telecommunications International, Inc. purchased a majority equity interest in the Company; and
C. As a condition of Employee's continued employment with the Company Employee must enter into this Agreement to protect and secure the Company's goodwill including, without limitation, its relationships with manufacturers, customers, vendors, suppliers, employees, and others, as set forth herein.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements set forth herein, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Employee, intending to be legally bound hereby, agree as follows:
1. EMPLOYMENT.
The Company hereby employs Employee, and Employee hereby agrees to be employed by the Company and to serve the Company, upon the terms and subject to the conditions set forth herein.
2. TERMINATION OF EMPLOYMENT.
2.1. ACKNOWLEDGMENT OF EMPLOYMENT "AT-WILL".
Notwithstanding any provision of this or any other Agreement, Employee's employment is "at-will" and, accordingly, either Employee or the Company may terminate at any time and for any reason Employee's employment with the Company. No provision of this Agreement shall entitle Employee to remain in the employment of the Company or affect the right of the Company or Employee to terminate the Employee's employment at any time or for any reason.
2.2. SURVIVAL OF EMPLOYEE'S OBLIGATIONS.
Notwithstanding the termination of this Agreement by either party hereto for any reason, the obligations of Employee under Section 3 hereof and the other provisions thereof shall survive the termination or expiration of this Agreement and/or the duration of Employee's employment with the Company (the "EMPLOYMENT TERM") and shall remain in full force and effect for the period provided therein.
3. COVENANTS.
In consideration of the compensation to be paid to Employee by the Company, Employee hereby makes the following covenants to the Company:
3.1. COVENANT NOT TO COMPETE.
During the Employment Term and for a period of two (2) years thereafter, or for so long as Employee owns stock in the Company, whichever is later, (the "Post-Employment Period"), Employee shall not, alone or together or in association with others, whether as owner, shareholder, employee, officer, director, partner, manager, member, lender, investor, consultant, principal, agent, independent contractor, co-venturer or in any other capacity, directly or indirectly, invest in, engage in, have a financial interest in or be in any way connected or affiliated with, or render advice or service to, any person, firm, enterprise or other business that is in competition with the Company.
(a) COMPETITION WITH THE COMPANY. For purposes of this Agreement, (i) the phrase "in competition with the Company" shall be deemed to include competition with the Company and its subsidiaries, or its respective successors or assigns, or the businesses of any of them, and (ii) a business shall be deemed to be in competition with the Company if it is engaged in any business activity or has products or services that are the same or similar to the business activities, products or services of the Company from time to time in any geographic area in which the Company is conducting or has conducted business at any time during the Employment Term in Jamaica, West Indies. Notwithstanding the foregoing, nothing herein contained shall prevent Employee from acquiring and holding for investment up to two percent (2%) of any class of securities of any corporation, if such securities are listed or traded either on a national securities exchange or the Nasdaq Stock Market or the over-the-counter market.
(b) INTERPRETATION OF COVENANT. The parties hereto acknowledge and agree that the duration and area for which the covenant not to compete set forth in this Section 3.1 is to be effective are fair and reasonable and are reasonably necessary for the protection of the Company and its business and good will, and Employee hereby waives any objections to or defenses in respect thereof. In the event that any court determines that any portion of the time period or the area, or both of them, are unreasonable, arbitrary or against public policy, and that such covenant is to such extent unenforceable, illegal or invalid, the parties hereto agree that this Section 3.1 shall be deemed amended to delete there from such provisions or portions adjudicated to be unenforceable, illegal or invalid so that the covenant shall remain in full force and effect for the greatest time period and in the greatest geographical area that would render it enforceable, legal and valid. The parties intend that the covenant set forth in this Section 3.1 shall be deemed to be a series of separate covenants; one for each and every county of each and every state of the United States of America and one for each and every political subdivision of each and every other country where the covenant is intended to be effective and is not proscribed by law.
3.2. COVENANT REGARDING DISCLOSURE OR USE OF CONFIDENTIAL INFORMATION.
Employee acknowledges that during the Employment Term and as part of his employment, he has learned, he will learn and he will have access to confidential and proprietary information regarding the Company, its business and affairs. Employee hereby agrees that he shall at all times during and after the Employment Term keep confidential and hold in confidence all Confidential Information (as defined below), and Employee shall not, at any time, either during or after the Employment Term, either directly or indirectly, use any Confidential Information for Employee's own benefit or to the benefit of any other person or entity or divulge, disclose, communicate or otherwise reveal any Confidential Information to any person or entity in any manner whatsoever, other than in the performance of Employee's duties hereunder. As used herein, "CONFIDENTIAL INFORMATION" shall mean any and all information, however documented, related to the business and affairs of the Company, including, but not limited to its assets, properties, operations, finances, practices,
procedures, policies, methods, contracts, agreements and arrangements, lending policies, pricing policies, price lists, financial plans, business plans, financial information, financial projections, budgets, marketing strategies and techniques; the identity and location of all past, present and prospective manufacturers, customers, suppliers, vendors, affiliates, debtors, creditors, lenders, employees, consultants, advisors, agents, distributors, wholesalers, clients and others who have dealings with the Company; trade secrets, processes, photographs, graphics, product specifications, formulas, compositions, samples, inventions, ideas, research and development; patents and patent applications; copyrights and copyright applications (in any such case, whether registered or to be registered in the United States or any foreign country) applied for, issued to or owned by the Company; any and all processes, computer programs and software (including object code and source codes), database, technologies, engineering or technical data, drawings, sketches or designs, manufacturing or distribution methods or techniques; and any other information known to Employee to be confidential or proprietary information. Employee hereby acknowledges and agrees that,, as between the Company and Employee, all of the Confidential Information, however documented, whether or not developed, created or modified by Employee, is the exclusive property of the Company. Upon the termination or expiration of the Employment Term, Employee shall leave with or return to the Company, without making or retaining any copies or other records of, all Confidential Information including all copies, summaries, abstracts thereof and all memoranda, notes, records, reports, books, letters, customer lists, customer databases, manuals and other writings or documents whatsoever pertaining thereto.
3.3. COVENANTS REGARDING BUSINESS RELATIONSHIPS.
Employee agrees that during and throughout the Employment Term and the Post-Employment Period, except when acting on behalf of the Company, he shall not, directly or indirectly, (1) employ, solicit, induce, engage, or be engaged by, or attempt to solicit, induce or engage any manufacturer, employee, independent contractor, consultant or salesman of the Company (whether now or hereafter engaged by the Company) to (A) terminate such employment or engagement, (B) accept employment or engagement or otherwise render services to any other person or business (wherever located, and regardless of type of business conducted), or (C) interfere with the business of the Company; (ii) solicit any manufacturers, clients or customers of the Company or interfere in any business relationship between the Company and any other person, firm or entity, including any person who was at any time an employee, consultant, contractor, advisor, supplier, lender, manufacturer or customer of the Company. Employee shall not, at any time during or after the Employment Term or the Post-Employment Period, disparage the Company or any of its shareholders, directors, officers, employees or agents.
3.4. INTELLECTUAL PROPERTY.
During and throughout the Employment Term and Post-Employment Period, Employee agrees to disclose to the Company any and all ideas, improvements, techniques, modifications, processes, inventions, developments, discoveries, trade secrets, business plans, software, code or other algorithms and any work of authorship ("INTELLECTUAL PROPERTY") developed, conceived, created, made, devised, discovered, acquired or acquired knowledge of, by Employee, either by himself or in conjunction with any other person, which relates in any way, directly or indirectly, or maybe useful in any manner in the business of the Company, and any such item that is based upon or uses Confidential Information, whether or not patentable or copyrightable. Employee hereby agrees that the Intellectual Property shall become and remain the sole and exclusive property of the Company. Employee hereby acknowledges that all of Employee's writing, works of authorship and other Intellectual Property are works made for hire and the property of the Company, including patents, copyrights and other intellectual property rights pertaining thereto. Employee will, at the Company's request and cost, render assistance as the Company deems necessary or desirable to secure, prosecute and/or defend the rights thereto by patent, copyright to otherwise to the Company, including without limitation the assignment, transfer and conveyance to the Company of all of Employee's right, title and interest in and to the Intellectual Property.
3.5. EQUITABLE RELIEF.
Employee hereby acknowledges and agrees that his services to be rendered to the Company hereunder and his obligations contained in this Section 3 are of special, unique and personal character which gives them a peculiar value to the Company, that the Company cannot be reasonably or adequately compensated in money damages in an action at law in the event Employee breaches any obligations under this Section 3, and that the provisions of this Section 3 are reasonable and necessary to protect the business of the Company. Employee therefore expressly agrees that, in addition to any other rights or remedies which the Company may have at law or in equity or by reason of any other agreement, the Company shall be entitled to injunctive and other equitable relief in the form of temporary, preliminary and permanent injunctions without posting bond or other security in the event of any actual or threatened breach of any such obligation by Employee and without the necessity of proving actual damages, and to discontinue any salary, bonus, benefits and/or insurance continuation provided hereunder. Nothing in this Agreement shall be construed to prohibit the Company from pursuing any other remedy, and the Employee agrees that all remedies of the Company are cumulative.
3.6. NATURE OF COVENANTS.
Employee's covenants in Section 3 hereof are independent covenants, and the existence of any claim by Employee against the Company under this Agreement or otherwise will not excuse Employee's breach or waive Employee's obligation to perform, any covenant in Section 3 hereof. If Employee's employment with the Company terminates for any reason, the terms and conditions of this Agreement necessary or appropriate to enforce the covenants of Employee in Section 3, shall survive and remain in full force and effect.
4. CONSOLIDATION, MERGER OR SALE OF ASSETS.
Nothing in this Agreement shall preclude the Company from consolidating with, merging into, or transferring all or substantially all of its assets to another corporation or entity which assumes all of the Company's obligations and undertakings hereunder. Upon such a consolidation, merger or transfer of assets, the term "Company" as used herein shall mean such other corporation or entity, and this Agreement shall continue or full force and effect.
5. BINDING AGREEMENT.
This Agreement shall be binding upon, and inure to the benefit of, Employee and the Company and their respective permitted heirs, legal representatives, successors and assigns.
6. AMENDMENT OF AGREEMENT.
Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated except by an instrument in writing signed by the parties hereto.
7. WAIVER.
No term or condition of this Agreement shall be deemed to have been waived, nor shall there be an estoppel against the enforcement of any tern, obligation, right, covenant or other provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each waiver shall operate only as to the specific teen waived and shall not constitute a waiver of such terns for the future or as to any act other than the act specifically waived.
8. SEVERABILITY.
The invalidity, illegally or unenforceability of any provision of this Agreement in any circumstance shall not affect the validity, legality or enforceability of such provision in any other circumstance or any other provision of this Agreement, and such provision in any other circumstance and each such other provision of this Agreement shall, to the full extent consistent with applicable law, continue in full force and effect.
9. HEADINGS.
The headings contained herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.
10. ENTIRE AGREEMENT.
10.1. SUPERSEDES PRIOR AGREEMENTS.
This Agreement contains the entire agreement and understanding between the parties hereto concerning the subject matter hereof and supersedes all prior agreements, arrangements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Company and Employee with respect thereto.
10.2. SUPERSEDES HANDBOOKS ETC.
Employee acknowledges that from time to time the Company may establish, maintain or distribute employee manuals or handbooks or personnel policy manuals, and officers or other representatives of the Company may make written or oral statements relating to personal policies and procedures. Such manuals, handbooks and statements are intended only for generally guidance. No policies, procedures or statements of any nature by or on behalf of the Company (whether written or oral, and whether or not continued in any employee manual or handbook or personnel policy manual), and no acts or practices of any nature, shall be construed to modify this Agreement.
11. GOVERNING LAW AND VENUE.
This Agreement shall be governed by and construed and interpreted in accordance with the internal substantive laws of the State of New York, without giving effect to the principles of conflict of laws.
Any litigation involving this Agreement shall be triable only in a court of competent jurisdiction located in state court located within the State of New York. The parties hereto irrevocably consent to the personal jurisdiction and venue of such court.
12. NOTICES.
Any notice given under this Agreement must be in writing and shall be deemed to have been duly given when delivered personally, when sent by facsimile (upon written confirmation of receipt), when received by the addressee if sent by a nationally-recognized overnight delivery service, or three (3) business days after being sent by certified or registered mail, postage prepaid, return receipt requested, in each case duly addressed to the party concerned at the address indicated below or to such changed address as such party may subsequently give notice:
If to the Company, to its principal business office.
If to Employee, to his address as set forth at the end of this Agreement.
13. REMEDIES CUMULATIVE.
No right or remedy conferred upon the Company or the Employee by this Agreement is intended to be exclusive of any other right or remedy, and each and every such right or remedy shall be cumulative and shall be in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity.
14. PRONOUNS.
When used in this Agreement, the number and gender of each pronoun shall be construed to be such number and gender as the contexts circumstances or antecedent may require.
15. COUNTERPARTS.
This Employment Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement.
16. LEGAL FEES.
In the event of litigation to enforce the terms and conditions of this Agreement, the losing party agrees to pay the substantially prevailing party's costs and expenses incurred including, without limitation, reasonable attorneys' fees.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by or on behalf of the parties hereto as of the date first above written.
FUSION JAMAICA LIMITED
Title:
EMPLOYEE:
EXHIBIT G
FORM OF SECURITY AGREEMENT
This SECURITY AGREEMENT (this "AGREEMENT") is dated as of [ ], and is entered into by and between [ ], a [ ] ("COMPANY"), and FUSION TELECOMMUNICATIONS INTERNATIONAL, INC., a Delaware corporation ("SECURED PARTY").
PRELIMINARY STATEMENTS
A. Pursuant to that certain Promissory Note, by and between Company and Secured Party (as it may hereafter be further amended, restated, supplemented or otherwise modified from time to time, the "NOTE") [dated ] Secured Party has made a loan to Company, subject to the terms and conditions set forth in the Note.
B. It is a condition precedent to the Secured Party's purchase of the Note that Company shall have granted the security interest and undertaken the obligations contemplated by this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing promises, the agreements and covenants set forth herein, and in order to induce Secured Party to purchase the Note, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. GRANT OF SECURITY.
Company hereby grants to Secured Party a security interest in all of Company's right, title and interest in and to the following, in each case whether now or hereafter existing, whether tangible or intangible, or in which Company now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"):
(a) all equipment in all of its forms, all parts thereof and all accessions thereto (any and all such equipment, parts and accessions being the "EQUIPMENT");
(b) all inventory in all of its forms, including but not limited to all goods held by Company for sale or lease or to be furnished under contracts of service or so leased or furnished (collectively the "INVENTORY");
(c) all accounts, contract rights, chattel paper, documents, instruments, general intangibles and other rights and obligations of any kind owned by or owing to Company and all rights in, to and under all security agreements, leases and other contracts securing or otherwise relating to any such accounts, contract rights, chattel paper, documents, instruments, general intangibles (other than Intellectual Property Collateral) or other obligations (any and all such accounts, contract rights, chattel paper, documents, instruments, general intangibles and other obligations being the "Accounts", and any and all such security agreements, leases and other contracts being the "RELATED CONTRACTS");
(d) all deposit accounts (the "DEPOSIT ACCOUNTS"), together with (i) all amounts on deposit from time to time in such deposit accounts, and (ii) all interest, cash, instruments, securities and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the foregoing;
(e) investment property, including, but not limited to commodity accounts and commodity contracts;
(f) letter of credit rights;
(g) promissory notes;
(h) the "INTELLECTUAL PROPERTY COLLATERAL", which term means:
(i) all right, title and interest (including rights acquired pursuant to a license or otherwise) in and to all trademarks, service marks, designs, logos, indicia, tradenames, trade dress, corporate names, company names, business names, fictitious business names, trade styles and/or other business identifiers and applications pertaining thereto, owned by Company, or hereafter adopted and used, in its business (collectively, the "Trademarks"), all registrations that have been or may hereafter be issued or applied for thereon in the United States and in foreign countries (the "TRADEMARK REGISTRATIONS"), and all common law and other rights in and to the Trademarks in the United States and any state thereof and in foreign countries (the "TRADEMARK RIGHTS");
(ii) all right, title and interest (including rights acquired pursuant to a license or otherwise) in and to all patents and patent applications and rights and interests in patents and patent applications under any domestic or foreign law that are presently, or in the future may be, owned or held by Company and all patents and patent applications and rights, title and interests in patents and patent applications under any domestic or foreign law that are presently, or in the future may be, owned by Company in whole or in part, all rights corresponding thereto, and all re-issues, divisions, continuations, renewals, extensions and continuations-in-part thereof (all of the foregoing being collectively referred to as the "PATENTS"); and
(iii) (a) all copyrights under the laws of the United States or any other country (whether or not the underlying works of authorship have been published), all registrations and recordings thereof, all copyrightable works of authorship (whether or not published), and all applications for copyrights under the laws of the United States or any other country, including, without limitation, registrations, recordings and applications in the United States Copyright Office (the "COPYRIGHT OFFICE") or any similar office or agency in any other country, (b) all renewals of any of the foregoing, (c) all claims for, and rights to sue for, past or future infringements of any of the foregoing and (d) all income, royalties, damages and payments now or hereafter due or payable with respect to any of the foregoing, including, without limitation, damages and payments for past or future infringements thereof (all of the foregoing collectively being referred to as the "COPYRIGHTS");
(i) all trade secrets, trade secret rights, know-how, customer lists, processes of production, ideas, confidential business information, techniques, processes, formulas, and all other proprietary information of Company;
(j) to the extent not included in any other paragraph of this
Section 1, all other general intangibles (including without limitation tax
refunds, rights to payment or performance, CHOSES IN ACTION and judgments taken
on any rights or claims included in the Collateral);
(k) all books, records, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; and
(l) all proceeds, products, rents and profits of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary.
Notwithstanding anything herein to the contrary, in no event shall the Collateral include, and Company shall not be deemed to have granted a security interest in (i) any item of Collateral that is leased to Company and for which Company has not exercised any applicable purchase option; (ii) any of Company's rights or interests in any license, contract or agreement to which Company is a party or any of its rights or interests thereunder to the extent, but only to the extent, that such a grant would, under the terms of such license, contract or agreement or otherwise, result in a breach of the terms of, or constitute a default under, any license, contract or agreement to which Company is a party (other than to the extent that any such term would be rendered ineffective pursuant to Section 9-406 of the UCC or any other applicable law (including the United States Bankruptcy Code (the "BANKRUPTCY CODE")) or principles of equity); PROVIDED, that immediately upon the ineffectiveness, lapse or termination of any such provision, the Collateral shall include, and Company shall be deemed to have granted a security interest in, all such rights and interests as if such provision had never been in effect, or (iii) any real property leasehold, unless Company has executed a leasehold mortgage or leasehold deed of trust covering such real property leasehold.
2. SECURITY FOR OBLIGATIONS.
This Agreement secures, and the Collateral assigned by Company is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including without limitation the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code), of all Secured Obligations of Company. "SECURED OBLIGATIONS" means all obligations and liabilities of Company to Secured Party now or hereafter existing, including all obligations and liabilities arising out of or in connection with the Note.
3. REPRESENTATIONS AND WARRANTIES.
Company represents and warrants as follows:
(a) OWNERSHIP OF COLLATERAL. Company owns the Collateral free and clear of any Lien (as defined below), security interest, assignment, option or other charge or encumbrance, except for the Liens and security interests (i) set forth on SCHEDULE A hereto, (ii) created by this Agreement or any other document in favor of Secured Party, (iii) resulting from taxes which have not yet been become delinquent, or (iv) that are minor liens, encumbrances and defects in title which do not materially detract from the value of the property subject thereto. This Agreement has been duly and validly authorized by Company and executed and delivered by Company and constitutes the legal, valid and binding obligation of Company, enforceable against Company in accordance with its terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)) and, subject to the performance of the relevant procedures as specified in Section 6(a) herein with respect to such Collateral, creates a valid, binding, enforceable and perfected security interest in and Lien upon all of the Collateral, to the extent such security interest can be created by performance of the procedures specified in Section 6(a), and Company is duly authorized to make all filings and take all other actions necessary or desirable to perfect and to continue perfected such security interest. For purposes of this Agreement, "LIEN" shall mean a pledge, assignment, lien, charge, mortgage, encumbrance, or other security interest obtained under this Agreement or under any other agreement or instrument with respect to any present or future assets, property, contract rights, or revenues in order to secure the payment of indebtedness of the party referred to in the context in which the term is used.
(b) OFFICE LOCATIONS. The principal place of business, the chief executive office and the office where Company keeps its records are, as of the date hereof, located at:
(c) LEGAL NAME. Company's exact legal name and spelling thereof as it appears on its Articles of Incorporation is as set forth in the preamble to this Agreement.
(d) STATE OF INCORPORATION; CORPORATE IDENTIFICATION NUMBER. Company is incorporated and validity exists under the laws of Jamaica, and its corporate identification number is [___________].
4. FURTHER ASSURANCES.
(a) Company agrees that from time to time, at its reasonable expense, Company will promptly execute and deliver to Secured Party one or more financing and continuation statements, and amendments thereto, relating to all or any part of the Collateral, and all further instruments and documents, and take all further action, that may be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral.
(b) Company will give prompt written notice to Secured Party of, and defend the Collateral against, any suit, action or proceeding related to the Collateral or which could adversely affect the security interests and Liens granted hereunder.
5. CERTAIN COVENANTS OF COMPANY.
Company shall:
(a) give Secured Party 15 days' prior written notice of any change in Company's chief place of business, chief executive office or residence or the office where Company keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts, prior to effectuating any change described in the preceding sentence, Company shall take or cause to be taken all actions deemed by Secured Party to be necessary or desirable to prevent any financing or continuation statement from becoming seriously misleading or rendered ineffective, or the security interests granted herein from becoming unperfected or the relative priority thereof otherwise impaired, as a result of such removal or change and, if reasonably requested by Secured Party, shall provide an opinion of nationally recognized counsel in form and substance reasonably satisfactory to Secured Party, describing such actions and confirming that such actions have been taken and are effective to prevent such results;
(b) maintain, or cause to be maintained, all items of the Collateral in good condition and repair, ordinary wear and tear excepted in the case of Equipment, and pay, or cause to be paid, the costs of repairs to or maintenance of that Collateral which is of a type that could be repaired or maintained;
(c) not use any Collateral in material violation of law or any applicable policy of insurance;
(d) pay or cause to be paid when due all taxes, assessments,
and other charges relating to the Collateral or this Agreement and reimburse
Secured Party for all reasonable costs of and reasonable fees incurred in
connection with the filing of the documents and instruments referred to in
Section 6(a) hereof; and
(e) furnish to Secured Party from time to time (but, unless an Event of Default (as defined in Section 6(b) below) shall have occurred and be continuing, no more frequently than quarterly) statements and schedules further identifying and
describing the Intellectual Property Collateral and such other reports in connection with the Intellectual Property Collateral as Secured Party may reasonably request, all in reasonable detail.
6. SECURED PARTY APPOINTED ATTORNEY-IN-FACT.
Company hereby irrevocably appoints Secured Party as Company's attorney-in-fact, with full authority in the place and stead of Company and in the name of Company, Secured Party or otherwise, from time to time in Secured Party's discretion to take any of the following actions:
(a) file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral;
(b) upon the occurrence and during the continuance of any of the default events described in the Note (an "EVENT OF DEFAULT"), to ask for, demand, collect, sue for, recover, compound, receive and give acquaintance and receipts for moneys due and to become due under or in respect of any of the Collateral;
(c) upon the occurrence and during the continuance of an Event of Default, to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (b) above;
(d) upon the occurrence and during the continuance of an Event of Default, to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Collateral;
(e) to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Note) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Secured Party in its sole discretion, any such payments made by Secured Party to become obligations of Company to Secured Party, due and payable immediately upon demand;
(f) upon the occurrence and during the continuance of an Event of Default, to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with Accounts and other documents relating to the Collateral; and
(g) upon the occurrence and during the continuance of an Event of Default, generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner thereof for all purposes, and to do, at Secured Party's option and Company's expense, at any time or from time to time, all acts and things that Secured Party deems necessary to protect, preserve or realize upon the Collateral and Secured Party's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Company might do.
The appointment set forth in this Section 6 is coupled with an interest and is irrevocable.
7. REMEDIES.
(a) If any Event of Default shall have occurred and be
continuing, Secured Party may exercise in respect of the Collateral, in addition
to all other rights and remedies provided for herein or otherwise available to
it, all the rights and remedies of a secured party on default under the UCC
(whether or not the UCC applies to the affected Collateral), and also may (i)
require Company to, and Company hereby agrees that it will at its expense and
upon request of Secured Party forthwith,
assemble all or part of the Collateral as directed by Secured Party and make it available to Secured Party at a place to be designated by Secured Party that is reasonably convenient to both parties, (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (iii) prior to the disposition of the Collateral, store, process, repair or recondition the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Secured Party deems appropriate, (iv) take possession of Company's premises or place custodians in exclusive control thereof, remain on such premises and use the same and any of Company's equipment for the purpose of completing any work in process, taking any actions described in the preceding clause (iii) and collecting any Secured Obligation, or (v) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable. Secured Party may be the purchaser of any or all of the Collateral at any such sale and Secured Party shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Secured Party at such sale. Each purchaser at any such sale effected in accordance with the provisions of this Section 7 and applicable law shall hold the property sold absolutely free from any claim or right on the part of Company, and Company hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Company agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Company of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Company hereby waives any claims against Secured Party arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Company shall liable for the deficiency and the fees and costs of any attorneys employed by Secured Party to collect such deficiency.
8. APPLICATION OF PROCEEDS.
Except as expressly provided elsewhere in this Agreement, all proceeds received by Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied in the following order of priority:
FIRST: To the payment of all costs and expenses of such sale, collection or other realization, including reasonable compensation to Secured Party and its agents and counsel, and all other reasonable expenses, liabilities and advances made or incurred by Secured Party in connection therewith, and all amounts for which Secured Party is entitled to indemnification hereunder and all advances made by Secured Party hereunder for the account of Company, and to the payment of all reasonable costs and expenses paid or incurred by Secured Party in connection with the exercise of any right or remedy hereunder;
SECOND: To the payment of all other Secured Obligations and, as to obligations arising under the Note, as provided in the Note; and
THIRD: To the payment to or upon the order of Company, or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds.
9. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS; TERMINATION AND RELEASE.
(a) This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until the payment in full of the Secured Obligations or the cancellation, termination or conversion into Company equity securities of the Note, (ii) be binding upon Company and its successors and assigns, and (iii) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and their respective successors, transferees and assigns.
(b) Upon the payment in full of all Secured Obligations or the cancellation, expiration or conversion of the Note, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to Company. Upon any such payment in full of all Secured Obligations or cancellations, termination or conversion, Secured Party will, at Company's expense, execute and deliver to Company such documents as Company shall reasonably request to evidence such termination.
10. EXCULPATION OF SECURED PARTY.
(a) Secured Party shall not be responsible in any manner for the validity or transferability of any of the Collateral conveyed or held pursuant to the terms of this Agreement, nor for any representation or warranty made by any other party to this Agreement. Nothing contained herein shall be deemed to obligate Secured Party to deliver any funds or evidences of ownership of any asset, tangible or otherwise, nor anything else, to any person or entity, unless the same shall first have been received by Secured Party pursuant to this Agreement.
(b) Anything in this Agreement to the contrary notwithstanding, in no event shall Secured Party be liable for any special, incidental, or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if Secured Party has been advised of the likelihood of such loss or damage and regardless of the form of action.
(c) Secured Party shall not be liable for any action taken or omitted by it in its reasonable discretion under or in connection with this Agreement, the Note, or any other applicable document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct).
(d) Secured Party shall be entitled to rely, and shall be fully protected in relying, upon advice and statements of legal counsel selected by Secured Party.
(e) In the event that any notice or instruction required to be delivered to Secured Party hereunder is not so delivered, Secured Party may hold any funds in its possession pursuant to this Agreement, or the interest in any Collateral, pending delivery to it of such written notice or instruction and, if an Event of Default occurs while such funds are in its possession may exercise all other rights and remedies of Secured Party under this Agreement.
(f) It is understood and agreed that should any dispute arise with respect to the delivery or ownership, or right of possession of or to any of the Collateral, or to any funds received by Secured Party hereunder or in connection herewith, or the due and proper performance by any party of its obligations hereunder, Secured Party is authorized and directed to retain in its possession without liability to anyone all or any of the Collateral or funds delivered to it pursuant hereto until such dispute shall have been settled by mutual and unanimous agreement by the parties concerned, or by a final order, decree or judgment of a court of competent jurisdiction and from which no appeal has been taken and as to which the time the right to appeal has expired. Secured Party shall be entitled, but shall be under no duty whatsoever, to institute an action in interpleader or similar proceedings in order to determine the rights of the respective parties to the Collateral, any funds held pursuant hereto, or to defend any such proceedings.
(g) Notwithstanding any representation or warranty or other statement set forth herein that the documents and instruments executed and delivered by Company hereunder or pursuant hereto (including without limitation any UCC financing statements) are adequate in form and substance to create and perfect a lien against the Collateral, Secured Party bears no responsibility for investigating whether or not such documents and instruments do effectively create such an interest, and Secured Party bears no responsibility or liability therefor or for the failure of such document or instruments so to create or perfect such an interest.
11. INDEMNIFICATION OF SECURED PARTY.
Company hereby indemnifies and agrees to hold Secured Party harmless from and against any and all damage, cost, liability, or expenses (including, but not limited to, reasonable legal fees and court costs) that Secured Party incurs by reason of acting in such capacity hereunder, without prejudice to any right that any party may have to recover from the other party for any such damage, cost, liability, or expense. It is expressly agreed and acknowledged by the parties hereto that the foregoing indemnity shall apply to such reasonable legal fees and expenses incurred by Secured Party in defending any action brought by any party hereto alleging misconduct or negligence by Secured Party, unless there shall have been finally concluded by a court of competent jurisdiction that Secured Party was responsible for, or committed, gross negligence or willful misconduct in discharging or in failing to discharge its duties hereunder. The indemnification obligations in this Section shall survive the payment of all obligations hereunder and the resignation or replacement of Secured Party.
12. AMENDMENTS.
No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Company therefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party and by Company. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given.
13. NOTICES.
Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile, or three business days after depositing it in the United States mail with postage prepaid and properly addressed to the addresses set forth on the signature pages hereto.
14. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE.
No failure or delay on the part of Secured Party in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available.
15. SEVERABILITY.
In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.
16. HEADINGS.
Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect.
17. GOVERNING LAW; TERMS.
THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
18. CONSENT TO JURISDICTION AND SERVICE OF PROCESS.
ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST COMPANY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE, BUT NEED NOT EXCLUSIVELY BE, BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, COMPANY, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; AND (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS.
19. WAIVER OF JURY TRIAL.
COMPANY AND SECURED PARTY HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT.
20. COUNTERPARTS.
This Agreement may be delivered by facsimile transmission and be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. SIGNATURE PAGE FOLLOWS.]
IN WITNESS WHEREOF, Company and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above.
[ ]
By: ____________________________ As its President
[ ]
By: _____________________________
As its [ ]
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the __ day of January 2005 by and between Fusion Telecommunications International, Inc., a Delaware corporation (hereinafter called the "Company"), and Roger Karam (hereinafter called the "Executive").
RECITALS
A. The Board of Directors of the Company (the "Board") desires to assure the Company of the Executive's continued employment as CEO of Efonica FZ-LLC ("Efonica"), the Company's wholly-owned subsidiary and President of the Company's VoIP operations and to compensate him therefor.
B. The Board has determined that this Agreement will reinforce and encourage the Executive's continued attention and dedication to the Company.
C. The Executive is willing to make his services available to the Company on the terms and conditions hereinafter set forth (the term the "Company" shall include Fusion Telecommunications International, Inc. "Fusion" and Efonica, unless otherwise indicated).
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the parties agree as follows:
1. EMPLOYMENT.
1.1 EMPLOYMENT AND TERM. The Company hereby agrees to employ the Executive and the Executive hereby agrees to serve the Company, on the terms and conditions set forth herein, for the period commencing on the date hereof and expiring on January __, 2008 (the "Initial Term") unless sooner terminated as hereinafter set forth; provided, however, that commencing on January __, 2008 and January __, 2009 the Initial Term of this Agreement shall automatically be extended for an additional one year unless at least ninety (90) days prior to such dates, the Company shall have delivered to the Executive or the Executive shall have delivered to the Company written notice that the term of the Executive's employment hereunder will not be extended.
1.2 DUTIES OF EXECUTIVE. The Executive shall serve as the CEO
of Efonica and President of the Company's VoIP Division. Subject to the
preceding sentence, during the term of Employment, the Executive shall
diligently perform all services as may be reasonably assigned to him by the
President of Fusion, and shall exercise such power and authority as may from
time to time be delegated to him by the President of Fusion. The Executive shall
be required to report solely to, and shall be subject solely to the supervision
and direction of the President of Fusion and no other person or group shall be
given authority to supervise or direct Executive in the performance of his
duties. The Executive shall devote substantially all his working time and
attention to the business and affairs of the Company (excluding any vacation and
sick leave to which the Executive is entitled), render such services to the best
of his ability, and use his reasonable best efforts to promote the interests of
the Company. It shall not be a violation of this Agreement for the Executive to
(A) serve on corporate, civic or charitable boards or committees, (B) deliver
lectures, fulfill speaking engagements or teach at educational institutions, and
(C) manage personal investments, so long as such activities do not significantly
interfere with the performance of the Executive's responsibilities as an
employee of the Company in accordance with this Agreement.
1.3 PLACE OF PERFORMANCE. In connection with his employment by the Company, the Executive shall be based in the United Arab Emirates, except for travel reasonably necessary in connection with the Company's business.
2. COMPENSATION.
2.1 BASE SALARY. Commencing on the effective date of this Agreement, the Executive shall receive a base salary at the annual rate of not less than $225,000 (the "Base Salary") during the term of this Agreement, with such Base Salary payable in installments consistent with the Company's normal payroll schedule, subject to applicable withholding and other taxes. The Base Salary shall also be reviewed, every year, for merit increases and may, by action and in the discretion of the Compensation and Nominating Committee established by the Board, be increased at any time or from time to time. The Base Salary shall also be increased at any time and from time to time as shall be substantially consistent with increases in base salary awarded in the ordinary course of business to other key executives of the Company and its subsidiaries. The Base Salary, if increased, shall not thereafter be decreased for any reason.
2.2 INCENTIVE COMPENSATION. The Executive shall be entitled to receive such bonus payments or incentive compensation as may be determined at any time or from time to time by the Board (or any authorized committee thereof) in its discretion. Such potential bonus payments and/or incentive compensation shall be considered at least annually by the Board or committee. In no event shall Executive's annual bonus be less than 25% of Executive's annual salary then in effect. The Compensation Committee shall review Executive's bonus at least annually. However, In the event that the Company achieves positive Earnings Before Income Tax, Depreciation and Amortization ("EBITDA") for a fiscal year, Executive's minimum annual bonus shall not be less than 35% of his annual salary then in effect. .
2.3 STOCK OPTION.
(a) The Executive shall be entitled to participate in all stock option plans (the "Plans") in effect during the term of this Agreement.
(b) The Company hereby agrees to issue the Executive an additional 50,000 options with an exercise price equal to the price of a share of common stock in the Company's IPO. These options will provide for a three year vesting schedule.
(c) Notwithstanding the preceding clause (b), the Option shall become immediately exercisable as to 100% of the shares of Common Stock not otherwise vested upon any termination of Executive's employment pursuant to Section 4.5 hereof, it is being agreed that the Company shall cooperate in good faith to afford the Executive the right to exercise the Option in full immediately prior to any "Change in Control" (as hereinafter defined). In the event that Executive is terminated pursuant to Section 4.5, Executive shall have the greater of (i) five years after termination, or (ii) the remaining term of the option, in order to exercise his options.
(d) The Company shall take all action reasonably requested by the Executive to permit any "cashless" exercise of the Option that is permitted under the Plan.
(e) Upon proper exercise of an Option, the Executive shall be deemed for all purposes the owner of the shares of Common Stock that are purchasable upon such exercise.
(f) The provisions of the Plan shall not be adversely modified as to the Executive without the Executive's prior written consent.
3. EXPENSE REIMBURSEMENT AND OTHER BENEFITS.
3.1 EXPENSE REIMBURSEMENT. During the term of Executive's employment hereunder, the Company, upon the submission of reasonable supporting documentation by the Executive, shall reimburse the Executive for all reasonable expenses actually paid or incurred by the Executive in the course of and pursuant to the business of the Company, including expenses for travel and entertainment.
3.2 INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Initial Term, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable to other key executives of the Company and its subsidiaries, in each case comparable to those currently in effect or as subsequently amended. Such plans, practices, policies and programs, in the aggregate, shall provide the Executive with compensation, benefits and reward opportunities at least as favorable as the most favorable of such compensation, benefits and reward opportunities provided at any time hereafter with respect to other key executives.
3.3 WELFARE BENEFIT PLANS. During the Initial Term, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its subsidiaries (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs), at least as favorable as the most favorable of such plans, practices, policies and programs in effect at any time hereafter with respect to other key executives. Additionally, the company shall, at all times, maintain D&O insurance.
3.4 WORKING FACILITIES. During the term of Executive's employment hereunder, the Company shall furnish the Executive with an office, a secretary and such other facilities and services suitable to his position and adequate for the performance of his duties hereunder.
3.5 VACATION. During the Initial Term, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its subsidiaries as in effect at any time hereafter with respect to other key executives of the Company and its subsidiaries; PROVIDED, however, that in no event shall Executive be entitled to fewer than five weeks paid vacation per year.
4. TERMINATION.
4.1 TERMINATION FOR CAUSE. Notwithstanding anything contained
to the contrary in this Agreement, this Agreement may be terminated by the
Company for Cause. As used in this Agreement, "Cause" shall only mean (i) an act
or acts of personal dishonesty taken by the Executive and intended to result in
substantial personal enrichment of the Executive at the expense of the Company,
(ii) subject to the following sentences, repeated violation by the Executive of
the Executive's material obligations under this Agreement which are demonstrably
willful and deliberate on the Executive's part and which are not remedied in a
reasonable period of time after receipt of written notice from the Company, or
(iii) the conviction of the Executive for any criminal act which is a felony.
Upon any determination by the Company's Board of Directors that Cause exists
under clauses (i) and (ii) of the preceding sentence, the Company shall cause a
special meeting of the Board to be called and held at a time mutually convenient
to the Board and Executive, but in no event later than ten (10) business days
after Executive's receipt of the notice contemplated by clauses (i) and (ii).
Executive shall have the right to appear before such special meeting of the
Board with legal counsel of his choosing to refute any determination of Cause
specified in such notice, and any termination of Executive's employment by
reason of such Cause determination shall not be effective until Executive is
afforded such opportunity to appear. Any termination for Cause pursuant to
clause (i) or (iii) of the first sentence of this Section 4.1 shall be made in
writing to Executive, which notice shall set forth in detail all acts or
omissions upon which the Company is relying for such termination. Upon any
termination pursuant to this Section 4.1, the Executive shall be entitled to be
paid his Base Salary to the date of termination and the Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination).
4.2 DISABILITY. Notwithstanding anything contained in this Agreement to the contrary, the Company, by written notice to the Executive, shall at all times have the right to terminate this Agreement, and the Executive's employment hereunder, if the Executive shall, as the result of mental or physical incapacity, illness or disability, fail to perform his duties and responsibilities provided for herein for a period of more than one hundred twenty (120) consecutive days in any 12-month period. Upon any termination pursuant to this Section 4.2, the Executive shall be entitled to be paid his Base Salary for the remaining term of the Agreement but in no event longer than two years. In the event that the Agreement has less than six months remaining at such time, Executive shall be entitled to a payment equal to six months of his Base Salary. In addition, Executive shall be entitled to reimbursement for all business expenses incurred prior to his disability.
4.3 DEATH. In the event of the death of the Executive during the term of his employment hereunder, the Company shall pay to the estate of the deceased Executive an amount equal to the Base Salary for the remaining term of this Agreement but in no event longer than two years. In the event that the Agreement has less than six months remaining at such time, Executive shall be entitled to a payment equal to six months of his Base Salary. In addition, Executive shall be entitled to reimbursement for all business expenses incurred prior to his death.
4.4 TERMINATION WITHOUT CAUSE. At any time the Company shall have the right to terminate Executive's employment hereunder by written notice to Executive; provided, however, that the Company shall (i) pay to Executive any unpaid Base Salary accrued through the effective date of termination specified in such notice, and any pro-rata bonus that would be payable had Executive completed a full year of employment, and (ii) Pay to the executive in cash, within 30 days an amount equals to 150% of the base salary in addition to his highest annual bonus for three years. The Company shall be deemed to have terminated the Executive's employment pursuant to this Section 4.4 if such employment is terminated (i) by the Company without Cause, or (ii) by the Executive voluntarily for "Good Reason." For purposes of this Agreement, "Good Reason" means
(a) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 1.2 of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;
(b) any failure by the Company to comply with any of the provisions of Section 2, Section 3, or Section 16 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;
(c) any change in the designation of the particular executive that the Executive is obligated to report to under Section 1.2 hereof;
(d) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement;
(e) any termination by the Executive for any reason during the three-month period following the effective date of any "Change in Control".
For purposes of this Section 4.4, any good faith determination of "Good Reason" made by the Executive shall be conclusive.
5. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in Control" shall mean:
(a) The acquisition (other than by or from the Company), at any time after the date hereof, by any person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act"), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either the then outstanding shares of common stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally in the election of directors; or
(b) All or any of the fourteen (14) individuals who, as of the date hereof, constitute the Board (as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or
(c) Approval by the shareholders of the Company of (A) a reorganization, merger or consolidation with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 75% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company's then outstanding voting securities, (B) a liquidation or dissolution of the Company, or (C) the sale of all or substantially all of the assets of the Company, unless the approved reorganization, merger, consolidation, liquidation, dissolution or sale is subsequently abandoned.
(d) The approval by the Board of the sale, distribution and/or other transfer or action (and/or series of sales, distributions and/or other transfers or actions from time to time or over a period of time), that results in the Company's ownership of less than 50% of the Company's current assets.
6. RESTRICTIVE COVENANTS.
6.1 NONDISCLOSURE. During his employment and for twelve (12) months thereafter, Executive shall not divulge, communicate, use to the detriment of the Company or for the benefit of any other person or persons, or misuse in any way, any Confidential Information (as hereinafter defined) pertaining to the business of the Company. Any Confidential Information or data now or hereafter acquired by the Executive with respect to the business of the Company shall be deemed a valuable, special and unique asset of the Company that is received by the Executive in confidence and as a fiduciary, and Executive shall remain a fiduciary to the Company with respect to all of such information. For purposes of this Agreement, "Confidential Information" means all material information about the Company's business disclosed to the Executive or known by the Executive as a consequence of or through his employment by the Company (including information conceived, originated, discovered or developed by the Executive) after the date hereof, and not generally known.
6.2 NONSOLICITATION OF EMPLOYEES. While employed by the Company and for a period of twelve (12) months thereafter, Executive shall not directly or indirectly, for himself or for any other person, firm, corporation, partnership, association or other entity, attempt to employ or enter into any contractual arrangement with any employee or former employee of the Company, unless such employee or former employee has not been employed by the Company for a period in excess of six months.
6.3 COVENANT NOT TO COMPETE. Executive will not, at any time, during the term of this Agreement, and for one (1) year thereafter, either directly or indirectly, engage in, with or for any enterprise, institution, whether or not for profit, business, or company, competitive with the business (as identified herein) of Employer as such business may be conducted on the date thereof, as a creditor, guarantor, or financial backer, stockholder, director, officer, consultant, advisor, employee, member, or otherwise of or through any corporation, partnership, association, sole proprietorship or other entity; provided, that an investment by Employee, his spouse or his children is permitted if such investment is not more than four percent (4%) of the total debt or equity capital of any such competitive enterprise or business. As used in this Agreement, the business of Employer shall be deemed to include any business which directly competes with the Company in the provision of traditional voice services, VoIP services, private network services, Internet access services and Internet based video conferencing services. The covenant not to compete for one year after termination shall only be effective if the Executive has received all compensation due to him pursuant to this Agreement . The Company shall have the right in its sole discretion to waive the non-compete
6.4 INJUNCTION. It is recognized and hereby acknowledged by the parties hereto that a breach by the Executive of any of the covenants contained in Section 6.1, 6.2 or 6.3 of this Agreement will cause irreparable harm and damage to the Company, the monetary amount of which may be virtually impossible to ascertain. As a result, the Executive recognizes and hereby acknowledges that the Company shall be entitled to an injunction from any court of competent jurisdiction enjoining and restraining any violation of any or all of the covenants contained in this Section 6 by the Executive or any of his affiliates, associates, partners or agents, either directly or indirectly, and that such right to injunction shall be cumulative and in addition to whatever other remedies the Company may possess.
7. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.
8. NOTICES: Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered by hand or when deposited in the United States mail, by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Company: Fusion Telecommunications Intl, Inc. 420 Lexington Avenue - Suite 518 New York, New York 10170 Attention: CEO WITH A COPY TO: Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP 600 Lexington Avenue New York, New York 10022 Attention: Jay M. Kaplowitz If to the Executive: Roger Karam [ ] |
or to such other addresses as either party hereto may from time to time give notice of to the other in the aforesaid manner.
9. SUCCESSORS.
(a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise.
10. SEVERABILITY. The invalidity of any one or more of the words, phrases, sentences, clauses or sections contained in this Agreement shall not affect the enforceability of the remaining portions of this Agreement or any part thereof, all of which are inserted conditionally on their being valid in law, and, in the event that any one or more of the words, phrases, sentences, clauses or sections contained in this Agreement shall be declared invalid, this Agreement shall be construed as if such invalid word or words, phrase or phrases, sentence or sentences, clause or clauses, or section or sections had not been inserted. If such invalidity is caused by length of time or size of area, or both, the otherwise invalid provision will be considered to be reduced to a period or area which would cure such invalidity.
11. WAIVERS. The waiver by either party hereto of a breach or violation of any term or provision of this Agreement shall not operate nor be construed as a waiver of any subsequent breach or violation.
12. DAMAGES. Nothing contained herein shall be construed to prevent the Company or the Executive from seeking and recovering from the other damages sustained by either or both of them as a result of its or his breach of any term or provision of this Agreement.
13. NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this Agreement is intended, or shall be construed, to confer upon or give any person (other than the parties hereto and, in the case of Executive, his heirs, personal representative(s) and/or legal representative) any rights or remedies under or by reason of this Agreement.
14. FULL SETTLEMENT. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. The Company agrees to pay, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to Section 15 of this Agreement), plus in each case interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Code.
15. CERTAIN REDUCTION OF PAYMENTS BY THE COMPANY.
(d) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of amounts payable or distributable to or for the benefit of the Executive pursuant to this Agreement (such payments or distributions pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Company because of Section 280G of the Code. Anything to the contrary notwithstanding, if the Reduced Amount is zero and it is determined further that any Payment which is not an Agreement Payment would nevertheless be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of Payments which are not Agreement Payments shall also be reduced (but not below zero) to an amount expressed in present value which maximizes the aggregate present value of Payments without causing any Payment to be nondeductible by the Company because of Section 280G of the Code. For purposes of this Section 16, present value shall be determined in accordance with Section 280G(d)(4) of the Code. Any amount which is not paid in the taxable year in which it was originally scheduled to be paid as a result of the postponement thereof pursuant hereto shall be payable in the next succeeding taxable year in which such payment will not result in the disallowance of a deduction pursuant to either Section 162(m) or 280G of the Code; provided, however, that all postponed payments shall be placed in a trust or similar vehicle for the benefit of the Executive in such a way that the amounts so transferred are not taxable to such person or deductible by the Company until payment from such vehicle to the Executive is made. In the event a payment has been made to the Executive, but then disallowed as a deduction by the Internal Revenue Service and return of the payment is required into the trust, said payment to the Executive shall be treated as a loan and said payment to the trust shall be treated as repayment of said loan. The Company shall not pledge, hypothecate or otherwise encumber any amounts held in the trust or other similar vehicle for the benefit of the Executive hereunder.
(e) All determinations required to be made under
this Section 15 shall be made by Rothstein, Kass & Company, P.C. or, at the
Executive's option, any other nationally or regionally recognized firm of
independent public accountants selected by the Executive and approved by the
Company, which approval shall not be unreasonably withheld or delayed (the
"Accounting Firm"), which shall provide (i) detailed supporting calculations
both to the Company and the Executive within twenty (20) business days of the
termination of Executive's employment or such earlier time as is requested by
the Company, and (ii) an opinion to the Executive that he has substantial
authority not to report any excise tax on his Federal income tax return with
respect to any Payments. Any such determination by the Accounting Firm shall be
binding upon the Company and the Executive. The Executive shall determine which
and how much of the Payments shall be eliminated or reduced consistent with the
requirements of this Section 15, provided that, if the Executive does not make
such determination within ten business days of the receipt of the calculations
made by the Accounting Firm, the Company shall elect which and how much of the
Payments shall be eliminated or reduced consistent with the requirements of this
Section 15 and shall notify the Executive promptly of such election. Within five
business days thereafter, the Company shall pay to or distribute to or for the
benefit of the Executive such amounts as are then due to the Executive under
this Agreement. All fees and expenses of the Accounting Firm incurred in
connection with the determinations contemplated by this Section 15 shall be
borne by the Company.
(f) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Payments will have been made by the Company which should not have been made ("Overpayment") or that additional Payments which will not have been made by the Company could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that
the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against the Executive which the Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for the benefit of the Executive shall be treated for all purposes as a loan ab initio to the Executive which the Executive shall repay to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to the Company if and to the extent such deemed loan and payment would not either reduce the amount on which the Executive is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
EXECUTIVE:
Ex-10.30
STOCK PURCHASE AGREEMENT
AMONG
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.,
EFONICA FZ-LLC
AND
KARAMCO, INC.
JANUARY 11, 2005
STOCK PURCHASE AGREEMENT
THIS AGREEMENT dated as of January 11, 2005, is by and among Fusion Telecommunications International, Inc., a Delaware corporation ("Buyer"), Efonica, FZ-LLC, a company organized in Dubai Technology, Electric Commerce & Media Free Zone, Dubai, United Arab Emirates (the "Company"), and Karamco, Inc., a company organized in the British Virgin Islands ("Karamco" or the "Stockholder").
WITNESSETH
WHEREAS the Stockholder owns the number of the issued and outstanding shares (collectively, the "Shares") of the common stock, no par value per share (the "Common Stock"), of the Company set forth opposite such Stockholder's name on Schedule 1 attached hereto, which Shares in the aggregate represent, on a fully diluted basis, 49.8% of the authorized, issued and outstanding shares of the capital stock of the Company;
WHEREAS Buyer desires to acquire all of the Shares from Karamco, and Karamco desires to sell all of its Shares to Buyer, upon the terms and subject to the conditions hereinafter set forth.
NOW THEREFORE, in consideration of the foregoing and of the covenants set forth below, the parties hereby agree as follows:
SECTION
PURCHASE AND SALE OF THE SHARES
1.1 Purchase and Sale. Upon the terms and subject to the conditions of this Agreement, at the Closing (as defined below), Karamco agrees to sell to Buyer, and Buyer agrees to purchase from Karamco, the number of Shares owned by Karamco, as set forth opposite its name on Schedule 1 hereto ([ ] Shares). The aggregate purchase price for the Shares (the "Final Purchase Price") shall be set forth and payable as expressed on Section 1.2.
1.2 Valuation and Purchase Price
A. Valuation. The valuation of the Company shall equal 4.5 times the net income before taxes of the Company (the "Net Income") for the 12-month period ending February 28, 2006 (the "Computation Period"). The Net Income of the Company shall be as set forth on the Company's financial statements computed in accordance with generally accepted accounting principals, provided however that in computing the Company's Net Income, there shall be added back any administrative and mark-up fees paid or payable to the back office service provider during the Computation Period (the "Valuation"). The Valuation shall be computed within 60 days of the end of the Computation Period. In no event shall the Valuation for the Company be less than $11.25 million or greater than $29.25 million.
B. Base Purchase Price. The base purchase price for the Shares (the "Base Purchase Price") shall be NINE MILLION SEVEN HUNDRED EIGHTY FIVE THOUSAND SEVEN HUNDRED ($9,785,700) DOLLARS (49.8% of an initial estimated valuation of
$20,000,000 minus 49.8% of the promissory notes payable (including accrued interest) that the Company owes to the Buyer as of [DATE] ("Efonica Debt")), subject to adjustment pursuant to Section 1.2(C)(vii) and Section 8 of the Agreement, and payable as set forth in Section 1.2(C).
C. Payment at Closing. At Closing, Buyer shall deliver to Karamco:
(i) Stock. [NUMBER] shares of Buyer's common stock at the IPO price (exact number of shares will be calculated on the effective date of the IPO and will be equal to the Base Purchase Price minus the cash payment as set forth in Section 1.2(C)(iii) divided by the IPO price per share) (the aggregate number of Shares under this Section shall be referred to as the "Base Shares");
(ii) Escrow. From the Closing Date until March 30, 2006, Buyer's attorney (the "Escrow Agent") shall hold [NUMBER] shares of the Base Shares (not to include the Registered Stock) in escrow (the "Escrowed Stock") and subject to an Escrow Agreement between the parties and the Escrow Agent, a form of which is attached hereto as Exhibit "D". The Escrowed Stock will be subject to adjustment pursuant to Section 1.2(C)(vii);
(iii) Cash Payment. Within three (3) days of the Closing, Buyer will pay Karamco an amount equal to FIVE HUNDRED THOUSAND ($500,000.00) DOLLARS as a credit to the Final Purchase Price;
(iv) Registration. The Buyer shall include in its Registration Statement for its IPO, 150,000 shares of Common Stock (the "Registered Shares"). The Registered Shares shall be part of the Base Shares. During the 90 day period following the Closing, the Buyer will either allow the Stockholder to sell up to $1 million in Registered Shares in ordinary brokerage transactions in the public market or purchase the Registered Shares as set forth herein. The Registered Shares will be subject to a lock-up that will allow Karamco to sell 1/2 of the Registered Shares 45 days following the effective date of an IPO and 1/2 of the Registered Shares 90 days following the effective date of the IPO. In the event Karamco elects to sell the Registered Shares in the public market as set forth above, Karamco shall provide notice to Buyer with at least two business days' notice prior to any sale, and Buyer shall have the exclusive option to purchase the Registered Shares from Karamco at the higher of the IPO price or the average 5 day bid price prior to the date of the sale to the Buyer. In the event that Karamco's aggregate gross proceeds of a public sale of the Registered Shares as set forth in this Section, in the aggregate, and within 95 days following the effective date of the IPO, does not equal $1,000,000, the Buyer will purchase from Karamco an amount of Base Shares, at the IPO price, equal to the difference between the aggregate gross proceeds of Karamco's sale of the Registered Shares and $1,000,000;
(v) Lock-Up. The unregistered Base Shares issued to Karamco will be subject to a lock-up for a one year period following the effective date of the IPO ("Lock-Up Period"). Karamco agrees to execute an agreement to that effect in the form attached hereto as Exhibit "B" (the "Lock-Up Agreement"). In the event a significant shareholder (owner of 5% or more of the issued and outstanding common stock ("Significant Shareholder")) is allowed to register all or a portion of his common stock prior to the expiration of the Lock-Up Period,
Karamco will be allowed to register its shares on a pro rata basis (will be allowed to sell the same % of shares the Significant Shareholder sells). If any Significant Shareholder shall receive and determine to accept any bona fide offer from a third party (the "Offeror") to purchase all or substantially all of such Significant Shareholders' Shares "a "Tag-Along Offer") prior to expiration of the Lock-Up Period, Karamco shall have the right to participate in such transaction in the manner set forth in this Section. The Significant Shareholders shall, promptly after receipt of a Tag-Along Offer, send a copy thereof or a summary of the terms of any offer to Karamco. Karamco shall have the right to cause the Significant Shareholder(s) to condition his or their sale of Shares to an Offeror on the sale of all, or a pro-rata amount (equal to the percentage of the selling Significant Shareholder), of Shares of Karamco to Offeror (the "Tag-Along Shareholder"). The purchase price and payment terms for the Shares of the Tag-Along Shareholder shall be the same price per Share and same payment terms for the Shares as the Significant Shareholders' Shares and as set forth in the Tag-Along Offer. Should Karamco choose to participate in a sale of Shares pursuant to this Section, it shall pay its proportionate share of any expenses attributable to the sale of Shares hereunder. In the event Karamco sells any stock prior to expiration of the Lock-Up Period, it shall cause the purchaser to be bound by the Lock-up Agreement.
(vi) Limitation on Sale Following Lock-Up Period. The Lock-Up Agreement will further provide after the Lock-Up Period sales by the Stockholder shall be subject to Rule 144. Both parties acknowledge that the holding period for Karamco's unregistered shares commences at the time of closing.
(vii) Post Closing Adjustments.
(a) Within 60 days of the Computation Period, Buyer will determine the final purchase price which shall equal 49.8% of the actual Valuation minus 49.8% of the Efonica Debt less adjustments in Section 8 of the Agreement (the "Final Purchase Price").
(b) In the event that the Final Purchase Price is less than the Base Purchase Price, the excess Escrowed Stock will be released from escrow to the Buyer, the released shares being valued equal to the IPO price per share. Provided, however, that the Final Purchase Price shall not be less than $5,428,200;
(c) In the event that the Final Purchase Price exceeds the Base Purchase Price (i) the Escrowed Stock will be released from escrow to Karamco, and if applicable, (ii) the Buyer will issue additional Stock to Buyer for the difference between the Final Purchase Price and the Base Purchase Price, the additional stock being valued at the common stock closing price on March 30, 2006. Provided however, that the Final Purchase Price shall not exceed $14,392,200 ("Maximum Purchase Price").
1.3 Closing. The closing (the "Closing") of the purchase and sale of the Shares hereunder shall take place at the Buyer's office located at 420 Lexington Avenue, Suite 518, New
York, New York 10170, at 2:00 p.m. (EST) on the closing of the Buyer's initial public offering ("IPO"), or at such other time or place as Buyer and the Stockholder agree (the "Closing Date"). If the IPO does not occur by March 1, 2005, Karamco will have the option to deem this Agreement null and void and maintain its 49.8% equity interest in the Company.
1.4 Additional Stock. If between January 1, 2006 and February 28, 2006 (the "11th and 12th Month"), the Company receives a contract (or contracts as the case may be) with pre-payment(s) that within 45 days from February 28, 2006, the Company is able to record as revenue under GAAP, on May 15, 2006 Karamco will be issued additional stock equal to (49.8% times (4.5 times the additional net income before taxes)) (the "Additional Stock").The Additional Stock shall be valued at the closing price of common stock on May 15, 2006.
Provided however, cash pre-payments collected in the 11th and 12th Month that
exceed 25 % of the average pre-payments for the period of November 1, 2005 to
December 31, 2005, shall not be included in the Additional Stock calculation and
the Additional Stock shall be subject to the Maximum Purchase Price in Section
1.2(vii)(c). This Section shall survive Closing of the Agreement.
SECTION 2
REPRESENTATIONS AND WARRANTIES OF THE
STOCKHOLDER WITH RESPECT TO THE COMPANY
The Stockholder represents and warrants to Buyer as of the date hereof and on and as of the Closing Date as follows:
2.1 Organization and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the country of Dubai, UAE and has all requisite corporate power and lawful authority to own, lease and operate its assets, properties and business and to conduct its business as and in the places where such properties are now owned, leased or operated or such business is now conducted or proposed to be conducted.
2.2 Capitalization; Voting Rights. The authorized capital of the Company consists of [ ] shares of Common Stock, of which [ ] shares have been validly subscribed and issued, are outstanding as fully paid and non-assessable shares as of the date hereof, and represent all of the issued and outstanding shares of capital stock of the Company, on a fully diluted basis, as set forth on Schedule 1. There is no: (i) outstanding security of the Company convertible into or exchangeable for any share or shares of the capital of the Company; (ii) outstanding subscription, option, warrant, call, commitment, agreement or understanding (oral or written) obligating the Company to issue any share or shares of its capital stock or any security or securities of any class or kind which in any way relate to the authorized or issued capital stock of the Company or any interest therein; (iii) agreement or understanding (oral or written) (other than this Agreement) which grants to any Person (as hereinafter defined) the right to purchase or otherwise acquire any share or shares of the issued and outstanding shares of the capital stock of the Company or any interest therein, including without limitation any preemptive right, right of first refusal or co-sale right; (iv) voting trust or voting agreement or pooling agreement or proxy (oral or written) with respect to any issued and outstanding shares of the capital stock of the
Company; or (v) obligation of the Company (oral or written) to purchase, redeem, or otherwise acquire any shares of its capital stock or any interest therein or to pay any dividend or distribution with respect thereto.
2.3 Consents. No consent, approval, waiver or other action by any individual, corporation, company, partnership, association, trust or other entity or organization, including any government or political subdivision or agency or instrumentality thereof (each, a "Person"), under any contract, agreement, understanding, indenture, lease, instrument or other document (oral or written) to which the Company is a party or by which it or any of the assets of the Company is bound, is required or necessary for (i) the execution, delivery and performance of this Agreement or any Related Agreement by the Stockholder or the Company or the consummation of the transactions contemplated hereby or thereby or (ii) the continuation after the consummation of the transactions contemplated hereby or thereby of any contract, agreement, indenture, lease, instrument or other document to which the Company is a party or by which it or its assets are bound.
2.4 Authorization; No Breach. The execution and delivery by the Company of this Agreement and all the agreements contemplated herein (the "Related Agreements"), and the consummation by the Company of all transactions contemplated hereunder and thereunder by the Company, have been duly authorized by all requisite corporate action. This Agreement and the Related Agreements have been duly executed by the Company and the Stockholder (where applicable) and each other party thereto. This Agreement and the Related Agreements and all other agreements and obligations entered into and undertaken in connection with the transactions contemplated hereby or thereby to which the Company or the Stockholder is a party constitute the valid and legally binding obligations of the Company and the Stockholder, enforceable against each of them in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights; and (ii) general principles of equity that restrict the availability of equitable remedies. The execution, delivery and performance of this Agreement and the Related Agreements and the consummation of the transactions contemplated hereby and thereby will not: (i) violate, contravene or breach any provision of the Articles of Incorporation or By-laws of the Company; (ii) violate, conflict with, contravene, or result in the breach of any of the terms or conditions of, result in modification of the effect of, or otherwise give any other contracting party the right to terminate, accelerate or cancel any right or obligation of the Company or constitute (or with notice or lapse of time or both constitute) a default under, any instrument, contract or other agreement to which the Company is a party or by which it or its assets or properties may be bound or subject; (iii) violate, contravene or breach any constitution, treaty, law, statute, code, ordinance, decree, rule, regulation, or municipal by-law, whether domestic, foreign or international, any judgment, order, writ, injunction, decision, ruling, decree or award of any governmental authority or body, or any provision of any of the foregoing applicable to or binding upon, the Company or its properties, assets or business (each, a "Law," and collectively, "Laws"); (iv) violate any license, permit, franchise, or order or other approval of any federal, provincial, state, local or foreign governmental or regulatory body (each, a "Permit", and collectively, "Permits"); or (v) result in the creation of any mortgage, pledge, charge, security interest, lien or other encumbrance (each, a "Lien") on the Shares or on any of the assets or properties of the Company.
2.5 Subsidiaries and Other Affiliates. The Company has no subsidiaries. The Company does not directly or indirectly own or have any investment in any shares of the capital stock of, or any other proprietary interest in (including without limitation, any partnership or joint venture interest other than with the Buyer), any other Person. For this purpose, "joint venture"
means any entity or contractual relationship (written or oral) pursuant to which the Company shares with any Person the profits and/or losses of any undertaking or pursuant to which the Company may be liable for the acts or undertakings of any Person.
2.6 Corporate Records. The Company has previously delivered to Buyer true and complete copies of its Articles of Incorporation, as amended, and By-laws as currently in effect. The minute books of the Company, which have been furnished to Buyer, are complete and accurate, and contain copies of all by-laws and resolutions passed by the shareholders and directors of the Company since the date of its incorporation, all of which by-laws and resolutions have been duly passed. The share certificate books, register of shareholders, register of transfers and register of directors of the Company are complete and accurate. The financial books and records of the Company have been maintained in accordance with sound business practices and fairly, accurately and completely present and disclose consistently applied (i) the financial position of the Company, and (ii) all transactions of the Company.
2.7 Financial Statements. The Company has delivered to Buyer drafts dated November 30, 2004 of the unaudited financial statements of the Company for the fiscal year ended December 31, 2004 (the "Unaudited Financial Statements"), the unaudited balance sheet (the "Current Balance Sheet") of the Company as of November 30, 2004 (the "Current Balance Sheet Date") collectively with the Unaudited Financial Statements and the Current Balance Sheet, the "Financial Statements"). The Unaudited Financial Statements together with the notes thereto have been prepared in accordance with past practices, and the Unaudited Financial Statements together with the notes thereto have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout such period. Except as disclosed therein, such Unaudited Financial Statements are true, correct and complete, and present fairly and accurately the financial condition and position of the Company as of the dates indicated.
2.8 Absence of Undisclosed Liabilities. Except as set forth in
Schedule 2.8, as of the Closing Date, the Company had/has no liabilities of any
nature, whether direct, indirect, accrued, absolute, contingent or otherwise
(including, without limitation, liabilities as guarantor or otherwise with
respect to obligations of others or liabilities for Taxes due or then accrued or
to become due), that were not fully and adequately reflected or reserved against
on the Financial Statements of the Company. There is no existing condition,
situation or set of circumstances (excluding possible changes in the Tax laws of
any jurisdiction) that could reasonably be expected to result in any such
liability, other than liabilities (i) fully and adequately reflected or reserved
against on the Financial Statements or (ii) incurred since the Current Balance
Sheet Date in the ordinary course of business consistent with past practice,
which in the aggregate are not material to the Company. For purposes of this
Section 2.8, "material" shall mean any amount in excess of $5,000.00.
2.9 No Material Adverse Change. To the best knowledge of the Company, since the Current Balance Sheet dated November 30, 2004, there have been no changes in the assets, properties, business, operations, prospects or condition (financial or otherwise) of the Company that, individually or in the aggregate, materially and adversely affect the Company, nor does any Stockholder or executive of the Company know of any such change that is reasonably likely to occur, nor has there been any damage, destruction or loss materially and adversely affecting the assets, properties, business, operations, prospects or condition (financial or otherwise) of the Company, whether or not covered by insurance. Without limiting the generality of the foregoing since the Current Balance Sheet Date, the Company has not:
(i) incurred any indebtedness for borrowed money, assumed or guaranteed or otherwise
become responsible for the obligations of any Person, or otherwise made or assumed any commitment, obligation or liability outside the ordinary course of business;
(ii) declared or paid any dividend or declared or made any other distribution of any kind to its shareholders, or made any direct or indirect redemption, retirement, purchase or other acquisition of any shares of its capital stock or entered into any agreement or made any commitment with respect to the same;
(iii) made any loan, advance or capital contribution to or investment in any Person;
(iv) made any payment or commitment to pay any severance or termination pay to any of its officers, directors, shareholders, employees, consultants, agents or other representatives;
(v) entered into any lease (as lessor or lessee), sold, abandoned or made any other disposition of any of its assets, properties or rights, granted or suffered any Lien or other encumbrance on any of its assets or properties, or entered into or amended any contract or other arrangement to do any of the foregoing or pursuant to which the Company agreed to indemnify any party or to refrain from competing with any party;
(vi) except for inventory or equipment acquired in the ordinary course of business, made any acquisition of all or any part of the assets, properties, capital stock or business of any other Person or entered into or amended any contract or other arrangement to do the same;
(vii) made any change in any method of accounting or accounting practice, waived or cancelled any material claim, account receivable, or right, or changed its pricing, credit, or payment policies;
(viii) paid any long-term liability otherwise than in accordance with its terms;
(ix) (A) entered into any employment, deferred compensation or other similar agreement (or any amendment to any such existing agreement)with any director, officer, shareholder, consultant, agent or employee of the Company, (B) increased the benefits payable under any existing severance or termination pay policies or employment agreement or (C) increased the compensation, bonus or other benefits payable to directors, officers or employees of the Company;
(x) suffered any labor dispute, other than routine individual grievances, or any activity or proceeding by a labor union or representative thereof to organize any employees of the Company, which employees were not subject to a collective bargaining agreement at the Current Balance Sheet Date, or any lockouts, strikes, slowdowns, work stoppages or threats thereof by or with respect to any employees of the Company; or
(xi) failed to comply with any Law in any respect that, individually or in the aggregate, has had or is reasonably likely to have a material adverse effect on the assets, properties, business, operations, prospects or conditions (financial or otherwise) of the Company.
2.10 Accounts and Notes Receivable. All accounts and notes receivable reflected in the Financial Statements and all accounts receivable arising after the Current Balance Sheet Date (collectively, the "Accounts Receivable") have arisen in the ordinary course of business of the Company, represent valid and enforceable obligations due to the Company, and are not subject to any discount, set-off or counter-claim. All such Accounts Receivable have been collected or, to
the best knowledge of the Company, are fully collectible in the ordinary course of business of the Company in the aggregate recorded amounts thereof in accordance with their terms.
2.11 Tax Matters.
(a) As used in this Agreement, "Taxes" shall mean all taxes, including without limitation income taxes, corporation taxes, capital taxes, excise taxes, value added and sales taxes, use taxes, gross receipts taxes, franchise taxes, employment and payroll related taxes, goods and services taxes, stamp taxes, transfer taxes, withholding taxes, property taxes and import duties, whether or not measured in whole or in part by net income, all imposts, levies, duties, deductions, withholdings, charges, public and private pension plan contributions, social security contributions, workmen's compensation, public health contributions, regulatory fees and taxes, assessments, reassessments or fees of any nature, and all deficiencies or other additions to tax, interest and penalties owed by it; and "Tax" shall mean any one of them. The Company has paid all Taxes required to be paid by it through the date hereof (other than Taxes not yet due and payable the liability for which is adequately reserved for by the Company in the Financial Statements and other than possible adjustments as set forth in Schedule 2.8). The provisions for Taxes reflected in the Financial Statements are adequate to cover any and all Tax liabilities of the Company in respect of their respective assets, properties, business and operations during the periods covered by said Financial Statements and all prior periods.
(b) The Company has timely filed all Tax returns required to be filed by it through the date hereof. Each of the Tax returns filed by the Company completely, correctly and accurately reflects the amount of the Company's Tax liability for the period covered thereby.
(c) There has not been any audit of any Tax return filed by the Company, no audit of any Tax return of the Company is in progress, and the Company has not been notified by any Tax authority that any such audit is contemplated or pending. No taxing authority is now asserting or, to the best knowledge of any Stockholder, threatening to assert any Tax deficiency or claim for additional Taxes or interest thereon or penalties in connection therewith. All Tax returns of the Company have been assessed through and including the date hereof, and there are no outstanding waivers of any limitation periods or agreements providing for an extension of time for the filing of any Tax return or the payment of any Tax or for the issue of an assessment or reassessment against the Company. All deficiencies proposed as a result of such assessments of the Tax returns have been paid and settled.
(d) The Company has withheld from each payment made to any of its past and present shareholders, directors, officers, employees and agents the amount of all Taxes and other deductions required to be withheld and has paid or made adequate provision for the payment of such amounts to the proper receiving authorities.
(e) The Company is not subject to and shall not be subject after the Closing Date to any assessments, levies, penalties or interest with respect to Taxes which shall result in any liability on its part in respect of any period ending on or prior to the Closing Date in excess of the amount provided for and reserved against in the Financial Statements.
2.12 Compliance with Laws; Permits.
(a) The Company is not in violation or default of any term of its Articles of Incorporation or Bylaws, or of any provision of any mortgage, indenture, contract, agreement, instrument or contract to which it is party or by which it is bound or of any judgment, decree,
order, writ or, to its knowledge, any Law applicable to the Company which would materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of the Company.
(b) Schedule 2.12 sets forth a complete list (including detailed description of the authority granted under each) of (i) all Permits and Licenses (collectively referred to as "Permits") that are material to the conduct of the Company's business (including but not limited to all telecommunications and Voice over Internet Protocol ("VoIP") licenses))
(c) The Company has, is in full compliance with, and is entitled to all the benefits under, all Permits that are material to the conduct of its business and the uses of its assets; such Permits have been validly issued and are in full force and effect and will continue in full force and effect upon consummation of the transactions contemplated hereunder; no violations are or have been recorded with any governmental or regulatory body in respect of any Permit; and no proceeding is pending or, to the best knowledge of the Stockholder threatened to revoke or limit any Permit.
2.13 Actions and Proceedings. There are no outstanding orders, judgments, injunctions, awards or decrees of any court, governmental or regulatory body or arbitration tribunal against or involving the Company or any of its securities, assets, or properties or any Stockholder or Employee of the Company. There are no actions, proceedings (or any basis therefor), suits or claims or legal, administrative or arbitral proceedings pending against or, to the best knowledge of the Company, threatened against or affecting (whether or not the defense thereof or liabilities in respect thereof are covered by insurance) the Company or any of its securities, assets or properties, or any Stockholder or Employee of the Company, nor, to the best knowledge of the Company, is there any investigation pending or threatened against or affecting the Company or any Stockholder or Employee of the Company, that questions the validity of this Agreement, or any of the Related Agreements or any of the Schedules or Exhibits attached hereto or the right of the Company or any Stockholder or other party to enter into any of such agreements, or to consummate the transactions contemplated hereby or thereby, or which might result, either individually or in the aggregate, in any material adverse change in the business, assets, intellectual property rights, liabilities, financial condition, operations, affairs or prospects of the Company, financially or otherwise, or any change in the current equity ownership of the Company. To the best knowledge of the Company, there is no fact, event or circumstance that may give rise to any suit, action, claim, investigation or proceeding that individually or in the aggregate could have a material adverse effect on the transactions contemplated hereby or on the assets, properties, business, operations, prospects or condition (financial or otherwise) of the Company.
2.14 Contracts and Other Agreements.
(a) Schedule 2.14 sets forth a list of all of the following contracts and other agreements (oral or written) to which the Company is a party or by or to which it or its assets or properties are bound or subject (collectively, the "Material Contracts"): (i) contracts and other agreements with any current or former officer, director, shareholder, employee, consultant, agent or other representative of the Company and contracts and other agreements for the payment of fees or other consideration to any entity in which any officer or director of the Company has an interest; (ii) contracts and other agreements with any labor union or association representing any employee of the Company or otherwise providing for any form of collective bargaining; (iii) contracts and other agreements for the purchase or sale of materials, supplies, equipment, merchandise, products or services providing in each instance for a purchase or sale price exceeding $10,000;
(iv) contracts and other agreements for the sale of any of the assets or
properties of the Company other than in the ordinary course of business or for
the grant to any person of any options, rights of first refusal, or referential
or similar rights to purchase any of such assets or properties; (v) partnership
or joint venture agreements; (vi) contracts or other agreements under which the
Company agrees to indemnify any party or to share the tax liability of any
party; (vii) contracts, options and other agreements for the purchase of any
asset, tangible or intangible, calling for an aggregate purchase price or
payments in any one year of more than $25,000 in any one case (or in the
aggregate, in the case of any related series of contracts and other agreements;
(viii) contracts and other agreements that cannot by their terms be canceled by
the Company and any successor or assignee of the Company without liability,
premium or penalty on no less than thirty (30) days' notice and which provide
for payments in any one year in excess of $5,000 and $10,000 in the aggregate;
(ix) contracts and other agreements with customers or suppliers for the sharing
of fees, the rebating of charges or other similar arrangements; (x) contracts
and other agreements containing obligations or liabilities of any kind to
holders of the securities of the Company as such (including, without limitation,
an obligation to register any of such securities under any federal or state
securities laws); (xi) contracts and other agreements containing covenants of
the Company not to compete in any line of business or with any person or
covenants of any other person not to compete with the Company in any line of
business; (xii) contracts and other agreements relating to the acquisition by
the Company of any operating business or the capital stock of any other person;
(xiii) contracts and other agreements requiring the payment to any person of a
commission or fee, including contracts or other agreements with consultants
which provide for aggregate payments in excess of $10,000; (xiv) contracts,
indentures, mortgages, promissory notes, loan agreements, guaranties, security
agreements, pledge agreements, and other agreements relating to the borrowing of
money or securing any such liability; (xv) distributorship or licensing
agreements; (xvi) contracts under which the Company will acquire or has acquired
ownership of, or license to, intangible property, including software (other than
software licensed by the Company as an end user for less than $10,000 and not
distributed by it); (xvii) leases, subleases or other agreements under which the
Company is lessor or lessee of any real property or personal property and which
provide for payments in any one year in excess of $5,000 and $10,000 in the
aggregate; (xviii) any other material contracts or other agreements whether or
not made in the ordinary course of business that are in each instance material
to the Company or the terms of which in each instance would have a material
adverse effect on the Company's business or prospects, condition, financial or
otherwise, or any of its assets or properties of the Company; or (xix) contracts
or agreements for any pension, profit sharing, retirement, deferred
compensation, stock purchase, stock option, incentive, bonus, sales commission,
vacation, severance, disability, life insurance, group insurance, multi-employer
or other employee benefit plans, programs or other contractual arrangements, in
respect of, or that otherwise cover, any of the current or former officers or
employees of the Company, or their heirs or beneficiaries.
(b) There have been delivered or made available to Buyer true and complete copies of all such Material Contracts (and all amendments, waivers or other modifications thereto) and, with respect to any oral Material Contracts, complete and accurate summaries thereof. Except as set forth on Schedule 2.14, making specific reference to the Material Contract as to which exception is taken and explaining the exception, all of such Material Contracts are valid, subsisting, in full force and effect, binding upon the Company, and to the best knowledge of the Company, binding upon the other parties thereto in accordance with their terms. The Company, and to the best knowledge of each employee of the Company each other party thereto has in all material respects performed all the obligations required to be performed by them to date, has received no notice of default and is not in default under any such Material Contracts. The Company has no present expectation or intention of not fully performing all its obligations under
each Material Contract, and no employee of the Company has any knowledge of any breach or anticipated breach by the Company or any other party to any such Material Contract.
(c) Except as set forth on Schedule 2.14(c), the Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities or mortgaged or pledged, or otherwise placed or agreed to place a lien or security interest on any asset of the Company individually in excess of $10,000.00, (iii) made any loans or advances to any person, other than ordinary advances for travel or other expenses, or (iv) sold, exchanged, licensed, encumbered, mortgaged, pledged or otherwise disposed of any of its assets or rights, other than in the ordinary course of business.
2.15 Real Estate. The Company does not own any real property or any buildings or other structures and does not have any options or any contractual obligations to purchase or acquire any interest in real property. The leasehold interests of the Company set forth in Schedule 2.15 are subject to no Lien (other than Liens on the interests of the respective lessors that indirectly burden such leasehold interests). All such leases are in good standing and in full force and effect without amendment thereto, and the Company is entitled to all benefits under such leases.
2.16 Personal Property. Schedule 2.16 attached hereto sets forth (i) a true, correct and complete list of all items of tangible personal property (A) owned by the Company as of the date hereof having either a net book value per unit or an estimated fair market value per unit in excess of $5,000 or (B) not owned by the Company but in the possession of or used or useful in the business of the Company and having rental payments therefor in excess of $250 per month or $3,000 per year (collectively, the "Personal Property") as well as other assets (i.e. cash, etc.); and (ii) a description of the owner of, and any agreement relating to the use of, each item of Personal Property not owned by the Company and the circumstances under which such Personal Property is used. Except as disclosed in Schedule 2.16:
(a) no officer, director, stockholder or employee of the Company, nor any spouse, child or other relative or affiliate thereof, owns directly or indirectly, in whole or in part, any of the Personal Property;
(b) each item of Personal Property not owned by the Company is in such condition that upon the return of such Personal Property to its owner in its present condition at the end of the relevant lease term or as otherwise contemplated by the applicable agreement between the Company and the owner or lessor thereof, the obligations of the Company to such owner or lessor will be discharged;
(c) the Personal Property is in good operating condition and repair, normal wear and tear excepted, is currently used by the Company in the ordinary course of its business and normal maintenance has been consistently performed with respect to the Personal Property; and
(d) the Company owns or otherwise has the right to use all of the Personal Property now used or useful in the operation of its business or the use of which is necessary for or useful in the performance of any material contract, letter of intent or proposal to which the Company is a party.
2.17 Proprietary Rights.
(i) As used in this Agreement, the term "Proprietary Rights" means all:
(a) trademarks, service marks, trade names, franchises and copyrights and all registrations and applications to register any of the foregoing with any agency or authority;
(b) patents, patent applications, inventions and designs, and any registration thereof with any agency or authority;
(c) trade secrets, including all processes, know-how, technical data, shop rights, and any media or other tangible embodiment thereof and all descriptions thereof; and
(d) other technology and intangible property, including without limitation computer programs, databases, and documentation and flow charts.
(ii) The Company's Proprietary Rights are listed on Schedule 2.17.
(a) (i) None of the present activities or, to the best
knowledge of the Company, the proposed activities, of the Company or its
products or assets infringe on any Proprietary Rights of others, (ii) the
Company has not received any claim or notice of any claim to that effect, and
(iii) to the best knowledge of the Company, there is no existing or threatened
infringement or violation by others of the Proprietary Rights of the Company.
(b) To the best knowledge of the Company, there is no existing or threatened violation of the confidentiality of the Company's confidential information or trade secrets. The Company is not making unauthorized use of any confidential information or trade secrets of any Person, including without limitation any former employer of any past or present employees or consultants of the Company.
(c) To the best knowledge of the Company, none of the activities of the employees or consultants of the Company on behalf of the Company violates or has violated any agreements or arrangements that any such employees or consultants have or have had with former employers. Each of the employees and consultants who contributed to the discovery or development of any of the Proprietary Rights (other than Proprietary Rights licensed to the Company by any party other than a consultant to the Company) did so in each case within the scope of his or her employment or contractual relationship with the Company.
2.18 Title to Assets; Liens. Except as set forth on Schedule 2.18, the Company owns outright and has good, valid and marketable title to all of its assets and properties of every nature whatsoever, including Proprietary Rights and Personal Property, used in the business, including, without limitation, all of the assets and properties reflected in the Financial Statements, free and clear of any Lien, except for (i) assets and properties disposed of, or subject to purchase or sales orders, in the ordinary course of business consistent with past practice since the Current Balance Sheet Date or (ii) liens or other encumbrances securing the claims of materialmen, carriers, landlords and like persons, all of which are not yet due and payable. There are no developments affecting any of such properties or assets pending or, to the best knowledge of the Company, threatened, that might materially detract from the value of such property or assets, materially interfere with any present or intended use of any such property or assets or materially and adversely affect the marketability of such properties or assets.
2.19 Employees and Consultants. Set forth on Schedule 2.19 is a complete list of the Company's (i) employees, (ii) consultants and (iii) independent contractors who spend at least
fifty percent (50%) of their professional time working for the Company, with names, current salaries and, with respect to employees, current positions with the Company. The Company generally enjoys a good employer-employee relationship with its employees. The Company is not delinquent in payments to any of its employees or consultants for any wages, salaries, commissions, bonuses or other direct compensation for any services performed by them to the date hereof or amounts required to be reimbursed to such employees and the Company enjoys good relations with its employees.
2.20 Insurance. Schedule 2.20 sets forth a list of all policies or binders of fire, liability, product liability, workmen's compensation, vehicular, directors and officers and other insurance held by or on behalf of the Company. Such policies and binders are in full force and effect, are reasonably believed to be adequate for the businesses engaged in by the Company and are in conformity with the requirements of all leases to which the Company is a party and, to the best knowledge of the Company, are valid and enforceable in accordance with their terms. The Company is not in default with respect to any provision contained in any such policy or binder, nor has the Company failed to give any notice or present any claim under any such policy or binder in due and timely fashion. There are no outstanding unpaid claims in excess of $1,000 in the aggregate under all such policies and binders. The Company has not received notice of cancellation or non-renewal of any such policy or binder.
2.21 Banks, Brokers and Proxies. Schedule 2.21 sets forth (i) the name of each bank, trust company, securities or other broker or other financial institution with which the Company has an account, credit line, or safe deposit box or vault or otherwise maintains relations; (ii) the name of each person authorized by the Company to draw on any such account or credit line, to transfer securities, or to have access to any safe deposit box or vault; (iii) the purpose of each such account, safe deposit box or vault; and (iv) the names of all persons authorized by proxies, powers of attorney or other like instruments to act on behalf of the Company in matters concerning its business or affairs. All such accounts, credit lines, safe deposit boxes and vaults are maintained by the Company for normal business purposes, and no such proxies, powers of attorney or other like instruments are irrevocable.
2.22 Brokerage. No broker, finder, agent or similar intermediary has acted on behalf of the Company in connection with this Agreement or the transactions contemplated hereby, and there are no brokerage commissions, finders fees or similar fees or commissions payable by the Company, Buyer or any subsidiary that acquires the Shares in connection therewith based on any agreement, arrangement or understanding with the Company or any Stockholder or any action taken by it or any of them.
2.23 FCPA. The Stockholder represents and warrants to Buyer that it is are familiar with the U.S. Foreign Corrupt Practices Act, as amended, and the regulations adopted thereunder (the ""ct"), and that the Company has conducted all of its activities in full compliance with such Act and regulations. The Company, nor anyone acting on its behalf, has made or offered any payment or given anything of value directly or indirectly to any government official or to any official of a political party or candidate for public office in violation of the Act.
2.24 Full Disclosure. Now and as of the date of Closing, the Schedules hereto and all documents and other papers listed therein or required to be delivered pursuant to this Agreement and the Related Agreements are true, complete, correct and authentic. No representation or warranty of the Stockholder contained in this Agreement, and, to the best knowledge of the Company and the Stockholder or executive of the Company, no document or other paper furnished by or on behalf of the Company to Buyer (or any of its agents) pursuant to this
Agreement or in connection with the transactions contemplated hereby, taken as a whole, contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements made, in the context in which made, not false or misleading. There is no fact known to the Stockholder or executive of the Company that has not been disclosed to Buyer in this Agreement and the Related Agreements or the Schedules hereto and thereto that has or will have a material adverse effect on the Company or its assets, properties, business, operations, prospects or condition (financial or otherwise), or is reasonably likely to have such an effect.
2.28 Best Knowledge. As used herein, an individual will be deemed to have "best knowledge" of a particular fact or other matter if:
(a) such individual is actually aware of such fact or other matter;
(b) a reasonable individual could be expected to discover or otherwise become aware of such fact or other matter in the course of conducting a reasonably comprehensive investigation concerning the existence of such fact or other matter; or
(c) it relates to any matter of Law.
A corporation or entity (other than an individual) will be deemed to have "best knowledge" of a particular fact or other matter if any individual who is serving, or who has at any time served, as a director, officer, employee, agent, partner, executor, or trustee of such corporation or entity (or in any similar capacity) has, or at any time had, knowledge of such fact or other matter.
SECTION 3
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER
The Stockholder represents and warrants to Buyer as of the date hereof and on and as of the Closing Date as follows:
3.1 Title to Shares.
(a) The Stockholder is and will be at the Closing the holder of record and the owner of the entire beneficial interest in the Shares set forth opposite such Stockholder's name on Schedule 1 hereto, free and clear of any Lien whatsoever and without any exception whatsoever.
(b) The Stockholder will transfer and deliver to Buyer or its designee at the Closing a good and valid title to all of the Shares set forth opposite its name on Schedule 1, free and clear of any Lien or claim of any kind, and the entire beneficial interest therein without any exception whatsoever.
3.2 Authority to Execute and Perform Agreements. The Stockholder has full legal right and power to enter into, execute and deliver this Agreement and to perform in full such Stockholder's obligations hereunder. The execution, delivery and performance of this Agreement or any Related Agreement (where applicable) by the Stockholder requires no consent, approval, waiver or other action by or in respect of, or filing with, any governmental body, agency, official or authority, the landlord or any other Person. This Agreement or any Related Agreement (where
applicable) has been duly executed and delivered and is the valid and binding obligation of each Stockholder, enforceable against each Stockholder in accordance with its terms.
3.3 No Breach. The execution, delivery and performance of this Agreement and the Related Agreements and the consummation of the transactions contemplated hereby and thereby will not violate, conflict with, contravene, or result in the breach of or constitute (or with notice or lapse of time or both constitute) a default under, any instrument, contract or other agreement to which each Stockholder is a party or to which each Stockholder or each Stockholder's Shares may be bound or subject; or violate, conflict with or contravene any order, judgment, injunction, award or decree or other requirement of any court, arbitrator or governmental or regulatory body against, or binding upon, each Stockholder or each Stockholder's Shares; or violate, contravene or conflict with any statute, law, ordinance or regulation of any jurisdiction binding upon or applicable to each Stockholder or each Stockholder's Shares.
3.4 Actions and Proceedings. There are no actions, investigations, proceedings (or any basis therefor), suits or claims or legal, administrative or arbitral proceedings pending against or, to the best knowledge of the Stockholder, threatened against or affecting the Stockholder or the Stockholder's Shares that have or may have (a) the effect of restraining, modifying or preventing the consummation of the transactions contemplated hereby or (b) a materially adverse effect on the assets, properties, business, operations, prospects, or condition (financial or otherwise) of the Company or Buyer
3.5 Brokerage. There are no brokerage commissions, finders' fees or similar fees or commissions payable in connection therewith based on any agreement, arrangement or understanding with the Stockholder or any action taken by such Stockholder, the liability for which is or will be on the Company or Buyer.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to the Stockholder as follows:
4.1 Organization. Buyer is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has the corporate power and lawful authority to own, lease and operate its assets, properties and business and to carry on its business as now being and as heretofore conducted.
4.2 Authority to Execute and Perform Agreements. Buyer has the full legal right and power and all authority required to enter into, execute and deliver this Agreement and to perform fully its respective obligations hereunder, and this Agreement has been duly executed and delivered and is the valid and binding obligation of Buyer enforceable in accordance with its terms except, (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights; and (ii) general principles of equity that restrict the availability of equitable remedies.
4.3 No Breach. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby will not
(i) violate any provision of the respective charter or By-laws of Buyer; (ii)
violate any order, judgment, injunction, award or decree of any court,
arbitrator or governmental or regulatory body against, or binding upon,
Buyer or upon the securities, properties, assets or business of Buyer; (iii) violate any Law which relates to Buyer or to the securities, properties, assets or business of Buyer; (iv) violate any Permit of the Buyer; or (v) except as set forth on Schedule 4.3, require any filing with, notice to, or permit, approval or consent of any foreign, federal, state, local or other governmental or regulatory body or of any other person.
SECTION 5
COVENANTS AND AGREEMENTS
The parties covenant and agree as follows:
5.1 Consummation of Agreement. Buyer and the Stockholder shall use their best efforts to perform and fulfill all conditions and obligations to be performed and fulfilled by it under this Agreement and the Stockholder shall use its best efforts further to ensure that to the extent within the Stockholder's control, no breach of any of the Stockholder's representations, warranties, and agreements hereunder or contemplated hereby occurs or exists on or before the Closing Date to the end that the transactions contemplated by this Agreement shall be fully carried out.
5.2 Further Assurances. Each of the parties shall execute such documents, further instruments and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated hereby.
5.3 Survival. Each of the parties agrees that following Closing, the following action shall be taken:
(i) The back office service provider administrative and mark-up fees (if any) shall be added to the Company's net income starting March 1, 2005;
(ii) Beginning [DATE], Buyer will not impose any additional expenses on the Company and its management without prior mutual agreement with the Company. Prior to Closing, Buyer and the Company will mutually determine what the anticipated cost elements are and incorporate these costs into the Company's financial statements;
(iii) Roger Karam shall enter into an employment agreement with the Buyer for a period of three years. Mr. Karam shall be appointed CEO of Efonica and President of VoIP. A form of Employment Agreement is attached hereto as Exhibit "A".
(iv) The Stockholder agrees to execute a lock up agreement covering the Base Shares (as defined in Section 1.2(c)(i)) in form and substance satisfactory to Kirlin Securities. A form of Lock-Up Agreement is attached hereto as Exhibit "B".
(v) The Stockholder agrees to execute a lock up agreement covering the Registered Shares as defined in Section 1.2(c)(iv).. A form of Lock-Up Agreement for Registered Shares is attached hereto as Exhibit "C".
SECTION 6
CONDITIONS PRECEDENT TO THE OBLIGATION OF BUYER TO CLOSE
The obligations of Buyer to enter into and complete the Closing is subject, at the option of Buyer acting in accordance with the provisions of this Agreement with respect to termination hereof, to the fulfillment of the following conditions, each of which is for the exclusive benefit of Buyer and not of the Stockholder and any one or more of which may be waived by Buyer alone:
6.1 Representations, Warranties and Covenants. The representations and warranties of the Company and the Stockholder contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. The Company and each Stockholder shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by it on or before the Closing Date. The Company and each Stockholder shall have delivered to Buyer a certificate, dated the Closing Date, to the foregoing effect and stating that all conditions to Buyer's obligations hereunder have been satisfied.
6.2 Consents and Approvals. All consents, Permits and approvals from all Persons, including without limitation all governmental authorities and all parties to contracts or other agreements with any Stockholder or the Company, that may be required in connection with the performance by each Stockholder of his or her obligations under this Agreement, the continuance (without modification, amendment, variation or renegotiation) after the Closing of such contracts or other agreements with the Company or Buyer or any subsidiary of Buyer that acquires the Shares, and/or the acquisition and ownership of the Shares by Buyer or its subsidiary shall have been obtained.
6.3 Litigation. No action, suit or proceeding shall have been instituted before any court or governmental or regulatory body or instituted or threatened by any governmental or regulatory body to restrain, modify or prevent the consummation of the transactions contemplated hereby, or to seek damages or a discovery order in connection with such transactions, or that has or may have, in the reasonable opinion of the Buyer, (a) the effect of restraining, modifying or preventing the consummation of such transactions or (b) a materially adverse effect on the assets, properties, business, operations or condition (financial or otherwise) of the Company or Buyer.
6.4 Delivery of Share Certificates. The Stockholder shall have delivered or caused to be delivered to Buyer or its designee the certificates for all of the Shares, which shall be all of the issued and outstanding capital shares of the Company not owned by the Buyer, duly endorsed for transfer to Buyer or its designee, free and clear of any Liens or beneficial interests of any party.
6.5 Releases. The Stockholder shall, in form satisfactory to Buyer's counsel, have released and discharged the Company from any and all claims, demands and liabilities whatsoever arising or accruing before the Closing under each and every agreement, arrangement, Law or other state of facts.
6.6 Certificates as to Representations and Warranties. The Stockholder shall have delivered to Buyer a certificate in form and substance reasonably satisfactory to Buyer certifying as to his or her knowledge of certain representations and warranties of the Company.
6.7 Documents. The Stockholder shall have delivered or caused the Company to deliver such documents as are set forth in Section 5.
6.8 Additional Action. The Stockholder shall have delivered or caused the Company to deliver such additional certificates, and shall have taken such additional actions, as Buyer shall reasonably require to evidence and confirm the authorization and approval of the sale of the Shares, their assignment and transfer to Buyer or its designee, and their registration in the name of the Buyer or its designee.
6.9 Board Approval. This Agreement and the transactions contemplated hereby shall have been approved by the Board of Directors of Buyer.
6.10 Government Approval. In the event that governmental approval is required, the government of Dubai, UAE shall have provided Buyer counsel with approval of the transactions contemplated herein.
6.11 Attorney Approval. The Buyer receives approval from its [ ] counsel that this Agreement meets the requirements of the government of Dubai, UAE and the United States of America and contains the necessary terms and conditions of similar stock sales transactions within Dubai, UAE and the United States of America.
SECTION 7
CONDITIONS PRECEDENT TO THE OBLIGATION OF THE STOCKHOLDER TO CLOSE
The obligation of the Stockholder to enter into and complete the Closing is subject to the fulfillment of the following conditions, each of which is for the exclusive benefit of the Stockholder and not of Buyer and any one or more of which may be waived by the Stockholder:
7.1 Representations, Warranties and Covenants. The representations and warranties of Buyer contained in this Agreement shall be true in all material respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. Buyer shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by it on or before the Closing Date. Buyer shall have delivered to the Stockholder a certificate, dated the Closing Date and signed by an officer of the Buyer, to the foregoing effect and stating that all conditions to the obligations of the Stockholder hereunder have been satisfied.
7.2 Litigation. No action, suit or proceeding shall have been instituted before any court or governmental or regulatory body, or instituted by any governmental or regulatory body, to restrain, modify or prevent the carrying out of the transactions contemplated hereby, which such action, suit or proceeding shall not have been stayed.
7.3 Consents and Approvals. All consents, permits and approvals from parties to contracts or other agreements with Buyer that may be required in connection with the performance by Buyer of its obligations under this Agreement shall have been obtained
7.4 Board Approval. This Agreement and the transactions contemplated hereby shall have been approved by the Board of Directors of the Company.
7.5 Delivery of Share Certificates. As soon as practicable after the Closing, the Buyer shall have delivered or caused to be delivered to Stockholder, its designee or the Escrow Agent, as the case may be, the certificates for all of the Base Shares, duly endorsed for transfer to
Stockholder or its designee, free and clear of any Liens or beneficial interests of any party (provided however, this Section 7.5 is not a condition to Close).
SECTION 8
INDEMNIFICATION
8.1 Survival. Notwithstanding any right of any party to investigate fully the affairs of the other party and notwithstanding any knowledge of facts determined or determinable by such party pursuant to such investigation or right of investigation, each party has the right to rely fully upon the representations, warranties, covenants and agreements of each other party in this Agreement or in any Schedule, certificate or financial statement delivered by any party pursuant hereto. All such representations, warranties, covenants and agreements shall survive the execution and delivery hereof and the Closing hereunder and be indemnified in accordance with this Section 8, and, except as otherwise specifically provided in this Agreement, shall thereafter:
(a) except as provided in clauses (b) and (c) hereof, terminate and
expire at the end of the twelfth (12th) full calendar month after the Closing
Date with respect to any claim based upon, arising out of or otherwise in
respect of any inaccuracy in or any breach of any representation or warranty of
the Stockholder contained in Sections 2 or 3 hereof or of Buyer contained in
Section 4 hereof, of which the party asserting such claim shall have given no
notice on or before the end of such twelfth (12th) month, except for any claim
based upon fraud willfulful misconduct by the Stockholder or the Company, which
shall survive until the end of the twenty- fourth (24th) full calendar month
after the Closing Date;
(b) survive forever, with respect to the representations and warranties of the Stockholder contained in Section 2.24 hereof and the representations and warranties of the Stockholder contained in Sections 3.1 hereof; and
(c) terminate and expire, with respect to any Tax Claim (as hereinafter defined), on the later of (i) the date upon which the assessment of any taxes to which any such Tax Claim may relate is barred by all applicable statutes of limitations and (ii) the date upon which any claim for refund or credit related to such Tax Claim is barred by all applicable statutes of limitations. As used herein, "Tax Claim" means any claim based upon, arising out of or otherwise in respect of (A) issues raised on audit of the Company by taxing authorities with respect to any period ending on or before the Closing Date, (B) any inaccuracy in or any breach of any representation, warranty, covenant or agreement of the Stockholder contained in this Agreement related to Taxes or (C) any other Tax liabilities of the Company other than Taxes of the Company that are properly allocable to periods of time beginning after the Closing Date; provided that the "Tax Claim" shall exclude any such claim arising out of any Tax return filed by the Company after the Closing which claim (x) is not based on incorrect or incomplete information compiled by the Company before the Closing and (y) does not result from any misconduct or bad faith of the Stockholder or of the Company prior to the Closing.
8.2 Obligation of the Stockholder to Indemnify. Subject to the
limitations set forth below and to the termination provisions set forth in
Section 8.1, the Stockholder agrees, jointly and severally, to indemnify, defend
and hold harmless Buyer (and its subsidiaries, directors, officers, employees,
affiliates and assigns) from and against all losses, liabilities, damages, costs
or expenses (including interest and penalties imposed or assessed by any
judicial or administrative body and reasonable attorneys fee" ("Losses") based
upon, arising out of or otherwise in respect of any inaccuracy in or any breach
of any representation, warranty,
covenant or agreement of any Stockholder contained in this Agreement or in any Schedule delivered pursuant hereto;
(ii) any Tax Claim, whether or not included in clause (i); compensation by any broker, finder, agent or similar intermediary claiming to have been employed or retained by or on behalf of the Company or the Stockholder, whether or not included in clause (i), (b) based upon any fraud willful misconduct by the Stockholder.
8.3 Obligation of Buyer to Indemnify. Subject to the
limitations set forth below and to the termination provisions set forth in
Section 8.1, Buyer agrees to indemnify, defend and hold harmless the Stockholder
from and against any Losses based upon, arising out of or otherwise in respect
of (i) any material inaccuracy in or breach of any representation, warranty,
covenant or agreement of Buyer contained in this Agreement or in any Schedule,
certificate, document or other papers delivered pursuant hereto, or (ii) any
claim or demand for commission or other compensation by any broker, finder,
agent or similar intermediary claiming to have been employed by or on behalf of
Buyer.
8.4 Notice and Opportunity to Defend.
(a) Notice of Asserted Liability. Promptly after receipt by any party entitled to indemnification (the "Indemnitee") of notice of any demand, claim or circumstances that, with or without the lapse of time, would give rise to a claim or the commencement (or threatened commencement) of any action, proceeding or investigation ("Asserted Liability") that may result in a Loss, the Indemnitee shall give notice thereof (the "Claims Notice") to any other party or parties obligated to provide indemnification pursuant to Sections 8.2 or 8.3 hereof (the "Indemnifying Party"). The Claims Notice shall describe the Asserted Liability in reasonable detail, and shall indicate the amount (estimated, if necessary) of the Loss that has been or may be suffered by the Indemnitee. If the Indemnitee fails to give the Indemnifying Party timely and reasonable notice of an Asserted Liability that might result in a Loss, such failure to so notify Indemnitee shall relieve the Indemnifying Party from liability hereunder with respect to such claim if such failure to so notify the Indemnifying Party results in the forfeiture by the Indemnifying Party of any material rights and defenses otherwise available to the Indemnifying Party with respect to such Asserted Liability.
(b) Opportunity to Defend. The Indemnifying Party may elect to compromise or defend, and control the defense of, at its own expense and by counsel reasonably satisfactory to the Indemnitee, any Asserted Liability, provided that the Indemnitee shall have no liability or obligation, and shall be subject to no restriction, under any compromise or settlement agreed to by the Indemnifying Party that it has not approved in writing.
SECTION 9
MISCELLANEOUS
9.1 Publicity. No public release or announcement concerning this Agreement or the transactions contemplated hereby shall be made without advance approval thereof by the Stockholder Representative and Buyer. No party shall disclose any term or terms of this Agreement to any third party without advance approval thereof by the other party except as necessary or desirable for either party to enforce its rights hereunder or as may otherwise be required by law, or as contemplated by the Confidentiality Agreement.
9.2 Expenses. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such cost or expense.
9.3 Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission or, if mailed, two days after the date of deposit in the mails, as follows:
If to Buyer:
Fusion Telecommunications International, Inc.
c/o Matthew D. Rosen
420 Lexington Avenue
Suite 520
New York, New York 10170
Telephone: 212-972-2000
Facsimile: 212-972-7884
with a copy to:
Heitz & Associates, P.C.
345 Woodcliff Drive
Fairport, New York 14450
Telephone: 585-387-0000
Facsimile: 585-387-0130
If to Stockholder or the Company:
Efonica FZ-LLC
P.O.Box: 500322 Dubai, UAE
Dubai Internet City, DIC Bldg. 9, Offices G02 & G03,
Dubai, UAE
Telephone: +971.4.3910333
Facsimile: +971.4.3908872
Any party may by notice given in accordance with this Section 9.3 to the other parties designate another address or person for receipt of notices hereunder.
9.4 Entire Agreement. This Agreement (including the Related Agreements, Exhibits and Schedules) and the Confidentiality Agreement contain the entire agreement among the parties with respect to the transactions contemplated hereby, and supersedes all prior agreements, written or oral, with respect thereto.
9.5 Waivers and Amendments; Non-Contractual Remedies; Preservation of Remedies. This Agreement may be amended, superseded, cancelled, renewed or extended, and any term hereof may be waived, only by a written instrument signed by Buyer and the Stockholder or, in the case of a waiver, by Buyer or the Stockholder, as the case may be, waiving compliance. No delay on the part of any party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof nor shall any waiver on the part of any party of any such right, power or privilege, nor any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any other such right, power or privilege. The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies that any party may otherwise have at law or in equity. The rights and remedies of any party based upon, arising out of or otherwise in respect of any inaccuracy in or breach of any representation, warranty, covenant or agreement contained in this Agreement shall in no way be limited by the fact that the act, omission, occurrence or other state of facts upon which any claim of any such inaccuracy or breach is based may also be the subject matter of any other representation, warranty, covenant or agreement contained in this Agreement (or in any other agreement between the parties) as to which there is no inaccuracy or breach.
9.6 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York without regard to its conflict of laws provisions. The parties hereto specifically submit to the exclusive jurisdiction of the courts of the State of New York in respect of any litigation arising out of this Agreement or the nonperformance hereof. The prevailing party of any litigation shall be entitled to receive from the losing party reasonable attorneys' fees and costs.
9.7 Binding Effect; No Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and legal representatives. This Agreement is not assignable except by operation of law or by Buyer to any of its affiliates.
9.8 Variations in Pronouns. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require.
9.9 Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto.
9.10 Exhibits and Schedules. The Exhibits and Schedules are a part of this Agreement as if fully set forth herein. All references herein to Sections, subsections, clauses, Exhibits and Schedules shall be deemed references to such parts of this Agreement, unless the context shall otherwise require.
9.11 Headings. The headings in this Agreement are for reference only, and shall not affect the interpretation of this Agreement.
9.12 Severability. Any Section, subsection or other subdivision of this Agreement or any other provision of this Agreement which is, or becomes, illegal, invalid or unenforceable shall be severed herefrom and shall be ineffective to the extent of such illegality, invalidity or unenforceability and shall not affect or impair the remaining provisions hereof, which provisions shall (a) be severed from any illegal, invalid or unenforceable Section or other subdivision of this Agreement, and (b) otherwise remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
BUYER
FUSION
TELECOMMUNICATIONS
INTERNATIONAL, INC.
By:
STOCKHOLDER:
KARAMCO, INC.
COMPANY
EFONICA FZ-LLC
SCHEDULE 1
Karamco, Inc. 49.8% [ ]
SCHEDULE 2.17
Proprietary Rights
Pending applications to register Trademarks:
1. Mark: Efonica
Serial Number: 76/572173.
2. Mark: O Efonica (drawing)
Serial Number: 76/572172
Software Licenses:
1.
2.
SCHEDULE 2.14
MATERIAL CONTRACTS
ALL CUSTOMERS WERE PREVIOUSLY DISCLOSED TO BUYER
SCHEDULE 2.14(C)
SCHEDULE 2.19
EMPLOYEES
SCHEDULE 2.20
INSURANCE
EXHIBIT "A"
Form of Employment Agreement
(TO BE PROVIDED AT A LATER DATE)
EXHIBIT "B"
FORM OF LOCK-UP AGREEMENT
12 MONTH LOCK-UP
Fusion Telecommunications International, Inc.
420 Lexington Avenue
Suite 518
New York, NY 10170
Ladies and Gentlemen:
The undersigned, a beneficial owner(1) of the common stock, no par value (the "Common Stock"), of Fusion Telecommunications International, Inc. (the "Company") aagrees, for the benefit of the Company and Kirlin, that the undersigned will not, without Kirlin's prior written consent (and, if required by applicable state blue sky laws, the securities commissions in any such states), offer, sell, assign, hypothecate, pledge, transfer or otherwise dispose of, directly or indirectly, any shares of Common Stock owned by him/her, or subsequently acquired through the exercise of any options, warrants or other rights, or the conversion of any other security, or by reason of any stock split or other distribution of stock, or grant options, warrants or other rights with respect to any such securities, all during the 12-month period commencing on the "Effective Date" of the Company's Registration Statement. This lock-up will not be applicable to any shares of Common Stock in the Registration Statement. Furthermore, the undersigned will permit all certificates evidencing any such securities to be endorsed with the appropriate restrictive legends, and consents to the placement of appropriate stop transfer orders with the transfer agent for the Company. A copy of this Agreement will be available from the Company or the Company's transfer agent upon request and without charge.
The undersigned hereby agrees to be bound by the applicable provisions of the Underwriting Agreement.
The terms and conditions of this Agreement only can be modified (including premature termination of this Agreement) with the prior written consent of Kirlin.
--------------------------------------- ------------------------------------ Number of shares beneficially owned Shareholder Name --------------------------------------- Number of shares subject to options, By: warrants, rights and/or convertible ------------------------------------ securities Signature ------------------------------------ Printed Name |
* sales by the Stockholder will be subject to rule 144. Both parties acknowledge that the holding period for Karamco's unregistered shares commence at the time of the closing
Exhibit "C"
Form of Lock-Up Agreement for Registered Shares
Fusion Telecommunications International, Inc.
420 Lexington Avenue
Suite 518
New York, NY 10170
Ladies and Gentlemen:
During the 90 day period following the Closing of the Stock Purchase Agreement (as defined herein), the Company (as defined herein) will either allow the Stockholder to sell up to $1 million in Registered Shares in ordinary brokerage transactions in the public market or purchase the Registered Shares as more particularly set forth in the Stock Purchase Agreement.
The undersigned, a beneficial owner(2) of the registered common stock, no par value (the "Registered Shares"), of Fusion Telecommunications International, Inc. (the "Company") issued pursuant to Section 1.2(C)(iv) of the Stock Purchase Agreement dated January 10, 2005 ("Stock Purchase Agreement") agrees, for the benefit of the Company, it will not, without the Company's prior written consent, offer, sell, assign, hypothecate, pledge, transfer or otherwise dispose of, directly or indirectly, any of the Registered Shares other than as set forth in the following schedule:
(i) 0-44 days following the effective date of an IPO- 0 Registered Shares;
(ii) 45-89 days following the effective date of an IPO- up to 1/2 of the Registered Shares; and
(iii) 90 days following the effective date of the IPO- the remaining Registered Shares.
The undersigned hereby agrees to be bound by the applicable provisions of the Stock Purchase Agreement.
The terms and conditions of this Agreement only can be modified with the prior written consent of the Company.
--------------------------------------- ------------------------------------ Number of shares beneficially owned Shareholder Name --------------------------------------- By: ------------------------------------ Signature ------------------------------------ Printed Name ---------- |
(2) It is agreed that, for purposes of this letter, the undersigned beneficially owns, among other shares, any shares owned by (i) members of his or her family and (ii) any person or entity controlled by the undersigned or under common control with the undersigned.
EXHIBIT "D"
Form of Escrow Agreement
ESCROW AGREEMENT
This Escrow Agreement ("Escrow Agreement") is made and entered into this _______ day of __________, 2005 ("Effective Date"), by and between Fusion Telecommunications International, Inc. ("Fusion"), Karamco, Inc. ("Karamco") and Heitz & Associates, P.C., a professional corporation in good standing in the state of New York ("Disbursement Manager").
WHEREAS, Fusion, Karamco and Efonica FL-LLC entered into a Stock Purchase Agreement dated __________, 2005 (the "Agreement"); and
WHEREAS, Pursuant to the Agreement, Fusion is required to place __________ Escrowed Shares (as defined in the Agreement) in escrow to be held by Disbursement Manager under the terms of the Agreement and this Escrow Agreement;
WHEREAS, Fusion and Karamco hereby employ Disbursement Manager to escrow the Escrowed Stock pursuant to the Agreement which is attached hereto and made a part hereof as EXHIBIT 1;
NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, the adequacy and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
ITEM 1 SERVICE. Disbursement Manager will provide to Fusion and Karamco
the escrow services as hereinafter set forth.
ITEM 2 EXHIBITS. In the event of a conflict between the provisions of
any Exhibit attached hereto and the provisions of the body of this Escrow
Agreement, the provisions of such Exhibit shall control and prevail.
ITEM 3 TERM. The term of this Escrow Agreement shall commence on the
Effective Date and expire subsequent to the Agreement.
ITEM 4 SECURITY/PRE-PAYMENT. Upon Closing of the Agreement, Fusion
shall deliver to the Disbursement Manager the Escrowed Stock. The Disbursement
Manager will hold the Escrowed Stock in escrow.
ITEM 5 ARBITRATION. The parties agree to binding arbitration in the
state of New York, County of New York, with respect to any issue. Any proceeding
shall be by and pursuant to the Commercial Arbitration Rules then in effect of
the American Arbitration Association. Either party may make a demand for
arbitration by delivering a written demand for arbitration to the other
party(s), provided, however, such written demand shall not be delivered earlier
than twenty (23) days, nor later than thirty-five (35) days, following the date
of the invoice in question. The parties may agree on one arbitrator, but in the
event they cannot so agree, the arbitrator shall be named by the American
Arbitration Association. The hearing before the arbitrator of the matter to
arbitrate may be selected by the arbitrator, at a time and place in New York
County, New York. The arbitrator shall determine the matter, execute and
acknowledge their award in writing,
and deliver a copy of the award to each of the parties by registered or certified mail. Any court having jurisdiction may enter a judgment confirming the award, or the court may vacate, modify or correct the award as provided by law. If the arbitrator shall fail to reach an agreement within thirty (30) days following the arbitration hearing, they shall be discharged, and a new arbitrator shall be appointed and shall proceed in the same manner, and the process shall be repeated until a decision is finally reached. All cost and expense of arbitration, including the fees of arbitration, shall be borne by each party(s) or in such proportions, as the arbitrator shall determine.
ITEM 6 OBLIGATION OF DISBURSEMENT MANAGER.
a. POWERS. Fusion and Karamco hereby authorize and direct Disbursement Manager to receive, hold, pay and disburse the Escrowed Stock in accordance with the provisions of the Agreement and this Escrow Agreement.
ITEM 7 MISCELLANEOUS.
a. NO AGENCY. This Agreement does not in any way create the relationship of principal and agency, joint, venture, partner or employer and employee between Customer, Disbursement Manager and Supplier.
b. NOTICES. Any notice required or permitted to be given hereunder shall be in writing and shall be deemed given and effective when delivered personally, or by private express service such as, without limitation, Federal Express and addressed to the parties as follows:
As to Fusion:
Fusion Telecommunications International, Inc.
c/o Matthew D. Rosen
420 Lexington Avenue
Suite 520
New York, New York 10170
Telephone: 212-972-2000
Facsimile: 212-972-7884
As to Karamco:
Efonica FZ-LLC
P.O.Box: 500322 Dubai, UAE
Dubai Internet City, DIC Bldg. 9, Offices G02 & G03
Dubai, UAE
Telephone: +971.4.3910333
Facsimile: +971.4.3908872
As to Disbursement Manager:
Heitz & Associates, P.C.
c/o William R. Heitz, Esq.
345 Woodcliff Drive
Fairport, New York 14450
Phone: 585-387-0000
Fax: 585-387-0130
c. WAIVER. No failure on the part of any party hereto to exercise, and no delay in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or remedy by any such party preclude any other right, power or remedy. No express waiver or assent is given by any party hereto to any breach of or default in the same or any other term or condition hereof.
d. HEADINGS. The captions heading the various paragraphs of this Agreement are for convenience of reference only and shall not be deemed to limit, expand, or define the contents of the respective paragraphs.
e. GOVERNING LAW. This Agreement shall be construed in accordance with and be governed by the laws of the State of New York.
f. ENTIRE AGREEMENT. This Agreement supersedes all prior discussions, negotiations and agreements between the parties with respect to the subject matter hereof and this Agreement contains the sole and entire agreement between the parties with respect to the matters covered hereby. There are no promises, agreements, conditions or undertakings, either oral or written, between the parties and relating to the subject matter of this Agreement other than those set forth or referred to herein.
g. SEVERABILITY. In the event any portion of this Agreement may be determined by a court of competent jurisdiction to be unenforceable, the balance of the Agreement shall be severed therefrom and shall remain in full force and effect unless a failure of consideration would thereby result.
h. MODIFICATIONS. No amendment or modifications of the terms or provisions of this Agreement shall be valid, unless same shall be in writing and signed by both of the parties hereto.
i. INTERPRETATION. Should any provision of this Agreement require judicial interpretation, it is agreed that the court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against one party be reason of the rule of construction that a document is to be construed more strictly against the party who itself or through its agent prepared the same, it being agreed that the agents of all parties have participated in the preparation hereof.
j. AUTHORITY TO EXECUTE. Each person executing this Agreement on behalf of such person or organization represents and warrants that he or she is fully authorized to execute and deliver this Agreement on behalf of such person or organization. Each member of each party represents and warrants to all members of all other parties that no consent of any person not a party to this Agreement is necessary in order for this Agreement to be fully and completely binding upon each member of the parties hereto.
k. NO THIRD-PARTY BENEFICIARIES. This Agreement is not intended nor shall be construed to create, vest or convert any right in or upon any entity or person not a party to this Agreement.
l. ASSIGNMENT. Fusion or Karamco may assign, in whole or in part, its rights and/or duties under this Agreement, with notice to Disbursement Manager. Disbursement Manager may not assign this Agreement.
m. ATTORNEYS' FEES. If any action or other proceeding is brought for the enforcement or interpretation of this Agreement, or because of any alleged dispute, breach or default in connection with any of the provisions of this Agreement, the successful or prevailing party and the Disbursement Manager shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding (including, without limitation, reasonable attorneys' fees and costs incurred in all appellate proceedings), in addition to any other relief to which it may be entitled.
n. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
o. GENDER. Word or any gender used in this Agreement shall be held and construed to include the other gender, and words in the singular shall be held to include the plural and vice versa, unless the context requires otherwise.
p. SURVIVAL. Any obligations and covenants of the Customer hereunder which, by their nature, would continue beyond the termination, cancellation or expiration of the Agreement, shall survive such termination, cancellation or expiration.
q. BINDING EFFECT. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective heirs, legal representatives, executors, administrators, successors and permitted assigns.
r. INDUSTRY TERMS. Words having well-known technical or trade meanings shall be so construed.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals the day and year first above-written.
Fusion:
Name:
Title: President
Karamco:
Name:
Title:
Disbursement Manager:
Name:
Title:
EX-10.31
CARRIER SERVICE AGREEMENT FOR INTERNATIONAL TERMINATING TRAFFIC
THIS AGREEMENT is made and entered into as of this 17th day of May, 2000, by and between QWEST COMMUNICATIONS CORPORATION, (collectively referred to as "Qwest" and/or "QCC"), a Delaware corporation (hereinafter referred to as "Customer"), with offices at 555 17th Street, Denver, Colorado 80202 and FUSION TELECOMMUNICATIONS INTERNATIONAL, (herein referred to as "Service Provider"), with offices at 420, Lexington Avenue, Suite 518, New York, NY 10170, Customer and Service Provider being collectively referred to herein as the Parties.
WITNESSETH:
WHEREAS, Service Provider owns and operates telecommunications facilities and is in the business of providing dedicated switched telecommunications Services; and
WHEREAS, Service Provider is desirous of providing dedicated switched transport Services to Customer on Service Provider facilities pursuant to certain terms and conditions set forth in this Agreement; and
WHEREAS, Customer and its Affiliates, (as defined in Section 11) are desirous of having Service Provider provide such telecommunications Service.
NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the Parties hereby mutually agree as follows:
1. SERVICE TO BE PROVIDED BY SERVICE PROVIDER:
(a) Service Provider shall provide telecommunication services and facilities to Customer to route Customers international, telecommunications traffic to and from various destinations/originations around the world (hereinafter collectively, "Service'). The destinations/originations offered by the Service Provider for the provision of Service are listed in Exhibit A, and maybe amended from time to time by Service Provider upon fifteen (15) calendar days prior written notice to Customer, with the exception of Puerto Rico, Alaska, Hawaii and the United States Virgin Islands, which shall have a rate notification period of thirty (30) days. Service provider shall provide Customer with rate/destination notifications as outlined in Section 3 of this Agreement.
(b) Customer shall access Service Provider's network via dedicated lines "Access Lines" offered from local exchange carriers or alternate access carriers, (collectively, "Alternate carriers"). If Customer orders an Access Line from an Alternate Carrier, Customer shall pay the alternate carrier directly for the access line. If Customer requests Service Provider to order the access line and same is permitted by the Alternate Carrier, Service Provider shall order of the Access Line on behalf of Customer and shall have the Alternate Carrier or Service Provider bill Customer directly for the Access Line. Services requested by Customer hereunder shall be in accordance with the Customer's specifications and Agreement as to the rates therefore, and with the Service Providers ordering policies, practices and procedures, all as in effect and as may be revised from time to time.
(c) Service Provider shall provide to Customer accurate international dialing codes for all international destinations to which the Service Provider is providing the Service to Customer in Exhibit A, and on all subsequent rate notifications. Service provider shall provide Customer with written updates of these codes on a continuous basis within five (5) calendar days of any code changes.
(d) Service Provider shall provide Customer with a complete rate sheet at the end of each calendar quarter for all international destinations. This quarterly rate sheet shall include all destinations, current rates, and dialing codes that the Service Provider is offering to Customer.
(e) Service Provider shall have an account representative meet/teleconference with Customer on a quarterly basis, at a minimum, to discuss cost reductions and/or recommendations for improvements to
Services. Further, the account representative shall advise Customer as to any new technology that has become commercially available from Service Provider and which shall assist Customer in improving the quality of Services and/or reduce its costs.
2. TERM AND TERMINATION
(a) The term of this Agreement shall commence on the date this
Agreement is made and entered into, terminating one (1) year thereafter
("Initial Term") or less terminated earlier by Customer upon thirty (30)
calendar days written notice to Service Provider without further liability. This
Agreement shall be automatically renewed in successive one-year periods (each a
"Renewal Term") until terminated by either Party providing the other with thirty
(30) calendar days prior written notice. Both the Initial Term and any Renewal
Term shall be collectively referred to herein as the "Term".
(b) If Customer fails to make payments of undisputed amounts when due, and then does not cure such failure within thirty (30) calendar days after receiving written notice thereof from Service Provider, Service Provider may suspend Service until undisputed amounts are paid by Customer.
(c) In addition to the provisions in Section 2 herein, additional termination provisions are provided for in the following sections of this Agreement: 3(c), 6(b), 11, and Exhibit B(11) and (12).
3. RATES AND TAXES.
(a) Customer shall pay the undisputed monthly reoccurring, usage, and nonrecurring charges, if any, in U.S. dollars at the rates set forth in Exhibit A of this Agreement unless such charges are waived by Service Provider. The Parties agree that for all Services, functions, and items provided or to be provided under this Agreement, Customer shall not be obligated to pay Service Provider any amounts in addition to the charges payable to Service Provider under this Section 3 and Exhibit A. Service Provider and Customer mutually agree that Customer has no obligation, legal or otherwise, to purchase any amount of Services hereunder during the Term of this Agreement.
(b) Each call shall be billed in six (6) second increments. For the purposes of this Agreement, the Service Provider shall invoice the Customer utilizing Bulk Rounding, as hereinafter defined. Bulk rounding is defined as carrying over the 3rd and 4th place amounts of a call charged to the next call, and counting to do so until one full cent ($.01) is accrued. When that has occurred, the one cent is applied to the next call("Bulk Rounding"). In addition, the Service employees whole call rounding, which means that all calls are rounded only once, as opposed to once for each element (e.g., initial and incremental). For in instance, an actual call bills as...
CALL DURATION BILL CARRY COMMENTS ------------------------------------------------------------- -.1234 minutes 0.12 .0034 -.2345 minutes 0.23 .0079 (.0034+.0045 [last two digits in call duration) -.3456 minutes 0.35 .0035 (.0079+.0056=.0135, so .34 becomes .35 and .0035 goes to next call) -.4567 minutes 0.46 .0002 (.0035+.0067=.0102, so .45 becomes .46 and .0002 goes to next call) -.5678 minutes 0.56 .0080 (.0002+.0078=.0080) |
(c) Service Provider may, upon fifteen (15) calendar days written notice to Customer, at the specified address below, increase any of the rates for any of the international destinations set forth in this Agreement, or as later offered to Customer from Service Provider, and in a rate change notification or addenda. Customer may, upon written notice to Service Provider, terminate the Agreement and all Service provided thereunder immediately and without further liability if Service Provider increases any of the rates set forth in Exhibit A. In the event of such termination, Customer shall pay Service Provider for all undisputed charges incurred up through the date of termination. In the event that Service Provider decreases any of the rates for any of the countries set forth in this Agreement, the lower rates shall be
effective immediately upon written notification to Customer or the earlier data of rate decrease approval, as may be applicable.
Rate change notifications shall be sent to the following address:
Quest Communications Corporation Attn: International Cost Optimization Department 4250 N. Fairfax Drive Arlington, VA 22203 Voice: (703) 363-3139 Facsimile: (703) 363-5775
(d) For purposes of this Agreement,(tax or taxes) shall mean any and all national, federal, state and local taxes, including, without limitation, sales, use, value added, surcharges, excise, franchise, property, commercial, property, license, privilege, utility and gross receipts taxes, levies, duties, other similar tax-like charges and tax-related surcharges which may be required or imposed by any legitimate domestic or foreign taxing authority applicable to the Services being provided to a Party ("Tax or t Taxes"). Each Party shall be responsible for any and all Taxes on (i) property it owns or leases and (ii) its business, its net income in gross receipts. Each Party shall be solely responsible for its own taxes, including without limitation, Tax filing, payment, protest, audit and litigation. Service provider agrees that it shall be solely responsible for any Taxes payable by it (i) any goods or Services used or consumed by Service Provider in providing the Services, (ii) where the Tax imposed on Service Provider's acquisition, ownership or use of such goods or Services and (iii) where the amount of Tax is measured by Service Provider's cost and acquiring, owning or using such goods or Services, and not by Customer's cost of acquiring Services from Service Provider. In addition, Customer may provide the Service Provider with any applicable Tax exempt certificates that may be pertinent to such Services being provided by Service Provider under this Agreement.
(e) Service Provider represents to Customer that all Services provided under this Agreement shall be provided at prices and upon the terms that are no less favorable to Customer than the prices and terms offered by Service Provider to any third Party for similar volumes of substantially similar Services. Service provider shall adjust its prices as necessary to remain in compliance with its obligation under this Section. In the event that any prices or terms for the Services provided hereunder are to be reduced or changed under this Section, Service Provider shall notify Customer in writing thereof, and such reduced prices or more favorable terms shall become effective immediately and retroactively upon earlier of the (i) date such new prices or terms or made available to such other third Party or (ii) notification of such reduction. Customer shall be entitled to a credit for all amounts overpaid due to the retroactive true up of such prices, and the corresponding credit, and/or price adjustments shimmy reflected on the next invoice submitted to Customer by Service Provider.
4. Payment:
(a) Service Provider shall provide to Customer monthly invoices
accompanied by the Call Detail Records ("CDR"), if available, covering
designated thirty (30) calendar day periods. CDR's, billing specifications and
invoices shall be submitted to Customer from Service Provider as provided in
Exhibit D and Exhibit E, attached hereto. Customer shall use commercially
reasonable efforts to pay undisputed amounts on such invoices within thirty (30)
calendar days from Customer's actual receipt of invoice (the "Payment Period").
Any disputes that Customer may have concerning an invoice must be brought to
Service Provider's attention within ninety (90) calendar days of the date of
invoice and the Parties shall cooperate in good faith to resolve any such
disputes within forty-five 45 calendar day period after the date such disputes
are brought to Service Provider's attention. If the dispute is not resolved
during this period, then either Party may seek arbitration in accordance with
Section 13 below. Notwithstanding any provisions contained in this Agreement to
the contrary, Customers failure to pay any invoice or portion thereof as a
result of an unresolved dispute shall not be considered a breach of the terms
and provisions of this Agreement.
(b) Service Provider shall bill for all Services rendered within sixty
(60) calendar days of the scheduled billing date or shall forfeit the right to
collect for such charges. The Customer has the right to refuse payment for such
charges billed subsequent to the sixty (60) calendar day period. The Service
Provider and/or or Customer shall deduct any such charges from the Customer's
legitimate Service charges on any subsequent invoice.
(c) if CDR's are available, Service Provider shall supply accurate CDR's, and no additional charge, for Services purchased by Customer. When and if Service Provider develops the capability to deliver CDR's on a real-time basis by means of electronic data transfer, it shall offer Customer the opportunity to participate in any "beta" test of the capability.
(d) Service Provider shall notify Customer of any modification in the format of the CDRs at least ninety (90) days prior to the first delivery of such modified CDR. Such notice shall include an explanation of the modification sufficient to allow Customer to modify/program its systems to process the modified CDR. In no event shall Service Provider modify the format of the CDR in a manner that would prevent Customer from billing its customers promptly and accurately.
5. Currency:
(a) All fees, advances, payments, commissions, reimbursements, and indemnification payments and other payments under or pursuant to this Agreement shall be calculated and made in the currency of US dollars, unless otherwise specifically agreed to in any particular Exhibit.
(b) The Parties confirmed that the introduction of a single currency (the "Euro") to replace the national currency of a European Monetary Union member state shall not have the effect of altering any term of this Agreement or of discharging or excusing performance under this Agreement, nor give any Party the right to unilaterally alter or terminate this Agreement.
6. Warranties:
(a) Service Provider represents and warrants to Customer that it has the right to provide to Customer the Service specified herein, and that it is an Entity, duly organized, validly existing and in good standing under the laws of its origin, with all requisite power to enter into and perform the obligations under this Agreement in accordance with its terms.
(b) Service Provider shall provide Service that means generally accepted industry Service standards, including without limitation, the standards set forth in Exhibit B (the "Service Standards"), attached hereto. In the event that Service Provider fails to meet the Service standards, Customer, may at its sole discretion, terminate the Agreement immediately without further liability to Customer.
(c) Service Provider shall warrant, without limitation as to any time period, on behalf of itself and its third Parties, that the Services and facilities utilized by it to provide Services shall not incur any errors as a result of the century date change in the year 2000.
7. Maintenance/repair: Service Provider shall provide maintenance and repair on Services as set forth in Exhibit B. and make available to Customer and escalation procedure as described in Exhibit C, attached hereto.
8. Indemnification/Limitation of Liability: The Service Provider shall defend, indemnify and hold Customer harmless from and against all claims, demands, actions, causes of action, judgments, costs and reasonable attorneys' fees(including an allocable amount of in-house counsel expenses) and expenses of any kind arising from or related to any use of the Service or otherwise arising under this Agreement. In no event shall either Party be liable for any loss of profits, or for any indirect, incidental, punitive, reliance, special, exemplary or consequential damages.
9. This Agreement for Service is made pursuant to and shall be construed
and enforced in accordance with the laws in force and the State of New York,
without giving effect to principles regarding conflict of laws (excluding
Section 5-1401 of the New York General Obligations Law, as amended from time to
time, or any successor provisions thereto).
10. Confidentiality: Should confidential or proprietary information of
either Customer or Service Provider be disclosed to the other Party in the
performance of this Agreement, the Party receiving such confidential or
proprietary information (hereinafter "Recipient") hereby agrees to receive such
information and covenants, and take such precautions as may be necessary to
protect same from disclosure to others, during the initial term of this
Agreement and for two (2) years following termination of this Agreement.
Precautions taken shall be at least equivalent to recipient's precautions with
respect to its own confidential and proprietary information, but in no event
less than a commercially reasonable efforts standard of care ("Confidential
Information") shall mean proprietary and confidential data or information of a
Party, which is of a tangible or intangible value to that Party and is not
public information or is not generally known or available to that Party's
competitors but is known only to that Party, and those of its employees,
independent contractors, consultants, Customers or agents to whom it must be
confided in order to apply it to the uses intended, including, without
limitation, information regarding that Party's Customers or prospective
Customers, marketing methods and business plans gained by the other Party).
Confidential Information shall not include information which (i) at the time of
disclosure to recipient is in the public domain through no acts or omissions of
recipient; (ii) as shown by written records, is already known to recipient;
(iii) is revealed to Recipient by third-Party, who does not thereby breach any
obligation of confidentiality or who discloses such information in good faith;
(iv) as disclosed pursuant to a legal order to disclose same to any governmental
Entity or pursuant to judicial or quasi judicial action (so long as Recipient
gives disclosing Party prompt written notice sufficient to allow disclosing
Party to seek a protective order or other appropriate remedy). Recipient agrees
to disclose only such confidential information as is legally required and shall
use its commercially reasonable efforts to obtain confidential treatment for any
confidential or proprietary information so disclosed.
11. Assignability. Neither Party may assign this Agreement or any of its
rights hereunder without the prior written consent of the other Party, which the
other Party may grant or withhold in its sole discretion. Notwithstanding the
foregoing, the Parties may assign this Agreement or any other rights and
benefits hereunder without the consent of the other Party under the following
conditions: (a) to any Affiliate, as described below, of such Party, to the
surviving Entity, as defined below, into which such Party may merge or
consolidate; or (b) to any Entity to which the Party transfers all, or
substantially all, of its business and assets, provided that the assignor shall
remain liable for all of its obligations hereunder and such assignee shall in
writing assume all obligations of the assignor hereunder arising after the
effective date of such assignment; or (c) if necessary to satisfy the rules,
regulations and/or orders of any federal, state or local governmental agency or
body. Any prohibited assignment or delegation shall be null and void. If during
the Term of this Agreement, an Entity acquires a controlling interest in or
substantially all of the assets of Qwest, acquiring Entity or successor shall
have the right, terminate this Agreement immediately and without further
liability, financial or otherwise. ("Affiliate" defined as, (i) any individual,
corporation, partnership, limited liability company, limited liability
partnership, practice, association, joint stock company, trust, unincorporated
organization or other venture or business vehicle (each an "Entity") in which a
Party owns a twenty (20%) or greater equity interest; or (ii) any Entity which,
directly or indirectly, is in control of, is controlled by or is under common
control with a Party, as applicable, after applying the attribution rules of
Section 318 of the Internal Revenue Code. For the purpose of this definition,
control of an Entity shall include the power, directly or indirectly, whether or
not excised: (i) to vote fifty (50%) (or such lesser percentage as is the
maximum allowed to be owned by a foreign corporation in a particular
jurisdiction) or more of the securities or other interest having ordinary voting
power for the election of directors or other managing authority of such Entity;
or (ii) to direct or cause the direction of the management or policies of such
Entity, whether through ownership of voting securities, partnership interest or
equity, by contract or otherwise.)
12. Notices: notices required or permitted under this Agreement shall be in writing and delivered by certified mail, return receipt requested, courier, or by facsimile or electronic transmission (followed up by telephone call to confirm receipt of facsimile or electronic transmission) to the persons whose names and
businesses addresses appear below and such notice, except for rate increase notifications, shall be effective on the date of receipt or refusal thereof by the receiving Party. Any notice delivered by hand shall be deemed received at the time of delivery and any notice sent by certified mail or courier shall be deemed to have been received and the date shown as received or upon the return receipt. Any notice sent by facsimile transmission or electronic transmission shall be deemed to have been delivered upon the date verbal confirmation of receipt of such notice has been made.
If to Customer:
Qwest Communications Corporation
Attn: Contract Manager/Legal Dept.
4650 Lakehurst Court
Dublin, Ohio 43016
Voice: (614) 798-6426
Facsimile: (614) 798-6498
E-mail: diane.wright@qwest.com
With a copy of all applicable rate change notices to:
Qwest Communications Corporation
Attn: Director International Cost Optimization
4250 N. Fairfax Drive
Arlington, VA 22203
Voice: (703) 363-3139
Facsimile: (703) 363-5775
With a copy to:
Qwest Communications Corporation
Attn: General Counsel/ Legal Dept.
1000 Qwest Tower
555 17th Street
Denver, CO 80202
If to Service Provider:
Fusion Telecommunications International, Inc.
Attn: Howard Miller, VP Sales & Marketing
420 Lexington Avenue
Suite 518
New York, New York 10170
Voice: 212-201-2410
Facsimile 212-972-2111
E-mail: hmiller@fusiontel.com
13. Arbitration. Any dispute arising between Service Provider and Customer in connection with this Agreement, which is not settled to the mutual satisfaction of Customer in Service Provider within forty five (45) calendar days(or such longer period as may be mutually agreed upon) from the date that either Party informs the other in writing that such dispute or disagreement exists, shall be settled by arbitration conducted in Washington DC in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect on the date that such notice is given. The decision of the arbitrator shall be final and binding upon the Parties, except for instances where misapplication of the law has occurred, and judgment may be obtained thereon by either Party in a court of competent jurisdiction. Each Party shall bear the costs of preparing and presenting its case. The cost of arbitration, including the fees and expenses of the arbitrator, shall be shared equally by the Parties unless the award otherwise provides. The arbitrator shall not be able to award, nor shall any Party be entitled to receive punitive, incidental, indirect, consequential, exemplary, reliance or special damages, including damages for lost profits.
14. Compliance with laws:
(a) At all times during the term of this Agreement, Service Provider represents and warrants to Customer that all Service rendered by it hereunder shall be designed, produced, installed, furnished and in all respects provided and maintained in full conformance and compliance with all applicable laws, rules and regulations relating to or affecting the performance of their obligations hereunder including relating to the Services, and shall secure and maintain in full force and effect all licenses, permits and authorizations from all governmental entities in the U.S. and each and every other country, where the Services are provided, as applicable, to the extent the same are required or devisable for the performance of the respective obligations hereunder. Service Provider shall keep Customer informed of all governmental regulations, licenses, permits and authorizations which may affect the business of Customer and a particular country or which Customer may be required to procure in a particular country where Services are provided.
(b) Service Provider hereby agrees that its shareholders, directors, officers, employees, agents or contractors shall not make, authorize or offer, or cause to be made or offered, any payment, loan or gift of money or anything of value directly or indirectly to: (i) any official or employee of any government, or agency or instrumentality thereof; (ii) any political Party or official thereof or any candidate for political office; (iii) any person; under circumstances in which the shareholders, directors, officers, employees, agents or contractors of Service Provider knows or has reason to know, that all or a portion of such money or thing of value shall be offered or given, directly or indirectly, to any person named in clauses (i) and (ii) above to influence a decision or to gain any advantage to Service Provider or its shareholders, directors, officers, employees, agents or subcontractors, or to retain business for or with, or directing business to, Service Provider, or in connection with any transaction relating to this Agreement, which could result in violation of the U.S. Foreign Corrupt Practices Act, as amended and any other law, regulation, order, decree or directive having the force of law and relating to bribery, kick-backs, or similar business practices. For purposes of this Agreement, the term "official" shall mean and include any employee or officer and public Service or in the private sector, any employee of official in any governmental or quasi-governmental department, agency or instrumentality thereof, or any person or entity acting in an official capacity for on behalf of any such government or department, agency or instrumentality.
15. Miscellaneous:
(a) This Agreement is not constitute either Party as the agent or legal representative of the other Party and does not create a partnership or joint venture between Customer in Service Provider.
Neither Party shall have any authority to enter into an Agreement for or by any other Party in any manner whatsoever. This Agreement confers no rights of any kind upon any third Party.
(b) The failure of either Party to give notice of default or to enforce or insist upon compliance with any of the terms or conditions of this Agreement shall not be considered the waiver of any other term or condition of this Agreement.
(c) Though subsequent Agreement among the Parties concerning the Service shall be effective or binding unless it is made in writing by authorize representatives of the Parties.
(d) In the event of a conflict between this Agreement and any of its Exhibits, the terms and conditions of this Agreement shall take precedence.
(e) If any part of any provision of this Agreement or any other Agreement, document or writing given pursuant to or in connection with this Agreement shall be invalid or unenforceable under applicable law, said part shall be ineffective to the extent of such invalidity only, without in any way affecting the remaining parts of such provision or the remaining provisions of this Agreement.
(f) This Agreement is nonexclusive. Nothing in this Agreement shall prevent Customer or Service Provider from entering into similar Agreements with, or otherwise providing Services to, any other person or Entity.
(g) Neither Party shall issue a news release, public announcement, advertisement, or other form of publicity concerning existence of this Agreement or the Services to be provided hereunder without obtaining the prior written approval of the other Party. Service provider shall not include Qwest's name in any list of Customers or disclose Qwest as a Customer without the prior express written approval of Qwest.
(h) Neither Party shall, without the other Party's prior written consent, use any trademark Service mark, brand-name, copyright, patent, or any other intellectual property of any other Party or its respective Affiliates. Since a breach of this material obligation may cause irreparable harm to which monetary damages may be inadequate, in addition to other available remedies, the non-breaching Party may seek injunctive relief for any disclosure in violation hereof.
(i) If Service Provider is also purchasing Services from Customer, Service Provider shall use commercially reasonable efforts to warrant that it shall not knowingly route any calls to Customer for the same countries to which Customer is purchasing Service from Service Provider. In addition, if Service Provider routes Customer's traffic to another carrier that is also using Qwest as a Service Provider for termination other traffic the same destination (i.e., international country or city), Service Provider shall immediately, upon notification from Qwest, change the routing of Customers calls to the destination in question.
(j) References in this Agreement to Customer shall include its Affiliates and respective employees, agents, successors (whether by operation of law or otherwise) and permitted assigns.
(k) This Agreement constitutes the entire understanding of the Parties with respect to the subject matter hereof, and it supersedes all prior or contemporaneous oral or written Agreements, understandings and representations with respect thereto.
(l) Any and all provisions of this Agreement which by their nature or terms contemplate survival beyond the expiration of this Agreement or which are reasonably necessary to survive termination in order to achieve the respective fundamental purposes, including without limitation, any provision to this Agreement relating to or specifically entitled [Confidentiality, Indemnification, Liability, Dispute Resolution, Marks, Intellectual Property and Arbitration] shall survive and continue to bind the Parties following any termination of this Agreement.
(m) The Parties, who have both been represented by legal counsel, have jointly participated in negotiating and drafting this Agreement, including its Exhibits and any attachments. In the event, an ambiguity or question of intent arises, this Agreement shall be construed as if jointly drafted by the Parties and no presumption, interference or burden of proof shall arise favoring or disfavoring a Party by virtue of authorship of any or all of the Agreement provisions.
Qwest Communications Corporation
Signature: ____/Dean E. Thrish/___
Printed Name: Dean E. Thrish
Title: Sr. Director, ICO
Date: May 19, 2000
Fusion Telecommunications International
Signature: ___/Howard J. Miller/___
Printed Name: Howard J. Miller
Title: VP Sales and Marketing
Date: 5/17/00
CARRIER SERVICE AGREEMENT
This Carrier Service Agreement is entered into on April 3, 2001, between Fusion Telecommunications International, Inc., a Delaware corporation ("Provider"), having its principal place of business at 420 Lexington Avenue, Suite 518, New York, NY 10170 and Telco Group Inc. ("Purchaser"), a Delaware corporation, having its principal office at 30-50 Whitestone Expressway, 1st floor, Flushing, New York 11354.
RECITALS:
A. Provider provides telecommunications services between its location and the outbound termination points identified on Exhibit A attached hereto and incorporated herein by this reference and
B. Purchaser desires to purchase, upon the terms and conditions set forth in this Agreement, telecommunications services from Provider.
AGREEMENT:
Now, therefore, intending to be legally bound, the parties agree as follows:
1. RATES, TERMS AND CONDITIONS: Provider shall provide telecommunications
services to Purchaser at the rates, terms and conditions described in
Exhibit A, and to the termination points set forth in Exhibit A.
Purchaser acknowledges that the per minute rates set forth on Exhibit A
are preferential rates based on prompt payment on or before the Due
Date. The services to be provided are limited to those set forth in
Exhibit A and require from Purchaser a monthly minimum usage per T-1
and/or E-1 as set forth in said Exhibit. Rates listed in Exhibit A or
any subsequent rate sheet are subject to change by Provider with five
(5) days written notice to Purchaser.
2. PERIOD OF SERVICE: This Agreement shall become effective and the parties' obligations shall commence upon the date set forth in Exhibit A of this Agreement and shall continue (subject to Provider's right to terminate this Agreement sooner) for a period of one year (12 months) from such date (the Initial Term"). This Agreement will be automatically renewed on a month-to month basis after the expiration of the initial term or any subsequent term. If either party desires to cancel this Agreement upon the expiration of the current term or any subsequent term, it shall give the other party written notice of its intent to cancel at least twenty (20) days prior to the expiration of the current term. This Agreement shall continue and remain in full force and effect until canceled by either party upon notice as provided herein.
3. SECURITY: Purchaser shall submit financial documentation for review to Provider's credit department. To ensure the prompt payment of sums due hereunder, Purchaser shall furnish to Provider upon the execution of this Agreement, a prepayment or security deposit in the form of cash, irrevocable and unconditional letter of credit, or such other security in form and amount acceptable to Provider. Upon request by Provider at any time, Purchaser agrees to provide financial statements or other indications of its financial circumstances. In addition, after service commencement, Provider, at its option, may request additional security if: (a) Purchaser's payment history, financial circumstances or credit exposure becomes unacceptable, (b) if Purchaser's account balance, plus unbilled usage exceeds the amount of any security deposit or assurance requirement or (c) in light of Purchaser's actual usage when compared to projected usage levels upon which any prior security or assurance requirement was based. Purchaser shall provide the requested additional security within two (2) days/forty-eight (48) hours: after request by Provider. In the event that Purchaser fails to provide the requested security in accordance with this provision, Provider may suspend service and/or terminate this Agreement without further notice.
4. ADDITIONAL SECURITY PROVISIONS: The dollar value of service available to Purchaser shall be limited to the dollar amount of the prepayment or security deposit available to Provider. The amount of any required prepayment, cash security deposit, or letter of credit is outlined in Exhibit A. Any letter of credit shall be substantially similar in form to Exhibit A to this Agreement and shall be from a financial institution reasonable acceptable to Provider.
5. BILLING INCREMENTS: All traffic shall be billed with an initial 30 second minimum increment, followed by 6 second additional increments (i.e. a minimum call length 30 seconds with all additional usage rounded up to the nearest 6 second increment). The sole exception to this billing arrangement shall be traffic terminating in Mexico which shall be billed in full minute increments (i.e. a minimum call length 60 seconds with additional usage rounded up to the nearest full minute).
6. BILLING PERIOD/PAYMENT SCHEDULE: The billing period shall be seven days long, commencing at 12:00:00 a.m., Eastern Standard Time, on Monday and continuing through 11:59:59 p.m. Eastern Standard Time, the following Sunday. Provider shall send bill to Purchaser for service provided during the preceding billing period (i.e. the prior seven days), via e-mail or facsimile, by close of business each Monday. Payment of the amount shown on the bill is due from Purchaser by 5:00 p.m., Eastern Standard Time, the following Thursday (i.e. three working days later) (the "Due Date"). All payments are to be made by wire transfer per the banking information detailed in Exhibit B. The charges for services that are not paid by the Due Date shall be deemed past due. The uncollectability, fraud or any other problem that may affect Purchaser in the assessment, appraisal, accounting, billing or collecting of debt will never exempt Purchaser from the obligation of full payment to Provider. Any payment received by Provider after the Due Date shall be subject to an interest charge on delinquent amounts from the date such amounts were due at the rate of one and a half percent (1.5%) of the late payment per month (or, if unlawful, the maximum lawful rate allowable under applicable law).
7. TAXES: Purchaser acknowledges and understands that all charges stated in the Exhibits hereto are computed by Provider exclusive of any applicable use, excise, gross receipts, sales and privilege taxes, duties, fees or other taxes or similar liabilities, including but not limited to universal service or pursuant to similar regulatory, federal or state laws, whether charged to or against Purchaser or Provider because of the services furnished to Purchaser pursuant to this Agreement ("Additional Charges"). Purchaser also acknowledges and understands that such Additional Charges will be invoiced by Provider only if Purchaser has not provided Provider with a direct payment permit, sale for resale exemption certificate, sales tax exemption certificate or other applicable exemption certificate and any non-exempt Additional Charges shall be paid by Purchaser, in addition to all other charges provided for herein.
8. BILLING DISPUTES: If Purchaser, in good faith, disputes the amount or appropriateness of a charge included in an invoice, it shall notify Provider in writing and provide supporting documentation establishing such claim. Such documentation supporting disputed charges shall include a detailed analysis showing the difference between the specific invoice amount and Purchaser's specific asserted amount. A summary of the disputed charges will not be accepted. Purchaser shall further provide all information reasonably requested by Provider including, but not limited to, call detail records (CDRs), to resolve the dispute. Such notification shall not relieve Purchaser of the obligation to make all undisputed payments, by the Due Date. Any resolution made by Provider in favor of Purchaser shall be credited to Purchaser's next invoice. Failure to contest a charge within thirty (30) calendar days from receipt of an invoice shall create an irrefutable presumption of the correctness of the charge.
Upon dispute, the parties agree to use their best efforts to resolve the dispute in good faith within thirty (30) calendar days of Purchaser's receipt of invoice. In the event that the parties are unable to resolve the dispute within this thirty (30) day period, the dispute shall be submitted to arbitration as otherwise provided for in this Agreement.
9. DISPUTE RESOLUTION: In the event of any controversy or claim arising from or related to this Agreement, its performance or interpretation, the parties, in good faith, initially will attempt to resolve the dispute among themselves. Failing such resolution, the dispute will be settled by binding arbitration conducted in accordance with the commercial Arbitration Rules of the American Arbitration Association ("AAA Rules"), as amended by this Agreement and judgment upon the award rendered by the arbitrator(s) may be entered by any court with jurisdiction. The location of the arbitration shall be New York, New York. The cost of the arbitration, including the fees and expenses of the arbitrator(s), shall be shared equally by the parties unless the arbitration award provides otherwise. Each party shall bear the cost of preparing and presenting its case. The arbitrator(s) are not empowered to award damages in excess of compensatory damages and each party irrevocably waives any damages in excess of compensatory damages.
10. RIGHT TO COLLECT AGAINST FUNDS ON DEPOSIT: IF FULL PAYMENT IS NOT RECEIVED BY PROVIDER WHEN DUE, PROVIDER SHALL HAVE THE RIGHT, WITH 48 HOUR NOTICE, TO MAKE PAYMENT OUT OF FUNDS ON DEPOSIT. FOR THE PURPOSES OF THIS AGREEMENT, PAYMENT SHALL NOT BE DEEMED TO BE MADE UNTIL FUNDS HAVE CLEARED INTO PROVIDER'S ACCOUNT.
11. SERVICE INTERCONNECTIONS:
11.1 INTERCONNECTION OF PURCHASER FACILITIES: In order to receive services via TDM connection from Provider hereunder, Purchaser must establish dedicated DS-1 circuits between Purchaser's designated network and Provider's designated network meet point ("POP") as specified in Exhibit A. Purchaser shall pay any installation charges and continuing charges for circuits used to connect Purchaser to Provider's POP in compliance with network interface procedures. 11.2 CIRCUIT UTILIZATION: 12. TERMINATION: 12.1 REGULATORY CHANGES: If the FCC, any state or other regulatory agency or court of competent jurisdiction elects to implement or enforce a rule, regulation, law or order which has the effect of cancelling, changing, or superseding any material term or provision of this Agreement or rate charged (collectively "Regulatory Requirement"), then this Agreement shall be deemed modified in such a way as the parties mutually agree is consistent with the form, intent and purpose of this Agreement and as is necessary to comply with such Regulatory Requirement. Should the parties not be able to agree on modifications necessary to comply with a Regulatory Requirement within thirty (30) days after the Regulatory Requirement is implemented or enforced, then upon written notice either party may, to the extent practicable, terminate that portion of this Agreement impacted by the Regulatory Requirement enforcement. 12.2 NON-PAYMENT: If payment has not been received by the Due Date, for all charges (including transmission charges, service charges and monthly fixed charges, if any) billed to Purchaser, then Provider may, at its sole discretion and with five (5) days prior written notice to Purchaser, terminate transmission services and/or this Agreement in part or in whole. 12.3 CORPORATE DISSOLUTION: Either party may terminate this Agreement in the event the other party makes an arrangement or composition with its creditors generally or makes an application to a court of competent jurisdiction for protection from its creditors generally or a bankruptcy order is made against the other party or a resolution is passed by it for its winding up, a court of competent jurisdiction makes an order for its winding-up or dissolution, an administration order is Page 3 of 9 |
made in relation to it or a receiver is appointed over (or an encumbrance takes possession of or sells) any of its assets. 12.4 BREACH OF AGREEMENT In the event of a breach of any material term or condition of this Agreement by a party (other than failure to pay which is covered under Section 12.2 above or failure to provide additional security which is covered under Section 3 above), the other party may terminate this Agreement upon thirty (30) days written notice, unless the breaching party cures the breach during the thirty (30) day period. 12.4.1 Upon any material breach by Purchaser after expiration of all applicable notice and cure periods, Provider may at its sole option do any or all of the following: (I) cease accepting traffic; (ii) cease all electronically and manually generated information and reports; (iii) draw on any letter of credit, security deposit or other assurance of payment and enforce interest provider by Purchaser; (iv) terminate this Agreement and services without liability to Provider; (v) pursue such other legal or equitable remedy or relief as may be appropriate. 12.5 NETWORK PROTECTION: In the event Purchaser's service traffic volumes (or traffic distribution patterns to individual cities and countries) results in a lower than industry standard completion rate, severely abnormal or disproportionate distribution of traffic by city, or other similar abnormality which adversely affects the Provider network (including, but not limited to looping situations where Purchaser's traffic is delivered by Provider to another carrier for termination and ultimately returned to Provider), Provider reserves the right to block and refuse to accept such adverse traffic at any time, with prompt notice as soon as possible thereafter. 13. NO WARRANTIES: PROVIDER SHALL USE REASONABLE EFFORTS TO PROVIDE TELECOMMUNICATION SERVICES TO PURCHASER, HOWEVER, PROVIDER MAKES NO WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE TRANSMISSION SERVICES PROVIDED HEREUNDER AND EXPRESSLY DISCLAIMS ANY WARRANTY OF MERCHANTIBILITY, DESCRIPTION OR FITNESS FOR ANY PARTICULAR PURPOSE OR FUNCTION. 13. WAIVER OF LIABILITY: As a material inducement for Provider to provide the services hereunder at the prices stated, Purchaser agrees that Provider shall in no event be liable to Purchaser or Purchaser's own customers for any loss, expense or damage for (i) loss of revenue, profits, savings, business or goodwill,and (ii) exemplary, proximate, consequential, or incidental damages and expenses of any type or nature on account of any breach or default hereunder by Provider or on account of the use or nonuse or the services. 14. INDEMNITY: Purchaser shall indemnify and hold harmless Provider, its stockholders, officers, directors, employees and agents from any and all loss, cost damage, expense or liability, including without limitation, court costs and reasonable attorneys' fees, arising out of, in whole or in part, directly or indirectly, the installation, hook-up, maintenance, service or trouble-shooting of the transmission services described in this Agreement including any interruption of transmission service to Purchaser, its employees, agents and customers, except when caused by the gross negligence by the Provider or the intentional violations of any applicable law or governmental regulation by Provider. 15. PROVISION OF INFORMATION AND CONFIDENTIALITY: 15.1 Each party undertakes to the other to promptly provide all information and assistance which the other may reasonably require to enable it to perform its obligations under this Agreement. Page 4 of 9 |
15.2 Subject to sub-Section 15.3, each party undertakes to the other that it will treat as confidential, and will use its reasonable endeavors to procure that its directors, employees, professional advisers and agents will treat as confidential, the terms and conditions of this Agreement as well as all data, summaries, rates, reports or information of all kinds and all other confidential information whether of a technical or business nature or otherwise relating in any manner to the business or affairs of the other party which it may receive in connection with this Agreement, and will not (and will use its reasonable endeavors to procure that its directors, employees, professional advisers and agents will not) disclose or use such information other than strictly for the purposes of this Agreement except with the written permission of the other party. 15.3 The provisions of sub-Section 15.2 shall not apply to information held by a party which 15.3.1 is in or comes into the public domain other than by breach of this Agreement; 15.3.2 is obtained by that party from a third party who has the right to disclose it; 15.3.3 is or has been independently generated by that party (but not including data generated by that party about calls handed over by the other party); or 15.3.4 is in the possession of or is known to that party prior to the date of this Agreement, to the extent that party is not bound by any confidentiality obligation in respect of such information to the other party. 15.4 The following disclosures by either party shall not constitute a breach of sub-Section 15.2: 15.4.1 a disclosure of information necessary to comply with any law or the valid order of a court of competent jurisdiction or the rule, regulation or request of any governmental or other regulatory authority or agency provided that the party disclosing the information shall request confidential treatment of such information by the third party to which it is disclosed; 15.4.2 a disclosure of information to a party's auditors and/or other professional advisors or as part of its normal reporting or review procedure to its parent company, members or partners as the case may be, provided that the party disclosing the information will endeavor to procure that its auditors, professional advisors, parent company members and partners will also treat such information as confidential; 15.4.3 a disclosure of information made in order to enforce its rights under this Agreement; 15.4.4 a disclosure made to a financial institution, lender of funds or financial advisor where such disclosure is required as part of an arrangement for the financing or refinancing of such party; provided, however, that before making any disclosure pursuant to this sub-Section 15.4, the recipient party agrees that it will provide the disclosing party with prompt written notice so that the disclosing party has the opportunity to pursue its legal and equitable remedies regarding potential disclosure. 15.5 On termination of this Agreement for whatever reason, the recipient party shall return to the disclosing party (or, at the discretion of the disclosing party, destroy) all copies of confidential information of the other party which it has in its possession. The provisions of this Section 16 shall survive the termination or expiry of this Agreement for any reason whatsoever. 16. NO AGENCY: Neither party is authorized to act as an agent for, or legal representative of, the other party and neither party shall have the authority to assume or create any obligation on behalf of, in the name of, or binding upon the other party. 17. FORCE MAJEURE: The parties' obligations under this Agreement are subject to and neither party shall be liable for (except for the obligation to pay money by Purchaser): delays, failures to perform, damages, losses or destruction, or malfunction of any equipment or any consequence Page 5 of 9 |
thereof caused or occasioned by, or due to fire, flood, water, the elements, labor disputes or shortages, utility curtailments, power failures, explosion, civil disturbances, governmental actions, shortages of equipment for supplies, unavailability of transportation, acts or omissions of third parties, or any other cause beyond the party's reasonable control. Purchaser shall not represent that Provider is responsible for the type or quality of Purchaser's services to its customers 18. NO WAIVER: The failure of either party to enforce or insist upon compliance with any of the provisions of this Agreement or the waiver thereof, in any instance, shall not be construed as a general waiver or relinquishment of any other provision of this Agreement. 19. BINDING EFFECT: This Agreement shall be binding upon and inure to the benefit of the parties' hereto and their respective heirs, successors and assigns. 20. NO ASSIGNMENT: Neither party shall voluntarily or by operation of law assign, transfer, license, or otherwise transfer all or any part of its right, duties or other interest in the Agreement of the proceeds thereof (collectively, "Assignment"), without the other party's prior written consent, which consent shall not be unreasonably withheld or delayed. Any attempt to make an Assignment in violation of this provision shall be null and void. Purchaser and Provider shall provide written notice to the other of any change in ownership or control. Either party's failure to comply with the assignment provisions, as contained in this paragraph, shall give the other, at its sole discretion, the option to either accept the others assignee or terminate this Agreement. No assignment shall release the other of its obligations hereunder. 21. AMENDMENT: This Agreement may not be amended except by an instrument in writing, executed by the parties. The acknowledgment or acceptance hereto shall effect no modification or amendment by either party of any purchaser order, sales acknowledgment or other similar form from the other party. 22. MERGER: This Agreement (including its Exhibits) supersedes and merges all prior agreements, promises, understandings, statements, representations, warranties indemnities and covenants and all inducements to the making of this Agreement relied upon by either party herein, whether written or oral, and embodies the parties' complete and entire agreement with respect to the subject matter hereof. No statement or agreement, oral or written, made before the execution of this Agreement shall vary or modify the written terms hereof in any way whatsoever. 23. INTERPRETATION: The words and phrases used herein shall have the meaning generally understood in the telecommunications industry. This Agreement shall be construed in accordance with its fair meaning and not for or against either party drafted this Agreement. 24. THIRD PARTY BENEFICIARIES/PARTIES IN INTEREST: This Agreement has been made and is made solely for the benefit of the Provider and Purchaser, and their respective successors and permitted assigns. Nothing in this Agreement is intended to confer any rights/remedies under or by reason of this Agreement on any third party. 25. REPRESENTATION OF AUTHORITY: Each party represents and warrants to the other that the execution and delivery of this Agreement and the performance of such party's obligations hereunder have been duly authorized and that the Agreement is a valid and legal agreement binding on such parties and enforceable in accordance with its terms. 26. FURTHER ASSURANCES: The parties shall at their own cost and expense execute and deliver such further documents and instruments and shall take such other actions as may be reasonably required or appropriate to carry out the intent and purposes of this Agreement. Page 6 of 9 |
27. GOVERNING LAW: This Agreement shall be in all respects, governed by and construed and enforced in accordance with the laws of the State of New York, including all matters of construction, validity and performance. 28. COUNTERPARTS: This Agreement may be executed in several counterparts, each of which shall constitute an original, but all of which shall constitute one and the same instrument. 29. NOTICES: All notices, demands, requests and other communications required or permitted hereunder shall be in writing and shall be deemed to be delivered on the earlier of: (a) the date of actual receipt; (b) three days after the date of mailing, by certified or registered mail, duly addressed and with proper pre-paid postage, with return receipt requested, to the last known place of business of either party; or (c) the day after being sent via a nationally recognized overnight courier service such as Federal Express. Notices will be delivered as follows: PROVIDER: Fusion Telecommunications International, Inc. 420 Lexington Avenue, Suite 518 New York, New York 10170 Attn: Sales Dept Phone: 212-201-2400 Fax: 212-972-7884 PURCHASER: TELCO GROUP, INC. 30-50 Whitestone Expressway 1st Floor Flushing, New York 11354 Attn: COTRACT ADMINISTRATION Phone:718-358-5390 |
Fax: 718-358-4625
IN WITNESS WHEREOF the parties have executed this Agreement as of the day and year first written above.
Fusion Telecommunications Int'l, Inc. Purchaser: Telco Group By: / Joseph M. Troche/ By: /s/ --------------------------- -------------------------------- Printed Name: Joseph M. Troche Printed Name: _____________________ Title: VP Wholesale Markets Title: EVP Network OPS |
EXHIBIT A
1. FUSION GATEWAY LOCATION ("POP"): For all TDM services rendered by Provider to Purchaser under this Agreement, the Fusion Gateway Location ("POP") shall be the facilities maintained by Fusion at 75 Broad St., New York,NY. Purchaser is responsible for all connection fees, circuit costs of local loop fees necessary for connection to Provider. If Purchaser does not fulfill the monthly minimum minutes per T-1 (100,000 minutes monthly), a monthly charge of $350.00 per DS-1 will be separately billed to Purchaser by Provider on the first of the month.
3. RATES: The following rates shall apply to the Services rendered by Provider:
Provider rates to follow
EXHIBIT B
WIRING INSTRUCTIONS:
[OMITTED IN ELECTRONIC VERSION]
FOR: FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
420 Lexington Ave, Ste 518 - New York, NY 10170
Chase Manhattan Bank
ABA #: 021000021
Acct #: 777-390515
EXHIBIT C
UNITED STATES TAX EXEMPTION CERTIFICATE
THE UNDERSIGNED CLAIMS exemption under Section 4235(f) of the United States Internal Revenue Code from the taxes imposed by Section 4251 and any state of other codes that may apply to the taxation of communication services.
THE UNDERSIGNED AGREES to notify Fusion Telecommunications International, Inc. in writing when the basis for tax exemption indicated above changes or ceases to exist.
THE UNDERSIGNED UNDERSTANDS that the fraudulent use of this certificate will subject all guilty parties to criminal penalties resulting in fines or imprisonment.
Billing Name of Account: Teleco Group, Inc. Signature of Authorized Representative: /Douglas B. Barley/ ----------------------------- Printed Name: Douglas B. Barley Title: CFO |
COLOCATION LICENSE AGREEMENT
This Colocation License Agreement ("Agreement") is made and entered into as of this 28 day of Jan., 2002 between, Fusion Telecommunications International, Inc., a Delaware corporation with its principal office located at 420 Lexington Avenue, Suite 518, New York, NY 10170 ("Fusion") and Telco Group Inc., a Delaware corporation with its principal office located at 30-50 Whitestone Expressway, Suite 101, Flushing, NY 11354 ("Telco Group" or "Licensee").
A. Fusion is engaged in the business of providing customers with networking and telecommunications services through its telecommunications facilities, including the facility located at 75 Broad Street, 19th Floor, New York, NY (the "Facility").
B. Fusion has the right to permit other telecommunications companies to collocate with it at the Facility, as long as other collocations do not infringe upon the space occupied by Licensee.
C. Telco Group desires to enter into an agreement with Fusion for the use of the Facility for the purpose of installing equipment and operating its network, and Fusion desires to grant to Licensee the right to use the Facility upon the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the following mutual exchange of promises and covenants, the parties agree as follows:
1. GRANT OF LICENSE:
(a) Subject to the terms and conditions contained herein, Fusion hereby grants to Telco Group an exclusive license to install, operate, and maintain certain communications equipment of Licensee in the Facility. Licensee shall have use of the equipment space described in Exhibit A ("Equipment Space"). Telco Group shall also be afforded the use of other ancillary services of the Facility, including, but not limited to, battery backup or uninterruptible power supply, electricity and air conditioning.
(b) Fusion hereby reserves all rights not specifically granted to Licensee, including, without limitation, the right to: (1) access to and use of the Facility for its own use and for the use of its agents and licensees; (2) grant additional licenses to other uses; and (3) exercise or grant other rights not inconsistent with the rights granted hereunder.
(c) This License is expressly made subject and subordinate to the terms and conditions of any underlying ground or facilities lease or other superior right by which Fusion has acquired its interest in the Facility. Licensee agrees to comply with any terms and conditions of such superior right. If the consent of the holder of such superior right is required in order for the parties to enter into the License, then this License shall not become effective until such consent is obtained. If any action or consent is required of Licensee under the terms of such superior right, Fusion agrees to provide to Licensee, within (30) days following receipt of Licensee's written request, copies of any documents evidencing any such superior rights.
2. TERM:
(a) Telco Group's license to occupy the space described in Exhibit A shall begin on February 7, 2002, or the date of the completion of the infrastructure build out of the space ("Commencement Date"). The "Minimum Term" of the Customer's license to occupy the Equipment Space shall be two (2) years from the commencement date.
(b) If Fusion fails for any reason to tender possession of the Equipment Space to Telco Group Inc. within ninety (90) days of the date of this Agreement, Licensee may, upon written notice to Fusion, declare this Agreement null and void. If Licensee declares this Agreement null and void, it shall not be obligated to pay any fees hereunder and Fusion shall refund all fees and charges paid in advance by licensee.
(c) Provided that Licensee is not in default of this Agreement with Fusion, Licensee shall have the option, upon thirty (30)
COLOCATION LICENSE AGREEMENT
days prior written notice to Fusion, to renew its license to occupy the Equipment Space for an additional period of one (1) year ("Renewal Period") on the terms and conditions which are set forth in this Agreement. The Minimum Term and any and all Renewal Periods may be collectively referred to as the "Term."
(d) Any option Granted to Licensee to renew its license to occupy the Equipment Space shall be contingent upon the election by Fusion to continue to own or lease the Premises in which the Equipment Space is located for the duration of the Renewal Period(s), with such election to be exercised at the sole discretion of Fusion.
3. LICENSE FEES AND OTHER CHARGES:
(a) As a license fee for use of the Equipment Space and the Facility during the term of the License, Licensee shall pay to Fusion a monthly recurring charge of $8,150.00 (Eight Thousand One Hundred Fifty dollars) for year 1 and $8,254.17 (Eight Thousand Two Hundred Fifty-four dollars and Seventeen cents) for year 2. The monthly recurring charge shall be due and payable in advance on the first day of each calendar month during the term, commencing with the installation of the equipment in the Equipment Space, or the Commencement Date, whichever occurs earlier. If the term commences or ends on a day other than the first day of the calendar month, then the monthly recurring charge for the month in which the term commences or ends shall be prorated (and paid at the beginning of the month) in proportion that the number of days this License is in effect during such month bears to the total number of days in the month. If the monthly recurring charge is not paid when due, the amount due and payable shall be subject to a late payment charge equal to two percent (2%) of such amount.
(b) In addition, Licensee shall pay to Fusion, within ten (10) days of receipt of an invoice from Fusion, all pre-approved costs incurred by Fusion in making modifications or improvements to the Facility or the Equipment Space for Licensee, or for fire suppression, energy sources or other utilities, and the costs of any work or service performed for, or facilities furnished to, Licensee to a greater extent or in a manner more favorable to Licensee than that performed for or furnished to others within the Facility. A preliminary estimate of these types of costs which Fusion will initially incur, and for which Licensee shall reimburse Fusion within thirty (30) days of receipt of an invoice from Fusion, is set forth on the attached Exhibit B. If any such costs are not paid when due, the amount due and payable shall be subject to a later payment charge equal to two percent (2%) of such amount.
4. USE OF THE FACILITY: Licensee shall use the Facility and the Equipment Space solely for the purpose of installing, maintaining and utilizing the communications equipment and other personal property of Licensee installed in the Facility pursuant to the terms of this License for interconnection with the facilities of Fusion and the local exchange carriers and competitive access providers that are present in the facility, or brought into the Facility by licensee, and for no other purpose. Licensee shall not use the Facility of the Equipment Space except in accordance with the terms of this License.
In its use of the Facility and the Equipment Space, Licensee shall not interfere with, or connect its equipment to that of, any customer of Fusion or any other tenant or licensee within the Facility.
Except as otherwise provided herein, Licensee's equipment shall remain the sole property of Licensee, and Fusion's equipment shall remain the sole property of Fusion. Licensee expressly disclaims any right, title, or interest in or to any of Fusion's equipment or property of that of any of Fusion's affiliates, customers, agents or licensees, whether located in the Facility, the Equipment Space, or elsewhere.
5. ACCESS TO FACILITY; INSTALLATION AND MAINTENANCE OF EQUIPMENT: Licensee shall have unrestricted access to the Equipment Space for 24 hours a day, 7 days a week.
6. ACCEPTANCE OF FACILITY AND THE EQUIPMENT SPACE: The installation of equipment by Licensee shall be conclusive evidence that Licensee accepts the Facility and the Equipment Space "as is, " and that the Facility and the Equipment Space are suitable for the use intended by Licensee and were in satisfactory condition at the time the equipment was installed.
7. MAINTENANCE OF PERMISES: Licensee, at its own cost and expense, shall protect, maintain and keep in good order the Equipment Space and any equipment in the Equipment Space, and shall ensure that neither Licensee nor its employees, agents, contractors or invitees damage any part of the Facility, the Equipment Space, and/or any equipment located in or about the Facility. Licensee shall not maintain or permit any nuisances or violations of governmental laws,
COLOCATION LICENSE AGREEMENT
rules, regulations, or ordinances with respect to the Facility. Licensee shall ensure that its employees, agents, contractors, or invitees shall not permit any explosive, flammable, or combustible material or any hazardous or toxic materials, as defined under applicable state, federal or local laws, rules, regulations, or ordinances to be located in or about the Facility, except in compliance with all applicable laws, rules, regulations, and ordinances.
8. ALTERATIONS: Without the prior approval of Fusion, Licensee shall not commence any addition or alteration to the Facility, the Equipment Space, that would in any way result in an increased cost to Fusion, or that might affect the use of the Facility or other equipment by Fusion or any other licensee. Whenever Fusion's approval of work is required, Licensee shall deliver a written request for consent to Fusion, specifying the names and addresses of the desired contractors or subcontractors, along with a description of the services to be performed, and the desired dates and times of service. If Fusion does not respond to Licensee's written notice requesting approval within ten (10) business days, approval is deemed to have been given. In addition, if approval of any contractor or subcontractor is required by the terms of an agreement with a lessor or other party holding a superior interest in the Facility. Fusion shall also submit the written request to such other party for approval, and Licensee's use of contractors shall be subject to the landlord's approval as set forth in the underlying lease.
Licensee shall pay or cause to be paid all costs and charges (a) for work done by Licensee or caused to be done by Licensee in or about the Facility; (b) for all materials furnished for or in connection with such work; and (c) for alterations or additions to the Facility or equipment that require Fusion to incur costs. Licensee shall indemnify Fusion against and hold Fusion and the Facility free and clear of and from all mechanics' liens and claims of liens, and all other liabilities, liens, claims, demands, costs and expenses of any kind on account of such work done by or on behalf of Licensee. If any such lien is filed at any time against the Facility, or any part thereof, Licensee shall cause such lien to be discharged of record within ten (10) days after the filing thereof, except that if Licensee desires to contest such lien, it will furnish Fusion, within such ten-day period, security reasonably satisfactory to Fusion of at least 100% of the amount of the claim, plus estimated costs and interest. If a final judgment establishing the validity or existence of a lien for any amount is entered, Licensee shall pay and satisfy the same without delay. If Licensee fails to pay any charge and related costs and interest, and the amount so paid, together with reasonable attorneys' fees incurred in connection with such lien, will be immediately due from Licensee to Fusion. Nothing contained in this License shall be deemed to constitute a consent or agreement of Fusion to subject the Facility to liability under any mechanics' or other lien law. If Licensee receives notice that a lien has been or is about to be filed against the Facility, or any action affecting title to the Facility has been commenced on account of work done by or on behalf of, or materials furnished to or for Licensee, Licensee will immediately give Fusion written notice of such notice. At least fifteen (15) days before commencement of any work (including but not limited to any maintenance, repaired, alterations, additions, improvements or installations) in or to the Facility or the Equipment Space by or for Licensee, Licensee will give Fusion notice of the proposed work and the names and addresses of the persons supplying labor and materials for the proposed work. Fusion shall have the right to post notices of nonresponsibility or similar notices at the Facility in order to protect the Facility against any such liens.
9. COMPLIANCE WITH LAWS: Licensee shall, at Licensee's sole cost and expense, comply with all federal, state and local laws, rules, regulations, ordinances and requirements, whether now in force or hereinafter enacted, relating to Licensee's use of the Facility and the Equipment Space. Licensee will obtain all required permits and licenses pertaining to the installation, operation, maintenance and repair of its equipment in the Facility and the Equipment Space.
10. WAIVER OF LIABILITY: INDEMNIFICATION:
(a) FUSION SHALL NOT BE LIABLE TO LICENSEE, AND LICENSEE HEREBY RELEASES AND WAIVES ALL CLAIMS AGAINST FUSION, FOR ANY INJURY OR DAMAGE ARISING FROM INTERRUPTIONS OF SERVICE OR POWER, EVEN IF CAUSED BY THE NEGLIENCE OF FUSION OR ITS EMPLOYEES, AGENS OR CONTRACTORS. NEITHER PARY SHALL BE LIABLE TO THE OTHER PARY FOR NAY INDIRECT, SPECIAL, EXEMPLARY, OR PUNITIVE DAMAGES, LOSS OF PROFITS OR CONSEQUENTIAL DAMAGES.
LICENSEE EXPRESSLY ACKNOWLEDGES THAT FUSION INTENDS TO ALLOW OTHER LICENSEES TO INSTALL EQUIPMENT IN THE FACILITY. LICENSEE EXPRESSLY AGREES THAT FUSION SHALL HAVE NO LIABILITY FOR NAY DAMAGES, COSTS, OR LOSSES INCURRED BY LICENSEE CAUSED BY SUCH OTHER LICENSEES' ACTS, EQUIPMENT, OR FAILURE TO ACT.
COLOCATION LICENSE AGREEMENT
FUSION SPECIFICALLY DISCLAIMS ALL EZPRESS AND IMPLIED WARRANTIES RELATING TO THE FACILITY, THE EQUIPMENT SPACE, AND ANY MAINTENANCE SERVICES, INCLUDING BUT NOT LIMITED TO ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSE.
(b) Licensee agrees to indemnify and hold harmless and defend Fusion, its employees, officers, directors, contractors, and agents from and against any and all demands, claims, causes of action, fines, penalties, damages, losses, liabilities, judgements, and expenses (including without limitation attorneys' fees and court costs) incurred in connection with or arising from:
(1) The use or occupancy of the Facility and/or Equipment Space by Licensee or any person claiming under Licensee;
(2) Any activity, work or thing done or permitted by Licensee in or about the Facility and/or Equipment Space;
(3) Any act, omission, negligence, or willful misconduct of Licensee or any person claiming under Licensee, or the employees, agents, contractors, invitees, or visitors of Licensee;
(4) Any breach, violation, or nonperformance by Licensee or any person claiming under Licensee, or the employees, agents, contractors, invitees, or visitors of Licensee of any term, covenant, or provision of tis License, or any law, statute, ordinance or governmental requirement of any kind;
(5) Any injury or damage to the person, property, or business of Licensee, its employees, agents, contractors, invitees, visitors, or any other person entering the Facility and/or the Equipment Space under the express or implied invitation of Licensee.
If any action or proceeding is brought against Fusion, its employees, officers, directors, contractors or agents by reason of any such claim, Licensee shall, on notice from Fusion, defend the claim at Licensee's sole cost and expense with counsel reasonably satisfactory to Fusion. The obligations of this section shall survive the expiration or other termination of this License.
12. ASSIGNMENT AND SUBLICENSING: This License may be freely assigned by Fusion. Licensee shall not sell, assign, pledge, encumber or otherwise transfer by operation of law or otherwise all or any part of Licensee's rights or obligations under this License, nor permit any other person to occupy or use the Facility or the Equipment Space or any portion thereof, without first obtaining Fusion's prior written consent, which consent may not be unreasonably withheld. Licensee shall notify Fusion sixty (60) days prior to the effective date of any proposed assignment, advising Fusion of its intention to assign this License.
13. SERVICES PROVIDED BY FUSION: Fusion shall make available the following services for Licensee's use of the Equipment Space:
(a) HVAC sufficient to maintain an ambient temperature of 50 to 86 degrees F and relative noncondensing humidity.
(b) Fire suppressions system, either sprinkler system or other system that conforms with local, state, and federal laws and regulations.
(c) Grounding.
Licensee shall pay to Fusion the costs of labor and materials and other costs incurred by Fusion to make the services available to Licensee hereunder.
FUSION SHALL HAVE NO DUTY TO MONITOR, MAINTAIN, OR CARE FOR THE EQUIPMENT INSTALLED BY OR FOR LICENSEE.
14. TERMINATION IN THE EVENT OF CASUALTY OR CONDEMNATION: In the event of any damage, destruction, or condemnation of the Facility that renders the Facility or the Equipment Space unusable or inoperable, Fusion shall have the right to terminate this License and all of its duties and obligations hereunder by giving written notice to Licensee within ninty (90) days after such damage, destruction or condemnation.
COLOCATION LICENSE AGREEMENT
15. EVENTS OF DEFAULT
(a) The occurrence of any one or more of the following events shall constitute a default and breach of this License by Licensee ("Event of Default"):
(1) Licensee's failure to pay when due any recurring monthly license or service fees, any initial installation charges, or any other amount, if any such failure continues for five (5) days after notice of nonpayment has been givento Licensee.
(2) Licensee's failure to perform or observe any
other term, covenant or condition of this
License, if the failure continues for thirty
(30) days after notice has been given to
Licensee.
(3) Licensee's abandonment of the Facility and/or the Equipment Space.
16. SURRENDER OF THE PREMISES: Within fifteen (30) days of expiration or earlier termination of this License, Licensee shall remove its equipment from the Facility at Licensee's sole cost and expense. Licensee shall surrender the Equipment Space in good condition, reasonable wear and tear excepted. If Licensee fails to remove its equipment and other personal property from the Facility within fifteen (30) days after the date of expiration or other termination, Fusion may remove and store such items at Licensee's sole cost and expense.
17. FORCE MAJEURE: Should the performance of any act required by this License, other than the payment of money, be prevented or delayed by reason of an act of God, strike, lockout, labor troubles, inability of Fusion to secure materials necessary to provide the services, restrictive governmental laws or regulations, or any other cause beyond the control of the party required to perform the act, the time for performance of the act during the period of delay will be excused.
18. GOVERNING LAW: This License shall be governed by and construed in accordance with the laws of the State of New York .
19. INTERPRETATION: Fusion and Licensee hereby expressly agree that this License constitutes a mere license and not an interest in the Facility or the Equipment Space.
20. WAIVER: No waiver by Fusion of any default or breach of Licensee's performance of any term, condition, or covenant of this License shall be deemed to be a waiver of any subsequent default or breach by Licensee of the same or any other term, condition, or covenant contained in this License.
21. NOTICES: All notices required to be given by either party hereunder shall be in writing and delivered by hand, courier, overnight delivery service or registered or certified mail, return receipt requested. Any notice or other communication under this License shall be deemed given when received or refused and shall be directed to the following addresses:
(a) If to Fusion: Fusion Telecommunications International, Inc. Attention: General Counsel 420 Lexington Avenue Suite 518 New York, New York 10170 Telefax: 1-212-972-7884
(b) if to Licensee: Teleco Group Inc. 30-50 Whitestone Expressway, Suite 101 Flushing, NY 11358 Telefax: 1-718-358-4625 Attn: Sam Tawfik, CEO and Chairman
COLOCATION LICENSE AGREEMENT
Either party may change its address for purposes of this section by notice similarly given.
22. TERMS AND HEADINGS: The section titles of this License shall have no effect upon the construction or interpretation of any part hereof.
23. SUCCESSORS: This License shall inure to the benefit of and be binding on the parties, and their heirs, successors. Assigns, and legal representatives, but nothing contained in this section shall be construed to permit an assignment or other transfer except as specifically provided herein.
24. SEVERABILITY: Any provision of this License which shall prove to be invalid, void, or illegal shall in no way affect, impair, or invalidate any other provision hereof and the remaining provisions hereof shall remain in full force and effect to the greatest extent permitted by law.
25. RULES AND REGULATIONS: Licensee and its employees, agents, contractors, and invitees shall abide by and observe all reasonable rates and regulations as may be promulgated by Fusion or Fusion's lessor for the maintenance and use of the
26. Facility. Notice of the rules and regulations will be posted or provided to Licensee. Fusion may periodically amend or supplement the rules and regulations at its sole discretion.
27. AMENDMENT AND MODIFICATION: This License may be amended, changed or modified only by an instrument in writing signed by duly authorized representatives of the parties hereto. Licensee expressly agrees to execute any amendment to this License which may be required by a holder of a superior interest in the Facility, which does not materially and adversely affect Licensee's rights under this License, within fifteen (30) days of a written request by Fusion or Fusion may terminate this License on notice to Licensee.
28. ATTORNEYS' FEES: If either party commences an action against the other party arising out of or concerning this License, the prevailing party in such litigation shall be entitled to reasonable attorneys fees and costs in addition to such other relief as may be awarded.
29. USE OF NAME: Licensee shall submit to Fusion all news releases, advertising and other publicity material related to this License wherein Fusion's name is mentioned or language is used from which a connection to Fusion's name therein may, in Fusion's judgment, be inferred or implied. Licensee shall neither publish nor use such material nor use Fusion's name, without the prior written consent of Fusion.
30. COUNTERPARTS: This License may be executed in several counterparts, each of which shall constitute an original but all of which shall constitute one and the same instrument.
31. ENTIRE AGREEMENT: This License contains all of the agreements of the parties concerning the Facility and the Equipment Space, and there are no verbal or other agreements, which modify or affect this License. This License supersedes any and all prior agreements made or executed by or on behalf of the parties hereto regarding the Facility and the Equipment Space.
IN WITNESS WHEREOF, the parties have executed this License as of the date first above written.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. LICENSEE: TELCO GROUP INC. By: ___/ Matthew Rosen /______ By: ___/ Sam Tewfik /_______ Print Name: Matthew Rosen Print Name: Sam Tewfik_______ Title: COO Title: CHIEF EXECUTIVE OFFICER |
COLOCATION LICENSE AGREEMENT
EXHIBIT A
FACILITY LOCATION, AND MONTHLY RECURRING SERVICES FEES
1. Serving Switch Location: 75 Broad Street 19th Floor New York, NY
2. Equipment Space: 1,000 Square Feet (RSF), including enclosed office space. Equipment space is bounded by columns A1, A2, B1, and B2. (see attached drawing)
3. Initial Term: Two (2) years
4. Monthly Recurring License and Service Fees: Year 1 Year 2
Equipment and Office Space 3,250.00 3,354.17 DC/Power 200 AMP 4,000.00 4,000.00 Electricity 900.00 900.00 Monthly Recurring Charge $8,150.00 $8,254.17 |
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We consent to use in this Registration Statement, Amendment 2 of Form S-1 of Fusion Telecommunications International, Inc. of our report dated April 23, 2004, except for paragraph 7 of Note 12 which is as of August 24, 2004, paragraph 2 of Note 13 as to which the date is December 22, 2004, except for paragraph 6 of Note 22 which is as of December 11, 2004, except for paragraphs 7, 8, and 9 of Note 22 which is as of November 1, 2004, except for paragraph 10 of Note 22 which is as of November 10, 2004, except for paragraphs 11, 12, 13 and 14 of Note 22 which is as of January 11, 2005, except for paragraph 15 which is as of July 14, 2004 relating to the consolidated financial statements of Fusion Telecommunications International Inc. and Subsidiaries as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001. We consent to the reference to our Firm under the caption "Experts" in the Prospectus.
/s/ Rothstein, Kass & Company, P.C. Rothstein, Kass & Company, P.C. Roseland, New Jersey January 14, 2005 |