x  Preliminary Proxy Statement

 

o  Confidential, for use of the Commission only (as permitted by Rule 14a-6(e)(2))

 

o  Definitive Proxy Statement

 

o  Definitive Additional Materials

 

o  Soliciting Material pursuant to § 240.14a-12

 

VoIP, INC.

(Name of Registrant as Specified In Its Charter)

 

---

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

(1)	Title of each class of securities to which transaction applies:

 

(2)	Aggregate number of securities to which transaction applies:

 

(3)	Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

(4)	Proposed maximum aggregate value of transaction:

 

(5)	Total fee paid:

 

o	Fee paid previously with preliminary materials.

 

o         Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.

(1)	Amount Previously Paid:

 

(2)	Form, Schedule or Registration Statement No.:

 

(3)	Filing Party:

 

(4)	Date Filed:

 

---

VoIP, Inc.

151 So. Wymore Rd., Suite 3000

Altamonte Springs, Florida 32714

 

Notice of Annual Meeting of Shareholders

to be held on ______________, 2007

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of VoIP, Inc., a Texas corporation (the “Company”), will be held on ________________, 2007, at 10:00 a.m., Eastern Standard Time, at the Company's offices at 151 So. Wymore Rd., Suite 3000, Altamonte Springs, Florida 32714 for the purpose of considering and voting upon the following matters:

 

1. To approve the election of Anthony Cataldo, Gary Post, Stuart Kosh, and Nicholas A. Iannuzzi, Jr. to the board of directors of the Company to serve for 2007 and until their successors are elected and qualified;

 

2. To approve the VoIP, Inc. 2006 Equity Incentive Plan;

 

3. To approve the Amended and Restated Articles of Incorporation of the Company to authorize 25,000,000 shares of preferred stock (which approval does not extend to the approval of any issuances of preferred stock);

 

4. To approve the Amended and Restated Articles of Incorporation of the Company to increase the number of authorized shares of common stock that the Company is authorized to issue to 400,000,000 shares of common stock (which approval does not extend to the approval of the issuance of any shares of common stock);

 

5.  To consider and act on a proposal to approve the selection of Berkovits, Lago & Company, LLP as the Company's independent auditors for 2006; and

 

6. To transact such other business as may properly come before the annual meeting and any adjournment or adjournments of the meeting.

 

The proxies will not be used to vote to adjourn the meeting in order to continue to solicit votes to approve the matters to be voted on. Our board of directors has no knowledge of any other business to be transacted at the annual meeting.

 

Our board of directors has fixed the close of business on January 16, 2007 as the record date for the determination of shareholders entitled to notice of and to vote at the annual meeting and at any adjournment or adjournments of the meeting. Our stock transfer books will remain open.

 

A copy of our Annual Report on Form 10-KSB, including Amendments No. 1 and No. 2 related thereto, for the fiscal year ended December 31, 2005, which contains consolidated financial statements and other information of interest to shareholders, accompanies this notice and the enclosed Proxy Statement.

 

All shareholders are cordially invited to attend the annual meeting.

			By Order of the Board of Directors
			Robert V. Staats,
			Secretary

 

Altamonte Springs, Florida

 

January __, 2007

 

Your vote is very important. Whether or not you plan to attend the annual meeting, in order to ensure representation of your shares, please promptly complete, date and sign the enclosed proxy card and return it in the accompanying envelope or follow the instructions provided for voting by phone or via the Internet, if applicable. No postage need be affixed if the proxy card is mailed in the United States.

---

 

VoIP, INC.

151 So. Wymore Rd., Suite 3000

Altamonte Springs, Florida 32714

 

PROXY STATEMENT

FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON ______________

 

TABLE OF CONTENTS

SUMMARY		1
INFORMATION ABOUT SOLICITATION AND VOTING		1
INFORMATION ABOUT THE ANNUAL MEETING		1
PROPOSAL NO. ONE: ELECTION OF DIRECTORS		5
CORPORATE GOVERNANCE AND BOARD OF DIRECTORS' MATTERS		6
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT		7
MANAGEMENT		9
EXECUTIVE COMPENSATION		10
TRANSACTIONS WITH RELATED PERSONS, PROMOTORS AND CERTAIN CONTROL PERSONS		15
STOCK PERFORMANCE GRAPH		16
PROPOSAL NO. TWO: TO APPROVE THE COMPANY'S 2006 EQUITY INCENTIVE PLAN		17
PROPOSAL NO. THREE: TO APPROVE THE COMPANY'S AMENDED AND RESTATED
ARTICLES OF INCORPORATION TO AUTHORIZE 25,000,000 SHARES OF PREFERRED STOCK		20
PROPOSAL NO. FOUR: TO APPROVE THE COMPANY'S AMENDED AND RESTATED
ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK THAT THE COMPANY IS AUTHORIZED TO ISSUE TO 400,000,000  SHARES OF COMMON STOCK		32
PROPOSAL NO. FIVE: TO APPROVE THE SELECTION OF BERKOVITS,
LAGO & COMPANY LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR 2006		37
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE		38
AVAILABLE INFORMATION		38

---

 

SUMMARY 

 

The Company

 

VoIP, Inc.

151 So. Wymore Rd., Suite 3000

Altamonte Springs, FL 32714

(407) 389-3232

 

We are an emerging global provider of advanced communications services utilizing Voice over Internet Protocol (“VoIP”) technology. Internet Protocol telephony is the real time transmission of voice communications in the form of digitized “packets” of information over the Internet or a private network, similar to the way in which e-mail and other data is transmitted. VoIP services allow consumers and businesses to communicate at reduced costs compared to legacy telephony networks. For more information on the Company, see our 2005 Annual Report on Form 10-KSB, as amended, which accompanies this Proxy Statement.

 

INFORMATION ABOUT SOLICITATION AND VOTING

 

Solicitation

 

This Proxy Statement is furnished in connection with the solicitation of proxies by the board of directors of VoIP, Inc. (the “Company”) for use at the Annual Meeting of Shareholders to be held on ______________ at 10:00 a.m., Eastern Time, at 151 So. Wymore Road, Suite 3000, Altamonte Springs, Florida 32714 and at any adjournment or adjournments of the annual meeting.

 

The notice of meeting, this Proxy Statement, the enclosed proxy card, our 10-Q for the quarter ended September 30, 2006 and our annual report to shareholders for the year ended December 31, 2005 which includes a copy of our Annual Report on Form 10-KSB for the same fiscal year, as amended, as filed with the Securities and Exchange Commission (the “SEC”), including financial statements and schedules, but excluding exhibits are first being sent or given to shareholders on or about _______, 2007. We will, upon written request of any shareholder who has not otherwise received a copy of our annual report on Form 10-KSB for the fiscal year ended December 31, 2005, furnish without charge a copy of that annual report on Form 10-KSB (including amendments thereto), including financial statements and financial statement schedules, but excluding exhibits, as filed with the SEC. Please address your request to VoIP, Inc., 151 So. Wymore Rd., Suite 3000, Altamonte Springs, FL 32714, Attention: Robert Staats, Chief Accounting Officer. Exhibits will be provided upon written request and payment of an appropriate processing fee.

 

INFORMATION ABOUT THE ANNUAL MEETING

 

WHEN IS THE ANNUAL MEETING?

 

________________________________, 10:00 a.m. Eastern Standard Time

WHERE WILL THE ANNUAL MEETING BE HELD?

The meeting will be held at VoIP, Inc., 151 So. Wymore Road, Suite 3000, Altamonte, Springs, Florida 32714

WHAT ITEMS WILL BE VOTED UPON AT THE ANNUAL MEETING?

 

At the annual meeting and any adjournment or adjournments of the annual meeting, our shareholders will be asked to consider and vote upon the following matters:

 

1. To approve the election of Anthony Cataldo, Gary Post, Stuart Kosh and Nicholas A. Iannuzzi, Jr. to the board of directors of the Company to serve for 2007 and until their successors are elected and qualified;

 

2. To approve the VoIP, Inc. 2006 Equity Incentive Plan;

 

3. To approve the Amended and Restated Articles of Incorporation of the Company to authorize 25,000,000 shares of preferred stock (which approval does not extend to the approval of any issuances of shares of preferred stock);

4. To approve the Amended and Restated Articles of Incorporation of the Company to increase the number of authorized shares of common stock that the Company is authorized to issue to 400,000,000 shares of common stock (which approval does not extend to the approval of any issuance of any shares of common stock); and

 

1

---

 

5. To consider and act on a proposal to approve the selection of Berkovits, Lago & Company, LLP as the Company's independent auditors for 2006; and

 

6. To transact such other business as may properly come before the annual meeting and any adjournment or adjournments of the meeting.

The proxies will not be used to vote to adjourn the meeting in order to continue to solicit votes to approve the matters to be voted on.

 

WHO CAN VOTE?

 

Only holders of record of our common stock at the close of business on January 16, 2007 will be entitled to notice of and to vote at the annual meeting and any adjournments of the annual meeting. You are entitled to one vote for each share of common stock held on that date. On January 16, 2007, there were ____________ shares of our common stock outstanding and entitled to vote.

 

YOUR BOARD OF DIRECTORS HAS APPROVED EACH OF THE PROPOSALS SET FORTH HEREIN.

 

HOW DO I VOTE BY PROXY?

You may vote your shares by mail by marking, signing and dating the enclosed proxy card as promptly as possible and returning it in the enclosed postage-paid envelope. Proxies should not be sent by the stockholder to the Company, but to Securities Transfer Corporation, P.O. Box 701629, Dallas, Texas 75370. A pre-addressed, postage-paid envelope is provided for this purpose.

For each item of business, you may vote “FOR" or "AGAINST" or you may "ABSTAIN" from voting.

If you return your signed proxy card but do not specify how you want to vote your shares, we will vote them:

 

·	“FOR” the election of the four directors to serve for 2007 and until their successors are elected and qualified;

 

·	“FOR” the approval of the Company's 2006 Equity Incentive Plan;

 

·	“FOR” the approval of the Amended and Restated Articles of Incorporation of the Company to authorize 25,000,000 shares of preferred stock (which approval does not extend to the approval of any issuances of shares of preferred stock);

·

“FOR” the approval of the Amended and Restated Articles of Incorporation of the Company to increase the number of shares of common stock that the Company is authorized to issue to 400,000,000 shares of common stock (which approval does not extend to the approval of any issuances of shares of common or preferred stock); and

·	“FOR” the approval of the selection of Berkovits, Lago & Company, LLP as the Company's independent auditors for 2006.

If any matters other than those set forth above are properly brought before the annual meeting, the individuals named in your proxy card may vote your shares in accordance with their best judgment.

 

HOW DO I CHANGE OR REVOKE MY PROXY?

You can change or revoke your proxy at any time before it is voted at the special meeting by:

1. Submitting another proxy by mail with a more recent date than that of the proxy first given;

2. Sending written notice of revocation to VoIP, Inc. 151 So. Wymore Road, Suite 3000, Alamonte Spring, Florida 32714: Attention Robert Staats; or

3. Attending the annual meeting and voting in person. If your shares are held in the name of a bank, broker or other holder of record, you must obtain a proxy, executed in your favor, from the holder of record to be able to vote at the meeting.

 

2

---

WHAT CONSTITUTES A "QUORUM" FOR THE SPECIAL MEETING?

The holders of a majority of the issued and outstanding shares of the Company's common stock entitled to vote at the annual meeting present or represented by proxy, constitutes a quorum. A quorum is necessary to conduct business at the annual meeting. You will be considered part of the quorum if you have voted by proxy. Abstentions, broker non-votes and votes withheld from director nominees count as "shares present" at the annual meeting for purposes of determining a quorum. However, abstentions, withholding of a vote and broker non-votes do not count in the voting results. A broker non-vote occurs when a broker or other nominee who holds shares for another does not vote on a particular item because the broker or nominee does not have discretionary authority for that item and has not received instructions from the owner of the shares.

 

HOW MANY VOTES ARE REQUIRED?

 

On January 16, 2007, the record date for determination of shareholders entitled to vote at the annual meeting, there were outstanding and entitled to vote __________ shares of our common stock. The holders of a majority of our common stock issued and outstanding and entitled to vote at the annual meeting will constitute a quorum for the transaction of business at the annual meeting. Common stock represented in person or by proxy, including abstentions and broker non-votes with respect to one or more of the matters presented for shareholder approval, will be counted for purposes of determining whether a quorum exists at the annual meeting. When we refer to “broker non-votes,” we mean common stock held in “street name” by brokers or nominees who indicate on their proxies that they do not have discretionary authority to vote the common stock as to a particular matter.

 

·

The election of Anthony Cataldo, Gary Post, Stuart Kosh, and Nicholas A. Iannuzzi, Jr to the board of directors for 2007 will require an affirmative vote of the majority of the votes cast in person or by proxy, provided that a quorum is present at the annual meeting. Therefore, an abstention or withholding of a vote will not be counted for the purpose of determining whether the requisite vote has been obtained and will have no effect on the outcome of the vote.

 

·

The adoption of the 2006 Equity Incentive Plan will require an affirmative vote of the majority of the votes cast in person or by proxy, provided that a quorum is present at the annual meeting. Therefore, an abstention or withholding of a vote will not be counted for the purpose of determining whether the requisite vote has been obtained and will have no effect on the outcome of the vote.

 

·

The proposal to approve the selection of Berkovits, Lago & Company, LLP as the Company's independent auditors for 2006 will require the majority of the votes cast in person or by proxy, provided that a quorum is present at the annual meeting. Therefore, an abstention or withholding of a vote will not be counted for the purpose of determining whether the requisite vote has been obtained and will have no effect on the outcome of the vote.

 

·

The proposal to approve the Amended and Restated Articles of Incorporation to authorize 25,000,000 shares of preferred stock (which approval does not extend to the approval of any issuances of shares of preferred stock) and the proposal to approve the Amended and Restated Articles of Incorporation to increase the number of authorized shares of the Company's common stock to 400,000,000 shares (which approval does not extend to the approval of any issuance of shares of common stock) require the affirmative vote of at least a majority of the Company's outstanding shares of Common Stock. Therefore, any abstentions, “broker non-votes” (shares held by brokers or nominees as to which they have no discretionary authority to vote on a particular matter and have received no instructions from the beneficial owners or persons entitled to vote thereon), or other limited proxies will have the effect of a vote against the proposals to approve the Amended and Restated Articles of Incorporation.

 

Broker non-votes with respect to a particular matter will not be counted as votes in favor of that matter and will not be counted as votes cast on that matter. Accordingly, broker non-votes will have no effect on the matters specified in the notice of meeting.

 

DISSENTER'S RIGHT OF APPRAISAL.

 

No action will be taken in connection with the proposal described in this Proxy Statement for which Texas law, our Articles of Incorporation or Bylaws provide a right of a shareholder to dissent and obtain appraisal of or payment for such shareholder's shares.

3

---

 

HOUSEHOLDING OF PROXY MATERIALS.

 

Some banks, brokers and other nominee record holders may be participating in the practice of “householding” Proxy Statements and annual reports. This means that only one copy of this Proxy Statement or our annual report may have been sent to multiple shareholders in your household. We will promptly deliver a separate copy of either document to you if you call or write us at the following address or phone number: VoIP, Inc., 151 So. Wymore Rd., Suite 3000, Altamonte Springs, FL 32714, phone: (407) 389-3232, Attention: Robert Staats. If you want to receive separate copies of our annual report and Proxy Statement in the future, or if you are receiving multiple copies and would like to receive only one copy for your household, you should contact your bank, broker or other nominee record holder, or you may contact us at the above address and phone number.

 

SHAREHOLDER PROPOSALS FOR THE ANNUAL MEETING IN 2008.

 

Written notice of proposals of shareholders submitted outside the processes of Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for consideration at our annual meeting of shareholders in 2008 must be received by us within a reasonable time before the Company begins to print and mail the Proxy Statement in order to be considered timely for purposes of Rule 14a-8 under the Exchange Act. The persons designated in our proxy card will be granted discretionary authority with respect to any shareholder proposal with respect to which we do not receive timely notice. Shareholder proposals submitted pursuant to Rule 14a-8 under the Exchange Act for inclusion in our proxy materials for our annual meeting of shareholders in 2008 must be received by our corporate secretary at our principal offices by December 31, 2007.

 

OTHER MATTERS.

 

Our board of directors knows of no other business which will be presented for consideration at the annual meeting other than those matters described above. However, if any other business should come before the annual meeting, it is the intention of the person named in the enclosed proxy card to vote, or otherwise act, in accordance with his best judgment on such matters.

 

WHO PAYS FOR THE SOLICITATION OF PROXIES?

We will bear the costs of soliciting proxies. In addition to solicitations by mail, our directors, officers and employees may, without additional remuneration, solicit proxies by telephone, facsimile and personal interviews. We will reimburse these persons for their reasonable expenses in connection with any of these solicitations. In addition, we will request brokerage houses, custodians, nominees and fiduciaries to forward copies of the proxy materials to those persons for whom they hold shares and request instructions for voting the proxies, and we will reimburse brokerage houses and other persons for their reasonable expenses in connection with this distribution.

 

4

---

PROPOSAL NO. ONE:

APPROVAL OF THE ELECTION OF DIRECTORS

 

(ITEM ONE ON THE PROXY CARD)

 

Our board of directors presently consists of three directors. After the annual meeting, we expect that our board of directors will consist of four directors elected annually for a one year term. The persons named in the enclosed proxy will vote to elect as directors Mr. Anthony Cataldo, Mr. Gary Post, Mr. Stuart Kosh and Mr. Nicholas A. Iannuzzi, Jr., unless the proxy is marked otherwise. The directors will be elected at the upcoming annual meeting and will serve until the annual meeting of shareholders to be held in fiscal year 2008 and until their respective successors have been elected and qualified.

 

Each of the nominees has indicated his willingness to serve if elected. However, if any nominee should be unable to serve, the person acting under the proxy may vote the proxy for a substitute nominee. Our board of directors has no reason to believe that any nominee will be unable to serve if elected.

 

Current Members of the Board

 

The Board of Directors

 

Each member of our board of directors, including the nominees for election as director, have provided the following information: age; all positions or offices, including committee memberships held; length of service as a director of the Company; principal occupation and business experience for at least the past five years; and the names of other public reporting companies of which the director serves as a director.

 

The members of our board of director are identified below.

 

Name		Age		Position with Company		Director Since
Anthony Cataldo		55		Chairman and Chief Executive Officer		September 2006
Gary Post		58		Director		May 2006
Stuart Kosh		50		Director		January 2006

 

 

Nominees for Election to the Board of Directors

 

The nominees for election to our board are listed below.

 

Anthony J. Cataldo, age 55, became our Chief Executive Officer and Chairman in September 2006. During the past five (5) years, Mr. Cataldo has served as non-executive chairman of the board of directors of BrandPartners Group, Inc. (OTC BB:BPTR), a provider of integrated products and services dedicated to providing financial services and traditional retail clients with turn-key environmental solutions from October 2003 through August 2006. Mr. Cataldo also served as non-executive co-chairman of the board of MultiCell Technologies, Inc. (OTC BB: MUCL), a supplier of functional, non-tumorigenic immortalized human hepatocytes from February 2005 through July 2006. Mr. Cataldo has also served as executive chairman of Calypte Biomedical Corporation (AMEX: HIV), a publicly traded biotechnology company, involved in the development and sale of urine based HIV-1 screening tests from May 2002 through November 2004. Prior to that, Mr. Cataldo served as the Chief Executive Officer and Chairman of the Board of Directors of Miracle Entertainment, Inc., a Canadian film production company, from May 1999 through May 2002 where he was the executive producer or producer of several motion pictures. From August 1995 to December 1998, Mr. Cataldo served as President and Chairman of the Board of Senetek, PLC (OTC BB:SNTKY), a publicly traded biotechnology company involved in age-related therapies.

 

Gary Post, age 58, became our President, Chief Executive Officer and Chairman in May 2006 and served in this capacity until September 2006. Mr. Post continues to serve on our board of directors. Since 1999, Mr. Post has been a Managing Director and investment Principal of Ambient Advisors, LLC (“Ambient”), a venture investment and management company. In his capacity as Managing Director at Ambient, Mr. Post has acted as an interim Chief Executive Officer and/or a director for two private early- to mid-stage companies in which Ambient had invested since April 2002, and at OPMI Funding, Inc., a company that acquired in July 2002 the assets of Opticon Medical, Inc., a public medical device company. Since March 2006, he has also been a director of Oxis International, Inc. (OXIS:BB). Prior to Ambient, he served as First Vice President at Drexel Burnham Lambert; Vice President at Kidder Peabody; Managing Director at Houlihan, Lokey, Howard and Zukin; and Director of Research and Consultant at McKinsey & Company. Mr. Post holds an MBA from the UCLA Graduate School of Management and an AB in Economics from Stanford University.

 

5

---

 

Stuart Kosh, age 50, moved to Florida in 1978 to join his father and brother at Kosh Ophthalmic, Inc., a wholesale optical laboratory with annual sales of $15 million, where he managed 100 employees. In 1998, the company was sold to Essilor of America, and Mr. Kosh maintains his position as General Manager. His leadership roles have included involvement with the Big Brothers Big Sisters Program of Broward County as a mentor to needy youth. For the past 15 years, Mr. Kosh has been involved with the National Multiple Sclerosis Society. He has served on its board and chairs its annual golf tournament fundraiser. Presently he is serving on the Temple Dor Dorim Board of Directors.

  

Nicholas A. Iannuzzi, Jr., age 40, is a partner in the law firm of Rothenberg, Estner, Orsi, Arone and Grumbach, LLP of Wellesley, Massachusetts, where he has worked since 2002. From 1997 to 2002, Mr. Iannuzzi maintained his own law practice in Boston, Massachusetts. Mr. Iannuzzi specializes in the areas of corporate and contract law, civil litigation and real estate. He serves as general counsel to numerous corporations and has advised his clients on various business matters and transactions, including major acquisitions and sales of businesses. Mr. Iannuzzi is a graduate of Boston College and received his J.D. from the Suffolk University Law School.  

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF

THE PROPOSAL TO ELECT ALL OF THE NOMINEES TO THE BOARD OF DIRECTORS.

CORPORATE GOVERNANCE AND BOARD OF DIRECTORS' MATTERS

Board of Directors and Committee Meetings; Committees of the Board

 

During the fiscal year ended December 31, 2004 and through October 2005, Mr. Steven Ivester was the sole director of the Company; consequently, formal board and committee meetings were not held during that time. One formal meeting of the board of directors was held in December 2005. During the fiscal year ending December 31, 2006, there were six board meetings.

Because Mr. Ivester was the only director of the Company, he performed the functions of the audit committee. Mr. Ivester was not an “audit committee financial expert,” as defined by the SEC. Upon identification of the requisite number of suitable candidates, the Company plans to establish an audit committee of independent directors. During the fiscal years ended December 31, 2004 and 2005, the Company did not have a standing compensation or nominating committee. Existing board of directors members participate in the selection of director nominees, with the general objective of achieving a balance of experience, knowledge, integrity and capability on the board. A nominating committee is not considered necessary due to the small size of the company and of our board.

 

Upon election of the nominees for director, the Company plans to establish a compensation committee consisting of two or more independent directors. The compensation committee will operate pursuant to a written charter. Upon the election of the nominees for director, the Company plans to establish an audit committee consisting of two or more independent directors. The audit committee will operate pursuant to a written charter.

 

We do not presently have a policy with respect to attendance by the directors at the annual meetings of shareholders.

 

Procedures for Director Nominations

 

Neither our Articles of Incorporation nor our Bylaws contain any procedures whereby shareholders may recommend nominees for director. We do not pay and do not anticipate paying any fees to third parties for identifying or evaluating candidates for director.

 

Communications with Directors

 

Our board of directors does not provide a formal process by which shareholders may send communications to the board of directors. The Company does not at this time anticipate instituting such a process. However, shareholders may communicate with us or request information at any time by contacting Robert Staats, Chief Accounting Officer, at (407) 389-3232.

 

6

---

Compensation of Directors

 

In connection with their service on our board of directors, each non-employee director elected by the shareholders will receive 300,000 shares of our common stock per year. Also, each non-employee director receives $2,500 per board meeting or board committee meeting attended either by telephone or personally.

Code of Ethics

 

At the board of directors meeting following the annual meeting, it is anticipated that we will adopt a Code of Business Conduct and Ethics, within the meaning of Item 406(b) of Regulation S-K that applies to the Company's directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Upon adoption, a complete copy of the proposed Code of Ethics will be posted at our website at www.voipincorporated.com under “Investor Info.” Any amendments to, or waivers of, the Code of Ethics will be promptly disclosed on our website.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Beneficial Ownership

The following table sets forth information as of December 11, 2006, except as otherwise noted, with respect to the beneficial ownership of our common stock and is based on 99,443,034 shares of common stock issued and outstanding as of December 11, 2006:

·

Each person known by the Company to own beneficially more than five percent of our outstanding common stock;

 

·

Each director and prospective director of the Company;

 

·

The Company's Chief Executive Officer and each person who serves as an executive officer of the Company; and

 

·

All executive officers and directors of the Company as a group.

The number of shares beneficially owned by each shareholder is determined under rules promulgated by the SEC. The information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and any shares as to which the individual has the right to acquire beneficial ownership within 60 days, except as otherwise noted, through the exercise or conversion of any stock option, warrant, preferred stock or other right. The inclusion in the following table of those shares, however, does not constitute an admission that the named shareholder is a direct or indirect beneficial owner of those shares. Unless otherwise indicated, to our knowledge based upon information produced by the persons and entities named in the table, each person or entity named in the table has sole voting power and investment power, or shares voting and/or investment power with his or her spouse, with respect to all shares of capital stock listed as owned by that person or entity.

The address for each of our officers and directors is c/o VoIP, Inc., 151 South Wymore Road, Suite 3000, Altamonte Springs, Florida 32714.

 

7

---

 

Name of Beneficial Owner		Shares of Common Stock Beneficially Owned (1)			Ownership of Common Stock (1,2)
WQN, Inc. (3)			20,820,580			18.2	%
14911 Quorum Drive, Suite 140
Dallas, Texas 75240
Nicholas Iannuzzi **			7,355			*
Stuart Kosh (4)			2,009,727			2.0	%
Shawn Lewis (5,6)			8,265,730			8.1	%
Gary Post (7)			3,300,000			3.2	%
Robert Staats (8)			275,000			*
Anthony Cataldo (6)			*			*
All directors and executive officers as a			12,627,939			12.0	%
group (6 persons) (9)

 

* Less than one percent.

 

** Director nominee.

 

(1)	The Company has issued 99,443,034 shares of common stock; and a total of 100,000,000 shares are authorized. Additional assumed issuances of common stock resulting from the exercise of options and/or warrants and/or the conversion of debt are subject to the authorized limit.

(2)	Based upon 99,443,034 shares of common stock issued and outstanding as of December 11, 2006.

(3)

Consists of 5,787,429 shares of common stock and 15,033,151 shares issuable upon conversion of a convertible promissory note. Conversion shares were calculated by dividing (i) the sum of the note principal of $3,700,000 and interest at 6% from 1/3/06 through 12/11/06 by (ii) the effective common share conversion price of $0.26 per share.

(4)	Consists of (a) 1,347,227 shares of common stock; (b) currently exercisable options to purchase 156,250 shares of common stock; and (c) warrants to purchase 506,250 shares of common stock.

(5)	Consists of 6,230,512 shares of common stock and currently exercisable options to purchase 2,035,218 shares of common stock.

(6)

Pursuant to the Company’s employment agreements with Mr. Lewis and Mr. Cataldo, each is entitled to 10,000,000 stock options, which options may be granted by the Board of Directors only upon the authorization of a sufficient number of underlying shares of common stock. These stock options are not included with the shares, if any, reported as beneficially owned herein.

(7)	Consists of (a) 300,000 shares of common stock; (b) currently exercisable options to purchase 1,500,000 shares of common stock; and (c) warrants to purchase 1,500,000 shares of common stock.

(8)	Consists of warrants to purchase 125,000 shares of common stock and currently exercisable options to purchase 150,000 shares of common stock.

(9)	Represents the combined beneficial ownership as of December 11, 2006, of the executive officers and the Company’s three outside directors and one director nominee (a total of six persons).

 

8

---

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our directors, executive officers and holders of more than 10% of our common stock to file with the SEC reports of their ownership and changes in ownership of our securities. Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file. To our knowledge, based solely on a review of the copies of such reports and written representations that no other reports were required, we believe that all filing requirements applicable to our officers, directors and greater than 10% shareholders were satisfied during the years ended December 31, 2005, except as noted below:

 

· Seventeen (17) Forms 4 required under Section 16(a) were filed late by Mr. Steven Ivester, and Mr. Ivester noted in reports filed by him that he had realized certain “short swing profits,” all of which have been repaid to the Company. Two Forms 4 were filed late by Mr. Bill Burbank; one Form 4 was filed late by Mr. David Sasnett; and one Form 4 was filed late by Mr. John Todd. In addition, Forms 3 were filed late by each of Mr. Gary Post, Mr. David Ahn, Mr. Robert Staats, Mr. Bill Burbank, Mr. David Sasnett, and WQN, Inc.

 

MANAGEMENT

Executive Officers of the Registrant

 

The following table sets forth information concerning our executive officers and directors as of the periods set forth below:

Name		Age		Position with Company		Dates
Anthony Cataldo		55		Chairman and Chief Executive Officer		September 2006 to present
Shawn M. Lewis		38		Chief Operating Officer; Chief Technology Officer		May 2005 to present
Robert V. Staats		52		Chief Accounting Officer		May 2006 to present

 

9

---

 

Anthony J Cataldo. Please see Mr. Cataldo's biography on page 5.

 

Shawn M. Lewis oversees all of our technological and engineering activities. Mr. Lewis founded and was the President and CEO of Caerus, Inc. and its three subsidiaries, Volo Communications, Inc., Caerus Networks, Inc., and Caerus Billing & Mediation, Inc. from 2001 to 2005. We acquired Caerus, Inc. in May 2005 at which time Mr. Lewis became our Chief Technology Officer. Mr. Lewis also became our Chief Operating Officer in July 2006. Prior to Caerus, Mr. Lewis co-founded XCOM Technologies, a competitive local exchange carrier, where he served in an executive capacity and led the development of patents for the first softswitch and SS7 Media Gateway. XCOM Technologies was sold to Level 3 in 1998. His next venture, set-top box vendor River Delta, was sold to Motorola. His most recent venture, Caerus, Inc., empowers carriers and service providers to begin selling advanced Voice over Internet Protocol related services. In 2004, Mr. Lewis pled guilty to a felony drug possession offense and received probation. Mr. Lewis was recently engaged in a Chapter 11 bankruptcy in Orlando, Florida.

 Robert V. Staats has been the Director of Finance of the Company's Caerus, Inc. unit since June 2005 and became our Chief Accounting Officer in May 2006. Mr. Staats brings 30 years of financial management experience to the Company including during the past six years, CFO or Controller responsibilities at three startup telecommunications companies (including the Company). From 1996 to 2000, Mr. Staats was the Director, Finance with the telecommunications company Electric Lightwave, Inc. Before that at PacifiCorp (then a $3.4 billion company) he was Director of Financial Reporting and Accounting, responsible for consolidated financial statements and SEC reporting. Mr. Staats also has five years' experience with KPMG Peat Marwick. He graduated with high honors from the University of Washington with a bachelor's degree in Accounting and is a member of the Washington Society of Certified Public Accountants and the American Society of Certified Public Accountants. Mr. Staats was recently engaged in a Chapter 13 bankruptcy in Orlando, Florida.

EXECUTIVE COMPENSATION

 

The following table sets forth information with respect to the compensation for the last three fiscal years of our Chief Executive Officer and each person who served as an executive officer of our Company during the last three fiscal years and whose total annual salary and bonus exceeded $100,000 (the “Named Executive Officers”). In accordance with the rules of the SEC, the compensation set forth in the table below does not, unless otherwise noted, include medical, group life or other benefits that are available to all of our salaried employees, and perquisites and other personal benefits, securities or property that do not exceed the lesser of $50,000 or 10% of the total annual salary and bonuses for each of the individuals shown in the table.

 

Summary Compensation Table

		Annual Compensation									Long Term Compensation
Name and Principal Position		Fiscal Year			Salary			Bonus			Securities Underlying Options or Warrants			All Other Compensation
Steven Ivester(1) Former Chief Executive Officer			2005 2004 2003		$	231,722 125,000 —		$	250,000 — —			— — —		$	33,563 2,475 —
Bill Burbank(2) Former Chief Operating Officer			2005 2004 2003			— 146,156 2,116			1,923 — —			— — —			— — —
Osvaldo Pitters(3) Former Chief Financial Officer; Former Senior Vice President of Finance			2005 2004 2003			100,000 50,000 —			1,923 — —			— — —			— — —
Shawn Lewis Chief Technology Office; Chief Operating Officer			2005 2004 2003			115,385 — —			37,115 — —			— — —			— — —
B. Michael Adler(4) Former Chairman; Chief Executive Officer			2005 2004 2003			48,738 — —			2,769 — —			— — —			— — —

 

---

(1)	Mr. Ivester resigned his position as Chief Executive Officer in October 2005 and his position as director in December 2005.

 

10

---

 

(2)	Mr. Burbank resigned his position in January 2006.

(3)	Mr. Pitters resigned his position in March 2006.

(4)	Mr. Adler resigned his position as Chairman, Chief Executive Officer and Director in May 2006.

11

---

 

Option / SAR Grants in Last Fiscal Year

 

Name		Number of Securities Underlying Options/SARs Granted			% of Total  Options/SARs  Granted to  Employees in  Fiscal Year			Exercise Price			Expiration Date			Grant Date Value
B. Michael Adler(1)			500,000	(5)		12.3	%	$	1.56			October 18, 2015		$	435,000
Former Chief Executive Officer			500,000	(6)		12.3	%	$	1.50			October 18, 2010		$	480,000
Hal Bibee(2)			500,000	(5)		12.3	%	$	1.56			November 22, 2015		$	420,000
Former President			1,000,000	(6)		24.5	%	$	1.50			November 22, 2010		$	930,000
David Sasnett(3)			300,000	(5)		7.4	%	$	1.53			October 18, 2015		$	261,000
Former Chief Financial Officer			450,000	(6)		11.0	%	$	1.53			October 18, 2010		$	432,000
Bill Burbank(4)			500,000	(6)		12.3	%	$	1.50			October 18, 2010		$	480,000
Former Chief Operating Officer

 

(1)	Mr. Adler resigned his position as Chairman and Chief Executive Officer in May 2006.
(2)	Mr. Bibee resigned his position as President in May 2006.
(3)	Mr. Sasnett resigned his position as Chief Financial Officer in May 2006.
(4)	Mr. Burbank resigned his position as Chief Operating Officer in January 2006.
(5)	Represents options granted.
(6)	Represents warrants granted.

12

---

 

Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values

 

		Shares Acquired on			Value			Number of Securities Underlying Exercised Options/SARs at FY-End						Value of Unexercised In-the-Money Options/SARs at FY End
Name		Exercise			Realized			Exercisable			Unexercisable			Exercisable			Unexercisable
B. Michael Adler(1)			-		$	-			625,000			375,000		$	-		$	-
Former Chief Executive Officer
Hal Bibee(2)			-		$	-			1,125,000			375,000		$	-		$	-
Former President
David Sasnett(3)			-		$	-			525,000			225,000		$	-		$	-
Former Chief Financial Officer
Bill Burbank(4)			-		$	-			750,000			250,000		$	-		$	-
Former Chief Operating Officer
Osvaldo Pitters(5)			-		$	-			250,000			250,000		$	52,500		$	52,500
Former Senior VP of  Finance

 

(1)	Mr. Adler resigned his position as Chairman and Chief Executive Officer in May 2006.
(2)	Mr Bibee resigned his position as President in May 2006.
(3)	Mr Sasnett resigned his position as Chief Operating Officer in May 2006.
(4)	Mr. Burbank resigned his position as Chief Operating Officer in January 2006.
(5)	Mr. Pitters resigned his position as Senior Vice President of Finance in May 2006.

 

The Company's current Stock Option Plan (the "2004 Option Plan") provides for the grant to eligible employees and directors of options for the purchase of common stock. The 2004 Option Plan covers, in the aggregate, a maximum of 4,000,000 shares of common stock and provides for the granting of both incentive stock options (as defined in Section 422 of the Internal Revenue Code of 1986) and nonqualified stock options (options which do not meet the requirements of Section 422). Under the 2004 Option Plan, the exercise price may not be less than the fair market value of the Common Stock on the date of the grant of the option.

The board of directors administers and interprets the 2004 Option Plan and is authorized to grant options thereunder to all eligible employees of the Company, including officers. The board of directors designates the optionees, the number of shares subject to the options and the terms and conditions of each option. Each option granted under the 2004 Option Plan must be exercised, if at all, during a period established in the grant which may not exceed 10 years from the later of the date of grant or the date first exercisable. An optionee may not transfer or assign any option granted and may not exercise any options after a specified period subsequent to the termination of the optionee's employment with the Company.

 

The board of directors is proposing a new equity incentive plan. See PROPOSAL NO. TWO.

 

Employment, Change of Control and Severance Arrangements

 

In September 2006, we entered into an employment agreement with Mr. Cataldo, our Chairman and Chief Executive Officer. The Agreement is for a term of three (3) years and provides for, among other things: (i) annual base compensation to Mr. Cataldo of $250,000, (ii) a monthly vehicle allowance of $1,500, and (iii) a quarterly bonus of $15,000. The Agreement also provides for the award of 10,000,000 stock options which can only be issued upon sufficient underlying shares of common stock being authorized and available which would require shareholder approval. The options will be exercisable to purchase 10,000,000 shares of the Company's common stock at $0.01 a share for a period of five (5) years from the effective date of the Agreement.  The options contain a cashless exercise provision and certain anti-dilution protections. Mr. Cataldo was also granted cost free piggyback registration rights with respect to the common stock underlying the options. Pursuant to the employment agreement, Mr. Cataldo is entitled to receive additional options during the term of the Agreement to assure that he has the right to exercise options to maintain a minimum of 5% beneficial ownership of the Company's issued and outstanding shares of common stock.

 

13

---

 

In May 2006, we entered into an employment agreement with Mr. Lewis, the Company's Chief Technology Officer. This agreement was modified in July 2006 to add the title Chief Operating Officer, and the initial term was extended to December 31, 2007 (unless terminated earlier pursuant to its terms). Mr. Lewis receives an annual salary of $200,000, a monthly car allowance of $1,500, and is eligible to participate in the Company's various benefit plans that are available to other executive officers of the Company. Mr. Lewis is also eligible to receive performance-based stock options under the Company's stock option plan, based on the Company's profitability and other measures as determined by the board of directors and Mr. Lewis. Mr. Lewis will be entitled to receive severance payments if his employment is terminated in certain circumstances, including in connection with a change of control of the Company. The employment agreement contains customary confidentiality and non-competition covenants. In September 2006, we entered into an amended employment agreement with Mr. Lewis, whereby the term of Mr. Lewis' agreement was extended for a period of three (3) years from the effective date of the Amended Agreement. The Amended Agreement also provides for: (i) an increase in annual base compensation from $200,000 to $250,000, and (ii) the award of 10,000,000 stock options to be issued upon sufficient underlying shares of common stock being authorized and available. The options will be exercisable to purchase 10,000,000 shares of the Company's common stock at $0.01 a share for a period of five (5) years. The options contain a cashless exercise provision and certain anti-dilution protections. Mr. Lewis was also granted cost free piggyback registration rights with respect to the common stock underlying the options. The Amended Agreement also provides that Mr. Lewis has the right to receive additional options during the term of the Agreement to assure that he has the right to exercise options to maintain a minimum of 8% beneficial ownership of the Company's issued and outstanding shares of common stock.

 

In May 2006 we entered into an employment agreement with Gary Post who became our President, Chief Executive Officer and Chairman and served in this capacity until September 2006. During his employment with the Company Mr. Post served under an employment agreement. The employment agreement was for a term of three years (unless terminated earlier pursuant to its terms) and provided for a salary of $16,667 per month through December 31, 2006, increasing to $18,000 per month on January 1, 2007. Upon execution of the agreement, Mr. Post was issued 300,000 shares of restricted common stock, warrants to purchase 1,500,000 shares of the Company's common stock at a purchase price of $1.00 per share, and non-qualified stock options to purchase 1,500,000 shares at $1.00 per share.

 

In May 2006 we entered into an employment agreement with Robert Staats who became our Chief Accounting Officer. The agreement is for a term of three years (unless terminated earlier pursuant to its terms). Mr. Staats receives a salary of $11,667 per month through December 31, 2006, increasing to $12,917 per month on January 1, 2007. Upon execution of the agreement, Mr. Staats was issued options to purchase 100,000 shares of the Company's common stock at a purchase price equal to $1.02 per share, and 150,000 warrants issued ratably over the six months following execution of the agreement at prices equal to the closing price of the common stock at the end of each such month. Mr. Staats will also be able to receive option grants on a yearly basis, as determined by the board of directors. Mr. Staats is eligible to participate in the Company's various benefit plans that are available to other executive officers of the Company.

 

In May 2006, we entered into an employment agreement with David Ahn who became our Vice President - Corporate Planning. Mr. Ahn's employment with us was terminated in September 2006. The employment agreement was for a term of three years (unless terminated earlier pursuant to its terms). The employment agreement also provided that Mr. Ahn would receive a salary of $8,500 per month through December 31, 2006, increasing to $10,000 per month beginning January 1, 2007. Upon execution of the agreement, Mr. Ahn was issued warrants to purchase 500,000 shares of the Company's common stock and options to purchase 500,000 shares of the Company's common stock at a purchase price equal to $1.00 per share. The employment agreement also provided that Mr. Ahn would be able to receive option grants on a yearly basis, as determined by the board of directors.

Steven Ivester resigned from his position as our Chief Executive Officer on October 18, 2005 and on that date entered into a three-year consulting agreement with our Company, whereby Mr. Ivester provided general business strategy, financing and product development advice. This agreement provided for the payment of fees and a car allowance totaling $230,000 annually. This agreement was terminated in September 2006. Mr. Ivester was entitled to receive a lump sum payment of any amounts due on the unexpired term of this agreement if the agreement was terminated under certain circumstances.

 

On October 18, 2005, we entered into an employment agreement with Mr. Adler, who became our Chief Executive Officer and served in this capacity until May 2006. This agreement, which has been terminated, was for a term of three years (unless terminated earlier pursuant to its terms). Upon execution of the agreement, Mr. Adler was issued 500,000 shares of restricted common stock and warrants to purchase 500,000 shares of common stock, at a price of $1.50 per share. In addition, Mr. Adler was granted non-qualified stock options to purchase 500,000 shares of common stock at an exercise price of $1.56.

 

On October 18, 2005, we entered into an employment agreement with Mr. Sasnett, who became our Chief Financial Officer and served in this capacity until May 2006. This agreement, which has since been terminated, was for a term of three years (unless terminated earlier pursuant to its terms). The agreement provided that Mr. Sasnett was to receive a salary of $10,416.66 per month through December 31, 2005, and would receive a salary of $12,083.33 per month during the year ending December 31, 2006, $13,750 per month during the year ending December 31, 2007 and $15,416.67 per month during the year ending December 31, 2008, provided the agreement is in effect. Upon execution of the agreement, Mr. Sasnett was granted non-qualified stock options to purchase 300,000 shares of common stock, at an exercise price of $1.53 per share. Mr. Sasnett was issued warrants to purchase 300,000 shares of common stock, at an exercise price of $1.53 per share and was granted additional warrants to purchase an aggregate of 150,000 shares of common stock, at a price of $1.53 per share, in six monthly increments beginning in November 2005.

 

14

---

 

On October 18, 2005, we entered into an employment agreement with Mr. Burbank, pursuant to which he served as our Chief Operating Officer. Mr. Burbank resigned as our Chief Operating Officer in January 2006. This agreement was for a term of three years (unless terminated earlier pursuant to its terms) and provided for a salary of $12,500.00 per month through December 31, 2005, and $15,000.00 per month thereafter. Upon execution of the agreement, Mr. Burbank was issued 500,000 shares of restricted common stock and issued warrants to purchase 500,000 shares of common stock at a purchase price of $1.50.

 

On November 22, 2005, we entered into an employment agreement with Mr. Bibee, who became our President. Mr. Bibee resigned as our President in May 2006. This agreement was for a term of three years (unless terminated earlier pursuant to its terms). Mr. Bibee received a salary of $13,750.00 per month through December 31, 2005 and received an annual salary of $180,000 thereafter. Upon execution of the agreement, Mr. Bibee was granted non-qualified stock options to purchase 500,000 shares of common stock at an exercise price of $1.56 and was issued warrants to purchase 1,000,000 shares of the Company's common stock, at a price of $1.50 per share. Mr. Bibee will be entitled to receive severance payments if his employment is terminated in certain circumstances.

 

TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS

In October 2005, the Company purchased all of the assets of WQN, Inc. Mr. Adler, our former chairman and chief executive officer, was the Chief Executive Officer of WQN, Inc. and owns approximately 37% of WQN's outstanding common stock. In connection with the transaction, the Company, through an acquisition subsidiary, purchased the assets for a purchase price consisting of (1) a note in the principal amount of $3,700,000 (the “Note”), (2) 1,250,000 shares of the Company's restricted common stock and (3) a warrant to purchase 5,000,000 shares of the Company's common stock at an exercise price of $ $0.001 per share (the “Warrant”). The Note accrues interest at the rate of 6% per annum. In addition, the Company issued WQN, Inc. an additional 500,000 shares of restricted common stock relating to the difference between the amount of accounts receivable transferred in the transaction and the accounts payable. The Note is convertible into common stock or preferred stock (at such time that a series of preferred stock is established). If a series of preferred stock is established, the Note will automatically convert into preferred stock. However, the Note is convertible, at the option of WQN, Inc., into common stock. The Warrant was exercised for common stock. Pursuant to the asset purchase agreement between the Company and WQN, the Company is required to hold a meeting of its shareholders in order to authorize a class of preferred stock that can be used to satisfy the conversion features of the Note.

 

As of December 31, 2004 the Company owed a shareholder $560,000 under a note payable bearing interest at 3.75% and maturing December 31, 2005. The Company owed Steven Ivester $1,000,000 as of December 31, 2005 under a note payable bearing interest at 3.75% and maturing December 31, 2005. The loan to Mr. Ivester was repaid by the Company in January 2006.

 

The Company and Mr. Ivester entered into a consulting agreement on October 18, 2005, which the Company terminated in October 2006. Pursuant to the consulting agreement, Mr. Ivester provided general business strategy, financing and product development advice. Mr. Ivester received $200,000 per year for his services under the consulting agreement, as well as a $2,500 per month vehicle allowance. Mr. Ivester was eligible to receive bonuses and participate in the Company's stock option plan, as determined by the board of directors.

 

Please see “Employment, Change of Control and Severance Arrangements” above for a discussion of arrangements and or employment agreements with our current and former executive officers.

 

Promoters

 

On February 27, 2004, the Company issued and sold 12,500,000 shares of common stock to Steven Ivester in exchange for cash of $12,500 and his agreement to contribute the intellectual property rights and related assets of two start-up companies formed to engage in the telecommunications industry. The shares issued represented approximately 88% of the shares outstanding after the exchange, as a result of which Mr. Ivester became the controlling shareholder of the Company. However, as of October 23, 2006, Mr. Ivester currently beneficially owns less than five percent of the Company's issued and outstanding shares of common stock.

 

On May 25, 2004 (but effective for all purposes as of April 15, 2004), the Company completed the acquisition of two Florida-based subsidiaries, eGlobalphone, Inc. and VoIP Solutions, Inc., both Florida corporations.

 

15

---

 

On August 4, 2004, the Company issued warrants to purchase 2,200,000 shares of common stock for an exercise price of $1.00 per share to each of John Todd and Clive Raines. Mr. Todd's warrants were exchanged for $40,000 and 250,000 shares in a net cashless exercise in February 2005, and Mr. Raines' warrants were exchanged for 1,000,000 shares of common stock on September 16, 2005.

 

Messrs. Ivester, Todd and Raines may be considered to be “promoters” of the Company, although Messrs. Ivestor, Todd and Raines are no longer associated with the Company.

STOCK PERFORMANCE GRAPH

 

(1)

The granting of Awards is discretionary, and we cannot now determine the number or type of Awards we will grant in the future to our executive officers. We expect that from time to time, in our discretion, we will grant Awards to our executive officers under the 2006 Plan under such terms consistent with the plan as we deem appropriate at the time of those grants.

 

(2)	All of these options will be granted with an exercise price equal to the fair market value of our common stock on the date of grant.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE

PROPOSAL TO APPROVE THE COMPANY'S 2006 EQUITY INCENTIVE PLAN.

19

---

 

PROPOSAL NO. THREE:

TO APPROVE THE COMPANY'S AMENDED AND RESTATED

ARTICLES OF INCORPORATION TO AUTHORIZE

25,000,000 SHARES OF PREFERRED STOCK

On December 7, 2005, the Company's board of directors unanimously approved and recommended for adoption by the shareholders the Amended and Restated Articles of Incorporation (the “Amended and Restated Articles”), the text of which is attached to this proxy statement as Appendix B. The following proposal is to approve the Amended and Restated Articles to authorize 25,000,000 shares of “blank check” preferred stock, but does not approve any issuance of any shares of common or preferred stock. Such shares issued or to be issued have previously been authorized by action of the board of directors, and no shareholder approval for such issuances is required or being sought.

As of December 11, 2006, there were 100,000,000 shares of our common stock authorized, of which 99,443,034 shares were issued and outstanding. The Company does not have any authorized shares of preferred stock.

 

The Amended and Restated Articles would authorize 25,000,000 shares of preferred stock. The board of directors would have the authority to issue classes or series of preferred stock in the future having such designations, rights, preferences and relative, participating, option or other special rights of the shares of each such class or series, including such things as voting rights, dividend rights, conversion rights, redemption rights, and other restrictions and features.

 

A copy of the Amended and Restated Articles is included as Appendix B to this proxy statement, and reference is made to Appendix B for a full description of the terms and provisions of the authorized preferred stock. If this proposal is approved by the Company's stockholders, the Company will as soon as practicable after the meeting file the Amended and Restated Articles of Incorporation with the Secretary of State of the State of Texas. Upon filing the Amended and Restated Articles, the Company will also file a Certificate of Designations, Rights and Preferences (the “Certificates of Designation”) to create a Series A Convertible Preferred Stock (the “Series A Preferred”), consisting of 2,000,000 shares of Series A Preferred.

 

The Series A Preferred will feature a 5% cumulative dividend, a liquidation preference in the event the Company is dissolved, a right of the Company to redeem after August 1, 2008 if the price of the common stock closes above $2.00 per share for 20 consecutive trading days, and each share of Series A Preferred will be convertible into 9.43 common shares. The Series A Preferred will have no voting rights.

 

The board of directors believes that the proposal to authorize 25,000,000 shares of preferred stock is in the best interests of the Company and its shareholders.

 

On August 3, 2005, the Company and WQN, Inc. (“WQN”) executed an Asset Purchase Agreement, pursuant to which, among other things, VoIP Acquisition Company, a wholly-owned subsidiary of the Company (“Acquisition Subsidiary”), purchased substantially all of the assets of WQN relating to WQN's “voice over internet protocol” business. This transaction closed in October 2005.

 

The terms and conditions of the Asset Purchase Agreement were the result of arm's-length negotiations between representatives of WQN, Inc. and representatives of the Company. The following is a summary of the terms of the Asset Purchase Agreement that we believe are material. However, the description does not contain all of the terms of the Asset Purchase Agreement and is qualified in its entirety by reference to the copy of the Asset Purchase Agreement attached as Appendix  C to this proxy statement and incorporated herein by reference. You are urged to read the Asset Purchase Agreement in its entirety.

 

The Company purchased WQN, Inc.'s assets pursuant to an asset purchase agreement (the “Asset Purchase Agreement”) for a purchase price consisting of (1) a convertible promissory note in the principal amount of $3,700,000 (the “Note”), (2) 1,250,000 shares of the Company's restricted common stock, and (3) a warrant (the “Warrant”) to purchase 5,000,000 shares of common stock at a price of $.001 per share. In addition, in connection with the closing of the Acquisition, the Company issued WQN, Inc. 500,000 shares of restricted common stock relating to the difference between the amount of accounts receivable transferred in the Acquisition and the accounts payable.

 

The aggregate outstanding principal amount of the Note, together with interest of 6% per annum, will (a) automatically convert into shares of Series A Preferred if the proposal to approve the Amended and Restated Articles is approved and the Company files the Amended and Restated Articles and the Certificate of Designation with the Secretary of State of Texas, or (b) at WQN’s option, convert into shares of common stock at an original conversion price of $1.06 per share. WQN received “favored nations” rights such that for future securities offerings by the Company at prices per share less than this conversion price, in defined instances this common stock conversion price would be adjusted to the lower offering price. In addition, the conversion amount is subject to adjustment for any stock splits, combinations, stock dividends or mergers, consolidations or sales of the Company’s assets. As a result of our Section 3(a)(10) agreements (as described in Proposal No. four) and the favored nations provision discussed above, the Note’s common stock conversion rate was effectively reduced to $0.26 per share. If the Note is converted into shares of Series A Preferred, the number of shares of Series A Preferred into which the Note shall be converted will be equal to the number of common shares convertible or converted hereunder, divided by 9.43. WQN will pay no further consideration if it converts one share of Series A convertible preferred stock into 9.43 shares of the Company’s common sock. The Note in the principal amount of $3,700,000 plus interest is currently convertible into approximately 15,033,151 common shares. Upon the establishment of Series A Preferred, the Company will automatically convert the Note into approximately 1,594,184 shares of Series A Preferred.

 

The Warrant

 

The Warrant was exercisable at any time after its issuance until August 1, 2010 for up to 5,000,000 shares of the Company's common stock at an exercise price of $0.001 per share. The Warrant was exercised in January 2006.

 

Registration Rights

 

The 1,250,000 shares of the Company's common stock that WQN, Inc. received at closing and all shares issuable upon conversion of securities or exercise of warrants are restricted stock and not freely tradable. Pursuant to the Asset Purchase Agreement, WQN, Inc. was granted “piggy-back” registration rights on these shares, together with any shares which WQN, Inc. has the right to obtain through exercise or conversion of the Note or the Warrant or otherwise; provided, however, that  at any time after WQN, Inc. has sold 1,250,000 shares pursuant to any such registration, the maximum number of shares that it may sell pursuant to any subsequent registration request shall not exceed 500,000 shares in any calendar quarter. Additionally, the shares WQN, Inc. requests to be registered will be subject to cut-back, if in the opinion of the Company's managing underwriter, if any, for such offering, the inclusion of the shares requested to be registered, when added to the securities being registered by the Company or the selling security holder(s) in the offering, would exceed the maximum amount of the Company's securities that can be marketed without otherwise materially and adversely affecting the entire offering.

 

20

---

 

Price Guarantee

WQN, Inc. was entitled to receive an additional amount of the Company’s common stock if the value of the Company’s common stock (1) held by WQN, Inc., (2) issuable upon exercise of the Warrant or conversion of the Note or the Company’s preferred stock received upon exercise of the Note, based on the 20 trading-day average of the Company’s common stock on May 26, 2006 or (3) thereafter sold by WQN, Inc. is less than $5,000,000. To the extent the aggregate value so determined was less than $5,000,000, the Company and Mr. Steven Ivester, the Company’s former Chief Executive Officer and then-largest shareholder, would have issued to WQN, Inc. additional shares of the Company’s common stock equal to the difference of such shortfall, using the same price per share on which the value of the Company’s common stock was determined above. The Company would have been responsible for issuing 60% of the additional shares, and Steven Ivester would have been responsible for transferring the balance from his personal holdings. Based on an average of the Company’s quoted common stock closing price for each of the 20 trading days preceding May 26, 2006, the aggregate market value of WQN, Inc.’s holdings, as previously defined, exceeded $5,000,000.  Therefore, no Company shares were issued or need to be issued under this provision.

 

Interest of Certain Persons in the Amended and Restated Articles

 

Mr. Michael Adler was the Chief Executive Officer of WQN, Inc. and became the Chief Executive Officer and a director of the Company in October 2005. Mr. Adler resigned as the Company's Chief Executive Officer in May 2006 and is no longer on its board. Mr. Adler serves on the board of directors of WQN, Inc. and is the holder of approximately 37% of the outstanding common stock of WQN, Inc.

 

INFORMATION ABOUT THE COMPANY

 

For detailed information on the Company, please see our Annual Report on Form 10-KSB for the year ended December 31, 2005, as amended, which is incorporated by reference into this proxy statement, a copy of which accompanies this proxy statement.

 

INFORMATION ABOUT WQN, INC.

 

Prior to the Acquisition, WQN, Inc. was a VOIP telephony company providing international long distance services. VOIP enables voice communications over the Internet by compressing voice into data packets that can be efficiently transmitted over data networks and then converted back into voice at the receiving end. Customers use the VOIP services platform to make and receive calls using their home phone, business phone, personal computer and mobile phone. The acquired business currently includes the provision of enhanced Internet-based and other telephony services under various brand names to individual consumers primarily seeking to make international calls as well as the provision of enhanced Internet-based and other telephony services to resellers, corporations and service providers under their brand names and carrier transmission services whereby we sell our excess capacity to other long-distance carriers.

 

Below are the key products and services acquired by the Company from WQN, Inc.

 

Products

 

RocketVoIP

 

The acquired proprietary next generation VOIP technology service is marketed under the brand name RocketVoIP. With RocketVoIP, subscribers can use their broadband service to make and receive unlimited domestic and international calls using a home phone, mobile phone or personal computer. RocketVoIP has unique features and advantages over competing products that include:

·	Unlimited local, long distance and international calling to 50 countries, for a low monthly fee;

·	The ability to use a mobile phone to access WQN, Inc.'s network for high quality unlimited international calls;

·	Free in-network calling;

 

·	Free features including Caller-ID, Call-Waiting, Call-Forwarding, 3-Way Calling, Voice Mail, and more; and

·	A total calling solution enabling travelers to make and receive phone calls from anywhere in the world using a personal computer and high-speed Internet access, including Wi-Fi hotspots.

 

24

---

SELECTED FINANCIAL DATA

 

The following table sets forth selected historical financial data as of and for each of the years ended December 31, 2001, 2002, 2003, 2004, and 2005 and the nine months ended September 30, 2005 and 2006. The related financial data as of December 31, 2004 and 2005 and for the years then ended are derived from our consolidated financial statements which have been audited by Berkovits, Lago & Company, LLP, independent auditors, and their report is included elsewhere in this proxy. The selected financial data as of December 31, 2003 and for the year then ended are derived from our consolidated financial statements which have been audited by Tschopp, Whitcomb & Orr, P.A., independent auditors, and their report is included elsewhere in this proxy. The selected financial data as of and for the nine months ended September 30, 2005 and 2006 are derived from our unaudited consolidated financial statements. The following financial information should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing in our annual report to shareholders.

 

		Years Ended December 31,															Nine Months Ended September 30,
		2001 (2)			2002 (2)			2003 (2)			2004 (2)			2005 (2)			2005			2006
Revenues		$	-		$	-		$	-		$	1,020,285		$	13,878,097		$	4,337,717		$	25,220,303
Gross profit (loss)			-			-			-			265,687			(1,196,624	)		(299,652	)		136,121
Operating expenses			-			-			-			5,573,575			21,159,717			13,297,337			25,215,592
Loss from continuing operations		$	-		$	-		$	-		$	(5,307,888	)	$	(23,788,646	)	$	(13,617,347	)	$	(30,343,179	)
Net loss		$	(61,634	)	$	(61,926	)	$	(352,968	)	$	(5,862,120	)	$	(28,313,333	)	$	(13,833,503	)	$	(31,311,440	)
Net loss per share:
Loss from continuing operations		$	-		$	-		$	-		$	(0.36	)	$	(0.57	)	$	(0.38	)	$	(0.43	)
Net loss		$	(0.04	)	$	(0.04	)	$	(0.20	)	$	(0.40	)	$	(0.67	)	$	(0.39	)	$	(0.45	)
Summary cash flow data:
Net cash used in operating activities		$	-		$	-		$	(78,706	)	$	(3,330,574	)	$	(17,301,611	)	$	(8,642,847	)	$	(10,998,391	)
Net cash provided by (used in) investing activities			52,902			73,849			82,196			479,594			(4,395,997	)		(737,585	)		(104,724	)
Net cash provided by financing activities			-			-			-			3,988,618			23,785,216			11,478,168			8,425,119
Balance sheet data (at period end) cash			1,656			9			3,499			1,141,137			3,228,745			3,238,873			550,749
Property and equipment			-			-			-			389,528			10,141,872			8,309,161			7,090,973
Goodwill and other intangible assets			-			-			-			1,713,301			38,404,271			29,996,814			35,894,985
Total assets			532,897			530,230			259,459			8,672,548			56,244,161			43,118,352			44,974,923
Long term obligations			-			-			-			-			245,248			776,565			236,974
Total liabilities			9,711			68,970			151,167			1,027,727			27,018,241			19,683,913			36,902,188
Total shareholders' equity			523,186			461,260			108,292			7,644,821			29,225,920			23,434,439			8,072,735
Book value per share		$	0.34		$	0.30		$	0.06		$	0.32		$	0.48		$	0.50		$	0.11
Cash dividends per share (1)		$	-		$	-		$	-		$	-		$	-		$	-		$	-

 

(1)

No cash dividends have been paid or declared.

 

(2)

Operations relating to Millennia Tea Masters and DTNet Technologies were discontinued in 2004 and 2006, respectively. Operating results prior to these events were reclassified as discontinued operations

 

25

---

 

SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

 

The selected unaudited pro forma combined financial information should not be relied upon as being indicative of future results that may be achieved. The following selected unaudited pro forma combined financial information has been derived from, and should be read in conjunction with, the Unaudited Pro Forma Consolidated Statement of Operations and Unaudited Pro Forma Consolidated Balance Sheet included in our annual report to shareholders.

The following table presents our unaudited quarterly results of operations for the eleven quarters ended September 30, 2006. This table includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for fair presentation of our financial position and operating results for the quarters presented.

 

		Quarter Ended
		Mar 31,			Jun 30,			Sep 30,			Dec 31,			Mar 31,			Jun 30,			Sep 30,			Dec 31,			Mar 31,			Jun 30,			Sep 30,
		2004			2004			2004			2004			2005			2005			2005			2005			2006			2006			2006
		(Unaudited)
Revenues		$	-		$	39,945		$	333,309		$	647,031		$	1,006,111		$	1,589,857		$	1,776,155		$	9,505,974		$	9,994,548		$	9,003,742		$	6,222,013
Gross profit (loss)			-			11,379			(24,615	)		278,924			8,222			528,602			(922,381	)		(811,067	)		(619,033	)		230,145			525,009
Income (loss) from continuing operations			(22,324	)		(417,024	)		(5,499,670	)		631,130			(1,559,518	)		(3,482,529	)		(8,833,168	)		(9,913,430	)		(13,808,215	)		(5,169,917	)		(12,312,707	)
Net income (loss)			(22,324	)		(408,658	)		(5,647,736	)		216,598			(1,555,398	)		(3,536,104	)		(8,742,001	)		(14,479,830	)		(14,754,694	)		(5,191,699	)		(12,312,707	)
Per share:
Net loss from continuing operations		$	(0.01	)	$	(0.03	)	$	(0.28	)	$	(0.01	)	$	(0.06	)	$	(0.12	)	$	(0.18	)	$	(0.67	)	$	(0.20	)	$	(0.07	)	$	(0.17	)
Net loss		$	(0.01	)	$	(0.03	)	$	(0.29	)	$	0.02		$	(0.06	)	$	(0.12	)	$	(0.18	)	$	(0.67	)	$	(0.22	)	$	(0.07	)	$	(0.17	)

 

(1)	These quarterly results reflect the merger in May 2005 of Caerus and the acquisition in October 2005 of the VoIP-related assets of WQN.

 

(2)	The results for the quarter ended September 30, 2004 include expenses of $4.9 million related to the issuance of stock warrants.

 

(3)	Operations relating to Millennia Tea Masters and DTNet Technologies were discontinued in 2004 and 2006, respectively. Operating results prior to these events were reclassified as discontinued operations.

 

THE ACQUISITION

 

The acquisition of WQN:

 

·	substantially enhanced our international VOIP business;

·	the Acquisition provided us with an additional 60,000 retail customers using various VOIP services that could be integrated onto our VoiceOne network;

·	the average margin at the time on the $30 million in revenue from WQN was 3%, primarily because of outsourced network cost and the lack of network ownership, and by moving that traffic to our Voice One(R) proprietary technology network, we anticipated increasing our margins.

·	the customer service personnel that we acquired enable us to provide additional services to our service providers.

 

27

---

Background of the Acquisition

 

On April 4, 2005, Mr. Michael Adler (then CEO of WQN, Inc.) met with Mr. Ivester (then CEO of VoIP, Inc.) to discuss a possible strategic relationship or acquisition transaction between WQN, Inc. and the Company.

 

On April 12, 2005, Mr. Adler and Victor Grijalva, WQN, Inc.’s then Chief Financial Officer, met with Bill Burbank (then Chief Operating Officer of VoIP, Inc.) and Mr. Ivester to further discuss the possibility of a business transaction between the Company and WQN, Inc. and presented an overview of WQN, Inc. and WQN’s VOIP business.

 

On April 14, 2005, the Company presented a formal, non-binding letter of intent to WQN, Inc. for the purchase of WQN’s VOIP business.

 

On June 14, 2005, Mr. Adler received an email from Mr. Ivester regarding his understanding of the proposed deal terms.

 

On July 8, 2005, the Company sent WQN, Inc. the initial draft of the Asset Purchase Agreement from our legal counsel.

 

On July 21, 2005, Mr. Adler and Mr. Jones of WQN, Inc. and Mr. Kropp of Ladenburg Thalmann & Co. Inc. (“Ladenburg”) visited the Company’s offices in Orlando, Florida and conducted an investigation of the Company’s Orlando operations, its management and its business.

 

On July 26, 2005, WQN, Inc. formally engaged Ladenburg as financial advisor and to issue a fairness opinion in connection with WQN, Inc.’s proposed sale of its VOIP business to the Company.

 

On August 3, 2005, the parties executed the Asset Purchase Agreement.

 

On August 9, 2005, each of the Company and WQN, Inc. filed a Current Report on Form 8-K with the SEC, disclosing the execution of the Asset Purchase Agreement.

 

On October 5, 2005, each of the Company and WQN, Inc. filed a Current Report on Form 8-K with the SEC, disclosing the closing of the Acquisition.

Steven Ivester, our former Chief Executive Officer, was the Company’s sole director during the time that the WQN acquisition transaction occurred. Mr. Ivestor is no longer affiliated with the Company. In October 2006, Mr. Ivester commenced an action against the Company in the Circuit Court of the 17^th Judicial Circuit in and for Broward County, Florida. In this action, Mr. Ivester alleges that on or about November 16, 2005, the Company executed and delivered a promissory note to Mr. Ivester and that the Company failed to pay the amounts due on the note, and that the Company owes Mr. Ivester $302,472.57 with interest since September 12, 2006 on the note. Mr. Ivestor’s action also alleges breach of contract. Specifically, Mr. Ivester alleges that on or about October 18, 2005, the Company and Mr. Ivester entered into a consulting services agreement, which provides for him to be indemnified by the Company for all expenses including reasonable attorneys fees incurred or paid by Mr. Ivester in connection with any action or proceeding, suit or investigation arising out of or relating to the performance by Mr. Ivester of his services pursuant to the consulting agreement. Mr. Ivester’s action alleges that he was sued by a certain individual and that despite his demand for reimbursement and indemnification of his attorneys’ fees incurred in said action related to such person’s claims against the Company, the Company has failed and refused to indemnify Mr. Ivester for his attorneys’ fees. Mr. Ivester’s action also alleges that under the consulting agreement he was to be paid $200,000 annually in equal bi-monthly installments; however, Mr. Ivester alleges, the Company has failed to pay him installment wages due on September 15, 2006 in the amount of $7,692.31, as well as other monetary obligations under the consulting agreement. Mr. Ivester’s action also alleges that as a result of the Company’s breach of the consulting agreement, he was entitled to notify the Company of his termination of the consulting agreement, which he alleges he did and as a result Mr. Ivester alleges that the compensation payable pursuant to consulting agreement was effectively accelerated and all compensation due under the consulting agreement became due and owing, but Mr. Ivester alleges the Company has repudiated its obligations under the consulting agreement. Mr. Ivester’s action requests a judgment against the Company for an award of costs, attorney’s fees and such further and other relief as deemed just and proper.

The Company has filed an Answer, Affirmative Defenses and Counterclaim to Mr. Ivester’s action. The Company’s answer denies Mr. Ivester’s allegations and asserts its own defenses. The Company’s counterclaim asserts that Mr. Ivester breached the fiduciary duty he owed the Company while he was its chief executive officer. The Company’s Answer, requests that the court dismiss Mr. Ivester’s complaint with prejudice and award the Company its reasonable attorneys’ fees, grant the Company a judgment in its favor on its counterclaim and award the Company such other and further relief as the court deems necessary.

As a result of the lawsuit involving Mr. Ivester, we do not believe that it is appropriate to discuss the acquisition of WQN with him at this time, and because Mr. Ivester was the Company’s sole director at the time of the WQN acquisition the Company cannot further describe the negotiations leading to and the reasons for the WQN acquisition.

 

Regulatory Approvals

 

The Acquisition was not subject to the approval of any state or federal regulatory agency or governmental body.

 

Conditions to the Closing of the Acquisition

 

The closing of the Acquisition was subject to certain customary conditions such as (1) the accuracy of certain representations and warranties in the Asset Purchase Agreement, (2) the performance of a number of covenants, (3) the absence of certain legal actions or proceedings prohibiting consummation of any of the transactions contemplated by the Asset Purchase Agreement, (4) WQN, Inc. having received approval of the Asset Purchase Agreement from its shareholders representing a majority of the shares eligible to vote and present in person or by proxy at its annual meeting, (5) all governmental consents having been received, (6) the Company having received the consent of each of (a) Cedar Boulevard Lease Funding, LLC and (b) the requisite investors in financing transactions consummated on July 5, 2005, and (7) the Company's internal controls being reasonably satisfactory to WQN, Inc. The Company's obligation to close was also subject to certain third party consents having been received and no material adverse change or effect having occurred on the part of WQN, Inc.

  

The Purchased Assets and Assumed Liabilities

 

The assets transferred to the Company were substantially all of WQN, Inc.'s assets comprising its VOIP business, including, without limitation, all of WQN, Inc.'s right, title and interest of WQN, Inc. in and to (but not including certain excluded assets): (1) all intellectual property (and rights associated therewith), including patents, patent applications, trademarks, service marks, proprietary rights in trade names (other than the name “WQN, Inc.”), brand names, Internet domain names, trade dress, labels, logos, slogans and other indications of origin, and copyrighted works, (2) all rights, benefits and interests in and to all assigned licenses (other than “shrink-wrap” and other “off the shelf” software licenses), leases, contracts, agreements, commitments and undertakings, (3) all assigned deposits and prepaid assets, (4) cash in the amount of $1,000,000, (5) all tangible personal property, (6) all inventories, (7) all accounts receivable, (8) all transferable governmental authorizations and all pending applications therefor or renewals thereof, (9) all data and records related to WQN, Inc.'s VOIP operations, (10) all intangible rights and property, including going concern value, goodwill, websites, URL listings, telephone, telecopy and e-mail addresses and listings, (11) all insurance benefits arising from or relating to the assets or the assumed liabilities prior to the effective time of the sale, and (12) all claims of WQN, Inc. against third parties relating to the assets.

 

28

---

 

Liabilities assumed by the Company in connection with the Acquisition consisted of approximately $1,227,500 in accounts payable and $167,000 in accrued liabilities, as adjusted on the closing date of the Acquisition. The Asset Purchase Agreement provided that WQN, Inc.'s accounts receivable conveyed to the Company as part of the assets, net of the allowance for doubtful accounts, must have equaled or exceeded WQN, Inc.'s accounts payable which were assumed by the Company as of the closing date. To the extent that the accounts receivable were less than WQN, Inc.'s accounts payable assumed by the Company, WQN, Inc. was obligated to pay to the Company the difference. Because WQN, Inc. was required to pay this excess amount, the Company issued to WQN, Inc. 500,000 shares of the Company's common stock.

 

Representations and Warranties

 

The Asset Purchase Agreement contained various representations and warranties of WQN, Inc. including, among others, representations and warranties related to: corporate organization and similar corporate matters; authorization and enforceability; non-contravention of WQN, Inc.'s certificate of incorporation or by-laws, and non-violation of laws and binding agreements; consents and approvals, compliance with certain laws of the Office of Foreign Asset Control; the timeliness and accuracy of SEC filings; the accuracy of financial statements contained in the SEC filings; the purchased assets (including good and marketable title thereto); absence of certain changes since March 31, 2005; absence of litigation; condition and title to assets and properties; taxes and tax returns; intellectual property; employee benefits; accounts receivable; absence of brokers; solvency; and investment intent.

 

The Asset Purchase Agreement contained various representations and warranties of the Company and the Acquisition Subsidiary, including among others, representations and warranties related to: corporate organization and similar corporate matters; authorization and enforceability; non-contravention of either the Acquisition Subsidiary's or the Company's certificate of incorporation or by-laws and non-violation of laws; consents and approvals; licenses and permits; absence of brokers; absence of litigation; the timeliness and accuracy of SEC filings; the absence of related party transactions; the absence of any other registration rights; and outstanding indebtedness.

 

The representations and warranties survive the closing until 12 months after the closing date or, in respect of intellectual property and employee benefits representations, until after the expiration of the applicable statutes of limitations, or, in respect of organization and authority and title to the purchased assets, indefinitely.

 

Bridge Loan

 

Concurrently with the execution of the Asset Purchase Agreement, on August 3, 2005, WQN, Inc. had advanced to the Company $1,000,000, pursuant to a promissory note (the “Bridge Note”). The Bridge Note was cancelled upon completion of the transaction. In connection with the Bridge Note, the Company had issued to WQN, Inc. a warrant (the “Bridge Warrant”) to purchase 625,000 shares of common stock, at an exercise price of $1.37 per share. The Bridge Warrant also was cancelled in connection with the completion of the Acquisition.

Agreement Not to Compete

 

With certain limitations, WQN, Inc. has agreed that, for a period of five full years after the closing of the Acquisition, it will not, directly or indirectly, (1) engage in a competing business anywhere in the United States, Latin America, Europe, India, Iran or Japan where WQN, Inc.'s VOIP business was conducted, whether such engagement is as owner, partner, agent, consultant or shareholder (except as the holder of not more than one percent of the outstanding shares of a publicly held corporation and as a holder in investment fund vehicles, in which WQN, Inc. does not hold a controlling interest, or does not hold a position on the governing body thereof) or (2) solicit the employment of or hire any person who is an employee or independent contractor of the Purchaser or its subsidiaries.

 

Transition; Transition Services

 

WQN, Inc. agreed not to take any action that is designed or intended to have the effect of discouraging any lessor, licensor, customer, supplier, or other business associate of WQN, Inc. from maintaining the same business relationships with the Company after the closing of the Acquisition as it maintained with WQN, Inc. prior to the closing. WQN, Inc. agreed to refer all customer inquiries relating to the business of WQN, Inc. to the Company from and after the closing of the Acquisition. The Company was entitled to access to WQN, Inc.'s offices, for a period of up to 180 days from the closing date, at a rate of $5,000 per month during each such month when such offices were actually utilized.

 

29

---

 

Board Observer; Board Member

 

WQN, Inc. will have board observation rights for so long as it holds 10% or more of the Company's outstanding common stock (or securities exercisable for, or convertible into, 10% or more of the Company's outstanding common stock). The observer will be entitled to attend all meetings of the board of directors of the Acquisition Subsidiary and receive the same information and materials as the other members of the board of directors in connection with such meetings; provided, that the observer may be excluded from all or part of any meeting (and may not receive materials) in order to preserve attorney client privilege, confidential information or trade secrets.

 

The Company agreed to nominate Mr. B. Michael Adler for election to, and use its best effort to cause Mr. Adler to be elected to, the board of directors of the Company at the annual meeting of shareholders. Mr. Adler became the Chairman of the Company's board. Mr. Adler served on the Company's board until May 2006.

 

Indemnification

 

WQN, Inc. has agreed to indemnify and hold harmless the Acquisition Subsidiary and the Company and their affiliates, parents, shareholders, subsidiaries, officers, directors, employees, agents, successors and assigns from and against all losses, liabilities, damages or deficiencies (including interest, penalties, judgments, costs of preparation and investigation, and attorneys' fees) (collectively, “Losses”) arising out of or due to (1) the liabilities or the assets that were excluded from the Acquisition, (2) the breach or failure to perform any covenant, undertaking, agreement or other obligation of WQN, Inc., (3) the breach of any representation of WQN, Inc., (4) any and all environmental liabilities relating to the acquired assets incurred prior to the closing date, (5) any failure of WQN, Inc. to comply with the laws of any jurisdiction relating to bulk transfers that may apply in connection with the sale and transfer of the assets to Purchaser, (6) any and all liabilities for taxes of WQN, Inc. or its respective affiliates for all taxable periods or portions thereof ending on or before the closing date, (7) any and all liabilities for taxes of any person under Treas. Reg. Section 1.1502-6(a) (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract or otherwise, or (8) any and all gains, transfer, sales, use, bulk sales, recording, registration, documentary, stamp, and other taxes that may result from, or be incurred in connection with, the transactions contemplated by the Asset Purchase Agreement.

 

The Company and the Acquisition Subsidiary agreed to indemnify and hold harmless WQN, Inc., and its affiliates, parents, shareholders, subsidiaries, officers, directors, members, managers, employees, agents, successors and assigns from and against any and all Losses arising out of or due to: (1) the use of the assets after the closing date, (2) the breach of or failure to perform any covenant, undertaking, agreement or other obligation of the Acquisition Subsidiary, (3) the breach of any representation of the Acquisition, (4) any and all environmental liabilities relating to the acquired assets incurred after the closing date, or (5) liabilities for taxes of the Acquisition Subsidiary for all taxable periods or portions thereof ending on or after the closing date.

 

No indemnification is available to any indemnified party for Losses until the aggregate amount of such Losses exceeds $200,000, and then to the full extent of such Losses in excess of $200,000 not to exceed $4,000,000.

Agreement to hold a Meeting of Shareholders.

 

Pursuant to the Asset Purchase Agreement, the Company was to hold a meeting of its shareholders by December 4, 2005 in order to, among other things, authorize a class of preferred stock that can be used to satisfy the conversion feature of the Note.

 

Expenses

 

Each party paid its own fees and expenses in respect of the Acquisition.

 

Accounting Treatment of the Acquisition

 

The Acquisition was accounted for using the purchase method of accounting.

 

The Company is not in compliance with the terms of the Note

The Company has not made the scheduled payments on the note, and WQN has agreed to subordinate its repayment claim to all other convertible note holders. At September 30, 2006 the Company was in violation of certain requirements of this note; including the requirement to hold a meeting by December 4, 2005 to, among other things, authorize a class of preferred stock that can be used to satisfy the conversion feature of the Note. While WQN has not declared the Note in default, the full amount of the note at September 30, 2006 has been classified as current. In the event that WQN declares the Note in default, the outstanding principal amount of $3,700,000 and interest then due, which as of November 30, 2006 was $201,929 and all other amounts payable under the Note, will immediately become due and payable upon demand of WQN.

 

30

---

 

Shareholder Approval Required to Consummate the Acquisition

 

Approval of the holders of the common stock of WQN, Inc. was required in order for WQN, Inc. to enter into and consummate the Acquisition. WQN, Inc.'s shareholders approved the Acquisition on October 4, 2005.

 

The Company's Board recommends approving the proposed Amended and restated Articles of Incorporation to authorize 25,000,000 shares of Preferred Stock. Approval of this proposal will enable the Company to designate 2,000,000 shares of its preferred stock as Series A which will enable it to issue such shares of Series A Preferred Stock to WQN in connection with its contractual obligations. The approval will also provide the Company with additional shares of preferred stock which would be available for issuance and the board of directors would have the flexibility to act in a timely manner to take advantage of favorable market conditions and other opportunities with respect to stock splits, stock dividends, financing acquisitions and other corporate business, subject to any applicable laws or regulations. Such availability of an increased number of authorized shares and the ability to issue preferred stock will eliminate the delays and expense involved in first conducting a special meeting of shareholders in order to approve an amendment to the Company's Articles of Incorporation to increase the number of shares it is authorized to issue.  

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” APPROVAL OF AMENDING THE COMPANY'S CERTIFICATE OF INCORPORATION TO AUTHORIZE 25,000,000 SHARES OF PREFERRED STOCK (WHICH APPROVAL DOES NOT EXTEND TO THE APPROVAL OF THE ISSUANCE OF ANY SHARES)

 

31

---

PROPOSAL No. FOUR:

TO APPROVE THE COMPANY'S AMENDED AND RESTATED

ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF SHARES OF

 COMMON STOCK THAT THE COMPANY IS AUTHORIZED TO ISSUE TO

400,000,000 SHARES OF COMMON STOCK

 (ITEM 4 ON THE PROXY CARD)

 

General

 

The Company's board of directors unanimously approved and recommended for adoption by the shareholders the Amended and Restated Articles of Incorporation (the “Amended and Restated Articles”), the text of which is attached to this Proxy Statement as Appendix D . The following proposal is to approve the Amended and Restated Articles, but does not approve any issuance of shares of common stock, and no shareholder approval for such issuances is required or being sought.

 

Background and Reasons for the Proposed Amended and Restated Articles

 

As of December 11, 2006, there were 100,000,000 shares of our common stock authorized, of which, 99,443,034 shares were issued and outstanding. Therefore, the Company has insufficient shares of common stock available for future issuance, or for the exercise of current stock options and warrants, or for the conversion of convertible debt securities.

The Amended and Restated Articles would increase the number of shares of the Company's common stock that it is authorized to issue to 400,000,000 shares of common stock and would enable the Company to comply with its contractual obligations including those described below. A copy of the Amended and Restated Articles of Incorporation is included as Appendix D to this Proxy Statement.

As discussed above, the Company executed an asset purchase agreement with WQN pursuant to which it acquired substantially all of the assets of WQN relating to WQN's “Voice over Internet Protocol” business. For a discussion of the acquisition of WQN, please see Proposal No. Three. Approving the Amended and Restated Articles of Incorporation will enable the Company to issue common stock to WQN as may be required pursuant to the asset purchase agreement.

In connection with a private placement memorandum dated May 20, 2005, we issued 2,242,500 shares of our common stock for $0.80 per share, and warrants to purchase 2,207,751 common shares at prices from $1.60 to $2.23 per share. As required by the subscription agreements, a portion of these shares was registered with the SEC in October 2005, but that registration became ineffective in July 2006. Until a registration statement covering all related shares and warrants is declared effective by the SEC, or the underlying shares and warrants are eligible for sales under Rule 144, we are liable for liquidated damages, requiring the issuance of new common shares at the rate of 10% of the unregistered shares per month, currently amounting to 1,218,500 common shares owing. All underlying shares and warrants are currently eligible for sale under Rule 144, so additional liquidated damages are not accruing.

In July and October 2005 we issued and sold $3,085,832 in principal amount of convertible notes to accredited investors at a discount, receiving net proceeds of $2,520,320. These notes are immediately convertible at the option of the note holders into shares of our common stock, at an original conversion rate of $0.80 per share. These investors also received five-year warrants to purchase 964,322 shares of our common stock for $1.37612 per share, five-year warrants to purchase 964,322 shares of our common stock for $1.6503 per share, and one-year warrants to purchase 1,928,644 shares of our common stock for $1.60 per share. The investors also received “favored nations” rights such that for future securities offerings by the Company at a price per share less than the above conversion rate or warrant exercise prices, the investors’ conversion rate and warrant exercise price would be adjusted to the lower offering price. The principal balance of these notes is currently $488,543. In May 2006, we repriced these warrants to $0.78 per share, at which time these warrants were exercised, resulting in net proceeds to the Company of $2,720,120. We then issued warrants to the investors to purchase a like number of shares for $0.80. As a result of our September 2006 Section 3(a)(10) agreement described below, and the favored nations provision discussed above, the notes’ conversion rate (retroactive to the original note principal balances) and the exercise price of outstanding warrants were effectively reduced to $0.26 per share. We are required to file registration statements to register up to 200% of the shares issuable upon conversion of these notes, and all of the shares issuable upon exercise of the warrants issued in connection with these notes.

In November 2005, we issued 1,375,000 shares of our common stock for $0.80 per share, and warrants to purchase 2,225,000 common shares at $0.26 per share. (This conversion rate is less than the original conversion rate, due to the note’s favored nations provision affected by the Section 3(a)(10) agreement described in Note R to our consolidated financial statements contained on page 17 of our September 30, 2006 Quarterly Report on Form 10-Q.) We also agreed to register a total of 5,850,000 common shares and warrants related to this and a related agreement by January 17, 2006.

In January and February 2006, we issued and sold $11,959,666 in principal amount of convertible notes to accredited investors at a discount, receiving net proceeds of $9,816,662. These notes are immediately convertible at the option of the note holders into shares of our common stock at an original conversion rate of $1.318 per share. These investors also received five-year warrants to purchase 4,537,052 shares of our common stock for $1.45889 per share, and one-year warrants to purchase 4,537,052 shares of our common stock for $1.5915 per share. The investors also received “favored nations” rights such that for future securities offerings by the Company at a price per share less than the above conversion rate or warrant exercise prices, the investor’s conversion rate and warrant exercise price would be adjusted to the lower offering price. The principal balance of the notes is currently $8,483,102. As a result of the Section 3(a)(10) agreement and the favored nations provision discussed below, the notes’ conversion rate (retroactive to the original note principal balances) was effectively reduced to $0.26 per share. As a result of the October 2006 financing discussed below and the favored nations provision discussed above, the outstanding warrants were effectively re-priced to $0.28 per share. We are required to file registration statements to register up to 120% of the shares issuable upon conversion of these notes, and all of the shares issuable upon exercise of the warrants issued in connection with these notes.

 

32

---

 

In September 2006, the parties to the January and February 2006 note sales commenced an action against the Company in the Circuit Court of the Twelfth Judicial Circuit, Sarasota County, Florida alleging breach of the notes (the “First Note Action”). In September 2006, the parties to the July and October 2005 note sales commenced an action against the Company in the Circuit Court of the Twelfth Judicial Circuit, Sarasota County, Florida alleging that the Company was in breach of the notes (the “Second Note Action”).

The parties to the First Note Action and the Company entered into a Settlement Agreement and Release in September 2006. The material terms of the Settlement and Release are:

·

The amount due and owing under the Notes shall be reset to the principal amount due under the Notes in the amount of $8,318,284, together with interest due under the Notes in the amount of $207,957.09, and liquidated damages provided in the Notes in the amount of $374,322.77, for a total amount of $9,781,719.

·	The plaintiffs agreed to surrender $4,940,000 of the Notes Claims, on a pro rata basis, to the Company in exchange for 19,000,000 shares of the Company’s common stock, par value $0.001 per share, through the issuance of freely trading securities issued pursuant to Section 3(a)(10) of the Act.

·	Four of the plaintiffs agreed to surrender their Warrant Claims to the Company in exchange for 2,500,000 shares of the Company’s common stock, par value $0.001 per share, through the issuance of freely trading securities issued pursuant to Section 3(a)(10) of the Act.

·	The plaintiffs agreed to retain the balance of their Notes Claims and the Company agreed to reset the conversion rate for the remaining balance under the Notes to $0.26 per share, which shall retain all rights.

·	The Company agreed to reduce the exercise price of the un-exercised warrants purchased by the plaintiffs in connection with the Notes to $0.475.

·

The Company agreed to amend its Certificate of Incorporation and take all steps necessary, including obtaining shareholder approval, to authorize at least an additional 18,621,997 shares of common stock, as well as sufficient shares to cover the un-exercised warrants issued to the plaintiffs under the Notes and hold such shares in reserve for the plaintiffs’ benefit in connection with the balance by the Investors herein on or before November 30, 2006.

·

The plaintiffs agreed that none of the plaintiffs shall sell more than its pro-rata allocation of thirty percent (30%) of the daily trading volume in the Company’s common stock, provided however, any Investor may cumulate the daily trading volume in any given calendar week to compute their leak-out amount; provided further, that the aforementioned cumulative trading volume resets every Monday. This Investors’ Leak-Out provision does not apply to any sale of the Company’s common stock at a price above $0.75 per share.

 

·	With respect to the balance of the claims retained by the plaintiffs under the Notes, the plaintiffs retained all rights granted to them in Notes that were not specifically waived in settlement agreement.

 

·	The Company and the plaintiffs agreed to execute a mutual release upon the plaintiffs’ receipt of the shares issued pursuant to Section 3(a)(10).

 

The parties to the Second Note Action entered into a Settlement and Release in September 2006. The material terms of the Settlement and Release are:

 

·	The amount due and owing under the Notes shall be reset to the principal amount due under the Notes in the amount of $911,781, together with interest due under the Notes in the amount of $34,192 and liquidated damages provided in the Notes in the amount of $41,030, for a total amount of $987,003.

 

·	The plaintiffs agreed to surrender $498,460 of the Notes Claims, on a pro rata basis, to the Company in exchange for 1,917,153 shares of the Company’s common stock, par value $0.001 per share, through the issuance of freely trading securities issued pursuant to Section 3(a)(10) of the Act.

 

33

---

 

·	The plaintiffs agreed to retain the balance of their Notes Claims, and the Company agreed to reset the conversion rate for the remaining balance under the Notes to $0.26 per share, which shall retain all rights.

 

·

The Company agreed to amend its Certificate of Incorporation and take all steps necessary, including obtaining shareholder approval, to authorize at least an additional 1,879,011 shares of common stock and hold such shares in reserve for plaintiffs’ benefit in connection with the balance of the Notes retained by plaintiffs herein on or before November 30, 2006.

 

·

The plaintiffs agreed that none of the plaintiffs shall sell more than their pro-rata allocation of thirty percent (30%) of the daily trading volume in the Company’s common stock, provided however, any Investor may cumulate the daily trading volume in any given calendar week to compute their leak-out amount; provided further, that the aforementioned cumulative trading volume resets every Monday. This Leak-Out provision does not apply to any sale of the Company’s common stock at a price above $0.75 per share.

 

·	With respect to the balance of the claims retained by the plaintiffs under the Notes, the plaintiffs retained all rights granted to them in Notes that were not specifically waived in the Settlement Agreement.

 

·	The Company and the plaintiffs agreed to execute a mutual release upon the Investors’ receipt of the shares issued pursuant to Section 3(a)(10).

 

In September 2006, in connection with employment agreements, our Chief Executive Officer (“CEO”) and Chief Operating Officer (“COO”) were each awarded options to purchase 10,000,000 shares of the Company’s common stock at $0.01 per share, subject to board of directors approval. Further, our CEO and COO are entitled to receive additional options with similar terms, in sufficient quantity to allow them to maintain a beneficial ownership of 5% and 8%, respectively, of the Company’s outstanding common stock. On October 8, 2006, our COO was granted options to purchase 3,000,000 shares of the Company’s common stock at $0.36 per share under our 2004 Stock Option Plan. On October 9, 2006, we settled claims the COO had against the Company for alleged breaches of his employment agreement, and for nonregistration of the Company’s common shares he holds pursuant to the Caerus merger agreement dated May 31, 2005, for $1,080,000. Also on October 9, 2006, the COO exercised his options to purchase 964,782 common shares, and the proceeds were credited toward the settlement of his claims.

On October 17, 2006, we issued and sold $2,905,875 in secured convertible notes to twelve accredited investors, for a net purchase price of $2,324,700 (after a 20% original issue discount) in a private placement, receiving net proceeds of approximately $1,436,900 (before closing costs of $308,735). The investors also received five-year warrants to purchase a total of 10,378,125 shares of our common stock at an exercise price of $0.407 per share. The note holders may at their election convert all or part of these convertible notes into shares of the Company's common stock at the conversion rate of $0.28 per share, subject to adjustment as provided in the notes. We are required to file registration statements to register 130% of the shares issuable upon conversion of these notes, and all of the shares issuable upon exercise of the warrants issued in connection with these notes.

As a result of these and other transactions, 128,571,902 common shares are currently issuable upon the conversion of all convertible debt, and the exercise of all options and warrants. We are also contractually obligated to reserve an additional 36,391,521 shares from our authorized common shares. In addition, we are contractually obligated and plan to issue 8,740,935 common shares upon approval of our proposed increase in our authorized common shares. The following table specifies, for each listed obligation, the common shares issuable upon the conversion of all convertible debt and the exercise of all options and warrants, additional reservation requirements, and planned common share issuances upon approval of our proposed increase in our authorized common shares.

 

34

---

 

			Additional Common Stock Issuable Upon Conversion/Exercise 1												Additional Reservation Requirements 2									Current Obligations			Minimim Total Additional Authorized
			Convertible Notes			Warrants			Options			Subtotal			Convertible Notes			Options			Subotal			To Issue Shares3			Shares Required
May 2005 private placement			-			2,207,751			-			2,207,751			-			-			-			1,218,500			3,426,251
July and October 2005 convertible notes and warrants			1,879,012			3,713,542			-			5,592,554			7,523,152			-			7,523,152			5,644,140			18,759,846
January and February 2006 convertible notes and warrants			32,627,311			9,074,104			-			41,701,415			6,525,462			-			6,525,462			-			48,226,877
November 2005 financing agreement			-			2,225,000			-			2,225,000			-			-			-			-			2,225,000
WQN, Inc.			15,033,151			-			-			15,033,151			-			-			-			-			15,033,151
October 06 convertible notes and warrants			10,378,125			10,378,125			-			20,756,250			10,378,125			-			10,378,125			-			31,134,375
December 06 Bridge Note Warrants			-			771,931			-			771,931			-			-			-			-			771,931
2004 Stock Option Plan			-			-			2,035,218			2,035,218			-			1,964,782			1,964,782			-			4,000,000
2006 Stock Option Plan 4			-			-			-			-			-			10,000,000			10,000,000			-			10,000,000
Securities owned by consulting and other professional firms			-			3,100,000			493,747			3,593,747												950,000			4,543,747
Current and former officer and employee securities 5			-			4,700,000			26,562,500			31,262,500			-			-			-			800,000			32,062,500
Securities owned by or owed to shareholders			-			3,392,385			-			3,392,385			-			-			-			128,295			3,520,680
Totals			59,917,599			39,562,838			29,091,465			128,571,902			24,426,739			11,964,782			36,391,521			8,740,935			173,704,358

 

1 These columns represent common shares issuable upon the hypothetical conversion of outstanding convertible debt, and the exercise of all outstanding warrants and options.

2 These columns represent contractual requirements to reserve specified or computed numbers of common shares from our authorized capital, in addition to the conversion/exercise amounts referred to in footnote 1.

3 These are common shares that are contractually owing to various individuals or firms, and are expected to be issued as soon as our authorized shares are increased.

4 The 2006 Stock Option Plan is pending shareholder approval.

5 In addition, our Chief Executive Officer and Chief Operating Officer may receive additional options sufficient to maintain their common share ownership at 5% and 8%, respectively.

 

Our authorized shares of stock consist of 100,000,000 shares of common stock, of which 99,443,034 shares are currently issued and outstanding, and 173,704,358 additional shares are contingently issuable upon the exercise of stock options and warrants, conversion of convertible securities, and issuance of contractually obligated shares. If our current proposal to increase the authorized shares of common stock to 400,000,000 shares is approved, and a significant number of additional shares are subsequently issued as allowed for above or in conjunction with new financing, our current shareholders would experience significant dilution of their ownership, and our stock price per share could decline substantially.

The board of directors believes that the proposal to increase the number of authorized shares of common stock is in the best interests of the Company and its shareholders. If the proposed Amended and Restated Articles are approved by the shareholders, the Company would have additional shares available for issuance in order to meet its contractual obligations, issue shares of common stock pursuant to its 2004 Option Pan, its 2006 Plan (if it is approved) and enable the board of directors to have the flexibility to act in a timely manner to take advantage of favorable market conditions and other opportunities with respect to stock splits, stock dividends, financings, acquisitions or other corporate business, subject to the rules of any securities exchange on which the shares of common stock are listed at the time or other applicable laws or regulations as may be in effect from time to time. Such availability of an increased number of authorized shares will eliminate the delays and expense involved in first conducting a special meeting of shareholders in order to issue additional shares when needed.

 

The Company will, from time to time, investigate possible acquisitions and financings through the issuance of additional equity securities, but it is not possible to state whether an acquisition will materialize or, if so, whether the issuance of additional common stock would be desirable or required. Additional information on the company's contractual obligations pertaining to issuances of its common stock are incorporated herein by reference to its 10-KSB of the year ended December 31, 2005 and its subsequent quarterly reports which have been filed with the Securities and Exchange Commission.

The increase in shares authorized by the Amended and Restated Articles could under some circumstances (1) enable existing directors and officers of the Company to increase their beneficial ownership of the Company in response to a takeover attempt by another person by entering into transactions resulting in the issuance of authorized shares by the Company to existing directors and officers, and/or (2) dilute the beneficial ownership of the person making the takeover attempt by issuing shares to another person who might assist the board of directors in opposing the takeover if the board of directors determines that the takeover is not in the best interests of the Company and its shareholders. In addition, issuances of additional common stock or preferred stock convertible into common stock would significantly dilute the ownership position of the Company's shareholders.

 

35

---

 

The Company is only seeking approval to increase the number of shares of its common stock to 400,000,000 shares but not for approval of the issuance of such shares which is not required or sought.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF THE PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION, AS AMENDED, TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK THAT THE COMPANY IS AUTHORIZED TO ISSUE TO 400,000,000 SHARES OF COMMON STOCK (WHICH APPROVAL DOES NOT EXTEND TO THE APPROVAL OF THE ISSUANCE OF ANY SHARES)

36

---

 

PROPOSAL NO. 5

 

TO APPROVE THE SELECTION OF

BERKOVITS, LAGO & COMPANY LLP

AS THE COMPANY'S INDEPENDENT AUDITORS FOR 2006

ITEM NO. 5 ON THE PROXY CARD

 

The board of directors recommends the selection of Berkovits, Lago & Company, LLP as our independent registered public accounting firm to perform the audit of our financials for the year ending December 31, 2006.

Berkovits, Lago & Company, LLP served as our auditor and audited our financial statements for our fiscal years ended December 31, 2005 and 2004. Representatives of Berkovits, Lago & Company, LLP are expected to be present at the annual meeting and will have the opportunity to make a statement if they desire and will be available to respond to appropriate questions.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On November 16, 2004, we were informed by Tschopp, Whitcomb & Orr that their firm was resigning as our auditor. During the two most recent fiscal years and during the interim period from December 31, 2003 until November 16, 2004, the Company did not have any disagreements with Tschopp, Whitcomb & Orr on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures that would require disclosure in this Proxy Statement. During such period, there were no reportable events as described in Item 304(a)(1)(v) of Regulation S-K.

On December 1, 2004, we retained the accounting firm of Berkovits, Lago & Company, LLP to conduct an audit of our financial statements for the year ended December 31, 2004, and to issue a report thereon. Our board of directors approved the selection of Berkovits, Lago & Company, LLP as new independent auditors. Neither management nor anyone on its behalf consulted with Berkovits, Lago & Company, LLP regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, and neither a written report nor oral advice was provided to the Company that Berkovits, Lago & Company, LLP concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue during our two most recent fiscal years prior to engaging Berkovits, Lago & Company, LLP.

 

Independent Auditor's Fees and Other Matters

 

Audit Fees. Berkovits, Lago & Company, LLP provided services to the Company during the years ended December 31, 2005 and 2004 in the categories shown below. Tschopp, Whitcomb & Orr provided services to the Company in these categories during the year ended December 31, 2003.

 

		Calendar Years
		2005			2004			2003
Audit Fees(1)		$	120,234		$	72,620		$	12,000
Audit-Related Fees(2)			-			-			-
Tax Fees(3)			-			-			-
All Other Fees(4)			-			-			-

 

(1)

Audit fees - These are fees for professional services performed by Berkovits, Lago & Company, LLP and Tschopp, Whitcomb & Orr for the audit of the Company's annual financial statements and review of financial statements included in the Company's 10-Q filings, and services that are normally provided in connection with statutory regulatory filings or engagements.

 

(2)

Audit-related fees - These are fees for assurance and related services performed by Berkovits, Lago & Company, LLP and Tschopp, Whitcomb & Orr that are reasonably related to the performance of the audit or review of the Company's financial statements. These include employee benefit and compensation plan audits, attestations that are not required by statute, and consulting on financial accounting/reporting standards.

 

37

---

(3)	Tax fees - These are fees for professional services performed by Berkovits, Lago & Company, LLP and Tschopp, Whitcomb & Orr with respect to tax compliance, tax advice and tax planning. These include preparation of original and amended tax returns for the Company and its consolidated subsidiaries, refund claims, payment planning, tax audit assistance, and tax work stemming from “audit-related” items.
(4)	All other fees - Services that do not meet the above three category descriptions are not permissible work performed for the Company by Berkovits, Lago & Company, LLP and Tschopp, Whitcomb & Orr.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF

THE SELECTION OF BERKOVITS, LAGO & COMPANY LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR 2006

 

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

This proxy statement incorporates by reference the documents listed below, which contain important business and financial information. This means that we can disclose information to you by referring you to other documents filed separately with the Securities and Exchange Commission (“SEC”). The information incorporated by reference is considered a part of this proxy statement, except for any information superseded by information contained in this proxy statement.

The following documents are incorporated by reference into this proxy statement:

The Company's Annual Report on Form 10-KSB for the year ended December 31, 2005;

Amendment No. 1 to Form 10-KSB;

Amendment No. 2 to Form 10-KSB; and

The Company's Quarterly Report on Form 10Q for the period ended September 30, 2006.

Any statement contained in a document incorporated by reference in this proxy statement will be deemed to be modified or superseded for purposes of this proxy statement to the extent that a statement contained in this proxy statement or any other subsequently filed document that is incorporated by reference into this proxy statement modifies or supersedes the statement. Any statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this proxy statement.

 

The Company's most recent Form 10-KSB and Amendments No. 1 and 2 thereto are included in our annual report to shareholders, which is enclosed with this proxy statement.

 

 

AVAILABLE INFORMATION

 

We are currently subject to the information requirements of the Exchange Act and in accordance therewith file periodic reports, Proxy Statements and other information with the SEC relating to our business, financial statements and other matters. Copies of such reports, Proxy Statements and other information may be copied (at prescribed rates) at the public reference room  maintained by the Securities and Exchange Commission at 100 F Street. N.E., Washington, D.C. 20549. For further information concerning the SEC's public reference room, you may call the SEC at 1-800-SEC-0330. Some of this information may also be accessed on the World Wide Web through the SEC's Internet address at http://www.sec.gov.

 

Requests for documents relating to the Company should be directed to:

 

VoIP, Inc.

Robert Staats

151 So. Wymore Rd., Suite 3000

ALTAMONTE SPRINGS, FL 32714

 

The Company's most recent Form 10-KSB and Amendments one and two thereto are included in our annual report to shareholders, which is enclosed with this Proxy Statement.

 

Our board of directors hopes that shareholders will attend the annual meeting. Whether or not you plan to attend, you are urged to complete, date and sign the enclosed proxy card and return it in the accompanying envelope or follow the instructions provided for voting by phone or via the Internet, if applicable. Prompt response will greatly facilitate arrangements for the meeting, and your cooperation is appreciated. Shareholders who attend the meeting may vote their shares personally even though they have sent in their proxy cards or voted by phone or the Internet.

			By Order of the Board of Directors
			Robert V. Staats, Secretary

January __, 2007

 

38

---

 

APPENDIX A

 

VoIP, Inc. 2006 Equity Incentive Plan

 

1.

PURPOSE

 

The purposes of this VoIP, Inc. 2006 Equity Incentive Plan (the “Plan”) are to encourage selected employees, outside directors and consultants of VoIP, Inc., together with any successor thereto, (the “Company”) and the Company's Affiliates (as defined below) to acquire a proprietary interest in the growth and performance of the Company; to generate an increased incentive to contribute to the Company's future success and prosperity, thus enhancing the value of the Company for the benefit of its shareholders; and to enhance the ability of the Company and its Affiliates to attract and retain exceptionally qualified individuals upon whom, in large measure, the sustained progress, growth and profitability of the Company depend.

 

2.	DEFINITIONS

 

As used in the Plan, the following terms shall have the meanings set forth below:

 

(d) whether the shares of such class or series shall be subject to redemption by the Corporation at its option or at the option of the holders of such shares or upon the happening of a specified event, and, if so, the times, prices and other terms, conditions and manner of such redemption;

(e) the preferences, if any, and the amount or amounts payable of such series upon, and the rights of the holders of such class or series in, the voluntary or involuntary liquidation, dissolution or winding up, or upon any distribution of the assets, of the Corporation;

(f) whether the shares of such class or series shall be subject to the operation of a retirement or sinking fund and, if so, the extent to and manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the shares of such class or series for retirement or other corporate purposes and the terms and provisions relative to the operation thereof;

(g) whether the shares of such class or series shall be convertible into, or exchangeable for, at the option of either the holder or the Corporation or upon the happening of a specified event, shares of stock of any other class or any other series of the same class or any other class or classes of securities or property and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, and any other terms and conditions of conversion or exchange;

(h) the limitations and restrictions, if any, to be effective while any shares of such class or series are outstanding, upon the payment of dividends or the making of other distributions on, and upon the purchase, redemption or other acquisition by the Corporation of, the Common Stock or shares of stock of any other class or any other series of the same class;

(i) the conditions or restrictions, if any, upon the creation of indebtedness of the Corporation or upon the issue of any additional stock, including additional shares of such series or of any other series of the same class or of any other class; and

(j) any other powers, preferences and relative, participating, optional and other special rights, and any qualifications, limitations and restrictions thereof.

The powers, preferences and relative, participating, optional and other special rights of each class or series of Preferred Stock, and the qualifications, limitations and restrictions thereof, if any, may differ from those of any and all other classes or series at any time outstanding. All shares of any one series of Preferred Stock shall be identical in all respects with all other shares of such series, except that shares of any one series issued at different times may differ as to the dates from which dividends thereof shall be cumulative. The Board of Directors may increase the number of shares of the Preferred Stock designated for any existing class or series by a resolution adding to such class or series authorized and unissued shares of the Preferred Stock not designated for any other class or series. The Board of Directors may decrease the number of shares of Preferred Stock designated for any existing class or series by a resolution subtracting from such class or series unissued shares of the Preferred Stock designated for such class or series, and the shares so subtracted shall become authorized, unissued, and undesignated shares of the Preferred Stock.

ARTICLE V

MAJORITY VOTE

 

With respect to any action to be taken by the shareholders of the Corporation under the Texas Business Corporation Act or otherwise, the vote or occurrence of the holders of a majority of the issued and outstanding shares of the Corporation shall control.

 

ARTICLE VI

NO CUMULATIVE VOTING

 

Cumulative voting is expressly prohibited. At each election of directors, every shareholder entitled to vote at such election shall have the right to vote, in person or by proxy, the number of shares owned by him for as many persons as there are directors to be elected and for whose election he has a right to vote; no shareholders shall be entitled to cumulate his votes by giving one candidate as many votes as the number of such directors multiplied by his shares shall equal, or by distributing such votes on the same principal among any number of such candidates.

   B. Relied upon the written opinion of any attorney hired by or representing the Corporation.

 

ARTICLE XII

BYLAWS

 

Except to the extent such power may be modified or divested by action of the shareholders representing a majority of the issued and outstanding shares of the Common Stock of the Corporation taken at a regular or special meeting of the shareholders, the power to adopt, alter, amend or repeal the Bylaws of the Corporation shall be vested in the Board of Directors.

 

B-3

---

 

ARTICLE XIII

REGISTERED OFFICE AND REGISTERED AGENT

 

The post office address of its initial registered office and the name of its initial registered agent at such address are:

 

Registered Office:		__________________  __________________
Registered Agent:		__________________

 

ARTICLE XIV

CONSENT OF SHAREHOLDERS

 

Any action which must be taken at any annual or special meeting of shareholders, or any action which may be taken without a meeting, without notice and without a vote, if a consent or consents in writing, setting forth the action taken, is signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares are entitled to vote on the action were present and voted.

 

IN WITNESS WHEREOF, the undersigned has executed these Amended and Restated Articles of Incorporation on this ___ day of ___________________, 2006.

 

	VOIP, INC.
	By:
		Anthony Cataldo, CEO

 

 

B-4

---

 

 

APPENDIX C

 

ASSET PURCHASE AGREEMENT

BY AND AMONG

WQN, INC.,

VOIP, INC.,

AND

VOIP ACQUISITION COMPANY

AUGUST 3, 2005

 

C-1

---

 

 

TABLE OF CONTENTS

				PAGE
ARTICLE I. DEFINITIONS
	1.1	Certain Definitions		C-4
	1.2	Other Definitional Provisions		C-8
ARTICLE II. PURCHASE AND SALE
	2.1	Purchase		C-8
	2.2	Transfer of Assets		C-8
	2.3	Excluded Liabilities		C-8
	2.4	Purchase Price		C-9
	2.5	Allocation of Purchase Price		C-9
ARTICLE III. CLOSING				C-10
	3.1	Closing		C-10
	3.2	Closing Deliveries		C-10
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF SELLER				C-10
	4.1	Organization; Capitalization		C-10
	4.2	Authorization		C-11
	4.3	No Conflict or Violation; Default		C-11
	4.4	Consents		C-11
	4.5	Licenses and Permits; Compliance with Laws		C-11
	4.6	Assets		C-11
	4.7	Solvency; Fair Value		C-11
	4.8	Litigation		C-11
	4.9	SEC Reports		C-12
	4.10	Absence of Certain Changes		C-12
	4.11	Tax Matters		C-12
	4.12	Employee Matters		C-12
	4.13	Intellectual Property		C-13
	4.14	Investment Purpose		C-13
	4.15	Real Property		C-13
	4.16	Brokers		C-13
	4.17	OFAC Compliance		C-13
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF BUYER				C-14
	5.1	Organization		C-14
	5.2	Authorization		C-14
	5.3	No Conflict or Violation; Default		C-14
	5.4	Consents		C-14
	5.5	SEC Documents		C-14
ARTICLE VI. COVENANTS RELATING TO COMPANY CONDUCT OF BUSINESS				C-15
	6.1	Seller Conduct of Business Pending the Closing		C-15
	6.2	No Solicitation by Seller		C-16

 

C-2

---

 

 

ARTICLE VII. ADDITIONAL AGREEMENTS				C-17
	7.1	Stockholder Meeting		C-17
	7.2	Preparation of the Proxy Statement		C-17
	7.3	Access to Information; Meetings with Company Officers		C-17
	7.4	Certain Payments, Fees and Expenses		C-17
	7.5	Reasonable Best Efforts		C-18
	7.6	Public Announcements		C-18
	7.7	Notification of Certain Matters		C-18
	7.8	Transition		C-18
	7.9	Covenant Not to Compete		C-18
	7.10	Registration Rights		C-19
	7.11	Employees and Employee Benefits		C-20
	7.12	Retention Records and Access		C-20
ARTICLE VIII. CONDITIONS PRECEDENT TO CLOSING				C-21
	8.1	Conditions to Closing		C-21
	8.2	Conditions to Obligations of Seller		C-21
	8.3	Conditions to Obligations of Parent and Buyer		C-22
ARTICLE IX. TERMINATION, AMENDMENT AND WAIVER				C-23
	9.1	Termination		C-23
	9.2	Effect of Termination		C-23
	9.3	Amendment		C-23
	9.4	Waiver		C-23
ARTICLE X. INDEMNIFICATION				C-24
	10.1	Indemnification by Seller		C-24
	10.2	Indemnification by Buyer		C-24
	10.3	Survival of Representations, Warranties and Covenants		C-24
	10.4	Notice and Opportunity to Defend		C-24
	10.5	Remedies Exclusive		C-25
	10.6	Right of Setoff		C-25
	10.7	Settlement of Disputes		C-25
ARTICLE XI. MISCELLANEOUS				C-26
	11.1	Expenses		C-26
	11.2	Notices		C-26
	11.3	Counterparts		C-26
	11.4	Entire Agreement		C-26
	11.5	Headings		C-26
	11.6	Assignment		C-27
	11.7	Governing Law; Jurisdiction		C-27
	11.8	No Third-Party Rights		C-27
	11.9	Non-Waiver		C-27
	11.10	Severability		C-27
	11.11	Incorporation of Exhibits and Schedules		C-27

 

 

C-3

---

 

ASSET PURCHASE AGREEMENT

 

This ASSET PURCHASE AGREEMENT (this “Agreement”), dated as of August 3, 2005, is entered into by and among WQN, INC., a Delaware corporation (“Seller”), VOIP, INC., a Texas corporation (“Parent”), and VOIP ACQUISITION COMPANY, a Delaware corporation (“Buyer”).

 

RECITALS

 

WHEREAS, Seller currently conducts the business of providing long distance telephony via a Voice-Over-Internet Protocol (“VOIP”);

 

WHEREAS, Parent is also engaged in the VOIP business and believes that a combination of Parent and Seller will result in a stronger competitor in a rapidly emerging industry;

 

WHEREAS, Seller desires to sell certain of Seller's assets and properties, including all rights and interests associated therewith to Buyer; and

 

WHEREAS, Parent and Buyer desire to purchase from Seller, upon the terms and conditions set forth herein, such assets, properties, rights and interests and, in connection therewith, Buyer will assume certain liabilities of Seller.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements set forth herein, the parties hereby agree as follows:

 

ARTICLE I.

DEFINITIONS

 

1.1 Certain Definitions. In addition to other terms defined throughout this Agreement, the following terms have the following meanings when used herein:

 

(a) “Assets” means all assets and properties used by Seller and its subsidiaries, if any, in its VOIP business, including all rights and interests associated therewith, other than the Excluded Assets, and, without limiting the generality of the foregoing, shall expressly include the following assets, properties, rights and interests of Seller:

 

(i) all intellectual property (and rights associated therewith), including patents, patent applications, trademarks, service marks, proprietary rights in trade names (other than the name “WQN, Inc.”), brand names, internet domain names, trade dress, labels, logos, slogans and other indications of origin, and copyrighted works (including any registrations or applications for registration of the foregoing in any jurisdiction and any extensions, modifications or renewals thereof), all as set forth in Section 1.1(a)(i) of the Disclosure Schedule (the “Seller Intellectual Property”);

 

(ii) except as otherwise provided herein, all rights, benefits and interests in and to all licenses (other than “shrink-wrap” and other “off the shelf” software licenses), Leases, contracts, agreements, commitments and undertakings (the “Contracts”) that are set forth in Section 1.1(a)(ii) of the Disclosure Schedule;

 

 (iii) the deposits and prepaid assets listed in Section 1.1(a)(iii) of the Disclosure Schedule; and

 

(iv) cash in the amount of USD 1,000,000.

 

(v) all Tangible Personal Property, including those items described in Section 1.1(a)(iv) the Disclosure Schedule;

 

(vi) all Inventories;

 

(vii) all Accounts Receivable;

 

(viii) all Governmental Authorizations and all pending applications therefor or renewals thereof, in each case to the extent transferable to Buyer, including those listed in Section 1.1(a)(viii) of the Disclosure Schedule;

 

(ix) all data and records (“Records”) related to the VOIP operations of Seller, including client and customer lists and Records, referral sources, research and development reports and Records, referral sources, research and development reports and Records, production reports and Records, service and warranty Records, equipment logs, operating guides and manuals, financial and accounting Records, creative materials, advertising materials, promotional materials, studies, reports, correspondence and other similar documents and Records and, subject to Legal Requirements, copies of all personnel Records and other Records described in Section 1.1(a)(ix) of the Disclosure Schedule;

 

C-4

---

 

(x) all of the intangible rights and property of Seller, including going concern value, goodwill, websites, URL listings, telephone, telecopy and e-mail addresses and listings and those items listed in Section 1.1(a)(x) of the Disclosure Schedule;

 

(xi) all insurance benefits, including rights and proceeds, arising from or relating to the Assets or the Assumed Liabilities prior to the Effective Time, unless expended in accordance with this Agreement; and

 

(xii) all claims of Seller against third parties relating to the Assets, whether choate or inchoate, known or unknown, contingent or noncontingent, including all such claims listed in the Disclosure Schedule.

 

(b) “Assumed Liabilities” means the liabilities of Seller set forth in Section 1.1(b) of the Disclosure Schedule to be assumed by Buyer.

 

(c) “Consent” means any notice to or consent, approval, authorization, order, filing, registration or qualification of or with any court, governmental body or third party.

 

(d) “Excluded Assets” means the following assets, properties, rights and interests of Seller:

 

(i) all cash, cash equivalents and short-term investments in excess of USD 1,000,000;

 

(ii) all minute books, stock Records and corporate seals;

 

(iii) the shares of capital stock of Seller held in treasury;

 

(iv) those rights relating to deposits and prepaid expenses and claims for refunds and rights to offset in respect thereof listed in Section 1.1(d)(iv) of the Disclosure Schedule;

 

(v) all insurance policies and rights thereunder (except to the extent included as a Contract);

 

(vi) the Seller Contracts listed in the Disclosure Schedule;

 

(vii) all personnel Records and other Records that Seller is required by law to retain in its possession;

 

(viii) all claims for refund of Taxes and other governmental charges of whatever nature;

 

(ix) all rights in connection with and assets of the Employee Plans;

 

(x) all rights of Seller under this Agreement, the Assignment and Assumption Agreement and the other Closing Documents;

 

(xi) the property and assets expressly designated in Section 1.1(d)(xi) of the Disclosure Schedule;

 

(xii) the limited partnership interest of Seller in the Cross Country Capital Partners, L.P. hedge fund;

 

(xiii) the limited partnership interest of Seller in Seaview Mezzanine Fund LP;

 

(xiv) the promissory note issued to Seller in connection with its sale of indiaonline.com, Inc.

 

(xv) Seller's director and officer liability insurance policy and all pre-paid deposits thereon;

 

(xvi) The “wqni.com” URL; and

 

(xvii) the interest of Seller in the office lease covering its principal offices in Dallas, Texas.

 

(e) “Business Day” means any day other than (a) Saturday or Sunday or (b) any other day on which banks in Texas are permitted or required to be closed. 

 

C-5

---

 

(f) “Effective Time” means the time at which the Closing is consummated.

(g) “Encumbrance” means any charge, claim, community or other marital property interest, condition, equitable interest, lien, option, pledge, security interest, mortgage, right of way, easement, encroachment, servitude, right of first option, right of first refusal or similar restriction, including any restriction on use, voting (in the case of any security or equity interest), transfer, receipt of income or exercise of any other attribute of ownership.

 

(h) “Environment” means soil, land surface or subsurface strata, surface waters (including navigable waters and ocean waters), groundwaters, drinking water supply, stream sediments, ambient air (including indoor air), plant and animal life and any other environmental medium or natural resource.

 

(i) “Environmental, Health and Safety Liabilities” means any cost, damages, expense, liability, obligation or other responsibility arising from or under any Environmental Law or occupational safety and health law (“Occupational Safety and Health Law”), including those consisting of or relating to:

 

(i) any environmental, health or safety matter or condition (including on-site or off-site contamination, occupational safety and health and regulation of any chemical substance or product);

 

(ii) any fine, penalty, judgment, award, settlement, legal or administrative proceeding, damages, loss, claim, demand or response, remedial or inspection cost or expense arising under any Environmental Law or Occupational Safety and Health Law;

 

(iii) financial responsibility under any Environmental Law or Occupational Safety and Health Law for cleanup costs or corrective action, including any cleanup, removal, containment or other remediation or response actions (“Cleanup”) required by any Environmental Law or Occupational Safety and Health Law (whether or not such Cleanup has been required or requested by any Governmental Body or any other Person) and for any natural resource damages; or

 

(iv) any other compliance, corrective or remedial measure required under any Environmental Law or Occupational Safety and Health Law.

 

The terms “removal,” “remedial” and “response action” include the types of activities covered by the United States Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”).

 

(j) “Environmental Law” means any Legal Requirement that requires or relates to:

 

(i) advising appropriate authorities, employees or the public of an intended or actual release or threatened release into the environmental of toxic or hazardous substances, or solid or hazardous waste, including, without limitation, emissions, discharges, spills, escapes or dumping (a “Release”) of pollutants or hazardous substances or materials, violations of discharge limits or other prohibitions and the commencement of activities, such as resource extraction or construction, that could have significant impact on the Environment;

4.4 Consents. Except as set forth in Section 4.4 of the Disclosure Schedule and duly obtained and delivered by Seller, no Consent is required to be made or obtained by Seller in connection with the execution and delivery of this Agreement or the consummation by Seller of the transactions contemplated herein, except for such Consents, the failure of which to obtain, would constitute a material adverse effect on Seller.

 

4.5 Assets.

 

(a) Seller has and will transfer to Buyer good, valid and marketable title to the Assets, free and clear of any Encumbrances of any kind. The delivery to Buyer of the instruments of transfer contemplated hereby will vest indefeasible and exclusive title to the Assets in Buyer, free and clear of all Encumbrances of any kind.

 

(b) Except for the Excluded Assets, the Assets are all material assets, properties, rights and interests used by Seller in connection with its VOIP business, and the Assets constitute all of the material assets, properties, rights and interests necessary to conduct its VOIP business in substantially the same manner as conducted by Seller prior to the date hereof. The Assets are in good operating condition and repair and are usable or salable in the Ordinary Course of Business, consistent with past practice and conform in all material respects to all applicable regulations relating to their use and operation.

 

4.6 Solvency; Fair Value. Seller is solvent. The consummation of the transactions contemplated hereby will not affect Seller's solvency subsequent to the Closing Date. Seller hereby acknowledges that the Purchase Price received pursuant to this Agreement constitutes reasonably equivalent value for the Assets that Buyer is acquiring pursuant hereto.

 

4.7 Litigation. Except as set forth in Section 4.7 of the Disclosure Schedule, there is no claim, action, suit, proceeding, or investigation pending or, to the Knowledge of Seller threatened against Seller or its directors, officers, agents or employees (in their capacity as such) relating to Seller's business, the Assets or any properties or rights of Seller's business or that is reasonably likely to adversely affect the Assets or the transactions contemplated hereby. There are no orders, writs, injunctions or decrees currently in force against Seller or its directors, officers, agents or employees (in their capacity as such) with respect to the conduct of Seller's business.

 

4.8 SEC Reports. (a) Seller has timely filed all required documents with the U.S. Securities and Exchange Commission (the “SEC”) since January 2003, including all certifications and statements required by (i) Rule 13-a-14 or 15d-14 under the Exchange Act or (ii) 18 U.S.C. Section 1350 with respect to such documents (collectively, the “Seller SEC Documents”). As of their respective dates, the Seller SEC Documents complied in all material respects with the requirements of the Securities Act of 1933, as amended (together with the rules and regulations promulgated thereunder, the “Securities Act”), or the Securities Exchange Act of 1934, as amended (together with the rules and regulations promulgated thereunder, the “Exchange Act”), as the case may be, and, at the respective times they were filed, none of the Seller SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Seller has made available to Parent and Buyer accurate and complete copies of all Seller SEC Documents.

(a) Subject to currently existing contractual and legal restrictions applicable to Seller or any of its subsidiaries, Seller shall, and shall cause each of its subsidiaries to, afford to the accountants, counsel, financial advisors and other representatives of Parent reasonable access to, and permit them to make such inspections as they may reasonably require of, during normal business hours during the period from the date of this Agreement through the Effective Time, all of its properties, books, contracts, commitments and records (including the work papers of independent accountants, if available and subject to the consent of such independent accountants) and, during such period, Seller shall, and shall cause each of its subsidiaries to, furnish promptly to Parent (i) a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of federal or state securities laws, (ii) a copy of the unaudited financial statements of Seller for each month ended during such period, in each case within 15 days after the last day of each such month ended and (iii) all other information concerning its business, properties and personnel as Parent may reasonably request. All information obtained pursuant to this Section 7.3 shall be kept confidential.

 

(b) From and after the Closing Date, Parent shall, and shall cause each of its subsidiaries to, afford to the accountants, counsel, financial advisors and other representatives of Seller reasonable access to, and permit them to make such copies as they may reasonably require of, during normal business hours, the Records relating to the Assets.

 

(c) From the date hereof until the Closing Date, within ten (10) days following the end of each calendar month, Parent shall provide to Seller and Seller shall provide to Parent, as applicable, copies of each party's unaudited financial statements for such calendar month.

7.4 Certain Payments, Fees and Expenses.

 

(a) Except as provided in this Section 7.4 and Section 7.8, whether or not the transactions contemplated by this Agreement is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby including the fees and disbursements of counsel and accountants and all financing commitment fees, shall be paid by the party incurring such costs and expenses from funds other that the Assets; provided, however, that all printing and mailing expenses and all filing fees (including filing fees under the Exchange Act) and all fees and expenses incurred with respect to communication with Seller's stockholders in connection with this Agreement and the transactions contemplated hereby shall be paid by Seller promptly when due.

 

(b) Notwithstanding any provision in this Agreement to the contrary, if this Agreement is terminated by (i) Seller pursuant to Section 9.1(g), or (ii) Parent pursuant to Section 9.1(h), then, in each case, Seller shall pay to Parent a fee of USD 250,000 in cash.

 

(c) In the case of such a termination of this Agreement by Seller, such payment shall be made no later than, and shall be a condition to the validity of, such termination; provided, however, that Seller may offset such payment against the amounts then due to Seller under the Bridge Note.

(e) Miscellaneous. If the final judgment of a court of competent jurisdiction declares that any term or provision of this Section 7.9 is invalid or unenforceable, the parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed.

 

7.10 Registration Rights. In addition to the rights of Seller under SEC Rule 144, if at any time during the two years after the Closing, Parent shall prepare and file one or more registration statements under the Securities Act with respect to public offering of equity securities of Parent, other than a registration statement on Forms S-4, S-8, or similar form, Parent will include in any such registration statement such information as is required, and such number of shares of Parent's common stock, par value $0.001 per share (the “Common Stock”), common stock held by Seller or as to which Seller has the right to obtain through exercise or conversion, to permit a public offering of such shares of Common Stock; provided, however, that (i) after Seller has sold 1,250,000 shares pursuant to any such registration statement(s), the maximum number of shares that Seller may sell pursuant to any such registration statement(s) shall not exceed 500,000 shares in any calendar quarter and (ii) if, in the written opinion of the Parent's managing underwriter, if any, for such offering, the inclusion of the shares requested to be registered, when added to the securities being registered by Parent or the selling security holder(s), would exceed the maximum amount of Parent's securities that can be marketed without otherwise materially and adversely affecting the entire offering, then Parent may exclude from such offering pro rata among all shareholders requesting registration that portion of the shares required to be so registered so that the total number of securities to be registered is within the maximum number of shares that, in the opinion of the managing underwriter, may be marketed without otherwise materially and adversely affecting the entire offering. Parent shall bear all fees and expenses other than the fees and expenses of Seller's counsel incurred in the preparation and filing of such registration statement and related state registrations, to the extent permitted by applicable law, and the furnishing of copies of the preliminary and final prospectus thereof to such Seller. This right shall be personal to Seller and not transferable.

 

7.11 Employees and Employee Benefits.

 

(a) Information on Active Employees. For the purpose of this Agreement, the term “Active Employees” shall mean all employees employed on the Closing Date by Seller for its business who are employed exclusively in Seller's business as currently conducted, including employees on temporary leave of absence, including family medical leave, military leave, temporary disability or sick leave, but excluding employees on long-term disability leave.

C-19

---

(b) Employment of Active Employees by Buyer.

(i) Buyer is not obligated to hire any Active Employee but may interview all Active Employees. Buyer will provide Seller with a list of Active Employees to whom Buyer has made an offer of employment that has been accepted to be effective on the Closing Date (the “Hired Active Employees”). Subject to Legal Requirements, Buyer will have reasonable access to the Seller's office and personnel Records (including performance appraisals, disciplinary actions, grievances and medical Records) of Seller for the purpose of preparing for and conducting employment interviews with all Active Employees and will conduct the interviews as expeditiously as possible prior to the Closing Date. Access will be provided by Seller upon reasonable prior notice during normal business hours. Effective immediately before the Closing, Seller will terminate the employment of all of its Hired Active Employees.

 

(ii) It is understood and agreed that (A) Buyer's expressed intention to extend offers of employment as set forth in this Section 6.11 shall not constitute any commitment, Contract or understanding (expressed or implied) of any obligation on the part of Buyer to a post-Closing employment relationship of any fixed term or duration or upon any terms or conditions other than those that Buyer may establish pursuant to individual offers of employment, and (B) employment offered by Buyer is “at will” and may be terminated by Buyer or by an employee at any time for any reason (subject to any written commitments to the contrary made by Buyer or an employee and Legal Requirements). Nothing in this Agreement shall be deemed to prevent or restrict in any way the right of Buyer to terminate, reassign, promote or demote any of the Hired Active Employees after the Closing or to change adversely or favorably the title, powers, duties, responsibilities, functions, locations, salaries, other compensation or terms or conditions of employment of such employees.

 

(c) Salaries and Benefits.

 

(i) Seller shall be responsible for (A) the payment of all wages and other remuneration due to Active Employees with respect to their services as employees of Seller through the close of business on the Closing Date, including pro rata bonus payments and all vacation pay earned prior to the Closing Date, and (B) the payment of any termination or severance payments and the provision of health plan continuation coverage in accordance with the requirements of COBRA and Sections 601 through 608 of ERISA.

 

(ii) Seller shall be liable for any claims made or incurred by Active Employees and their beneficiaries through the Closing Date under the Seller Employee Benefit Plans. For purposes of the immediately preceding sentence, a charge will be deemed incurred, in the case of hospital, medical or dental benefits, when the services that are the subject of the charge are performed and, in the case of other benefits (such as disability or life insurance), when an event has occurred or when a condition has been diagnosed that entitles the employee to the benefit.

ARTICLE IX.

TERMINATION, AMENDMENT AND WAIVER

 

9.1 Termination. Subject to Section 9.4(b), this Agreement may be terminated at any time prior to the Effective Time, whether before or after any approval of the sale of the Assets by the stockholders of Seller:

 

(a) by mutual written consent of Parent and Seller;

 

(b) by either Parent or Seller if the other party shall have failed to comply in any material respect with any of its covenants or agreements contained in this Agreement required to be complied with prior to the date of such termination, which failure to comply has not been cured within thirty business days following receipt by such other party of written notice from the nonbreaching party of such failure to comply;

C-22

---

 

(c) by either Parent or Seller if there has been (i) a breach by the other party (in the case of Parent, including any breach by Buyer) of any representation or warranty that is not qualified as to materiality which has the effect of making such representation or warranty not true and correct in all material respects or (ii) a breach by the other party (in the case of Parent, including any breach by Buyer) of any representation or warranty, in each case which breach has not been cured within thirty business days following receipt by the breaching party from the nonbreaching party of written notice of the breach;

 

(d) by Parent or Seller if the transactions contemplated by this Agreement have not been effected on or prior to the close of business on the date that is 120 days after the date of this Agreement; provided, however, that the right to terminate this Agreement pursuant to this Section 9.1(d) shall not be available to any party whose failure to fulfill any of its obligations contained in this Agreement has been the cause of, or resulted in, the failure of the sale of the Assets to have occurred on or prior to the aforesaid date;

 

(e) by Parent or Seller if any court or other Governmental Body having jurisdiction over a party hereto shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the consummation of the sale of the Assets and such order, decree, ruling or other action shall have become final and nonappealable;

 

(f) by Parent or Seller if the stockholders of the Company do not approve this Agreement at the Stockholder Meeting or at any adjournment or postponement thereof; provided, however, that Seller may not terminate this Agreement pursuant to this Section 9.1(f) if Seller has not complied with its obligations under Sections 6.1 and 6.2 or has otherwise breached in any material respect its obligations under this Agreement in any manner that could reasonably have caused the failure of the stockholder approval to be obtained at the Stockholder Meeting;

 

(g) by Seller on or after the tenth calendar day after Seller has notified Parent in writing that the Board of Directors of Seller has determined that a Takeover Proposal involving Seller constitutes a Superior Proposal (as hereinafter defined); provided, that, as of such tenth calendar day after Seller has so notified Parent, the Board of Directors of Seller continues to believe in its good faith judgment, after taking into consideration any changes in the terms of the transactions contemplated by this Agreement that have been proposed by Parent on or prior to such date, that such Takeover Proposal involving Seller continues to constitute a Superior Proposal. For purposes of this Agreement “Superior Proposal” means a Takeover Proposal involving Seller that the Board of Directors of Seller determines in its good faith judgment, after consultation with its financial advisors, is more favorable to Seller's stockholders than the transactions contemplated by this Agreement; or