<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 22, 1997
REGISTRATION NO. 333-29969
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
CHOICETEL COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
MINNESOTA 4813 41-1649949
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
9724 10TH AVENUE NORTH
PLYMOUTH, MINNESOTA 55441
(612) 544-1260
(Address and telephone number of registrant's principal executive offices and
principal place of business)
JACK S. KOHLER
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
9724 10TH AVENUE NORTH
PLYMOUTH, MINNESOTA 55441
PHONE: (612) 544-1260
FAX: (612) 544-1281
(Name, address and telephone number of agent for service)
--------------------------
COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS
SENT TO THE AGENT FOR SERVICE, SHOULD BE SENT TO:
ROBERT T. MONTAGUE MICHELE D. VAILLANCOURT
Robins, Kaplan, Miller & Ciresi L.L.P. Winthrop & Weinstine, P.A.
2800 LaSalle Plaza 3000 Dain Bosworth Plaza
800 LaSalle Avenue 60 South Sixth Street
Minneapolis, Minnesota 55402-2015 Minneapolis, Minnesota 55402-4430
Phone: (612) 349-8500 Phone: (612) 347-0700
Fax: (612) 339-4181 Fax: (612) 347-0600
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. /X/
--------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 22, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
CHOICETEL COMMUNICATIONS, INC.
800,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT
---------------------
ChoiceTel Communications, Inc. (the "Company") is offering 800,000 units
(the "Units"), each Unit consisting of one share of the Company's Common Stock,
par value $0.01 per share (the "Common Stock"), and one redeemable Common Stock
Purchase Warrant ("Redeemable Warrant"). The Redeemable Warrants are immediately
exercisable and transferable separately from the Common Stock. Each Redeemable
Warrant entitles the holder to purchase, at any time until five years following
the date that the Registration Statement relating to this Prospectus (the
"Registration Statement") has been declared effective by the Securities and
Exchange Commission (the "Effective Date"), one share of Common Stock at an
exercise price of $9.50 per Redeemable Warrant, subject to adjustment. The
Redeemable Warrants are subject to redemption by the Company for $0.01 per
Redeemable Warrant at any time 120 or more days after the Effective Date, on 30
days' written notice, provided that the closing bid price of the Common Stock
exceeds $10.00 per share (subject to adjustment) for any 10 consecutive trading
days prior to such notice. See "Description of Securities."
In addition to the Units offered hereby, this Prospectus also relates to the
registration for issuance by the Company of an additional 800,000 shares of
Common Stock upon exercise of the Redeemable Warrants. See "Description of
Securities."
Prior to this offering, there has been no public market for any of the
Company's securities, and no assurance can be given that a market will develop
or will be maintained after the offering. See "Underwriting" for a discussion of
the factors considered in determining the initial public offering price. The
Company has filed an application for quotation of its Common Stock and
Redeemable Warrants on The Nasdaq SmallCap Market under the symbols PHON and
PHONW, respectively.
--------------------------
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE, INVOLVE A HIGH DEGREE
OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION, AND SHOULD BE PURCHASED ONLY BY
PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS"
BEGINNING AT PAGE 6 FOR A DISCUSSION OF RISK FACTORS THAT SHOULD BE CONSIDERED
IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES OFFERED HEREBY AND "DILUTION"
ON PAGE 14.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Unit................................................. $7.50 $0.675 $6.825
Total (3)................................................ $6,000,000 $540,000 $5,460,000
</TABLE>
(1) The Company has agreed to (i) pay to the Underwriter a non-accountable
expense allowance equal to 2.0% of the gross proceeds of the offering; (ii)
indemnify the Underwriter against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"); and
(iii) grant the Underwriter a five-year warrant, exercisable during the last
four years, to purchase up to 80,000 Units at an exercise price of $9.00 per
Unit (the "Underwriter's Warrant"). See "Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$460,000, including the non-accountable expense allowance described in Note
1.
(3) Does not include 120,000 additional Units to cover over-allotments, if any,
which the Underwriter has an option to purchase from the Company for
forty-five (45) days from the date of this Prospectus. See "Underwriting."
If the option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $6,900,000, $621,000, and
$6,279,000, respectively.
--------------------------
The Units are offered by the Underwriter on a "firm commitment" basis when,
as and if delivered to and accepted by it, subject to the Underwriter's right to
reject orders in whole or in part. It is expected that delivery of certificates
representing the securities will be made on or about , 1997 in
Minneapolis, Minnesota.
EQUITY SECURITIES INVESTMENTS, INC.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
In the course of making forward-looking statements about the Company's
expectations for future performance, management makes assumptions which at the
time are based on information deemed to be accurate and relevant. The Company's
ability to achieve management's expectations is dependent upon numerous factors,
many of which are outside of the Company's control. Variations from the
assumptions used in making the forward-looking statements will cause the
Company's performance to differ from that expressed in such statements, and
those variations could be material.
------------------------
Prior to this offering, the Company has not been subject to the
informational requirements of the Securities Exchange Act of 1934, as amended.
After completion of this offering, the Company intends to furnish to its
shareholders annual reports containing audited financial statements and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENTS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
------------------------
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- --------------------------------------------- ---------
<S> <C>
AT&T......................................... 6
Bank......................................... 11
CAT.......................................... 11
ChoiceTel.................................... 15
CI........................................... 15
Common Stock................................. 1
Company...................................... 1, 3
Dial-Around.................................. 6, 25
Effective Date............................... 1
FCC.......................................... 6
independent pay telephones................... 23
interLATA.................................... 23
intraLATA.................................... 8, 23
LATA......................................... 23
LEC.......................................... 6, 23
MBCA......................................... 33
MN Act....................................... 16, 28
MNPUC........................................ 16
OSP.......................................... 17
<CAPTION>
DEFINED TERM PAGE
- --------------------------------------------- ---------
<S> <C>
PAL.......................................... 27
PSP.......................................... 6, 23
public pay telephones........................ 23
PUC.......................................... 7
RBOC......................................... 6, 23
Redeemable Warrant........................... 1
Registration Statement....................... 1
ROI.......................................... 19
SEC.......................................... 33
Securities Act............................... 1
Site Agreements.............................. 27
Site Providers............................... 6
smart phones................................. 24
Telco West................................... 11
Telecom Act.................................. 6
Underwriter.................................. 41
Underwriter's Warrant........................ 1
Units........................................ 1
U.S. West.................................... 16
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE COMBINED FINANCIAL
STATEMENTS OF THE COMPANY, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS
HAS BEEN ADJUSTED TO REFLECT THE CONSUMMATION OF THE ACQUISITIONS DESCRIBED
UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - RECENT ACQUISITIONS." IN ADDITION, AND UNLESS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO REFLECT A
TWO-FOR-ONE STOCK SPLIT WHICH OCCURRED IN APRIL 1997. AS USED IN THIS
PROSPECTUS, UNLESS THE CONTEXT REQUIRES OTHERWISE, THE "COMPANY" MEANS CHOICETEL
COMMUNICATIONS, INC., AND ITS WHOLLY-OWNED SUBSIDIARY, CHOICETEL, INC. UNLESS
OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITER IS NOT EXERCISED. SEE
"UNDERWRITING."
THE COMPANY
The Company is the largest independent payphone service provider in
Minnesota. The Company installed its first payphones in 1990 and presently has
an installed base of approximately 3,000 payphones in 10 states. Management
believes that it has developed the skills and systems to operate the Company on
a larger scale and intends to grow through internal expansion and acquisitions.
The Company believes the outlook for the pay telephone industry is favorable
because of recent legislation that has led to deregulation of the rates for
local pay telephone calls and an increase in the amount of compensation for
certain types of calls which previously produced little revenue for payphone
service providers. The Company anticipates that the rates for local pay
telephone calls will increase as a result of the deregulation. The Company also
believes that the continued expansion in telecommunication services, including
the rise in call waiting, voice mail and pager usage, will result in increased
calling volume, thus increasing the revenue generated by payphones. Deregulation
is also expected to lead to increased competition among local telephone service
providers and management anticipates that the increased competition will reduce
telephone line charges, one of the Company's principal operating expenses.
The Company has expanded its business through the installation of pay
telephones at new sites and through strategic acquisitions of payphone routes
and related assets. Since 1993, the Company has completed the acquisition of
four payphone routes, adding over 2,000 telephones to the Company's operations.
The Company seeks to acquire payphone routes with modern equipment, long-term
leases, potential for additional installations, a favorable regulatory
environment, and attractive returns based upon current operating conditions. The
Company believes that the pay telephone industry will continue to grow and the
Company will be well positioned to capture a larger share of the market.
The Company has developed a computer processing network that automates many
of the operations necessary for the efficient management of payphone routes. The
payphones operated by the Company are computer-based, enabling the Company to
monitor payphones in the field from its central office. The network allows the
Company to monitor phone call volume, identify malfunctioning equipment,
dispatch repair service, schedule efficient coin collections, calculate
commissions, print checks for location owners, rate and process long-distance
calls, and generate reports that analyze and monitor the profitability of the
phones. Management believes that as the Company grows, the network can be
expanded easily with little additional investment in infrastructure.
The Company was incorporated in Minnesota in 1989 as Intelliphone, Inc., and
changed its name in April 1997 to ChoiceTel Communications, Inc. Its executive
offices are located at 9724 10th Avenue North, Plymouth, Minnesota 55441, and
its telephone number is (612) 544-1260.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C> <C> <C>
800,000 Units, each Unit consisting of one share
Securities Offered....................... of Common Stock and one Redeemable Warrant. Each
Redeemable Warrant entitles the holder to
purchase, at any time until five years after the
Effective Date, one share of Common Stock at an
exercise price of $9.50 per Redeemable Warrant,
subject to adjustment. The Redeemable Warrants
are subject to redemption by the Company for
$0.01 per Redeemable Warrant at any time 120 or
more days after the Effective Date, on 30 days'
written notice, provided that the closing bid
price of the Common Stock exceeds $10.00 per
share (subject to adjustment) for any 10
consecutive trading days prior to such notice.
See "Description of Securities."
Securities Outstanding:(1)
Before the Offering.................... 2,115,006 shares of Common Stock
After the Offering..................... 2,915,006 shares of Common Stock
Use of Proceeds.......................... To retire debt, to finance acquisitions and
expansion, and for working capital and general
corporate purposes. See "Use of Proceeds."
Proposed Nasdaq SmallCap Market Common Stock: PHON
Symbols................................ Redeemable Warrants: PHONW
</TABLE>
- --------------------------
(1) Does not include 222,500 shares of Common Stock reserved for issuance
pursuant to options, consisting of outstanding options covering 122,500
shares and options for up to 100,000 shares which may be granted pursuant to
the Company's 1997 Long-Term Incentive and Stock Option Plan, or 800,000
shares of Common Stock issuable upon exercise of the Redeemable Warrants
comprising part of the Units in the offering. Also does not include 80,000
shares of Common Stock comprising part of the Units issuable upon exercise
of the Underwriter's Warrant or 80,000 shares reserved for issuance upon
exercise of the Redeemable Warrants comprising part of the Units subject to
the Underwriter's Warrant and up to 55,880 shares issuable upon conversion
of a note issued in connection with a recent acquisition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Recent Acquisitions," "Management," "Certain Transactions," "Description of
Securities" and "Underwriting."
RISK FACTORS
An investment in the securities offered hereby is highly speculative and
involves a high degree of risk and immediate substantial dilution. The Units
should be purchased only by persons who can afford to lose their entire
investment. See "Risk Factors" beginning at page 6 for a discussion of risk
factors that should be considered in connection with an investment in the Units
and "Dilution" at page 14.
4
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- -------------------------------------------
1996 1997
----------------------------- -----------------------------
1995 ACTUAL PRO FORMA(1) 1996 ACTUAL PRO FORMA(1)
---------- ------------- ------------- ----------- ----------- -------------
(DOLLARS IN 000S, EXCEPT PER SHARE FIGURES)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue....................... $2,817 $3,562 $7,705 $1,618 $3,768 $3,881
Cost of service....................... 1,785 1,987 4,181 1,031 1,719 1,793
Income (loss) before income taxes..... 122 (605)(2) (375)(2) (2) 363(2) 360(2)
Provision for income taxes
(unaudited)(3)...................... -- -- -- -- 127 127
Pro forma provision for income taxes
(credit) (unaudited)................ 43 (212) (131) 1 -- --
Net income (unaudited)(3)............. -- -- -- -- 236(2) 234(2)
Pro forma net income (loss)
(unaudited)......................... 79 (393) (244) 1 -- --
Per share:
Net income (unaudited).............. -- -- -- -- $0.12(2) $0.11(2)
Pro forma net income (loss)
(unaudited)....................... $ 0.04 $(0.20)(2) $(0.11)(2) $(0.00) -- --
Shares outstanding-weighted average... 1,935,189 1,948,489 2,134,729 1,935,189 1,951,516 2,137,756
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
---------------------- -------------------------------------
PRO PRO PRO FORMA AS
ACTUAL FORMA(1) ACTUAL FORMA(1) ADJUSTED(1)(4)
--------- ----------- --------- ----------- -------------
(DOLLARS IN 000S)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.......................................... $ 1,210 $ 1,371 $ 1,311 $ 1,468 $ 3,503
Total assets............................................ 2,969 8,440 6,756 8,923 10,958
Current liabilities..................................... 1,736 4,404 5,161 5,736 3,136
Long-term debt.......................................... 570 2,673 631 1,528 1,163
Shareholders' equity.................................... 664 1,362 964 1,659 6,659
Working capital (deficit)............................... (526) (3,033) (3,850) (4,267) 368
</TABLE>
- --------------------------
(1) Gives effect to the acquisitions described under "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Recent
Acquisitions" as if they were completed acquisitions as of the beginning of
the statement of operations periods presented or the balance sheet dates, as
applicable. The pro forma financial information is presented for
illustration purposes only and is not indicative of what the Company's
actual results and financial condition would have been for the periods and
as of the dates presented.
(2) Reflects reserve for Minnesota sales tax contingency of $865,000
established December 31, 1996 for the years ended prior thereto and $110,140
for the six months ended June 30, 1997. See "Business - Legal Proceedings -
Minnesota Sales Tax" and the Combined Financial Statements of the Company
and notes thereto.
(3) Reflects the termination of the Company's status as an "S" corporation
effective January 1997.
(4) Adjusted to reflect the sale of the 800,000 Units offered hereby and the
application of the net proceeds thereof (after deducting the underwriting
discount and estimated offering expenses) as described in "Use of Proceeds."
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS HIGHLY SPECULATIVE AND
INVOLVES A HIGH DEGREE OF RISK. PRIOR TO MAKING AN INVESTMENT, A PROSPECTIVE
INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING THE COMBINED FINANCIAL
STATEMENTS OF THE COMPANY AND NOTES THERETO CONTAINED ELSEWHERE HEREIN.
RISKS ASSOCIATED WITH EXPANSION STRATEGY. The Company intends to expand its
business by contracting to install payphones or acquiring assets from payphone
service providers ("PSPs") in geographic areas where the Company is presently
operating as well as in new areas. There can be no assurance that the Company
will be able to identify and acquire businesses on a basis which permits it to
satisfy its minimum rates of return and other criteria for acquisitions.
Further, there can be no assurance that the Company will be able to locate
favorable new sites for internal growth, obtain the capital necessary to permit
it to pursue its business strategies, access developing technologies at
satisfactory costs to provide those service enhancements demanded by consumers
and location owners ("Site Providers") in its existing and future businesses, or
hire qualified new employees to meet the requirements of its expanding business.
The Company has been in business since 1989 and, therefore, has a limited
history of operations. Consequently, there can be no assurance that the
Company's business strategy will prove to be successful or that expansion of the
Company's business will not have a material adverse effect on the operations and
financial condition of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Recent Acquisitions" and
"Business - Acquisition and Expansion Strategy."
COMPETITION. The pay telephone business is highly competitive. The Company
has no patents or exclusive rights to operate its business. The markets in which
the Company operates are fragmented, but include certain large, well-capitalized
providers of telecommunications services with substantially greater resources
than the Company. The Company's principal competition in the pay telephone
business comes from local exchange carriers ("LECs") operated by the regional
Bell operating companies (the companies that were formed as a result of the 1985
divestiture of American Telephone & Telegraph Company ("AT&T"), collectively
referred to herein as "RBOCs"), GTE Corporation, a number of independent
providers of pay telephone services, major operator service providers and
interexchange carriers. In addition to offering pay telephone service, LECs are
the exclusive line service providers in certain geographical regions. The
Company also competes with many other non-LEC telecommunication companies which
offer services similar to those of the Company. Increased competition from these
sources could cause the Company to offer higher commissions to new Site
Providers. Such higher commissions could have a material adverse effect on the
Company by impeding its ability to grow and by increasing its operating expenses
as a percentage of revenue. Wireless and cellular communications provide an
alternative to payphones and may, therefore, be a factor in slowing the rate of
growth of the payphone industry. See "Business - Competition."
PENDING DETERMINATION OF DIAL-AROUND COMPENSATION RATE. Pursuant to the
Telecommunications Act of 1996 (the "Telecom Act"), the Federal Communications
Commission (the "FCC"), which administers the interstate common carriage of
telecommunications, was authorized to evaluate and adjust the amount of
compensation paid by long-distance carriers to payphone companies when consumers
access a long-distance carrier directly by dialing an access or an 800 number or
by using a non-billable calling card and thereby "dial-around" the Company's
long-distance carrier in order to reach another long-distance carrier
("Dial-Around"). The FCC's payphone order of November 6, 1996 increased the flat
rate of Dial-Around compensation to approximately $45 per payphone per month on
an interim basis, based on $0.35 per call times the national average of 131
monthly Dial-Around calls placed per payphone. Prior to the increase in
Dial-Around compensation, the Company was receiving approximately $6 per
payphone per month in Dial-Around compensation. The increase mandated by the FCC
resulted in a significant increase in the amount and proportion of the Company's
revenue from Dial-Around compensation, from $50,201 (or 1.8% of revenue) in the
year ended December 31, 1995 to $197,456 (or 7.0% of revenue) in the year
6
<PAGE>
ended December 31, 1996, and from $48,118 (or 3.0% of revenue) in the six months
ended June 30, 1996 to $700,695 (or 18.6% of revenue) in the six months ended
June 30, 1997. Pursuant to an appeal of the FCC's order, the U.S. Court of
Appeals for the D.C. Circuit ruled in July 1997 that the FCC's use of $0.35 as a
per call rate to determine an interim rate of monthly Dial-Around compensation
per payphone, which was based on the per call rate for a local coin call in
states where the local coin call rates have been deregulated, was inappropriate
and instructed the FCC to re-examine the $0.35 per call rate. In its Public
Notice, DA 97-1673, dated August 5, 1997 (the "Public Notice"), the FCC
solicited comments on "whether the local coin rate, subject to an offset for
expenses unique to those calls, is an appropriate per call compensation rate"
for determining the rate of Dial-Around compensation. The comment period will
expire on September 9, 1997, although there can be no assurance when the FCC
will issue another order regarding the rate of Dial-Around compensation, what
that order will determine, whether the order will be appealed, and what the
determination would be upon any appeal. While it is not a forgone conclusion
that the FCC's order on reconsideration will result in a rate of Dial-Around
compensation that is less than $45 per payphone per month, that was the intent
of the appeal of the FCC's 1996 order. During the pendency of the rate
determination, the long-distance carriers are required to pay the payphone
service providers Dial-Around compensation at the rate of approximately $45 per
payphone per month. However, the FCC stated in the Public Notice that
retroactive adjustments to such compensation may occur. Because the Company
cannot be certain that the rate of Dial-Around compensation will not be reduced
retroactively or in the future, it has established a reserve in the amount of
$109,000 at June 30, 1997 to cover a potential decrease from $0.35 to $0.30 in
the per call amount used to determine the Dial-Around compensation rate,
retroactive to November 1996, and it will continue to accumulate this reserve
until the Company believes there is a sufficient level of certainty regarding
the rate of Dial-Around compensation. However, there can be no assurance that a
reduction, if any, in the per call charge used to determine the rate of
Dial-Around compensation will not be greater than $0.05 per call. A reduction in
the rate of Dial-Around compensation that is to be paid to the Company that is
greater than the Company's estimate of such reduction could have an adverse
effect on the results of operations and financial condition of the Company,
which could be material. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations" and "Business -
Government Regulation - Dial-Around Compensation."
OTHER REGULATORY FACTORS. The Company's operations are significantly
influenced by the regulation of pay telephone services. Authority for regulating
these services is concurrently vested in the FCC, and the various state public
utilities commissions ("PUCs"). Regulatory jurisdiction is determined by the
interstate or intrastate character of the subject service, and the degree of
regulatory oversight exercised varies among jurisdictions. Regulatory actions by
these agencies have had, and are expected to continue to have, both positive and
negative effects upon the Company. While most matters affecting the Company's
operations fall within the administrative purview of these regulatory agencies,
state and federal legislatures and the federal district court administering the
AT&T divestiture are also involved in establishing certain rules and
requirements governing aspects of these services. Changes in existing laws and
regulations, as well as new laws and regulations, applicable to the activities
of the Company or other telecommunications businesses, may materially adversely
impact the operations and financial condition of the Company. See "Business -
Government Regulation."
The FCC has had under consideration for several years proposals that would
require most interstate long-distance calls initiated by dialing "0" from pay
telephones to be completed using one or more predetermined long-distance
carriers, such as AT&T, MCI and Sprint, rather than through the automated pay
telephone or operator service provider to whom the pay telephones are
pre-subscribed ("Billed Party Preference"). Some proposals would also extend
Billed Party Preference to most intrastate calls initiated by dialing 0. There
is significant industry opposition to all of the proposals. Although the Company
believes it is unlikely that such proposals will be implemented, if they were to
be adopted and implemented as currently proposed, they could have a material
adverse impact on the Company's business.
7
<PAGE>
The FCC also has under consideration alternatives to Billed Party
Preference, including rate cap and rate disclosure proposals. Although Billed
Party Preference and its alternatives have been under consideration since 1987,
the Company cannot predict whether or when the FCC will adopt any such
proposals, or, if adopted, whether a rate cap or rate disclosure will have a
material adverse impact on the Company.
The FCC's November 1996 payphone order will repeal all rules regulating the
cost of a local payphone call in October 1997, with the intention that the
market will set the rate for local payphone calls. See "Business - Government
Regulation - Deregulation of Local Pay Telephone Rates." The Company believes
that deregulation of rates for local pay telephone calls will result in
increased rates. However, there can be no assurance that there will be an
increase in the rates for local pay telephone calls, and the absence of such an
increase could have an adverse effect upon the Company's results of operations
and financial condition, which could be material.
State regulatory commissions are primarily responsible for regulating the
rates, terms and conditions for intrastate telephone services available from pay
telephones. There are several states in which it is illegal to provide certain
intrastate services using non-LEC pay telephones, and such prohibitions could
adversely affect the Company's ability to expand. In addition, several states
have not authorized competition among intraLATA operator services (services
related to calls originating and terminating in the same local access transport
area) because of the exclusive franchise granted to LECs in such states. All of
these barriers are expected to be eliminated as a result of the Telecom Act. See
"Business - Government Regulation."
TECHNOLOGICAL CHANGE AND NEW SERVICES. The telecommunications industry has
been characterized by rapid technological advancements, frequent new service
introductions and evolving industry standards. In the future, the Company's
business could be adversely affected by the introduction of new technology, such
as improved wireless communications, cellular telephone service and other
personal communications systems. The Company believes that its future success
will depend on its ability to anticipate and respond to changes and new
technology. There can be no assurance that the Company will have sufficient
resources to make the investments necessary to acquire new technology or to
introduce new services that would satisfy an expanded range of customer needs.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
DEPENDENCE UPON THIRD-PARTY PROVIDERS. The Company's ability to complete
operator and direct dial long-distance calls is dependent upon contractual
arrangements with long-distance carriers. While the Company believes that it has
access to several providers of these services at competitive rates and expects
to continue to have such access in the foreseeable future, the continuing
availability of these resources cannot be assured.
SERVICE INTERRUPTIONS; EQUIPMENT FAILURES. The Company's long-distance
operations require that the equipment of its long-distance service providers be
operational 24 hours per day, 365 days per year. As is the case with other
telecommunications companies, the Company's long-distance operations may
experience temporary service interruptions or equipment failures, which may
result from causes beyond the Company's control. Any such event could have a
material adverse effect on the Company.
RELIANCE ON SINGLE BRAND OF PAYPHONES. To date, the Company has installed
only "INTELLICALL" brand payphones and has acquired companies using only
INTELLICALL payphones. If INTELLICALL payphones were to become unavailable for
some reason, or if the Company decided to acquire payphones that were not
INTELLICALL brand payphones, the Company would experience delay and additional
costs in adapting its proprietary software, stocking additional spare parts and
training personnel to service the new brand of payphones, which could have a
material adverse effect on the Company. See "Business - Acquisition and
Expansion Strategy."
SEASONALITY. Similar to other pay telephone companies, the Company's
business is seasonal, with revenues and earnings being generally lower during
the winter months and greater during the summer months since weather conditions
affect outdoor pay telephone usage.
8
<PAGE>
DIVIDEND POLICY. The Company does not intend to pay dividends following
completion of this offering. See "Dividend Policy."
RELIANCE ON KEY PERSONNEL. The Company is heavily dependent on the efforts
of Jeffrey R. Paletz, Melvin Graf, Jack S. Kohler and certain other management
personnel. Jeffrey R. Paletz, Melvin Graf and Jack S. Kohler have each entered
into an employment agreement with the Company having a term that expires in
April 1999. The loss of the services of one or more of these individuals could
have a material adverse effect on the Company. The Company is the beneficiary
under policies of life insurance in the aggregate amount of $1,800,000 covering
these three officers. In addition, the failure of the Company to attract and
retain additional management to support its business strategy could have a
material adverse effect on the Company. See "Management."
DILUTION. Purchasers of the Units will incur immediate and substantial
dilution in the tangible book value of $5.46 per share of Common Stock. In
addition, the Company may use shares of Common Stock to consummate acquisitions,
and any such issuance of Common Stock or the issuance of Common Stock upon the
exercise of options or warrants would cause further dilution to existing
shareholders. See "Dilution."
NO PRIOR PUBLIC MARKET; SECURITIES ELIGIBLE FOR FUTURE SALE. Prior to this
offering, there has been no public market for any securities of the Company, and
there can be no assurance that an active trading market for the Common Stock or
Redeemable Warrants will develop or continue after this offering. The Company
has filed an application for quotation of its Common Stock and Redeemable
Warrants on The Nasdaq SmallCap Market, and no assurance can be given that such
application will be accepted. The initial public offering price was determined
by negotiations between the Company and the Underwriter based upon several
factors and may not be indicative of the market prices for the Common Stock and
Redeemable Warrants after this offering. See "Underwriting." The market prices
of the Company's Common Stock and Redeemable Warrants could be significantly
affected by factors such as variations in the Company's operating results and
regulatory developments. Although as a condition of the underwriting, the
Company's existing shareholders must agree with the Underwriter not to sell
Common Stock for periods of six months to two years from the date of this
Prospectus, the market prices of the Common Stock and Redeemable Warrants after
this offering could thereafter be adversely affected by sales of Common Stock by
those shareholders. See "Securities Eligible for Future Sale."
POSSIBLE VOLATILITY OF PRICES FOR SECURITIES. The market prices for the
Common Stock and Redeemable Warrants may be highly volatile depending on various
factors including, among others, the Company's operating results, general
conditions in the pay telephone industry, announcements of business developments
by the Company or its competitors, and the market for similar securities, which
market is subject to various pressures. In addition, the securities market is
subject to price and volume fluctuations unrelated to the operating performance
of the Company.
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS;
POSSIBLE REDEMPTION OF WARRANTS. Purchasers of Units will be able to exercise
the Redeemable Warrants only if a current prospectus relating to the shares of
Common Stock underlying the Redeemable Warrants is then in effect and only if
such securities are qualified for sale or exempt from qualification under the
applicable securities laws of the states in which the various holders of
Redeemable Warrants reside. Although the Company will use its best efforts to
maintain the effectiveness of a current prospectus covering the shares of Common
Stock underlying the Redeemable Warrants, there can be no assurance that the
Company will be able to do so, or that any required amendments will be declared
effective by federal or state authorities in a timely manner. The Company will
be unable to issue shares of Common Stock to those persons desiring to exercise
their Redeemable Warrants if a current prospectus covering the securities
issuable upon the exercise of the Redeemable Warrants is not kept effective or
if such securities are not qualified or exempt from qualification in the states
in which the holders of the Redeemable Warrants reside. The Redeemable Warrants
are subject to redemption by the Company at $0.01 per Redeemable Warrant at any
time 120 or more days after the Effective Date, on 30 days' written notice, if
the closing bid price of the
9
<PAGE>
Common Stock exceeds $10.00 per share (subject to adjustment) for 10 consecutive
trading days prior to such notice. If the Redeemable Warrants are redeemed,
holders of Redeemable Warrants will lose their right to exercise the Redeemable
Warrants except during such 30-day redemption period. Redemption of the
Redeemable Warrants could force the holders to exercise the Redeemable Warrants
at a time when it may be disadvantageous for the holders to do so or to sell the
Redeemable Warrants at the then market price or accept the redemption price,
which is likely to be substantially less than the market value of the Redeemable
Warrants at the time of redemption. See "Description of Securities - Redeemable
Warrants."
CONTROL BY MANAGEMENT; ANTI-TAKEOVER PROVISIONS. Upon completion of this
offering, officers and directors of the Company will beneficially own
approximately 60% of the outstanding shares of Common Stock and, accordingly,
will be in a position to control the affairs of the Company, including the
election of the Board of Directors. If these shareholders vote together as a
group, they will be able to substantially influence the business and affairs of
the Company, including the election of individuals to the Company's Board of
Directors, and to otherwise affect the outcome of certain actions that require
shareholder approval, such as adopting amendments to the Company's articles of
incorporation and approving certain mergers, sales of assets and other business
acquisitions and dispositions. See "Principal Shareholders."
The Company is subject to the provisions of the Minnesota Business
Corporation Act which includes provisions relating to "control share
acquisitions" and restricting "business combinations" with "interested
shareholders." Such provisions could have the effect of deterring or delaying a
takeover or other change in control of the Company and could have a depressive
effect on the market prices of the Common Stock and Redeemable Warrants.
Accordingly, shareholders may be denied the opportunity to participate in a
transaction which offers a premium to the prevailing market prices of the Common
Stock or Redeemable Warrants. See "Description of Securities - Provisions of the
Company's Articles and Bylaws and the Minnesota Business Corporation Act."
DISCRETIONARY USE OF PROCEEDS. Approximately $2,035,000, or 40.7%, of the
net proceeds to be received by the Company in the offering have been designated
for acquisitions and expansion, and for working capital and general corporate
purposes which may be utilized for one or more alternative purposes in the
discretion of the Company. See "Use of Proceeds."
UNDESIGNATED PREFERRED STOCK. The Board of Directors is authorized, without
any action by the Company's shareholders, to issue up to 5,000,000 shares of
authorized but undesignated Preferred Stock and to fix the powers, preferences,
rights and limitations of any such Preferred Stock or any class or series
thereof. Persons acquiring Preferred Stock could have preferential rights with
respect to voting, liquidation, dissolution or dividends over existing
shareholders, including purchasers of Units in this offering. This ability of
the Board would permit the Company to adopt a shareholders' rights plan or to
take other action that could deter a hostile takeover of the Company, entrench
the Board of Directors or deter an unsolicited tender offer. See "Description of
Securities."
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units are estimated to
be approximately $5,000,000 (or approximately $5,801,000 if the Underwriter's
over-allotment option is exercised in full) after deducting underwriting
discounts and estimated expenses of this offering. The Company intends to apply
the net proceeds approximately as follows:
<TABLE>
<CAPTION>
DOLLARS
------------
<S> <C>
Retirement of bank debt......................................................... $ 2,600,000
Retirement of acquisition debt.................................................. 365,000
Acquisitions and expansion...................................................... 2,000,000
Working capital and general corporate purposes.................................. 35,000
------------
Total....................................................................... $ 5,000,000
------------
------------
</TABLE>
RETIREMENT OF BANK DEBT. Approximately $2,600,000 of the proceeds from this
offering will be used to retire the balance of the Company's outstanding
obligation to National City Bank (the "Bank"), which obligation arose in January
1997 and matures in January 1998. The Company used $2,200,000 of the proceeds
from such loan to finance the acquisition of assets from Telco West, Inc.
("Telco West"). See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Recent Acquisitions." The Company makes principal
payments to the Bank on a monthly basis, together with interest on the
outstanding loan balance accruing at the rate of two points over the "reference"
rate announced from time to time by the Bank.
RETIREMENT OF ACQUISITION DEBT. Approximately $365,000 of the proceeds from
this offering will be used to retire a portion of the Company's outstanding
obligation to Telco West, due in April 1998, which arose in connection with the
acquisition of site contracts and related assets in Colorado, Idaho, Oregon,
Washington and Wyoming. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Acquisitions."
ACQUISITIONS AND EXPANSION. The Company will reserve approximately
$2,000,000 of the proceeds from this offering for acquisitions and expansion.
The Company anticipates expanding its business through the acquisition of site
contracts and related assets from PSPs. The Company completed the Telco West
acquisition in January 1997 and the acquisition of assets of Computer Assisted
Technologies, Inc. ("CAT") in August 1997. Although the Company routinely
explores acquisition opportunities, no acquisitions are pending as of the date
hereof. If the Company does not use the full amount of proceeds allocated for
acquisitions and expansion, it may use such proceeds for further debt reduction
and general corporate purposes.
WORKING CAPITAL AND GENERAL CORPORATE PURPOSES. The remainder of the
proceeds, estimated to be $35,000, will be retained as working capital and used
for general corporate purposes.
If the Underwriter exercises the over-allotment option in full, the Company
will realize additional net proceeds of approximately $801,000, which may be
used for further debt reduction, to finance acquisitions or for general
corporate purposes. In addition, the Company may derive up to $8,740,000 from
the exercise of the Redeemable Warrants included in the Units. Any amounts that
the Company derives from the exercise of the Redeemable Warrants are expected to
be used for further debt reduction, to finance acquisitions or for general
corporate purposes. The Company has the right, under certain circumstances, to
redeem the Redeemable Warrants for a total cost of up to $9,200. See "Risk
Factors - Current Prospectus and State Registration Required to Exercise
Warrants; Possible Redemption of Warrants."
The foregoing use of proceeds is based upon the Company's expectations with
respect to its projected business operations and anticipated revenue from such
operations. If such expectations are not met, the
11
<PAGE>
Company may have to reallocate the proceeds in such manner as it deems
appropriate under the circumstances.
Pending such uses, the net proceeds of this offering will be invested in
bank certificates of deposit, investment-grade securities and short-term,
income-producing investments, including government obligations and other money
market instruments. The Company believes that the net proceeds of this offering,
together with funds generated from operations, will be sufficient to conduct its
operations for two years.
DIVIDEND POLICY
The Company intends to retain future earnings to fund the development and
growth of its business and, therefore, does not anticipate paying cash dividends
on the Common Stock for the foreseeable future. The Company has paid a $0.01 per
quarter dividend on its outstanding shares of Common Stock since mid-1995. The
Company's credit arrangement with the Bank includes covenants which prohibit the
Company from paying dividends at a higher rate. Any future payment of dividends
will be determined by the Board of Directors of the Company and will depend on
its financial condition, results of operations, restrictions in financing
agreements and other factors the Board of Directors deems relevant.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997, and as adjusted to give effect to the sale of the Units offered hereby
and the application of the net proceeds from such sale as set forth under "Use
of Proceeds." This material should be read in conjunction with the Combined
Financial Statements of the Company and the notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA(1) ADJUSTED(2)
------------ ------------ -------------
<S> <C> <C> <C>
Short-term debt....................................................... $ 3,686,178 $ 4,260,558 $ 1,295,558
Long-term debt, net of current maturities............................. 630,942 1,528,462 1,528,462
Shareholders' equity:(3)
Preferred Stock, par value $0.01 per share, 5,000,000 shares
authorized; none outstanding
Common Stock, par value $0.01 per share, 15,000,000 shares
authorized; 1,928,766 shares issued and outstanding; 2,115,006
shares pro forma; 2,915,006 shares as adjusted.................... 1,479,892 2,178,292 7,178,292
Paid-in capital..................................................... 0 (515,679) (515,679)
Accumulated deficit................................................. (515,679) 0 0
------------ ------------ -------------
Total shareholders' equity........................................ 964,213 1,662,613 6,662,613
------------ ------------ -------------
Total capitalization............................................ $ 5,281,333 $ 7,451,633 $ 9,486,633
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
- --------------------------
(1) Gives effect to the acquisition of assets from CAT as described under
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Recent Acquisitions" as if it had been completed as of June
30, 1997. The pro forma financial information is presented for illustration
purposes only and is not indicative of what the Company's actual financial
condition would have been as of such date.
(2) Adjusted to reflect the sale of the 800,000 Units offered hereby and the
application of the net proceeds thereof (after deducting the underwriting
discount and estimated offering expenses) as described in "Use of Proceeds."
(3) Does not include 186,240 shares of Common Stock issued in August 1997 in
connection with a recent acquisition and up to 55,880 shares of Common
Stock issuable upon conversion of a note issued in connection therewith,
222,500 shares of Common Stock reserved for issuance pursuant to options,
consisting of outstanding options covering 122,500 shares and options for up
to 100,000 shares which may be granted pursuant to the Company's 1997
Long-Term Incentive and Stock Option Plan, or 800,000 shares of Common Stock
issuable upon exercise of the Redeemable Warrants comprising part of the
Units in the offering. Also does not include 80,000 shares of Common Stock
comprising part of the Units issuable upon exercise of the Underwriter's
Warrant or 80,000 shares reserved for issuance upon the exercise of the
Redeemable Warrants comprising part of the Units subject to the
Underwriter's Warrant. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Recent Acquisitions,"
"Management," "Certain Transactions," "Description of Securities" and
"Underwriting."
13
<PAGE>
DILUTION
For purposes of the following discussion, it is assumed that the entire
amount of each Unit's offering price is allocable to the share of Common Stock
included therein and that no amount is allocable to the Redeemable Warrant
included therein. The Company's net tangible book value as of June 30, 1997 was
$575,020, or $0.30 per share of Common Stock. "Net tangible book value" per
share is determined by dividing the tangible net worth of the Company (tangible
assets minus total liabilities) by the number of outstanding shares of Common
Stock. Without giving effect to changes in net tangible book value after June
30, 1997, except for the sale by the Company of the Units offered hereby (after
deduction of the underwriting discount and estimated offering expenses), the
Company's net tangible book value at June 30, 1997 would have been $5,575,020,
or $2.04 per share. This represents an immediate increase in the net tangible
book value per share of Common Stock to the present shareholders of $1.74 and an
immediate dilution of $5.46 per share to investors purchasing Units in this
offering. The following table illustrates this dilution per share:
<TABLE>
<S> <C> <C>
Initial public offering price................................. $ 7.50
Net tangible book value at June 30, 1997.................... $ 0.30
Increase in net tangible book value attributable to new
investors................................................. 1.74
---------
Pro forma net tangible book value after the offering.......... 2.04
---------
Dilution to new investors..................................... $ 5.46
---------
---------
</TABLE>
The following table provides a comparison of the total number of shares of
Common Stock purchased from the Company, the total consideration paid, and the
average price per share paid by the current holders of Common Stock and by the
investors purchasing Units in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(1) AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholders................................ 1,928,766 70.7% $ 1,443,473 19.4% $ 0.75
New investors........................................ 800,000 29.3 6,000,000 80.6 $ 7.50
---------- --------- ------------ ---------
Total............................................ 2,728,766 100.00% $ 7,443,473 100.00% $ 2.73
---------- --------- ------------ ---------
---------- --------- ------------ ---------
</TABLE>
- --------------------------
(1) Does not reflect deduction of any underwriting discounts or other expenses
incurred in connection with the issuance of the Units.
The above tables assume no exercise of the Underwriter's over-allotment
option. If such option is exercised in full, the new investors will have paid
$6,900,000 for 920,000 shares of Common Stock, representing 82.7% of the total
consideration for 32.3% of the total number of shares outstanding.
The foregoing calculations do not include 186,240 shares of Common Stock
issued in August 1997 in connection with a recent acquisition or up to 55,880
shares issuable upon conversion of a note issued in connection therewith,
222,500 shares reserved for issuance pursuant to options, consisting of
outstanding options covering 122,500 shares and options for up to 100,000 shares
which may be granted pursuant to the Company's 1997 Long-Term Incentive and
Stock Option Plan, or 800,000 shares of Common Stock issuable upon exercise of
the Redeemable Warrants. The calculations also do not include 80,000 shares of
Common Stock comprising part of the Units issuable upon exercise of the
Underwriter's Warrant or 80,000 shares reserved for issuance upon exercise of
the Redeemable Warrants comprising part of the Units subject to the
Underwriter's Warrant. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Acquisitions," "Management,"
"Certain Transactions," "Description of Securities" and "Underwriting."
14
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The selected combined financial data presented below for, and as of the end
of, the years ended December 31, 1995 and 1996, have been derived from the
financial statements of ChoiceTel Communications, Inc. ("ChoiceTel"), and its
wholly-owned subsidiary, Choicetel, Inc. ("CI"), which financial statements have
been audited by Schechter Dokken Kanter Andrews & Selcer, Ltd., independent
certified public accountants. The selected combined financial data presented
below for, and as of the end of, the six month periods ended June 30, 1996 and
1997, have been derived from the unaudited financial statements of ChoiceTel and
CI which, in the opinion of the Company's management, include all adjustments
necessary for a fair presentation of financial position and the results of
operations. The operating results for the six months ended June 30, 1997, are
not necessarily indicative of the operating results to be expected for the full
year or for any other period. The selected combined financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Combined Financial Statements of
the Company and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------- --------------------------------------
1996 1997
------------------------- -------------------------
1995 ACTUAL PRO FORMA(1) 1996 ACTUAL PRO FORMA(1)
--------- --------- ------------ --------- --------- ------------
(DOLLARS IN 000S, EXCEPT PER SHARE FIGURES)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue............... $2,817 $3,562 $7,705 $1,618 $3,768 $3,891
Cost of service............... 1,785 1,987 4,181 1,031 1,719 1,793
--------- --------- ------------ --------- --------- ------------
Gross margin.................. 1,032 1,575 3,524 587 2,049 2,098
--------- --------- ------------ --------- --------- ------------
Selling, general and
administrative expenses...... 573 830 1,911 358 814 823
--------- --------- ------------ --------- --------- ------------
Income (loss) before income
taxes........................ 122 (605)(2) (375)(2) 2 363(2) 360(2)
--------- --------- ------------ --------- --------- ------------
Provision for income taxes
(unaudited)(3)............... -- -- -- -- 127 127
--------- --------- ------------ --------- --------- ------------
Pro forma provision for income
taxes (credit) (unaudited)... 43 (212) (131) 1 -- --
--------- --------- ------------ --------- --------- ------------
Net income (unaudited)(3)..... -- -- -- -- 236(2) 234(2)
Pro forma net income (loss)
(unaudited).................. $ 79 $ (393) $ (244) $ 1 -- --
Per share:
Net income (unaudited)...... -- -- -- -- $ 0.12(2) $ 0.11(2)
Pro forma net income (loss)
(unaudited)............... $ 0.04 $ (0.20)(2) $ (0.11)(2) $ 0.00 -- --
--------- --------- ------------ --------- --------- ------------
--------- --------- ------------ --------- --------- ------------
Shares outstanding-weighted
average...................... 1,935,189 1,948,489 2,134,729 1,935,189 1,951,516 2,137,756
OPERATING DATA (AT END OF
PERIOD):
Number of phones in service... 1,013 1,219 2,824 1,133 3,047 3,047
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------
DECEMBER 31, 1996 PRO FORMA
------------------------ AS
ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1) ADJUSTED(1)(4)
--------- ------------- --------- ------------- -------------
(DOLLARS IN 000S)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................................... $ 1,210 $ 1,371 $ 1,311 $ 1,468 $ 3,503
Total assets..................................... 2,969 8,440 6,756 8,923 10,958
Current liabilities.............................. 1,736 4,404 5,161 5,736 3,136
Long-term debt................................... 570 2,673 631 1,528 1,163
Total liabilities................................ 2,305 7,077 5,792 7,264 4,299
Shareholders' equity............................. 664 1,362 964 1,659 6,659
Working capital (deficit)........................ (526) (3,033) (3,850) (4,267) 368
</TABLE>
- --------------------------
(1) Gives effect to the acquisitions described under "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Recent
Acquisitions" as if they were completed acquisitions as of the beginning of
the statement of operations periods presented or the balance sheet dates, as
applicable. The pro forma financial information is presented for
illustration purposes only and is not indicative of what the Company's
actual results and financial condition would have been for the periods and
as of the dates presented.
(2) Reflects reserve for Minnesota sales tax contingency of $865,000
established December 31, 1996 for the years prior thereto and $110,140 for
the six months ended June 30, 1997. See "Business - Legal Proceedings -
Minnesota Sales Tax" and the Combined Financial Statements of the Company
and notes thereto.
(3) Reflects the termination of the Company's status as an "S" corporation
effective January 1997.
(4) Adjusted to reflect the sale of the 800,000 Units offered hereby and the
application of the net proceeds thereof (after deducting the underwriting
discount and estimated offering expenses) as described in "Use of Proceeds."
REORGANIZATION
In 1995, CI was incorporated to operate as a competitive LEC under the
Minnesota Telecommunications Act of 1995 (the "MN Act"), which allows companies,
upon approval of the Minnesota Public Utilities Commission ("MNPUC"), to buy and
competitively resell non-residential telephone service provided by U.S. West
Communications, Inc. ("U.S. West"). CI was formed separately from ChoiceTel in
order to more efficiently facilitate MNPUC approval, which approval was obtained
on April 19, 1996. The stock ownership of CI was substantially identical to the
ownership of ChoiceTel at the time of CI's formation. In addition to the
telephone lines CI sells to ChoiceTel, CI also sells pay telephone lines to
several other pay telephone companies in Minnesota. In March 1997, a corporate
reorganization was effected in which the shareholders of CI transferred their
common stock to ChoiceTel as an additional contribution to its capital and, as a
result, CI became a wholly-owned subsidiary of ChoiceTel.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company derives revenue from three principal sources: coin calls,
non-coin calls and Dial-Around calls. Coin calls represent calls paid for with
coins deposited in the telephone. The Company recognizes coin revenue in the
amount deposited. Non-coin calls are calls charged to a customer credit card or
billed to the called party (collect calls). These calls are processed by the
payphone's computer using "store and forward" technology or, if a live operator
is requested, the call is processed by an operator service provider ("OSP") such
as, for example, AT&T, MCI or Sprint. Compensation for Dial-Around calls is paid
by long-distance carriers when consumers access a long-distance carrier directly
by dialing an access number or an 800 number or by using a non-billable calling
card. See "Business - Operations" and
"- Government Regulation."
The principal costs related to ongoing operation of the Company's payphones
include telephone line charges, consisting of payments made by the Company to
LECs and long-distance carriers for access charges and use of their networks;
commission payments to Site Providers; and collection, repair and maintenance
costs.
RESULTS OF OPERATIONS
The following table presents certain items in the combined statements of
operations as a percentage of revenue for the years ended December 31, 1994
through 1996, and the six month periods ended June 30, 1996 and 1997, as well as
the average number of phones in service during such periods:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
REVENUE:
Coin revenue.............................................. 81.4% 83.3% 78.9% 83.0% 67.3%
Non-coin revenue.......................................... 17.2 14.9 14.1 14.0 13.0
Dial-Around compensation.................................. 1.4 1.8 7.0 3.0 18.6
Competitive LEC revenue................................... -- -- 1.6 -- 0.3
--------- --------- ----- --------- ---------
Total service revenue................................. 100.0% 100.0% 100.0% 100.0% 100.0%
--------- --------- ----- --------- ---------
--------- --------- ----- --------- ---------
SERVICE COSTS AND EXPENSES:
Telephone line charges.................................... 43.0% 42.5% 36.2% 43.1% 26.3%
Commissions............................................... 18.3 18.0 16.3 17.6 15.5
Collection, repair and maintenance(1)..................... 7.1 7.5 8.5 10.6 10.0
--------- --------- ----- --------- ---------
Total cost of service................................. 68.4% 68.0% 61.0% 71.3% 51,8%
--------- --------- ----- --------- ---------
--------- --------- ----- --------- ---------
Gross margin.............................................. 31.6% 32.0% 39.0% 28.7% 48.2%
Selling, general and administrative expenses(1)........... 15.9 15.7 18.1 14.5 15.4
Interest.................................................. 3.7 3.2 3.4 9.5 11.6
Depreciation and amortization............................. 8.2 8.8 10.2 8.7 12.2
Sales tax contingency..................................... 0.0 0.0 24.3 0.0 2.9
--------- --------- ----- --------- ---------
Net income (loss) before pro forma
income tax provision..................................... 3.8% 4.3% (17.0)% 0.1% 9.6%
--------- --------- ----- --------- ---------
--------- --------- ----- --------- ---------
Average phones in service................................. 730 865 1,123 1,070 2,811
</TABLE>
- --------------------------
(1) A portion of the expenses classified as "Collection, repair and
maintenance" are classified as "Selling, general and administrative
expenses" in the Combined Financial Statements of the Company and notes
thereto.
17
<PAGE>
The following table presents items in the combined statements of operations
on a per phone in service basis for the years ended December 31, 1994 through
1996, and the six month periods ended March 31, 1996 and 1997, based on the
average number of phones in service during such periods:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(DOLLARS PER PHONE)
<S> <C> <C> <C> <C> <C>
REVENUE PER PHONE:
Coin revenue..................................................... $ 2,744 $ 2,714 $ 2,504 $ 1,290 953
Non-coin revenue................................................. 577 485 447 217 184
Dial-Around compensation......................................... 48 58 176 46 263
Competitive LEC revenue.......................................... 0 0 45 0 15
--------- --------- --------- --------- ---------
Total service revenue.......................................... $ 3,369 $ 3,257 $ 3,172 $ 1,554 $ 1,415
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SERVICE COSTS AND EXPENSES PER PHONE:
Telephone line charges........................................... $ 1,448 $ 1,384 $ 1,149 $ 670 $ 372
Commissions...................................................... 616 586 516 274 219
Collection, repair and maintenance(1)............................ 240 244 271 165 142
--------- --------- --------- --------- ---------
Total cost of service.......................................... 2,304 2,214 1,936 1,109 733
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Gross margin..................................................... $ 1,065 $ 1,043 $ 1,236 $ 445 $ 682
Selling, general and administrative expenses(1).................. 535 512 573 225 219
Interest......................................................... 125 104 107 70 122
Depreciation and amortization.................................... 275 286 325 148 164
Sales tax contingency............................................ 0 0 770 0 41
--------- --------- --------- --------- ---------
Net income (loss) before pro forma income tax provision.......... $ 130 $ 141 $ (539) $ 2 $ 136
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) A portion of the expenses classified as "Collection, repair and
maintenance" are classified as "Selling, general and administrative
expenses" in the Combined Financial Statements of the Company and notes
thereto.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30,
1996. Total revenue for the six months ended June 30, 1997, increased
approximately $2,150,082, or 132.9%, compared to the six months ended June 30,
1996. This growth was primarily attributable to the increase in the average
number of pay telephones in service from 1,070 during the 1996 period to 2,811
(including 586 phones in service pursuant to an agreement with CAT, which
effectively resulted in the Company realizing all of CAT's operating revenue and
expenses beginning February 1, 1997) during the 1997 period and the increased
Dial-Around compensation. Of the increase in revenue, $652,500, or 30.3%, is
attributable to an increase in the rate of Dial-Around compensation which
occurred on November 6, 1996. On that date, Dial-Around compensation increased
from approximately $6 per phone per month to approximately $45 per phone per
month. See "Business - Government Regulation - Dial-Around Compensation." Coin
revenue increased $1,193,000, but declined to $953 per phone for the period
compared to $1,290 in the previous year, as a result of the seasonal nature of
the phones acquired in Oregon, Idaho and Washington, which generate most of
their revenue from May through October.
Telephone and long-distance charges decreased to 26.3% of total revenue for
the 1997 period, as compared to 43.1% the previous year, due to the increase in
Dial-Around compensation and a reduction in line charges in Minnesota in June
1996 from approximately $90 per line to $52 per line. Site Provider commissions
and collection, service and repair costs decreased from 17.6% and 10.6% of
revenue,
18
<PAGE>
respectively, in 1996, to 15.5% and 10.0% of revenue, respectively, in 1997.
Selling, general and administrative ("SG&A") expenses increased by $347,555 but,
when expressed per phone in service, declined from $225 for the 1996 period to
$219 for the same period in 1997.
Interest expense for the first six months in 1997 increased to 8.6% of
revenue as compared to 4.5% of revenue in the prior year due to increased
borrowing to finance the acquisition of a route in the Pacific Northwest and new
installations. Depreciation and amortization for the 1997 period increased to
11.6% of revenue from 9.5% of revenue as a result of the depreciation and
amortization associated with the acquired routes.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995. For
the year ended December 31, 1996, total revenue increased approximately
$745,000, or 26.4%, compared to the year ended December 31, 1995. This growth
was primarily attributable to the increase in the average number of pay
telephones in service from 865 during 1995 to 1,123 during 1996, the increase in
Dial-Around compensation and the initiation of operations as a competitive LEC.
Of the increase in revenue, $147,000, or 19.7%, of the increase, was
attributable to the increase in the Dial-Around compensation rate on November 6,
1996, and $50,700, or 6.8%, of the increase in revenue was attributable to sales
of telephone service to non-affiliated companies.
Telephone and long-distance charges decreased in 1996 to 36.2% of total
revenue, compared to 42.5% of total revenue the prior year. The decrease was
primarily attributable to CI receiving authorization to act as a reseller of
telephone service in April 1996, which ultimately reduced the Company's line
charges in Minnesota to $52 per line.
Commissions paid to Site Providers decreased to 16.3% of total revenue in
1996, compared to 18.0% in the prior year. This was attributable to increased
Dial-Around compensation revenue (which is not included in commission
calculations for Site Providers) and to the phones added in 1996 which generated
less revenue and, therefore, lower Site Provider commissions than the phones
placed into service in prior years. As part of its growth strategy and in order
to take advantage of lower line rates, the Company was able to install pay
telephones that previously had insufficient revenue to meet the Company's return
on investment ("ROI") objectives.
Service, collection, repair and maintenance costs increased in 1996 over the
prior year by approximately $94,000, or 44.4%, due to the start-up costs
associated with adding phones in new geographic areas, as well as the increased
number of phones in service.
In 1996, SG&A expenses increased approximately $200,000, or 45.1%, from the
prior year. This was attributable, in part, to higher marketing costs associated
with the Company's growth strategy. Interest expense increased to 3.4% of
revenue compared to 3.2% of revenue in the prior year due to increased borrowing
to finance an acquisition of 85 phones in December 1995. Depreciation and
amortization increased in 1996 to 10.2% of revenue from 8.8% of revenue in the
prior year, attributable to amortization associated with the acquired contracts.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994. For
the year ended December 31, 1995, total revenue increased approximately
$358,000, or 14.6%, compared to the prior year. This growth was primarily
attributable to an increase in the average number of pay telephones in service
from 730 in 1994 to 865 in 1995. Long-distance revenue decreased to 14.9% of
total revenue compared to 17.2% in the previous year due to Dial-Around calls
replacing revenue producing calls at the Company's payphones.
Telephone and long-distance charges remained relatively unchanged as a
percentage of revenue. Such charges represented 42.5% of total revenue in 1995
compared to 43.0% of revenue in the prior year. Commissions paid to Site
Providers and collection, repair and maintenance costs remained relatively
constant.
19
<PAGE>
SG&A expenses increased approximately $52,000 in 1995, or 13.3%, from the
prior year. As a percentage of revenues, SG&A expenses decreased to 15.7% of
total revenues, compared to 15.9% in the prior year. Interest expenses remained
stable. Depreciation and amortization increased approximately $46,000, or 23.1%,
from the prior year.
SALES TAX CONTINGENCY. The Company, based on its analysis of the published
regulations of the Minnesota Department of Revenue, has not remitted any sales
tax payments to the State of Minnesota. In 1996, the Company learned that the
opinion of the Department was that calls from payphones were subject to state
sales tax. Management is of the view that the payphone service it provides is
not subject to sales tax and the Company is challenging the imposition of the
tax. Nonetheless, on December 31, 1996, the Company established a reserve of
$865,000 for the years prior thereto and has reserved an additional $110,140 for
the six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1997, the Company's operating activities
provided $131,600, net long- and short-term financing provided $3,123,000, and
the sale of shares of Common Stock and the collection of subscription
receivables provided $64,000. The Company invested $4,136,000 in acquisitions
and new installations, resulting in a $819,000 decrease in cash balances.
Operating activities in the year ended December 31, 1996 provided $600,400
and sales of shares of Common Stock during the year provided $920,000. During
the year, the Company invested $462,200 in new installations, reduced debt by
$68,500 and paid $143,700 in dividends. The overall impact was an $846,000
increase in cash balances.
For the year ended December 31, 1995, the Company's operating activities
provided $161,000 and long-term financing provided $778,000. During the year,
$623,000 was invested in acquisitions and new installations, $320,000 of
short-term debt was retired and $33,000 was paid as dividends, resulting in a
$37,000 decrease in cash balances for the year.
In January 1997, the Company entered into an Amended and Restated Loan
Agreement with the Bank pursuant to which the Company can borrow up to
$3,000,000. The Company has granted the Bank a first lien on all of its assets
to secure its obligations to the Bank. The agreement provides for the payment of
interest on the amount outstanding from time to time at an annual rate equal to
2.0% over the "reference" rate announced from time to time by the Bank and
expires in January 1998. The Company intends to repay all of its obligations to
the Bank with the proceeds from this offering. See "Use of Proceeds." The
Company has also borrowed $453,000 in the aggregate from certain individuals and
intends to repay the individual lenders out of cash generated from operations as
and when their promissory notes mature. Management believes that the proceeds
from the sale of the Units hereby, together with cash generated from operations,
will be adequate to fund the Company's operations for the foreseeable future.
RECENT ACQUISITIONS
In January 1997, the Company completed its acquisition from Telco West of
site contracts for 1,020 payphones located in Colorado, Idaho, Oregon,
Washington and Wyoming and all equipment located at the respective sites, as
well as the tradename "Telco Northwest." The purchase price for the acquired
assets was $3,374,745, with the Company paying $2,173,245 in cash (financed with
a short-term loan from the Bank) and the balance by delivery of a 10% secured
subordinated note in the principal amount of $365,000, with the principal due on
April 1, 1998, and a second 10% secured subordinated note in the principal
amount of $841,500, which amortizes over a 54-month period. The promissory notes
are collateralized by a security interest granted in substantially all of the
Company's pay telephone assets, which security interest is subordinate to the
senior secured position of the Bank as the Company's primary lender. In
connection with the acquisition, Telco West and its principal shareholder
entered into a five-year non-compete agreement covering the states of Colorado,
Idaho, Oregon, Washington and Wyoming. In
20
<PAGE>
1996, Telco West's payphone division earned $366,538 on revenues of $3,426,00.
The Company expects results to improve due to the increase in Dial-Around
compensation.
In January 1997, the Company entered into an agreement to acquire from CAT
586 pay telephone site contracts and related assets, as well as site contracts
only for the installation of an additional 98 pay telephones, all located in
Minnesota and Wisconsin. Pending approval of the acquisition by the MNPUC and
the satisfaction of other conditions of closing, the parties entered into a
Route Service Agreement effective as of February 1, 1997, pursuant to which the
Company managed and serviced the CAT payphones in Minnesota and Wisconsin for a
monthly fee equal to the operating revenue therefrom less equipment leasing
costs and certain other expenses payable by CAT to third parties. The MNPUC
entered an order on June 27, 1997, approving the Company's acquisition of CAT's
assets and the transaction was consummated as of August 14, 1997. The purchase
price for the assets was $2,270,300, consisting of $100,000 payable in cash at
closing, $350,000 pursuant to a convertible note payable to CAT as described
below, the Company's assumption of $1,121,900 of debt to two equipment leasing
companies, and the balance of $698,400 by delivery to CAT of 186,240 shares of
unregistered Common Stock. The convertible note bears interest at the rate of
8.5% per annum with interest only payable monthly and the entire principal
balance and any unpaid interest thereon is due on September 30, 1997. The note
is convertible at any time prior to payment into Common Stock on the basis of
one share of stock for each $6.33 of principal and accrued interest due. In
connection with the transaction, CAT and its principal shareholder entered into
a two-year non-compete agreement with the Company covering the states of
Minnesota and Wisconsin. The president of CAT, Dustin Elder, now a Vice
President of the Company, also entered into employment, non-compete and stock
option agreements with the Company. In 1996, CAT had a net loss of $166,000 on
revenues of $1,479,337. The Company expects results to improve due to lower line
rates in Minnesota and the increase in Dial-Around compensation.
The pro forma statements of operations and balance sheets below reflect the
acquisitions from Telco West and CAT as if they had been completed as of the
beginning of the statement of operations periods presented or the balance sheet
dates, as applicable. The pro forma financial information is presented for
illustration purposes only and is not indicative of what the Company's actual
results and financial condition would have been for the periods and as of the
dates presented.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 1996 30, 1997
------------------------------------------------ ------------------------
COMPANY TELCO WEST CAT COMBINED COMPANY CAT(1)
----------- ----------- --------- ----------- ----------- -----------
(DOLLARS IN 000S)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue.................................. $ 3,562 $ 2,664 $ 1,479 $ 7,705 $ 3,768 $ 123
Cost of service.................................. 1,987 1,486 825 4,298 1,719 73
----------- ----------- --------- ----------- ----------- -----
Gross margin..................................... 1,575 1,178 654 3,407 2,049 50
----------- ----------- --------- ----------- ----------- -----
Selling, general and administrative expenses..... 830 393 487 1,710 814 9
Depreciation and amortization.................... 365 307 158 830 437 12
Interest expense................................. 120 95 180 395 325 23
Sales tax contingency............................ 865 0 84 949 110 10
----------- ----------- --------- ----------- ----------- -----
Income (loss) before income taxes................ (605) 383 (255) (477) 363 (4)
Provision for income taxes....................... -- -- -- -- 127 --
Pro forma provision for income taxes (credit).... (212) 134 (89) (167) -- (1)
----------- ----------- --------- ----------- ----------- -----
Pro forma net income (loss)...................... $ (393) $ 249 $ (166) $ (310) $ 236 $ (2)
----------- ----------- --------- ----------- ----------- -----
----------- ----------- --------- ----------- ----------- -----
<CAPTION>
COMBINED
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue.................................. $ 3,891
Cost of service.................................. 1,792
-----------
Gross margin..................................... 2,099
-----------
Selling, general and administrative expenses..... 823
Depreciation and amortization.................... 449
Interest expense................................. 347
Sales tax contingency............................ 120
-----------
Income (loss) before income taxes................ 360
Provision for income taxes....................... 127
Pro forma provision for income taxes (credit).... (1)
-----------
Pro forma net income (loss)...................... $ 234
-----------
-----------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------------------------
PRO FORMA
COMPANY CAT ADJUSTMENTS(2) COMBINED
----------- --------- ----------------- -----------
(DOLLARS IN 000S)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets........................................................... $ 1,310 $ (100) $ 1,211
Property................................................................. 4,936 1,725 6,661
Other assets............................................................. 510 545 1,055
----------- --------- --- -----------
Total assets........................................................... $ 6,756 $ 2,170 $ 0 $ 8,927
----------- --------- --- -----------
----------- --------- --- -----------
Current liabilities...................................................... 5,161 574 5,736
Long-term debt net of current portion.................................... 631 897 1,528
Shareholders' equity
Common stock........................................................... 1,480 699 2,179
Paid-in capital........................................................ 0 (516) (516)
Accumulated deficit.................................................... (516) (516) 0
----------- --------- --- -----------
Total shareholders' equity........................................... 964 699 0 1,663
----------- --------- --- -----------
Total liabilities and shareholders' equity......................... $ 6,756 $ 2,170 $ 0 $ 8,927
----------- --------- --- -----------
----------- --------- --- -----------
</TABLE>
- --------------------------
(1) Does not include CAT's operating revenues or expenses for the period
February 1, 1997 to June 30, 1997, which are included in the Company's
operating revenues and expenses pursuant to the Route Service Agreement.
(2) Reflects the reclassification of accumulated deficit to paid-in capital.
RECENTLY ISSUED ACCOUNTING STANDARDS - NEW ACCOUNTING PRONOUNCEMENT
The Company will adopt in the fiscal year ending December 31, 1997,
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128"), which was issued in February 1997. SFAS No. 128 requires disclosure
of basic earnings per share ("EPS") and diluted EPS, which replaces the existing
primary EPS and fully diluted EPS, as defined by APB No. 15. Basic EPS is
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the year. Dilutive EPS is computed similar to
EPS as previously reported provided that, when applying the treasury stock
method to common equivalent shares, the Company must use its average share price
for the period rather than the more dilutive greater of the average share price
or end-of-period share price required by APB No. 15.
22
<PAGE>
BUSINESS
GENERAL
The Company is the largest independent payphone service provider ("PSP") in
Minnesota. The Company installed its first payphones in early 1990 and presently
has an installed phone base of approximately 3,000 payphones in 10 states. The
Company has grown its business through the installation of pay telephones in new
areas and through strategic asset acquisitions of payphone routes and related
assets, including 270 payphones located in Minnesota acquired from American
Amusement Arcade in 1993; 85 payphones acquired in Nevada from Telco West in
1995; an additional 1,020 payphones acquired from Telco West in 1997 in Oregon,
Idaho, Colorado, Washington and Wyoming; and 586 payphones located in Minnesota
and Wisconsin acquired from CAT, together with site contracts only for the
installation of an additional 98 payphones.
INDUSTRY OVERVIEW
In 1996, calls made from pay telephones were estimated at $7 billion in
annual revenues to the United States telecommunications industry. Pay telephones
may be "public," meaning they are owned by LECs, or "independent," meaning they
are owned and operated by companies independent of the LECs, such as the
Company. Of the approximately 2 million pay telephones operating in the United
States in 1996, it is estimated that approximately 350,000 were independent.
Today's telecommunications marketplace was principally shaped by the 1985
AT&T divestiture of the 22 regional Bell operating companies ("RBOCs"), which
provided local telephone services within their areas of operation. The AT&T
divestiture and the many regulatory changes adopted by the FCC and state
regulatory authorities in response to the AT&T divestiture have resulted in the
creation of new business segments in the telecommunications industry. As a
result of the AT&T divestiture, pay telephones may now be owned and operated
independently.
As part of the AT&T divestiture, the United States was divided into
geographic areas known as local access transport areas or "LATAs." Telephone
service that both originates and terminates within the same LATA ("intraLATA")
is priced based on tariffs filed with and approved by state regulatory
authorities. Local exchange carriers ("LECs") provide intraLATA telephone
service to, among others, independent pay telephone companies. LECs are
generally prohibited from offering or deriving revenues or income from services
between LATAs ("interLATA"). In addition, most state regulatory authorities
require LECs to provide local access line service to independent pay telephone
companies. See "Business - Government Regulation."
Long-distance carriers provide interLATA service and, in some circumstances,
may also provide long-distance service within LATAs. An interLATA long-distance
pay telephone call begins with an originating LEC transmitting the call from the
pay telephone that originates the call to a point of connection with a
long-distance carrier. The long-distance carrier, through its owned or leased
switching and transmission facilities, transmits the call across its
long-distance network to the LEC serving the local area in which the recipient
of the call is located. This terminating LEC then delivers the call to the
recipient. Independent PSPs contract with one or more long-distance carriers to
provide long-distance service to their pay telephones.
BUSINESS STRATEGY
The Company has focused on identifying payphone sites that had the potential
to achieve a high return on investment ("ROI") after depreciating the equipment
over the life of the phone lease. Although others in the industry have used
shorter leases, the Company's analysis indicated that a long-term lease was
necessary in order to achieve the Company's ROI objective and to offer a
competitive commission to Site
23
<PAGE>
Providers. Therefore, most of the Company's pay telephones are placed with Site
Providers under leases having terms of five years or more.
The Company's objective is to grow through additional acquisitions and
internally, thereby achieving economies of scale. There are approximately 1,500
independent PSPs nationally. The Company believes that there is a significant
opportunity to consolidate the highly fragmented independent segment of the
public payphone industry. Further, independent PSPs, as compared to the RBOCs,
generally have a larger percentage of computer-based, or "smart," phones in
their inventory of pay telephones and their payphones are placed in locations
that generate higher revenue per phone. The Company intends to use the proceeds
from this offering to become a more active consolidator of the independent
payphone market. Management believes that the Company's experience in completing
acquisitions will be instrumental in identifying, negotiating and ultimately
integrating additional acquisitions.
The Company also intends to expand through internal growth. The Company
actively seeks to contract and install additional payphones to increase its
sales in existing markets. The installation of new payphone locations is
generally less expensive, though less predictable, than acquiring existing PSPs.
ACQUISITION AND EXPANSION STRATEGY
The Company believes that the existence of many small independent PSPs
presents acquisition opportunities for the Company. The Company further believes
that management's experience in identifying and negotiating potential
acquisitions and integrating acquired companies into the Company's ongoing
operations will enable it to grow and benefit from the associated economies of
scale.
In reviewing potential acquisition candidates, the Company considers various
factors, including:
1. HISTORICAL AND PRO FORMA FINANCIAL PERFORMANCE
The Company reviews the historical revenues, mix between coin and
non-coin revenue and cash flows of the telephones to be acquired
and analyzes their prospective profitability based upon pro forma
considerations such as lower service and collection expenses,
lower general and administrative expenses, and the more favorable
terms and conditions which the Company may be able to obtain from
long-distance service providers.
2. LOCATION AGREEMENTS
The Company seeks to acquire payphone contracts that are long-term
(five or more years) with automatic renewals at the end of the
term, that are assignable to another company, and which cannot be
canceled by the Site Provider but give the Company the right to
remove the phone if the revenues are insufficient.
3. EQUIPMENT IN SERVICE
There are three primary suppliers of smart phones to PSPs. To
date, the Company has installed only "INTELLICALL" brand payphones
and has acquired only companies using INTELLICALL payphones. This
has allowed the Company to quickly integrate acquired phones into
daily operations. The Company could acquire routes using another
brand's smart phones but it would have to factor in the additional
costs associated with adapting proprietary software, stocking
additional spare parts and training personnel for proficiency on
new equipment.
24
<PAGE>
4. LOCATION AND ECONOMIES OF SCALE
The Company considers the geographic proximity of the payphones to
be acquired to the Company's existing service areas, and the
extent to which the acquisition would provide the Company with
economies of scale through more efficient utilization of coin
collection and service personnel. The Company seeks to enter new
geographic areas that will result in similar economies of scale
through one or more acquisitions.
Installations at new locations are an important part of the Company's
expansion strategy in that pay telephones placed directly with Site Providers,
rather than through acquisition, have historically provided the Company with its
highest returns. The Company has generally been able to add pay telephones at
the rate of 100 phones per year in Minnesota, and anticipates that this rate of
expansion will increase as the Company enters additional markets. Because the
Company's Site Provider base is primarily businesses, the Company regularly
obtains additional pay telephone locations as the Site Providers' respective
businesses grow.
OPERATIONS
The Company operates, services and maintains a system of approximately 3,000
pay telephones in the midwestern and western United States, with approximately
60% of its payphones located in Minnesota. All of the Company's pay telephones
accept coins as payment for local or long-distance calls and can also be used to
place local or long-distance cashless calls.
COIN CALLS
The Company's pay telephones generate coin revenue primarily from local
calls. In all of the states in which the Company's pay telephones are located,
the Company charges the same rates for local coin calls as does the relevant
LEC; in most states that charge is $0.25. The maximum rate LECs and independent
pay telephone companies may charge for local calls is typically set by state
regulatory authorities.
Long-distance coin calls are carried by long-distance carriers that have
agreed to provide long-distance service to the Company's telephones. The
majority of the Company's phones sell coin long-distance for a rate of $0.25 per
minute, with a two minute minimum. This rate is well below U.S. West's rates for
coin long-distance and is significantly less expensive than credit card or
collect long-distance rates. The Company offers these rates to create a better
value for price sensitive consumers and to discourage Dial-Around calling from
its phones (as the Company receives no incremental revenue from users who place
long-distance calls through such services as "1-800-COLLECT" and the many other
long-distance providers that can be accessed through the Company's payphones).
However, beginning in October 1997, the Company is scheduled to receive
incremental revenue from Dial-Around calling. See "Government Regulation -
Dial-Around Compensation." Management believes that its $0.25 per minute
long-distance rate results in considerable goodwill and is a point of
differentiation between its phones and its LEC competitors.
NON-COIN CALLS
The Company also receives revenue from non-coin, or cashless, calls made
from its pay telephones, including credit card calls, calling card calls,
collect calls and third-party billed calls. These calls are processed by the
payphone's computer using store and forward technology, or, if a live operator
is requested, then the call is transferred to the Company's designated OSP.
DIAL-AROUND CALLS
A Dial-Around call originates from a payphone when the user dials a
non-billable access number such as, for example, 1-800-Collect, 1-800-CallATT or
10ATT, and thereby dials around the Company's long-
25
<PAGE>
distance carrier in order to reach another long-distance carrier. The user
deposits no money for the call and, prior to 1992, the long-distance provider
carrying the call paid no commission to the payphone owner. Since 1992, payphone
owners have been compensated by long-distance carriers for Dial-Around calls.
COMPUTER NETWORK AND EQUIPMENT. The Company focused its early efforts on
building a computer processing network that automated many of the operations of
managing a pay telephone enterprise. Specialized software was designed and
written when it was not available from industry suppliers. The Company's smart
phones are part of a centralized network that links all of the Company's phones
in the field with central processors. The system allows the Company to monitor
phone call volume, identify malfunctioning equipment, dispatch repair service,
schedule efficient coin collections, calculate commissions, print checks to Site
Providers, rate and process long-distance calls using store and forward
technology, and generate necessary reports that analyze and monitor
profitability of the phones. Management believes that as the Company grows, this
network can be expanded easily with little additional investment in
infrastructure.
The Company installs pay telephones which it believes incorporate the latest
technology. The equipment makes use of microprocessors to provide voice
synthesized calling instructions, detect and count coins deposited during each
call, inform the caller at certain intervals of the time remaining on each call,
and identify the need for and the amount of an additional deposit. The pay
telephones can be programmed and reprogrammed from the Company's central
computer facilities to update rate information or to direct different kinds of
calls to particular carriers. The Company's pay telephones can distinguish coins
by size and weight, report to a remote location the total coinage in the coin
box, perform self-diagnosis and automatically report problems to a
pre-programmed service number, and immediately report attempts of vandalism or
theft. Some of the telephones also operate on power available from the telephone
lines, thereby avoiding the need for and reliance upon an additional power
source at the installation location. The telephones are designed to have a
user-friendly appearance and manner of operation similar to LEC-owned pay
telephones.
The Company's smart phones utilize store and forward technology which
enables the Company to sell credit card, calling card and collect calls through
its own OSP. The store and forward software program provides callers with
instructions communicated by a digitized human voice for entering billing
information, such as a calling card number or a terminating phone number for a
collect call, prior to connecting a call. For example, for a collect call, a
synthesized voice directs the caller to speak his name into the payphone
handset, the caller's response is digitally recorded and played back when the
call is answered at its destination, and the called party is instructed to press
"1" on his telephone to accept the call. The software program also minimizes
fraudulent charges for calling card or credit card calls by automatically
communicating with a credit bureau to verify that the card has not been
identified as a lost, stolen or delinquent card. For a collect call, the
software program can also verify that the number being called is not delinquent.
After verifying the call, the payphone will complete the connection using a
long-distance carrier. When the call is concluded, the software program directs
the billing information, including the date, time and length of the call, the
billed-to-number and the charges for the call, to the Company's computer. Later,
the billing records are sent to a processing agent that bills and collects the
charges. The processing agent keeps a percentage of the billed amount as its
processing fee and remits the balance to the Company. The Company books the net
amount received as non-coin revenue. The Company is billed by the long-distance
carrier for long-distance charges, which charges are only a small percentage of
the amount billed to the customer.
Some of the Company's payphones, primarily those placed in locations that
are not high generators of long-distance calls, do not have store and forward
capability. In addition, customers occasionally request a live operator even
with phones that have the store and forward technology. Examples of calls
requiring live operator assistance include person-to-person calls and calls
billed to a third party. In these situations, the calls are transferred to an
OSP which completes and bills the calls and pays the Company a commission based
on the amount billed. The Company contracts with several OSPs for this 24-hour a
day service. The
26
<PAGE>
Company routes all of these calls to a single OSP to maximize the commission
revenue it receives. There are numerous OSPs available to the Company and the
terms offered by them are highly competitive. In selecting an OSP, the Company
considers numerous factors including the commission offered, the quality of
service and the pricing of calls to customers.
PLACEMENT OF PAY TELEPHONES. As of May 31, 1997, the Company's pay
telephone system consisted of approximately 3,000 telephones located in 10
states. The following table sets forth certain information as of the dates
indicated concerning the number and location of pay telephones operated by the
Company:
NUMBER OF PAY TELEPHONES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- MAY 31,
STATE 1994 1995 1996 1997(1)
- ------------------------------------------------------------------------ ----- --------- --------- -----------
<S> <C> <C> <C> <C>
Minnesota............................................................... 792 910 1,074 1,741
Oregon.................................................................. -- -- 10 596
Idaho................................................................... -- -- -- 316
Nevada.................................................................. -- 84 112 110
Washington.............................................................. -- -- -- 57
Wisconsin............................................................... 7 7 32 46
New York................................................................ -- -- 12 36
Wyoming................................................................. -- -- -- 33
Colorado................................................................ -- -- -- 23
North Dakota............................................................ -- -- 5 5
--- --------- --------- -----
Total............................................................... 799 1,013(2) 1,219 2,963
--- --------- --------- -----
--- --------- --------- -----
</TABLE>
- --------------------------
(1) Includes 586 phones owned by CAT, from which the Company derived revenue
pursuant to a Route Service Agreement. The Company acquired such phones in
August 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Acquisitions."
(2) Does not include 12 phones located in Indiana and removed from service in
1996.
The Company's ROI focus has enabled it to profile locations based on the
likely profitability of a location. While this methodology is proprietary, as
are the specific locations under contract, the Company's locations include a
wide variety of establishments, such as restaurants, shopping malls, convenience
stores, grocery stores, gas stations and schools. The Company's pay telephone
lease mix includes indoor phones, walk-up outdoor phones and drive-up payphones.
While no single Site Provider accounted for more than 5% of the Company's pay
telephones or revenue in the six months ended June 30, 1997, the Company had a
single Site Provider that accounted for more than 5% of its pay telephones and
revenue in the years ended December 31, 1995 and 1996.
Agreements with Site Providers to install the Company's pay telephones (the
"Site Agreements") provide for revenue sharing with Site Providers, typically a
commission based on a negotiated percentage of revenue from the pay telephone.
The Site Agreements give the Company the exclusive right to install pay
telephones at that location and are generally of a five-year or greater term
with automatic renewal provisions. The Company's Site Agreements normally give
the Company the right to remove poor performing phones. Further, the Company can
typically terminate a Site Agreement on 30 days' notice to the Site Provider.
The Site Provider does not generally have the right to terminate a Site
Agreement.
PHONE LINE RATES. The Company pays local line charges for each of its
installed payphones. These line charges cover basic service to the telephone as
well as the transport of local calls. The Company's business model has always
been based on ROI and thus is highly influenced by the line rate charged by
LECs, primarily U.S. West. Pay telephones are regulated by state PUCs and
generally can be connected only to a Public Access Line ("PAL"). When the
Company commenced operations, the PAL rate in effect resulted in
27
<PAGE>
an average phone bill of about $130 per month per phone. In order to achieve its
ROI objective, the Company targeted high volume phones. In 1992, the MNPUC
reduced the tariff for PALs, which resulted in an average cost reduction of
about $20 per phone per month, allowing the Company to include slightly lower
volume phones in its network and still achieve its ROI objective. In April 1996,
CI was approved to purchase telephone lines which U.S. West sells at a monthly
rate of $52 per phone including tax. CI resells those lines to ChoiceTel at this
lower rate which has allowed the Company to increase the profitability of its
existing phones and to reduce the minimum call volume it needs from new phones
to achieve its ROI objective. In May 1997, CI entered into an agreement with
U.S. West that provides CI with a 21.5% reseller discount on the pre-tax cost of
telephone lines in Minnesota, which results in a monthly rate for the Company of
$42.50 per phone in such state.
MARKETING. Four of the Company's employees devote substantially all of
their time to locating and contracting with new Site Providers in Minnesota. In
addition, the Company has engaged two independent contractors in Oregon to
locate new sites for payphone installations. A successful contracting program
requires identifying good locations, selling Site Providers on the benefits of
the Company's payphones, and negotiating favorable Site Agreement terms.
Identifying good locations for payphones is the most important aspect of the
Company's marketing program, which includes an evaluation of population density,
calling patterns and neighborhood socio-economic factors. The Company
concentrates its efforts towards high traffic locations, lower income
neighborhoods, and venues where people expect to find payphones.
The Company promotes its payphone program to Site Providers by emphasizing
service and maintenance. Site Providers generally view the payphone as a
customer service rather than a profit center. Providing repair and collection
services during evenings and on weekends and providing 24-hour a day live call
placement assistance sometimes is more important in securing the Site Agreement
than the amount of commission paid to the Site Provider.
SERVICE AND MAINTENANCE. The Company believes it offers many of its Site
Providers a higher level of service than is provided by the LEC competitors, who
typically offer lower commissions and do not monitor payphone performance. The
Company monitors its payphones electronically and offers evening and weekend
repair service for its Minnesota payphones. The Company uses 29 full- and
part-time field service technicians, each of whom collects money, cleans phones
and responds to trouble calls made by either a consumer or by the telephone
itself as part of its internal diagnostic procedures. Many technicians are also
responsible for the installation of new telephones. Due to the ability of the
field service technicians to perform multiple service and maintenance functions,
the Company is able to limit the frequency of trips to each pay telephone as
well as the number of employees needed to service the pay telephones.
GOVERNMENT REGULATION
In 1995, the State of Minnesota passed comprehensive legislation for the
telecommunications industry (the "MN Act"). One provision of the legislation
created the ability for companies to compete with U.S. West in providing local
telephone service. The effect of the legislation for the Minnesota payphone
industry was to immediately decrease the cost of telephone lines. The Company
believes that the increased competition to provide local telephone service may
further reduce the cost of telephone lines.
In January 1996, Congress passed the Telecom Act, a comprehensive
telecommunications bill that, in part, dealt with several concerns of the
independent pay telephone industry. Congress stated that its intent was to
create a "pro-competitive, de-regulatory national policy framework designed to
accelerate rapidly private sector deployment of advanced telecommunications and
information technologies and services to all Americans by opening all
telecommunications markets to competition." The Telecom Act, among other things,
requires local telephone companies to eliminate subsidies of their pay telephone
services and to treat their own and independent payphones in a nondiscriminatory
manner. Of particular importance to the Company, the Telecom Act addressed the
inherently unfair disadvantage independent pay telephone
28
<PAGE>
companies have in competing with regulated monopolies, the compensation of
independent pay telephone companies for calls made from their equipment that
previously offered no compensation, and the issue of price regulation of local
calls by the various state PUCs.
COMPETITION WITH RBOCS. Under the Telecom Act, the RBOCs must operate their
payphone divisions with separate profit and loss statements. The Company
believes that this will likely result in the Company's RBOC competitors
(primarily, U.S. West) being less aggressive in bidding for locations. It also
may result in the RBOCs removing many low volume pay telephones that
collectively compete with the Company's pay telephones and, ultimately, may
result in the RBOCs raising prices for pay telephone calls when allowable under
price deregulation (see "- Deregulation of Local Pay Telephone Rates" below).
DIAL-AROUND COMPENSATION. Pay telephones are required by the FCC to provide
equal Dial-Around access to all long-distance carriers, either by access code
(such as "10ATT") or by 800 service. Prior to November 1996, the Company
received $6 per payphone per month from long-distance carriers for providing
this Dial-Around service. The Telecom Act recognized that it is a burden to
payphone companies to provide such access and that the compensation paid to
payphone companies for this access should be greater. Because the infrastructure
to track and compensate for these calls does not currently exist, the FCC's 1996
order raised the flat rate of compensation for the Dial-Around service to
approximately $45 per payphone per month, based on $0.35 per call (the per call
rate for a local coin call in deregulated states) times the national average of
131 monthly Dial-Around calls placed per payphone. In October 1997, the method
of compensating payphone companies is scheduled to switch to a per call charge
of $0.35 to be tracked and paid by the long-distance carriers and, in November
1998, the per call charge is scheduled to equal the cost of a local pay
telephone call. While the Company is unable to estimate the number of Dial-
Around calls made from its payphones, management believes that there will not be
a material change in the total amount of Dial-Around compensation it receives
when the basis for compensation is switched to a per call rate.
The FCC order implementing the increased Dial-Around compensation was
appealed, with the intent, in part, of decreasing the amount of Dial-Around
compensation mandated by the FCC's 1996 order. The appellate court remanded the
matter to the FCC for reconsideration of the rate of Dial-Around compensation.
The Court of Appeals for the D.C. Circuit found that the per call charge of
$0.35 (which was multiplied by 131 calls to determine the interim rate of
monthly Dial-Around compensation per payphone) was inappropriate because the FCC
did not consider evidence of the differences in the cost of coin calls and
Dial-Around calls. The FCC has solicited comments on the cost differences
between coin calls and Dial-Around calls, and whether the local coin rate,
subject to an offset for expenses unique to those calls, is an appropriate per
call compensation rate for determining the rate of Dial-Around compensation. The
comment period will expire on September 9, 1997. The Company has established a
reserve of $109,000 as of June 30, 1997 to cover a potential decrease in the per
call charge from $0.35 to $0.30 retroactive to November 1996; however, there can
be no assurance that a reduction, if any, in the per call charge used to
determine the rate of Dial-Around compensation will not be greater than $0.05
per call. See "Risk Factors - Pending Determination of Dial-Around Compensation
Rate."
DEREGULATION OF LOCAL PAY TELEPHONE RATES. The FCC also adopted rules
pursuant to the Telecom Act which will repeal on October 7, 1997, all rules
regulating the cost of a local call placed at a payphone and allow the market to
set the rate for local coin calls, unless the state can demonstrate to the
satisfaction of the FCC that there are market failures within the state that
would not allow market-based rates. Management anticipates that when this
deregulation goes into effect, the per call price of pay telephone service will
rise to $0.35 or more. Management bases its belief on the experience in Iowa in
1989 when the price of pay telephone calls was deregulated and U.S. West raised
its price to $0.35. Given the prohibitions on the RBOCs subsidizing their pay
telephone business, and given the large number of low volume RBOC pay telephones
in the marketplace, management believes the RBOCs will have a strong desire to
raise pay
29
<PAGE>
telephone rates. However, there can be no assurance that the per call price of
pay telephone service will increase.
COMPETITION
The Company competes for pay telephone locations with LECs and other
independent pay telephone operators. The Company also competes indirectly with
long-distance carriers, which can offer Site Providers commissions on
long-distance calls made from LEC-owned payphones. Most LECs and long-distance
carriers against which the Company competes and some independent pay telephone
companies have substantially greater financial, marketing and other resources
than the Company. In addition, many LECs, faced with competition from the
Company and other independent pay telephone companies, have increased their
compensation arrangements with Site Providers to offer more favorable commission
schedules.
The Company believes the principal competitive factors in the pay telephone
business are (i) responsiveness to customer service needs, (ii) the amount of
commission payments to a Site Provider and the opportunity for a Site Provider
to obtain commissions on both local and long-distance calls from the same
company, (iii) the quality of service and the availability of specialized
services provided to a Site Provider and telephone users, and (iv) the ability
to serve accounts with locations in several LATAs or states. The Company
believes that independent pay telephone operators have an advantage over LECs in
that they can offer Site Providers commissions on coin and cashless local and
long-distance calls. Most LECs are prohibited from obtaining revenues or
commissions on interLATA long-distance telephone calls and, consequently,
generally only pay commissions to Site Providers for local and intraLATA calls.
Under the Telecom Act, this prohibition will be removed at such time as
sufficient competition for local telephone service has been established.
Opening the local telephone markets to competition will likely reduce
telephone line charges, the Company's largest operating expense. In most of the
areas where the Company operates, it must purchase local telephone service from
a single regulated monopoly (primarily, U.S. West). As AT&T, MCI, Sprint and
others compete to offer local telephone service, telephone line charges are
expected to decline. In addition, the Company expects that its high number of
telephone lines will give it the ability to negotiate additional volume
discounts.
Technological advances and cost efficiencies underlie a continuing increase
in the transmission of voice messages. More telephone calls are being made
because the manner, means and cost of completing a call have improved. With the
advent of call waiting and caller I.D., and as the number of answering machines,
voice mail systems, pagers and cellular phones increases, the likelihood of a
telephone call being made also increases due to the perceived certainty that a
message can be communicated even if the intended recipient may not be reached
directly. Accordingly, as the means and desire to communicate by telephone
increase, the Company anticipates that its payphones will experience increased
usage.
EMPLOYEES
As of May 31, 1997, the Company had 31 employees, 26 of whom were full-time.
No employees are covered by a collective bargaining agreement. The Company
believes that its relationships with employees are good.
PROPERTIES
The Company's corporate offices are located in approximately 5,000 square
feet of leased space in Plymouth, Minnesota. The lease for this property expires
in May 2000 and the Company has two successive options to extend the lease for
additional one-year periods. The Company also leases approximately 2,250 square
feet of warehouse and office space in Lake Oswego, Oregon, pursuant to a lease
which expires in July 1998, subject to the exercise by the Company of two
successive options to extend the lease for
30
<PAGE>
additional one-year periods. The Company believes that its current facilities
are sufficient for its needs for the foreseeable future.
LEGAL PROCEEDINGS
MINNESOTA SALES TAX. The Company, based on an analysis of the published
regulations of the Minnesota Department of Revenue, has not remitted any sales
tax payments to the State of Minnesota. In 1996, the Company learned that the
opinion of the Department was that coin-operated payphone receipts were subject
to state sales tax. Despite the Department's position, management is still of
the view that the Company is not subject to sales tax, and the Company is
challenging the imposition of the tax. The Company retained special tax counsel
to contest the Department's position that coin-operated payphone receipts are
subject to sales tax. Nonetheless, the Company has established a reserve of
$975,140 as of June 30, 1997, to provide for the potential sales tax liability.
See the Combined Financial Statements of the Company and notes thereto set forth
elsewhere in this Prospectus.
CLAIM FOR REFUND OF OVERPAYMENT. Prior to enactment of the MN Act which
facilitated increased competition in the telecommunications industry, U.S. West
had required, with MNPUC approval, that PSPs purchase PALs at approximately
twice the cost of business lines even though business lines and PALs were
essentially the same. Beginning in August 1995, LECs could no longer restrict
the resale of its products, and the Company, along with other Minnesota
independent PSPs, requested to purchase for resale from U.S. West regular
business lines for its payphones. U.S. West refused the request on the grounds
that its requirement that PSPs use PALs had, prior to the enactment of the law,
been approved by the MNPUC. In November 1996, the MNPUC concluded that the law
did entitle PSPs to use business lines in place of PALs and ordered U.S. West to
convert the lines to business lines within 60 days. The MNPUC, however, did not
require U.S. West to refund the difference in costs collected during the period
from August 1995 until October 1996. Even though the Company was able to
purchase business lines through CI starting in the summer of 1996, it estimates
that it has overpaid U.S. West approximately $450,000. In April 1997, the
Company, together with other Minnesota independent PSPs, initiated an action in
the Minnesota Court of Appeals requesting the Court to order the MNPUC to order
U.S. West to refund the overpayment.
31
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the Company's
executive officers and directors as of August 15, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- -----------------------------------------------------
<S> <C> <C>
Gary S. Kohler 40 Chairman of the Board of Directors
Jeffrey R. Paletz 41 President and Director
Melvin Graf 42 Executive Vice President and Director
Jack S. Kohler 42 Vice President and Chief Financial Officer
Dustin Elder 28 Vice President
Robert A. Hegstrom 55 Director
</TABLE>
GARY S. KOHLER is a founder and has served as Chairman of the Board of
Directors of the Company since its inception in 1989. Mr. Kohler joined
Tarmachan Capital Management, an investment management firm, in July 1997. Prior
to that and since 1984, he was employed as Vice President of Okabena Company, a
private holding company. Mr. Kohler serves on the board of Northwest Mortgage
Services, Inc. Mr. Kohler has an M.B.A. from Cornell University and a B.A. from
the University of Minnesota. Mr. Kohler is the brother of Jack S. Kohler.
JEFFREY R. PALETZ is a founder of the Company, has been a director since its
inception and has been President since 1993, overseeing all operations of the
Company. Prior to founding the Company in 1989, Mr. Paletz was employed for 13
years at Sportsman's Guide, a mail order retailer, where he oversaw the computer
data operations. Mr. Paletz has a B.S. degree in Business from the University of
Minnesota.
MELVIN GRAF is a founder of the Company, has been a director since its
inception and has been Executive Vice President since 1993, overseeing all
marketing and leasing activities. Mr. Graf served as President of the Company
until 1993. Prior to founding the Company in 1989, Mr. Graf was President of
Network Travel, a Minneapolis travel agency, for five years. Mr. Graf has a B.S.
degree in Business from the University of Minnesota.
JACK S. KOHLER has been Vice President and Chief Financial Officer of the
Company since 1993. Prior to joining the Company, Mr. Kohler was employed for 13
years in various management and accounting positions at Cargill, Inc., where he
most recently served in the internal audit division. Mr. Kohler has a B.S.
degree in Accounting from the University of Minnesota. Mr. Kohler is the brother
of Gary S. Kohler.
DUSTIN ELDER became a Vice President of the Company in August 1997. Mr.
Elder had been President of CAT for three years prior to joining the Company.
Prior to that, he was a student at the University of Iowa.
ROBERT A. HEGSTROM became a director of the Company in June 1997. In January
1997, Mr. Hegstrom joined Northwest Mortgage Services, Inc. as Chairman,
President and Chief Executive Officer. Prior to that, he was a private investor
for two years and, from December 1991 to January 1995, he was Executive Vice
President of Green Tree Financial Corporation.
DIRECTORS' COMPENSATION. No cash compensation is paid to the Company's
directors. Upon the completion of this offering, each independent, non-employee
director (currently, only Robert A. Hegstrom) will receive an option to purchase
$75,000 of Common Stock, valued as of the date of grant, at the first meeting
thereafter of the Company's Board of Directors and upon each subsequent annual
re-election. The dollar value of the options was determined by the Company to be
the amount necessary to attract and retain qualified independent directors. The
options will be issued pursuant to the Company's 1997 Long-Term Incentive and
Stock Option Plan, will be exercisable upon grant and will have five-year terms
and exercise prices equal to the fair market value of the Common Stock as of the
date of grant. No options will be issued to employee directors for their service
as directors.
32
<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION. The Company's Articles of
Incorporation limit the liability of its directors to the fullest extent
permitted by the Minnesota Business Corporation Act ("MBCA"). Specifically,
directors of the Company will not be personally liable for monetary damages for
breach of fiduciary duty as directors, except for (i) any breach of the duty of
loyalty to the Company or its shareholders, (ii) acts or omissions not in good
faith or that involved intentional misconduct or a knowing violation of law,
(iii) dividends or other distributions of corporate assets that are in
contravention of certain statutory or contractual restrictions, (iv) violations
of certain Minnesota securities laws, or (v) any transaction from which the
director derives an improper personal benefit. Liability under federal
securities law is not limited by the Articles of Incorporation.
The MBCA requires that the Company indemnify any director, officer or
employee made or threatened to be made a party to a proceeding, by reason of the
former or present official capacity of the person, against judgments, penalties,
fines, settlements and reasonable expenses incurred in connection with the
proceeding if certain statutory standards are met. "Proceeding" means a
threatened, pending or completed civil, criminal, administrative, arbitration or
investigative proceeding, including a derivative action in the name of the
Company. Reference is made to the detailed terms of the Minnesota
indemnification statute (Section 302A.521 of the MBCA) for a complete statement
of such indemnification right. The Company's Bylaws also require the Company to
provide indemnification to the fullest extent of the Minnesota indemnification
statute.
Indemnification under the foregoing arrangements may be available for
liabilities arising in connection with this offering. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted for directors,
officers or persons controlling the Company pursuant to the foregoing
provisions, the Company is aware that in the opinion of the Securities and
Exchange Commission (the "SEC") such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
OFFICERS' COMPENSATION. The following table summarizes the compensation for
services rendered by the Company's President paid or accrued by the Company
during 1996. No executive officer of the Company earned or was paid salary and
bonus exceeding $100,000 in any fiscal year. The Company did not grant any
restricted stock awards or stock appreciation rights or make any long-term
incentive plan payouts to the named officer during 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------
NAME AND POSITION FISCAL YEAR SALARY BONUS
- ---------------------------------------------------------------- ----------- --------- ---------
<S> <C> <C> <C>
Jeffrey R. Paletz, President.................................... 1996 $ 70,000 $ 10,000
</TABLE>
BONUS PROGRAM. The Company has implemented the 1997 Incentive Compensation
Plan to provide an opportunity for executive officers and other Company
employees to receive a bonus based on individual and Company performance. The
maximum bonus for any executive officer will be 40% of annual salary. The bonus
opportunity for Jeffrey R. Paletz, the Company's President, depends on the
completion of this offering and achieving the Company's target earnings per
share. The bonus opportunities for other executive officers also depend on the
completion of this offering, as well as the success rate for new installations
of payphones and the number of completed acquisitions. The bonus opportunity for
other Company employees is discretionary and not subject to specific criteria.
STOCK OPTION PLAN. Under the terms of the Company's 1997 Long-Term
Incentive and Stock Option Plan (the "Stock Option Plan"), all of the directors,
officers, other employees and consultants of the Company are eligible to receive
options to purchase shares of the Company's Common Stock as part of their
compensation package. No such options had been granted as of July 31, 1997.
33
<PAGE>
The Board of Directors adopted the Stock Option Plan on April 17, 1997, and
the shareholders approved it on April 18, 1997. The Stock Option Plan provides
for the grant both of incentive stock options intended to qualify for
preferential tax treatment under Section 422 of the Internal Revenue Code of
1986, as amended, and nonqualified stock options that do not qualify for such
treatment. The exercise price of incentive stock options must equal or exceed
the fair market value of the Common Stock at the time of grant. The Stock Option
Plan also provides for grants of stock appreciation rights, restricted stock
awards and performance awards and allows for the grant of restoration options.
The Compensation Committee of the Board of Directors will administer the
Stock Option Plan, subject to approval of the Board. A total of 100,000 shares
of Common Stock are reserved for issuance under the Stock Option Plan. Incentive
stock options may be granted under the Stock Option Plan only to any full or
part-time employee of the Company (including officers and directors who are also
employees). Full or part-time employees, directors who are not employees, and
consultants and independent contractors to the Company are eligible to receive
options which do not qualify as incentive stock options, as well as other
awards. In determining the persons to whom options and awards shall be granted
and the number of shares subject to each, the Board of Directors may take into
account the nature of services rendered by the respective employees or
consultants, their present and potential contributions to the success of the
Company, and such other factors as the Board of Directors in its discretion
shall deem relevant.
The Board of Directors may amend or discontinue the Stock Option Plan at any
time but may not, without shareholder approval, make any revisions or amendments
to the Stock Option Plan that increase the number of shares subject to the Stock
Option Plan, decrease the minimum exercise price, extend the maximum exercise
term, or modify the eligibility requirements. The Board of Directors may not
alter or impair any award granted under the Stock Option Plan without the
consent of the holder of the award. The Stock Option Plan will expire April 15,
2007.
Pursuant to the terms of the Stock Option Plan, appropriate adjustments to
the Stock Option Plan and outstanding options will be made in the event of
changes in the Common Stock through merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, or other change in corporate
structure.
EMPLOYMENT AGREEMENTS. The Company has entered into employment agreements
with Jeffrey R. Paletz, Melvin Graf and Jack S. Kohler effective April 15, 1997,
and an employment agreement with Dustin Elder effective August 14, 1997, all of
which provide for an initial term expiring in April 1999, with automatic
one-year renewals. The agreements provide a base salary and the right to receive
additional compensation in the form of salary, bonus and other benefits as the
Board of Directors shall determine in its sole discretion. The agreements
prohibit each officer from competing against the Company for a period of one
year after employment ceases and from communicating with a Site Provider until
six months following expiration of the Site Agreement. In the event of
termination of the officer's employment, except a termination for cause, the
terminated officer is entitled to receive full compensation and benefits for a
six-month period.
CERTAIN TRANSACTIONS
The Company has an arrangement with Gary S. Kohler, the Company's Chairman
of the Board, pursuant to which Mr. Kohler advises the Company's management on
an as-needed basis. The consulting fees paid to Mr. Kohler for rendering this
service for the year ended December 31, 1996, totaled $16,000. Currently, the
monthly fee paid for Mr. Kohler's consulting services is $2,000.
The Company has borrowed money from members of the Topp family (or a trust
for the benefit thereof), who are in-laws of Gary S. Kohler. The two outstanding
loans are evidenced by promissory notes dated July 7 and 27, 1996, respectively,
copies of which are filed as exhibits to the Registration Statement. The notes,
in the aggregate principal amount of $114,669.45, bear interest at the rate of
12% per annum and mature on February 7, 1998, and September 27, 1997,
respectively.
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It is the Company's policy that it not engage in any future material
transactions and loans with officers, directors or beneficial holders of 5% or
more of the Company's Common Stock, or affiliates of such persons, unless the
terms of any such transaction are no less favorable to the Company than those
that could be obtained from unaffiliated third parties and are approved by a
majority of the Company's independent directors who do not have an interest in
the transaction.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of July 31, 1997 with
respect to the beneficial ownership of the Company's Common Stock by (i) each
director of the Company, (ii) all directors and executive officers of the
Company as a group, and (iii) each shareholder who owns more than 5% of the
outstanding shares of the Company's Common Stock. Except as otherwise indicated,
the Company believes each of the persons listed below possesses sole voting and
investment power with respect to the shares indicated. Beneficial ownership
means the shareholder has voting or investment power with respect to the shares.
Shares of the Company's Common Stock subject to options or warrants currently
exercisable or exercisable within 60 days are deemed outstanding for computing
the percentage of the person holding such options or warrants, but are not
deemed outstanding for computing the percentage of any other person.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY PERCENTAGE OF SHARES BENEFICIALLY
OWNED OWNED(1)
--------------- ----------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(2)(3) BEFORE OFFERING AFTER OFFERING
- ------------------------------------------------ ----------------- ---------------
<S> <C> <C> <C>
Gary S. Kohler(4)(5)............................ 1,032,784 53.5% 37.8%
Jeffrey R. Paletz............................... 347,398 18.0% 12.7%
Melvin Graf(6).................................. 213,334 11.1% 7.8%
Jack S. Kohler(5)(7)............................ 327,500 17.0% 12.0%
Robert A. Hegstrom.............................. 0 -- --
All directors and executive officers
as a group (5 persons)(4)(5)(6)(7)............. 1,721,016 87.0% 61.9%
</TABLE>
- --------------------------
(1) Based on 1,928,766 shares of Common Stock outstanding prior to the offering
and 2,728,766 shares outstanding after the offering. Does not include
186,240 shares issued in August 1997 in connection with the CAT acquisition
or up to 55,880 shares issuable upon converision of a note issued in
connection with such acquisition, or the 800,000 additional shares of Common
Stock issuable upon exercise of the Redeemable Warrants.
(2) The address of each shareholder listed is c/o ChoiceTel Communications,
Inc., 9724 10th Avenue North, Plymouth, Minnesota 55441.
(3) Does not include Dustin Elder, who became an executive officer of the
Company after the date as of which information is presented. In August 1997,
in connection with the CAT acquisition, Mr. Elder acquired 39,240 shares of
the Company's Common Stock and options to purchase 50,000 shares, 20,000 of
which are exercisable within 60 days.
(4) The figure includes 40,000 shares held by Gary S. Kohler as custodian for
the benefit of his children.
(5) The figure includes 200,000 shares currently owned by Gary S. Kohler, who
has granted an option to Jack S. Kohler, available for exercise within 60
days, to purchase such shares.
(6) The figure includes 13,334 shares of Common Stock held in the name of the
wife of Melvin Graf.
(7) The figure includes options granted to Jack S. Kohler by the Company,
available for exercise within 60 days, to purchase 50,000 shares.
35
<PAGE>
SECURITIES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 2,915,006 shares of
Common Stock outstanding not including the additional 800,000 shares of Common
Stock issuable upon exercise of the Redeemable Warrants or up to 55,880 shares
issuable upon conversion of a note issued in connection with the CAT acquisition
in August 1997. In addition, the Company has reserved 222,500 shares of Common
Stock for issuance pursuant to options (consisting of outstanding options
covering 122,500 shares and options for up to 100,000 shares which may be
granted pursuant to the Stock Option Plan), 80,000 shares of Common Stock
comprising part of the Units issuable upon exercise of the Underwriter's Warrant
and 80,000 shares issuable upon exercise of the Redeemable Warrants comprising
part of the Units subject to the Underwriter's Warrant. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Recent Acquisitions," "Management - Stock Option Plan" and "Underwriting." Of
the outstanding shares of Common Stock after this offering, the 800,000 shares
of Common Stock included in the Units offered hereby may be resold without
restriction under the Securities Act, except that any of such shares purchased
in the offering by "affiliates" of the Company, as the term is defined in Rule
144 adopted under the Securities Act ("Affiliates"), may generally be resold
only in compliance with applicable provisions of Rule 144. The remaining
2,115,006 shares of Common Stock held by the existing shareholders are
"restricted" securities within the meaning of Rule 144. Restricted securities
and securities held by Affiliates of the Company may not be sold unless the sale
is registered under the Securities Act or is made pursuant to an applicable
exemption from registration, including an exemption pursuant to Rule 144.
In general, under Rule 144, beginning 90 days after the date of this
Prospectus, a shareholder, including an Affiliate, who has beneficially owned
his or her restricted securities for at least one year from the later of the
date such securities were acquired from the Company, or (if applicable) the date
they were acquired from an Affiliate, is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock (approximately 29,150
shares immediately after this offering) or (ii) the average weekly trading
volume in the Common Stock during the four calendar weeks preceding the date on
which notice of such sale is filed under Rule 144. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. In addition, under
Rule 144(k), if a period of at least two years has elapsed between the later of
the date restricted securities were acquired from the Company or the date they
were acquired from an Affiliate, a shareholder who is not an Affiliate of the
Company at the time of sale and has not been an Affiliate of the Company for at
least three months prior to the sale would be entitled to sell the shares
immediately without compliance with the volume limitations, manner of sale
provisions, notice or public information requirements.
Beginning 90 days after the date of this Prospectus, 1,693,016 shares of
Common Stock will be eligible for sale in the public market under Rule 144, of
which 1,676,016 are subject to the volume limitations and other requirements
described above. Notwithstanding the above, Gary S. Kohler, Jeffrey R. Paletz,
Melvin Graf, Jack S. Kohler and Dustin Elder, who in the aggregate beneficially
own 1,710,256 outstanding shares of Common Stock and options to acquire an
additional 300,000 shares (which includes 200,000 shares that are currently
outstanding), have agreed that, without the Underwriter's prior written consent,
they will not sell or transfer any shares of Common Stock during the period
ending one year after the date of this Prospectus nor sell or transfer more than
10% of the shares of Common Stock which they own during the period beginning one
year and ending two years after the date of this Prospectus. As a condition of
the underwriting, the Company's other shareholders, who own 404,750 shares of
Common Stock, must agree that they will not, without the Underwriter's prior
written consent, sell or transfer any shares of Common Stock during the period
ending six months after the date of this Prospectus. Additional shares of Common
Stock may also become available for sale in the public market from time to time
in the future, including the shares of Common Stock issuable upon exercise of
the Redeemable Warrants.
Prior to this offering, there has been no public market for the Common
Stock, and no predictions can be made of the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market or the perception that such sales could occur
may adversely affect prevailing market prices and may impair the Company's
future ability to raise capital through the public sale of its Common Stock.
36
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Company's authorized capital stock consists of 15,000,000 shares of
Common Stock, par value $0.01 per share, and 5,000,000 shares of undesignated
Preferred Stock, par value $0.01 per share (the "Preferred Stock"). As of July
31, 1997, there were issued and outstanding 1,928,766 shares of Common Stock
which were held by 16 shareholders of record, and 72,500 shares of Common Stock
reserved for issuance upon exercise of outstanding options (not including an
option to purchase 50,000 shares issued in August 1997 in connection with the
CAT acquisition). In addition, 100,000 shares were reserved for issuance under
the Stock Option Plan, 186,240 shares were reserved for issuance in connection
with the CAT acquisition which was completed in August 1997 and up to 55,880
shares were reserved for issuance upon conversion of a note issued in connection
therewith, 80,000 shares of Common Stock comprising part of the Units issuable
upon exercise of the Underwriter's Warrant were reserved for issuance in
connection therewith and 80,000 shares were reserved for issuance upon exercise
of the Redeemable Warrants comprising part of the Units subject to the
Underwriter's Warrant. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Acquisitions," "Management - Stock
Option Plan" and "Underwriting." No shares of Preferred Stock were outstanding
as of July 31, 1997. There will be 2,728,766 shares of Common Stock issued and
outstanding upon completion of this offering (not including 186,240 shares
issued in August 1997 in connection with the CAT acquisition) and an additional
800,000 shares will be issuable upon exercise of the Redeemable Warrants
(assuming the over-allotment option is not exercised). The exercise prices for
the Company's outstanding options range from $1.50 to $4.00 per share (not
including the exercise price of $6.75 per share for vested options issued in
August 1997 in connection with the CAT acquisition or the exercise prices of
non-vested options issued in connection therewith which will be determined as of
the vesting dates).
COMMON STOCK
There are no preemptive, subscription, conversion or redemption rights
pertaining to the shares of Common Stock and no sinking fund provisions
applicable thereto. The absence of preemptive rights could result in the
dilution of the interests of existing shareholders should additional shares of
Common Stock be issued. Subject to preferences that may be applicable to any
outstanding Preferred Stock, holders of shares of Common Stock are entitled to
receive such dividends as may be declared by the Board of Directors out of
assets legally available therefor, and to share ratably, in proportion to the
number of shares held, in the assets of the Company available upon liquidation,
dissolution or winding up of the affairs of the Company after payment of all
prior claims.
Each share of Common Stock is entitled to one vote for all purposes, and
cumulative voting is not permitted in the election of directors. Accordingly,
the holders of more than fifty percent of all of the outstanding shares of
Common Stock can elect all of the directors. Significant corporate transactions
such as amendments to the articles of incorporation, mergers, sales of assets
and dissolution or liquidation require approval by the affirmative vote of the
majority of the outstanding shares of Common Stock. Other matters to be voted
upon by the holders of Common Stock normally require the affirmative vote of a
majority of the shares present at the particular shareholders meeting. Officers
and directors will own approximately 60% of the outstanding Common Stock upon
completion of this offering and, therefore, will continue to be able to elect
all of the directors of the Company and to control the Company's affairs,
including, without limitation, the sale of equity or debt securities of the
Company and the appointment of officers. The outstanding shares of Common Stock
are, and the shares of Common Stock included in the Units offered hereby and the
shares of Common Stock issuable upon exercise of the Redeemable Warrants
included in the Units offered hereby will be, fully paid and non-assessable.
37
<PAGE>
PREFERRED STOCK
The Articles of Incorporation authorize the Company's Board of Directors,
without further shareholder action, to issue up to 5,000,000 shares of Preferred
Stock in one or more series and to fix the voting rights, liquidation
preferences, dividend rights, repurchase rights, conversion rights, redemption
rights and terms, including sinking fund provisions, and certain other rights
and preferences, of the Preferred Stock. Although there is currently no
intention to do so, the Board of Directors of the Company may, without prior
shareholder approval, issue shares of a class or series of Preferred Stock with
voting and conversion rights which could adversely affect the voting power or
dividend rights of the holders of Common Stock and may have the effect of
delaying, deferring or preventing a change in control of the Company.
REDEEMABLE WARRANTS
WARRANT AGREEMENT. The Redeemable Warrants included as part of the Units
offered hereby will be issued under and governed by the provisions of the
Warrant Agreement between the Company and Norwest Bank Minnesota, National
Association, as Warrant Agent. A copy of the Warrant Agreement has been filed as
an exhibit to the Registration Statement. The following statements are summaries
of certain provisions contained therein, are not complete, and are qualified in
their entirety by reference to the Warrant Agreement.
The shares of Common Stock and the Redeemable Warrants offered as part of
the Units are detachable and are separately transferable following their
issuance. One Redeemable Warrant entitles the holder ("Warrantholder") thereof
to purchase one share of Common Stock during the five years following the
Effective Date of this Prospectus. Each Redeemable Warrant will be exercisable
at a price equal to $9.50 per share, subject to adjustment as a result of
certain events. Any time 120 or more days after the Effective Date of this
Prospectus, the Redeemable Warrants are redeemable, in whole but not in part, by
the Company at a redemption price of $0.01 per Redeemable Warrant on not less
than 30 days' written notice, provided that the closing bid price of the Common
Stock exceeds $10.00 per share (subject to adjustment) for any 10 consecutive
trading days prior to such notice. Holders of Redeemable Warrants may exercise
their rights until the close of business on the date fixed for redemption,
unless extended by the Company.
Warrantholders as such are not entitled to vote, receive dividends or
exercise any of the rights of holders of shares of Common Stock for any purpose
until such Redeemable Warrants have been duly exercised and payment of the
purchase price has been made. The Redeemable Warrants are in registered form and
may be presented for transfer, exchange or exercise at the corporate office of
the Warrant Agent. Although the Company has applied for listing of the
Redeemable Warrants on The Nasdaq SmallCap Market, there is currently no
established market for the Redeemable Warrants, and there is no assurance that
any such market will develop.
The Warrant Agreement provides for adjustment of the exercise price and the
number of shares of Common Stock purchasable upon exercise of the Redeemable
Warrants to protect Warrantholders against dilution in certain events, including
stock dividends, stock splits and any combination of Common Stock. In the event
of the merger, consolidation, reclassification or disposition of substantially
all the assets of the Company, the holders of the Redeemable Warrants are
entitled to receive, upon payment of the exercise price therefor, the securities
or property of the Company or the successor corporation resulting from such
transaction that such holders would have received had they exercised such
Redeemable Warrants immediately prior to such transaction.
REGISTRATION. The Company has sufficient shares of Common Stock authorized
and reserved for issuance upon exercise of the Redeemable Warrants, and such
shares when issued will be fully paid and nonassessable. The Company must have a
current registration statement on file with the SEC and, unless exempt
therefrom, with the securities authority of the state in which the Warrantholder
resides, in order for the Warrantholder to exercise his or her Redeemable
Warrants and obtain shares of Common Stock
38
<PAGE>
free of any transfer restrictions. The shares so reserved for issuance upon
exercise of the Redeemable Warrants are registered pursuant to the Registration
Statement. Furthermore, the Company has agreed to use its best efforts to
maintain the effectiveness of the Registration Statement (by filing any
necessary post-effective amendments or supplements thereto) throughout the term
of the Redeemable Warrants with respect to the shares of Common Stock issuable
upon exercise thereof. The Company will incur significant legal and other
related expenses in order to keep the Registration Statement current. However,
there can be no assurance that the Company will be able to keep the Registration
Statement current or that the Registration Statement will be effective at the
time a Warrantholder desires to exercise his or her Redeemable Warrants.
Additionally, the Company has agreed to use it best efforts to maintain
qualifications in those states where the Units were originally qualified for
sale to permit exercise of the Redeemable Warrants and issuance of shares of
Common Stock upon such exercise in such states. However, there can be no
assurance that any such qualification will be effective at the time a
Warrantholder desires to exercise his or her Redeemable Warrants. If for any
reason the Registration Statement is not kept current, or if the Company is
unable to maintain the qualification of the Common Stock underlying the
Redeemable Warrants for sale in particular states, Warrantholders in those
states, absent an applicable exemption, must either sell such Redeemable
Warrants or let them expire.
EXERCISE. The Redeemable Warrants may be exercised upon surrender of the
certificate therefor on or prior to the expiration date (or earlier redemption
date) at the corporate office of the Warrant Agent, with the form of "Election
to Purchase" on the reverse side of the certificate filled out and executed as
indicated, accompanied by payment of the full exercise price (by certified or
cashier's check payable to the order of the Company) for the number of
Redeemable Warrants being exercised.
For the term of the Redeemable Warrants, the Warrantholders are given the
opportunity to profit from a rise in the market price of the Company's Common
Stock with a resulting dilution in the interest of the Company's shareholders.
During such term, the Company may be deprived of opportunities to sell
additional equity securities at a favorable price. The Warrantholders may be
expected to exercise their Redeemable Warrants at a time when the Company would,
in all likelihood, be able to obtain equity capital by a sale or a new offering
on terms more favorable to the Company than the terms of the Redeemable
Warrants.
TAX CONSIDERATIONS. The following summary is based on present federal
income tax law and interpretations thereof, all of which are subject to change
or modification. The discussion is limited to the federal income tax matters
discussed below and does not include all of the federal income tax
considerations relevant to each investor's personal tax situation. Investors
should consult their own tax advisers with respect to the matters discussed
below and with respect to other federal and state tax considerations that may be
applicable to their own personal tax situation.
The cost basis of the Units will be the purchase price paid by each
investor. Purchasers of Units will be required to allocate the price paid for
such Units between the shares of Common Stock and the Redeemable Warrants based
on their relative fair market values on the date of purchase. Upon exercise of
the Redeemable Warrants, the Warrantholder's cost basis in the shares of Common
Stock thus acquired will be the original purchase price allocable to the
Redeemable Warrants plus any additional amount paid upon the exercise. No gain
or loss will be recognized by such holder upon exercise of the Redeemable
Warrants. However, gain or loss will be recognized upon the subsequent sale or
exchange of the shares of Common Stock acquired upon exercise of the Redeemable
Warrants. Gain or loss also will be recognized upon the sale or exchange of the
Redeemable Warrants. Generally, gain or loss will be long- or short-term capital
gain or loss, depending on how long the shares of Common Stock or the Redeemable
Warrants are held. If the Redeemable Warrants are exercised, the holding period
of the Common Stock will not include the period during which the Redeemable
Warrants were held.
39
<PAGE>
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Under the Company's Articles of Incorporation, upon completion of this
offering and assuming no exercise of the Redeemable Warrants, there will be
12,084,994 shares of Common Stock available for future issuance without
shareholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital or to facilitate corporate acquisitions. Except for the up to 55,880
shares of Common Stock issuable upon conversion of a note issued in connection
with a recent acquisition, the Company does not currently have any plans to
issue additional shares of Common Stock (other than shares that may be issued
upon exercise of the Redeemable Warrants, the Underwriter's Warrant, outstanding
options and options which may be granted to the Company's officers, directors
and employees pursuant to the Stock Option Plan). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Recent
Acquisitions," "Management - Stock Option Plan" and "Underwriting."
One of the effects of the existence of unissued and unreserved Common Stock
is that the Board of Directors could issue shares to persons likely to support
current management and thereby protect the continuity of the Company's
management. Such additional shares could also be used to dilute the stock
ownership of persons seeking to obtain control of the Company.
PROVISIONS OF THE COMPANY'S ARTICLES AND BYLAWS AND THE MINNESOTA BUSINESS
CORPORATION ACT
The existence of authorized but unissued stock, as described above, and
certain provisions of the Company's Articles of Incorporation and Bylaws and of
Minnesota law, as described below, could have anti-takeover effects. These
provisions are intended to provide management flexibility, to enhance the
likelihood of continuity and stability in the composition of the Board of
Directors and in the policies formulated by the Board of Directors and to
discourage an unsolicited takeover of the Company if the Board of Directors
determines that such a takeover is not in the best interests of the Company and
its shareholders. However, these provisions could have the effect of
discouraging certain attempts to acquire the Company, which could deprive the
Company's shareholders of opportunities to sell their shares of Common Stock at
prices higher than prevailing market prices. Such provisions may also have the
effect of preventing changes in the management of the Company.
Section 302A.671 of the MBCA applies, with certain exceptions, to any
acquisition of voting stock of the Company (from a person other than the
Company, and other than in connection with certain mergers and exchanges to
which the Company is a party) resulting in the beneficial ownership of 20% or
more of the voting stock then outstanding. Section 302A.671 requires approval of
any such acquisitions by a majority vote of the shareholders of the Company
prior to its consummation. In general, shares acquired in the absence of such
approval are denied voting rights and are redeemable at their then fair market
value by the Company within 30 days after the acquiring person has failed to
give a timely information statement to the Company or the date the shareholders
voted not to grant voting rights to the acquiring person's shares.
Section 302A.673 of the MBCA generally prohibits any business combination by
the Company, or any subsidiary of the Company, with any shareholder which
purchases 10% or more of the Company's voting shares (an "interested
shareholder") within four years following such interested shareholder's share
acquisition date, unless the business combination or the acquisition of shares
is approved by the affirmative vote of a majority of a committee of all the
disinterested members of the Board of Directors, before the interested
shareholder's share acquisition date.
The Bylaws permit the Board to create new directorships and to elect new
directors to serve for the full term of the directorship created. The Board (or
its remaining members, even though less than a quorum) is also empowered to fill
vacancies on the Board occurring for any reason for the remainder of the term of
the directorship in which the vacancy occurred.
TRANSFER AGENT
The Company currently serves as its own transfer agent and registrar with
respect to its Common Stock and does not utilize the services of an independent
transfer agent such as a bank or trust company. The Company has appointed
Norwest Bank Minnesota, National Association, to act upon completion of this
offering as its transfer agent and registrar for the Common Stock and its
warrant agent for the Redeemable Warrants.
40
<PAGE>
UNDERWRITING
Subject to the terms and conditions to be set forth in an underwriting
agreement (the "Underwriting Agreement"), the Company has agreed to sell to
Equity Securities Investments, Inc. (the "Underwriter"), and the Underwriter has
agreed to purchase from the Company, the 800,000 Units offered hereby at the
Price to Public set forth on the cover page of this Prospectus, less the
Underwriting Discount of $0.675 per Unit.
The Underwriting Agreement provides that the obligations of the Underwriter
are subject to certain conditions precedent. The nature of the Underwriter's
obligation is that it is committed to purchase all Units offered hereby if any
of the Units are purchased.
The Company has been advised by the Underwriter that the Underwriter
proposes to offer the Units directly to the public at the Price to Public set
forth on the cover page of this Prospectus and to certain selected securities
dealers who are members of the National Association of Securities Dealers, Inc.
at such price less usual and customary commissions. The Company has granted to
the Underwriter an option, exercisable not later than 45 days after the date of
this Prospectus, and subject to the terms and conditions set forth in the
Underwriting Agreement, to purchase up to 120,000 additional Units at the Price
to Public, less the underwriting discount of $0.675 per Unit. The Underwriter
may exercise such option only to cover over-allotments made in connection with
the sale of the 800,000 Units offered hereby. To the extent the Underwriter
exercises the over-allotment option, it will have a firm commitment to purchase
the number of Units to be purchased by it, and the Company will be obligated
pursuant to the option to sell such Units to the Underwriter.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance equal to 2.0% of the aggregate public offering price of the Units, or
$120,000 ($138,000 if the over-allotment option is exercised in full). Such
allowance is included in the expenses of the offering set forth on the cover
page of this Prospectus. The Underwriter has informed the Company that the
Underwriter does not intend to confirm sales of Units to any accounts over which
it exercises discretionary authority.
The Company has agreed to sell to the Underwriter upon the closing of this
offering, for $100.00, the Underwriter's Warrant to purchase up to 80,000 Units.
The Underwriter's Warrant is not exercisable during the first year after the
date of this Prospectus and, thereafter, is exercisable at a price per Unit of
$9.00 (or 120% of the per Unit Price to Public) for a period of four years. The
Underwriter's Warrant contains customary antidilution provisions and obligates
the Company to register the shares of Common Stock and the Redeemable Warrants
comprising the Units issuable upon exercise of the Underwriter's Warrant under
the Securities Act once at the election of the holders and at any other time the
Company has a registration statement pending under the Securities Act. The
Underwriter's Warrant also includes "cashless" exercise provisions entitling the
holder to apply the difference between the exercise price of the Underwriter's
Warrant and the higher fair market value of the Units underlying the
Underwriter's Warrant to the payment of the exercise price without paying cash
to exercise the Underwriter's Warrant. The Underwriter's Warrant is not
transferable during the first year after the date of this Prospectus (other than
by will, pursuant to the operation of law, or where directed by a court of
competent jurisdiction upon the dissolution of a corporate holder thereof),
except to a person who is both an officer and a shareholder of the Underwriter,
a successor in interest to the business of the Underwriter, a person who is both
an officer and a shareholder of a successor, or a person who is an employee of
the Underwriter or a successor, but only if such employee is also an officer of
the Underwriter or successor. Any profits realized upon the sale of the
Underwriter's Warrant, the Units issuable upon exercise of the Underwriter's
Warrant, or the shares of Common Stock or Redeemable Warrants comprising such
Units may be deemed to constitute additional underwriting compensation.
The Underwriter will not receive any commissions, expense reimbursement or
other compensation as a result of the exercise of the Redeemable Warrants
included in the Units offered hereby.
41
<PAGE>
The Company and the Underwriter have agreed in the Underwriting Agreement to
indemnify each other or provide contribution with respect to certain
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
Underwriting Agreement. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions or otherwise, the
Company has been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Gary S. Kohler, Jeffrey R. Paletz, Melvin Graf, Jack S. Kohler and Dustin
Elder, who in the aggregate beneficially own 1,710,016 outstanding shares of
Common Stock and options to acquire an additional 300,000 shares (which includes
200,000 outstanding shares that are currently owned by Gary S. Kohler), have
agreed that they will not, without the Underwriter's prior written consent,
offer, sell or contract to sell or otherwise dispose of any shares of Common
Stock during the period ending one year after the date of this Prospectus; and
that they will not offer, sell or contract to sell or otherwise dispose of more
than 10% of the shares of Common Stock which they own during the period
beginning one year and ending two years after the date of this Prospectus. As a
condition of the underwriting, the Company's other shareholders, who in the
aggregate own 404,750 shares of Common Stock, must agree that they will not,
without the Underwriter's prior written consent, offer, sell or contract to sell
or otherwise dispose of any shares of Common Stock during the period ending six
months after the date of this Prospectus. In addition, unless waived by the
Underwriter, the Company's shareholders must agree that any sale of shares of
the Company's Common Stock which is made by such shareholders during the period
ending two years after the date of this Prospectus will be made through the
Underwriter. The Company has agreed in the Underwriting Agreement that it will
not, without the prior written consent of the Underwriter, file a registration
statement relating to any shares of the Company's capital stock (other than a
registration statement on Form S-8 relating to shares issuable under a stock
option plan), whether such shares are to be sold by the Company or by
shareholders of the Company, until at least six months after the date of this
Prospectus.
The Underwriting Agreement provides that, for a period of three years from
the date of this Prospectus, the Underwriter will have a right of first refusal
to (i) serve as the managing underwriter or selling agent for any public or
private offering of the Company's equity or debt securities and (ii) act as the
Company's investment banker or financial advisor in connection with any
strategic partnership, sale of the Company or its assets, merger, acquisition of
stock or assets of another entity, or similar transaction. The Underwriting
Agreement also provides that, for a period of three years from the date of this
Prospectus, the Underwriter will have the right to nominate one person to serve
on the Company's Board of Directors, and the Company has agreed to use its best
efforts to secure the election of such nominee to the Board of Directors upon
request of the Underwriter. The Underwriter intends to exercise its right to
nominate a person to sit on the Company's Board of Directors by approving a
nominee to be identified by the Company. It is expected that such right will be
exercised prior to the end of 1997.
Prior to this offering, there has been no public market for any of the
Company's securities. The Price to Public has been determined by negotiation
between the Company and the Underwriter. The factors considered in determining
the Price to Public include prevailing market and economic conditions, estimates
of the business potential and prospects for the Company, the state of the
Company's business operations, an assessment of the Company's management, and
the consideration of the above factors in relation to market valuations of
companies in related businesses. There can be no assurance that the per Unit
Price to Public is indicative of the prices at which the Common Stock and
Redeemable Warrants will sell in the public market after this offering.
The foregoing is a summary of the provisions of the Underwriting Agreement,
the Underwriter's Warrant and related documents and does not purport to be a
complete statement of their terms and conditions. A copy of the Underwriting
Agreement, including the Underwriter's Warrant, has been filed as an exhibit to
the Registration Statement.
42
<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Robins, Kaplan, Miller & Ciresi L.L.P., Minneapolis, Minnesota.
Winthrop & Weinstine, P.A., Minneapolis, Minnesota, has acted as counsel to the
Underwriter in connection with certain legal matters relating to the securities
offered hereby.
EXPERTS
The Combined Financial Statements of the Company as of and for the years
ended December 31, 1995 and 1996, and the Financial Statements for the pay
telephone division of TelcoWest and the Financial Statements for CAT for the
periods ended December 31, 1995 and 1996, included herein and in the
Registration Statement, have been included in reliance upon the reports of
Schechter Dokken Kanter Andrews & Selcer, Ltd., Minneapolis, Minnesota,
independent certified public accountants, appearing elsewhere herein and upon
the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement under the
Securities Act with respect to the securities offered hereby. This Prospectus,
filed as a part of the Registration Statement, does not contain certain
information set forth in or annexed as exhibits to the Registration Statement.
For further information regarding the Company and the securities offered hereby,
reference is made to the Registration Statement and to the exhibits filed as a
part thereof. Statements contained in this Prospectus and the contents of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such a contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. Copies of the Registration Statement may be
inspected without charge and copied at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the SEC's regional offices at Northwestern Atrium Center, 500 West Madison,
Suite 1400, Chicago, Illinois 60661 and 75 Park Place, 14th Floor, New York, New
York 10048. Copies of such materials may be obtained from the SEC, 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of the prescribed fee. In
addition, the SEC maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants, including
the Company, that file electronically with the SEC. The Web site's address is
http://www.sec.gov.
43
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
COMBINED FINANCIAL STATEMENTS FOR INTELLIPHONE, INC. AND CHOICETEL, INC.
Independent Auditors' Report............................................................................. F-2
Combined Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (unaudited)................... F-3
Combined Statements of Operations for the Years Ended December 31, 1995 and 1996 and for the Six Month
Periods Ended June 30, 1996 and 1997 (unaudited)....................................................... F-4
Combined Statements of Shareholders' Equity for the Years Ended December 31, 1995 and 1996 and the Six
Month Period Ended June 30, 1997 (unaudited)........................................................... F-5
Combined Statements of Cash Flows for the Years Ended December 31, 1995 and 1996 and the Six Month
Periods Ended June 30, 1996 and 1997 (unaudited)....................................................... F-6
Notes to Combined Financial Statements for the Years Ended December 31, 1995 and 1996 and the Six Month
Period Ended June 30, 1997 (unaudited)................................................................. F-7
FINANCIAL STATEMENTS FOR TELCO WEST, INC. - PAY TELEPHONE DIVISION
Independent Auditors' Report............................................................................. F-12
Statements of Revenue and Direct Expenses for the Years Ended December 31, 1995 and 1996................. F-13
Statement of Assets Acquired by Intelliphone, Inc. on January 2, 1997.................................... F-14
Notes to Financial Statements for the Years Ended December 31, 1995 and 1996............................. F-15
FINANCIAL STATEMENTS FOR COMPUTER ASSISTED TECHNOLOGIES, INC.
Independent Auditors' Report............................................................................. F-16
Statements of Operations for the Years Ended December 31, 1995 and 1996.................................. F-17
Statement of Assets to be Acquired and Liabilities to be Assumed by ChoiceTel Communications, Inc........ F-18
Notes to Financial Statements for the Years Ended December 31, 1995 and 1996............................. F-19
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Intelliphone, Inc. and Choicetel, Inc.
Minneapolis, Minnesota
We have audited the accompanying combined balance sheets of Intelliphone,
Inc. and Choicetel, Inc. ("S" Corporations) as of December 31, 1995 and 1996,
and the related combined statements of operations, shareholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Intelliphone, Inc.
and Choicetel, Inc. as of December 31, 1995 and 1996, and the combined results
of their operations and cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ Schechter Dokken Kanter
Andrews & Selcer, Ltd.
--------------------------------------------------------------------
SCHECHTER DOKKEN KANTER
ANDREWS & SELCER, LTD.
Minneapolis, Minnesota
March 20, 1997,
except for Note 7
for which the date
is July 31, 1997
F-2
<PAGE>
INTELLIPHONE, INC. AND CHOICETEL, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................................................. $ 29,146 $ 875,150 $ 55,923
Accounts receivable, net of an allowance for revenue adjustments of
$109,000 at June 30, 1997.......................................... 35,289 172,934 828,269
Prepaid:
Rent............................................................... 90,285 78,732 105,027
Other.............................................................. 62,851 82,874 321,352
------------ ------------ -------------
Total current assets............................................. 217,571 1,209,690 1,310,571
------------ ------------ -------------
Property and equipment:
Phones and related equipment......................................... 1,964,289 2,373,199 6,135,888
Accumulated depreciation............................................. (594,959) (845,176) (1,244,576)
------------ ------------ -------------
1,369,330 1,528,023 4,891,312
------------ ------------ -------------
Office equipment and improvements.................................... 60,174 66,548 79,265
Accumulated depreciation............................................. (23,739) (36,239) (34,484)
------------ ------------ -------------
36,435 30,309 44,781
------------ ------------ -------------
1,405,765 1,558,332 4,936,093
------------ ------------ -------------
Other assets:
Prepaid rents........................................................ 197,232 134,443 120,566
Rental agreements, net of accumulated amortization of $75,719 in
1995, $111,073 in 1996 and $139,970 at June 30, 1997............... 91,914 65,632 389,193
Deferred financing, net of accumulated amortization of $4,975 in
1995, $33,870 in 1996 and $35,252 at June 30, 1997................. 30,277 1,382 0
------------ ------------ -------------
319,423 201,457 509,759
------------ ------------ -------------
$ 1,942,759 $ 2,969,479 $ 6,756,423
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable........................................................ $ 335,000 $ 360,000 $ 3,475,864
Current portion of long-term debt.................................... 100,572 265,931 210,314
Accounts payable..................................................... 183,800 136,298 431,513
Accrued expenses..................................................... 2,127 957,242 1,039,997
Unearned line charge received........................................ 0 16,218 3,580
------------ ------------ -------------
Total current liabilities........................................ 621,499 1,735,689 5,161,268
Long-term debt, net of current portion................................. 828,530 569,702 630,942
Shareholders' equity................................................... 492,730 664,088 964,213
------------ ------------ -------------
$ 1,942,759 $ 2,969,479 $ 6,756,423
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See notes to combined financial statements.
F-3
<PAGE>
INTELLIPHONE, INC. AND CHOICETEL, INC.
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- --------------------------
1995 1996 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Service revenue.......................................... $ 2,817,446 $ 3,561,902 $ 1,617,720 $ 3,767,801
Cost of service.......................................... 1,785,062 1,986,985 1,030,640 1,719,284
------------ ------------ ------------ ------------
Gross margin............................................. 1,032,384 1,574,917 587,080 2,048,517
------------ ------------ ------------ ------------
Selling, general and administrative expenses:
Salary and benefits.................................... 402,268 559,494 263,716 586,585
Travel and related..................................... 38,895 58,351 28,991 61,992
Office and overhead.................................... 132,331 212,506 65,123 165,205
------------ ------------ ------------ ------------
573,494 830,351 357,830 813,782
Depreciation and amortization............................ 247,039 364,849 154,370 436,390
Interest................................................. 90,276 119,649 72,918 324,920
Sales tax contingency.................................... 0 865,000 0 110,140
------------ ------------ ------------ ------------
337,315 1,349,498 585,118 1,684,232
------------ ------------ ------------ ------------
Income (loss) before income taxes........................ 121,575 (604,932) 1,962 363,285
Provision for income taxes (unaudited)................... -- -- -- 127,150
Pro forma provision for income taxes (credit)
(unaudited)............................................ 42,550 (211,725) 687 0
------------ ------------ ------------ ------------
Net income (unaudited)................................... -- -- -- $ 236,135
Pro forma net income (loss) (unaudited).................. $ 79,055 $ (393,207) $ 1,275 --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Per share:
Net income (unaudited)................................. -- -- -- $ .12
Pro forma net income (loss) (unaudited)................ $ .04 $ (.20) $ .00 --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares outstanding-weighted average...................... 1,935,189 1,948,489 1,935,189 1,951,516
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See notes to combined financial statements.
F-4
<PAGE>
INTELLIPHONE, INC. AND CHOICETEL, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
SIX MONTH PERIOD ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------
CHOICETEL, INC.
--------------- INTELLIPHONE, INC.
---------------------
10,000,000
SHARES 2,000,000
AUTHORIZED SHARES AUTHORIZED
--------------- --------------------- ACCUMULATED SUBSCRIPTIONS
SHARES AMOUNT SHARES AMOUNT DEFICIT RECEIVABLE TOTAL
------- ------ --------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995................ 1,622,016 $ 474,473 $ (91,627) $ (28,571) $ 354,275
Stock issued in exchange for retirement
of debt at $2.00 a share, February
1995.................................. 25,000 25,000 25,000
Stock issued in exchange for retirement
of debt at $5.00 a share, December
1995.................................. 10,000 25,000 25,000
Dividends............................... (33,120) (33,120)
Net income.............................. 121,575 121,575
------- ------ --------- ---------- ----------- ------------- ----------
Balance, December 31, 1995.............. 1,657,016 524,473 (3,172) (28,571) 492,730
Collection of subscription receivable... 10,000 10,000
Issuance of stock for:
Cash.................................. 256,000 910,000 910,000
Subscriptions receivable.............. 846,508 $1,000 6,250 25,000 (26,000)
Dividends............................... (143,710) (143,710)
Net loss................................ (604,932) (604,932)
------- ------ --------- ---------- ----------- ------------- ----------
Balance, December 31, 1996.............. 846,508 1,000 1,919,266 1,459,473 (751,814) (44,571) 664,088
Collection of subscription receivable... 25,990 25,990
Issuance of stock....................... 9,500 38,000 38,000
Dividends...............................
Net income.............................. 236,135 236,135
------- ------ --------- ---------- ----------- ------------- ----------
Balance, June 30, 1997.................. 846,508 $1,000 1,928,766 $1,497,473 $ (515,679) $ (18,581) $ 964,213
------- ------ --------- ---------- ----------- ------------- ----------
------- ------ --------- ---------- ----------- ------------- ----------
</TABLE>
See notes to combined financial statements.
F-5
<PAGE>
INTELLIPHONE, INC. AND CHOICETEL, INC.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- --------------------------
1995 1996 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income...................................... $ 121,575 $ (604,932) $ (1,962) $ 236,135
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization........................ 247,039 364,849 154,370 436,390
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable.............................. (1,257) (137,645) 20,020 (655,335)
Prepaid rent and other........................... (184,901) 54,319 39,594 (250,896)
Increase (decrease) in:
Accounts payable................................. (13,594) (47,502) 36,505 295,215
Accrued expenses................................. (8,258) 955,115 0 82,755
Unearned line charge received.................... 0 16,218 0 (12,638)
------------ ------------ ------------ ------------
Net cash provided by operating activities................ 160,604 600,422 252,451 131,626
------------ ------------ ------------ ------------
Cash flows used in investing activities, purchase of
equipment and rental contracts......................... (623,008) (462,239) (230,402) (4,136,331)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from
Issuance of:
Long-term debt..................................... 813,102 7,103 0 630,942
Common stock....................................... 0 910,000 20,000 38,000
Payments of subscription receivable.................. 0 10,000 0 25,990
Principal payments on long-term debt................. (324,026) (100,572) (50,281) (625,319)
Dividends paid....................................... (33,120) (143,710) (16,690) 0
Net change in notes payable.......................... 5,000 25,000 61,152 3,115,864
Deferred financing costs............................. (35,252) 0 0 0
------------ ------------ ------------ ------------
Net cash provided by financing activities............ 425,704 707,821 14,181 3,185,477
------------ ------------ ------------ ------------
Net increase (decrease) in cash.......................... (36,700) 846,004 (36,230) (819,228)
Cash, beginning balance.................................. 65,846 29,146 29,146 875,150
------------ ------------ ------------ ------------
Cash, ending balance..................................... $ 29,146 $ 875,150 $ 65,376 $ 55,923
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for interest................................. $ 96,486 $ 121,530 $ 60,391 $ 310,642
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Supplemental schedule of noncash investing and financing
activities:
Refinanced debt from notes payable to long-term debt... $ 15,000
------------
------------
Retirement of debt through issuance of stock........... $ 50,000
------------
------------
Issuance of stock in exchange for subscription
receivable........................................... $ 26,000
------------
------------
</TABLE>
See notes to combined financial statements.
F-6
<PAGE>
INTELLIPHONE, INC. AND CHOICETEL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
SIX MONTH PERIOD ENDED JUNE 30, 1997 (UNAUDITED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF COMBINATION:
The combined financial statements for 1995 and 1996 include the accounts of
Intelliphone, Inc. combined with Choicetel, Inc., after elimination of all
material intercompany transactions. The combined companies are commonly owned.
NATURE OF BUSINESS:
Intelliphone was incorporated in October 1989 to provide coin operated
telephone service throughout Minnesota. Since inception, Intelliphone has
expanded to other states; however, revenue is generated predominantly in the
Minneapolis/St. Paul area.
Choicetel, Inc. was incorporated in 1995 and was dormant until June 1996
when operations began. Choicetel is a reseller of telephone local line charge to
pay telephone owners in Minnesota.
PROPERTY AND EQUIPMENT AND DEPRECIATION METHODS:
Property and equipment, consisting principally of coin operated telephones,
are stated at cost. Depreciation is being provided by the straight-line method
over the estimated useful lives, principally seven years, of the related assets.
Phone locations are evaluated by management to determine if their carrying
amounts had been impaired. No reductions for impaired assets have occurred.
PREPAID RENTS:
Prepaid rents represent incentives paid to phone location merchants and
property owners to secure long term contracts at such sites and are being
amortized as consumed per the rental agreement.
RENTAL AGREEMENTS:
Rental agreements consist of the purchase price paid for phone location
agreements in excess of the purchase price of the related equipment on site and
is being amortized over a sixty month period on a straight line basis.
DEFERRED FINANCING:
Deferred financing costs are being amortized over the life of the related
note on a straight-line basis.
UNEARNED LINE CHARGE RECEIVED:
Collections of the line charge revenue in advance of providing service are
deferred until the month the service is provided.
INCOME TAXES:
Intelliphone, Inc. and Choicetel, Inc., with the consent of their
shareholders, have elected to be "S" corporations under the Internal Revenue
Code. Instead of paying corporate income taxes, the
F-7
<PAGE>
INTELLIPHONE, INC. AND CHOICETEL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
SIX MONTH PERIOD ENDED JUNE 30, 1997 (UNAUDITED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
shareholders of an "S" corporation are taxed individually on their proportionate
share of the Company's taxable income or loss.
Effective January 1997, Intelliphone's "S" corporation status terminated and
it became subject to federal and state income taxes.
The accompanying statements of operations include an unaudited pro forma
provision for income taxes (credit), using a rate of 35 percent, to reflect
estimated income tax expense (credit) of the Companies as if they had been
subject to corporate income taxes in 1995 and 1996.
PRO FORMA EARNING PER SHARE (UNAUDITED):
Pro forma earnings per share for the years ended December 31, 1995 and 1996
and the six months ended June 30, 1997 are computed on the basis of the number
of shares of common stock outstanding during 1995 and 1996 and the six months
ended June 30, 1997.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, stock issued by the Company at prices less than the initial offering price
during the twelve months immediately preceding the initial public offering, plus
common stock equivalents granted at exercise prices less than the initial public
offering price during the same period, have been included in the determination
of shares used in the calculation of historical earnings (loss) per share as if
they were outstanding for all periods.
USE OF ESTIMATES:
The timely preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Actual results
could differ from those estimates.
F-8
<PAGE>
INTELLIPHONE, INC. AND CHOICETEL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
SIX MONTH PERIOD ENDED JUNE 30, 1997 (UNAUDITED)
2. NOTES PAYABLE:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- ------------
1995 1996 1997
---------- ---------- ------------
<S> <C> <C> <C>
Line of credit, bank, $300,000, interest at 1.0% above
the bank's prime rate (9.25% at December 31, 1996)
guaranteed by shareholders and secured by equipment.
The line was paid off in January 1997................ $ 300,000 $ 275,000 $ 0
Term note, bank, $3,000,000, interest at 2.0% above the
bank's prime rate (10.5% at June 30, 1997) guaranteed
by shareholders and secured by equipment. Due January
1998................................................. 0 0 2,700,000
Note payable, interest only payable monthly at 8.75%.
Due on demand........................................ 0 50,000 100,000
Note payable, interest only payable monthly at 12%. Due
on demand............................................ 35,000 35,000 35,000
Note payable, Telco West, interest only payable monthly
at 10% through March 1998. Principal due April
1998(A).............................................. 0 0 364,896
Note payable, interest on payable monthly at 12%
through April 1997. Thereafter due in monthly
installments of $2,354 including interest to April
1999................................................. 0 0 46,293
Notes payable, interest only payable monthly at 12%
with various maturing dates from March 1997 through
December 1997........................................ 0 0 158,849
Note payable, interest at 12% compounded quarterly.
Interest due on demand, prinicpal due February
1998................................................. 0 0 70,826
---------- ---------- ------------
$ 335,000 $ 360,000 $ 3,475,864
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
- ------------------------
(A) Notes are secured by certain assets of Intelliphone and guaranteed by
certain of its shareholders.
F-9
<PAGE>
INTELLIPHONE, INC. AND CHOICETEL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
SIX MONTH PERIOD ENDED JUNE 30, 1997 (UNAUDITED)
3. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- ----------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Note payable, interest only payable monthly at 12% through April 1997.
Thereafter due in monthly installments of $2,354 including interest to
April 1999................................................................ 50,000 50,000 0
Notes payable, interest only payable monthly at 12% with various maturing
dates from March 1997 through December 1997.............................. 150,000 150,000 0
Note payable, interest at 12% compounded quarterly. Interest due on demand,
principal due February 1998.............................................. 60,823 67,926 0
Note payable, bank, due in monthly installments of $6,000 plus interest at
1.25% above bank's prime rate (9.5% at December 31, 1996) to August 2000
at which time remaining principal is due(A).............................. 468,279 396,279 0
Note payable, bank, due in monthly installments of $2,381 plus interest at
1.25% above prime rate (9.5% at December 31, 1996) to December 2000 at
which time remaining principal is due(A)................................. 200,000 171,428 0
Note payable, Telco West, interest only payable monthly at 10% through June
1997. Thereafter due in monthly installments of $21,343 including
interest to June 2001(B)................................................. 0 0 841,256
---------- ---------- ----------
929,102 835,633 841,256
Less current portion....................................................... 100,572 265,931 210,314
---------- ---------- ----------
$ 828,530 $ 569,702 $ 630,942
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(A) Notes are secured by all assets of Intelliphone and guaranteed by certain of
its shareholders. The loan agreement requires the Company to maintain
certain financial ratios and limits compensation and dividends.
(B) Notes are secured by certain assets of Intelliphone and guaranteed by
certain of its shareholders.
At December 31, 1995 and 1996, and June 30, 1997, notes with shareholders
and shareholder family members included in long-term debt and notes payable
amounted to $135,000 at an interest rate of 12%.
F-10
<PAGE>
INTELLIPHONE, INC. AND CHOICETEL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
SIX MONTH PERIOD ENDED JUNE 30, 1997 (UNAUDITED)
3. LONG-TERM DEBT: (CONTINUED)
Future maturities of long-term debt as of December 31, 1996, and June 30,
1997, are as follows:
<TABLE>
<CAPTION>
AMOUNT AT
YEAR ENDING DECEMBER 31, DECEMBER 31, 1996
- --------------------------------------------------------------------------- -----------------
<S> <C>
1997....................................................................... $ 265,931
1998....................................................................... 193,955
1999....................................................................... 109,756
2000....................................................................... 265,991
--------
$ 835,633
<CAPTION>
AMOUNT AT
TWELVE MONTHS ENDING JUNE 30, JUNE 30, 1997
- --------------------------------------------------------------------------- -----------------
<S> <C>
1998....................................................................... $ 210,314
1999....................................................................... 210,314
2000....................................................................... 210,314
2001....................................................................... 210,314
--------
$ 841,256
</TABLE>
4. COMMITMENTS AND CONTINGENCY:
PHONE LOCATIONS:
Intelliphone, Inc. rents phone locations from merchants and property owners
under varying lease terms, usually five or more years, generally cancelable by
the Company upon 15 days notice.
SALES TAX CONTINGENCY:
After an original contact by Intelliphone, Inc., the Minnesota Department of
Revenue conducted an audit of the Company's revenues for calculation of sales
taxes the department asserts are due on telephone receipts. While the Company
does not believe its coin receipts are subject to sales tax and has notified the
Minnesota Department of Revenue of its position, it may have to assert its
position in the Minnesota courts in order to prevail. The financial statements
include an accrual management believes is sufficient to cover this contingency.
5. CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash in excess of FDIC insurance limits. At
December 31, 1996, Intelliphone, Inc. had cash of approximately $765,000 in
excess of FDIC insurance limits in one financial institution. No losses have
been experienced from such deposits.
6. STOCK AND STOCK OPTIONS:
Intelliphone intends to make a public offering of its securities. The
proceeds of the offering will be used to retire debt, to finance acquisitions
and expansion and for working capital.
F-11
<PAGE>
INTELLIPHONE, INC. AND CHOICETEL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
SIX MONTH PERIOD ENDED JUNE 30, 1997 (UNAUDITED)
6. STOCK AND STOCK OPTIONS: (CONTINUED)
Intelliphone has issued stock options to a member of management providing
for the issuance of up to 50,000 shares of common stock at a price of $1.50 per
share expiring October 31, 1998.
Subsequent to December 31, 1996, Intelliphone declared a 2 for 1 stock
split. This stock split has been reflected in all share and per share amounts as
if the split had occurred on January 1, 1995.
7. SUBSEQUENT EVENTS:
In January 1997, Intelliphone purchased a route of pay telephones in the
Northwestern United States. The route consists of approximately 1,020 pay
phones. The purchase price was approximately $3,300,000 and was accounted for
under the purchase method and financed primarily with bank and seller financing.
In February 1997, Intelliphone reached an agreement to purchase another
provider of pay telephones in Minnesota and Wisconsin. The purchase would add
approximately 685 additional pay telephones and would be financed through the
issuance of stock and assumption of debt. Closing is subject to approval by the
Minnesota Public Utilities Commission.
A condensed pro forma balance sheet as if these transactions had closed on
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
1996 PURCHASE DECEMBER 31,
ACTUAL ADJUSTMENTS 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current assets......................................................... $1,209,690 $ (160,000) $1,049,690
Property and equipment, net............................................ 1,558,332 4,691,956 6,250,288
Other assets........................................................... 201,457 878,344 1,079,801
------------ ------------ ------------
$2,969,479 $ 5,410,300 $8,379,779
------------ ------------ ------------
------------ ------------ ------------
Liabilities............................................................ $2,305,391 $ 4,711,900 $7,017,291
Shareholders' equity................................................... 664,088 698,400 1,362,488
------------ ------------ ------------
$2,969,479 $ 5,410,300 $8,379,779
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
In March 1997, Choicetel, Inc. became a wholly owned subsidiary of
Intelliphone, Inc.
In April 1997, Intelliphone, Inc. changed its name to ChoiceTel
Communications, Inc.
Also, in April 1997, the Company adopted the 1997 Long-Term Incentive and
Stock Option Plan (the "Plan") which allows for the granting of options to
purchase up to 100,000 shares of common stock to directors, officers, other
employees and consultants. Options under the Plan may be either incentive stock
options (intended to qualify for preferential tax treatment under Section 422 of
the Internal Revenue Code of 1986, as amended) or non-qualified stock options.
As of July 31, 1997, no options had been granted under the Plan.
F-12
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
ChoiceTel Communications, Inc.
Minneapolis, Minnesota
We have audited the accompanying statements of revenue and direct expenses
of the pay telephone division of Telco West, Inc. for the years ended December
31, 1995 and 1996 and the statement of assets acquired by Intelliphone, Inc. on
January 2, 1997. These financial statements are the responsibility of the Telco
West management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations of the pay telephone
division of Telco West, Inc. for the years ended December 31, 1996 and 1995, and
the assets acquired by Intelliphone, Inc. on January 2, 1997, in conformity with
generally accepted accounting principles.
The statements of revenue and direct expenses are intended to be part of a
filing for ChoiceTel Communications, Inc. for sale of its securities under
Regulation S-B and are presented on a basis that is required for the filing with
the Securities and Exchange Commission as more fully described in Note 1.
/s/ Schechter Dokken Kanter
Andrews & Selcer, Ltd.
--------------------------------------------------------------------
SCHECHTER DOKKEN KANTER
ANDREWS & SELCER, LTD.
Minneapolis, Minnesota
April 30, 1997
F-13
<PAGE>
TELCO WEST, INC. PAY TELEPHONE DIVISION
STATEMENTS OF REVENUE AND DIRECT EXPENSES
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Revenues:
Coin collection..................................................................... $ 1,624,187 $ 1,308,067
Intellicall......................................................................... 1,268,073 807,793
Long distance....................................................................... 250,182 224,888
Other phone......................................................................... 93,342 174,630
Gain on sale of equipment........................................................... 184,090 146,730
Other operating income.............................................................. 6,299 1,886
------------ ------------
3,426,173 2,663,994
------------ ------------
Direct expenses:
Depreciation........................................................................ 414,924 307,331
Interest............................................................................ 133,273 95,323
Other direct expenses............................................................... 2,314,103 1,878,802
------------ ------------
2,862,300 2,281,456
------------ ------------
Income from pay telephone operations before pro forma income tax provision............ 563,873 382,538
Pro forma provision for income taxes (unaudited)...................................... 197,355 133,888
------------ ------------
Pro forma net income from pay telephone operations (unaudited)........................ $ 366,538 $ 248,650
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
F-14
<PAGE>
TELCO WEST, INC. PAY TELEPHONE DIVISION
STATEMENT OF ASSETS ACQUIRED BY INTELLIPHONE, INC.
JANUARY 2, 1997
<TABLE>
<CAPTION>
<S> <C>
Assets acquired (at cost to Intelliphone, Inc.):
Phones and equipment.............................................................................. $ 3,005,031
Rental agreements and goodwill.................................................................... 336,744
------------
Total assets acquired............................................................................... $ 3,391,785
------------
------------
</TABLE>
See notes to financial statements.
F-15
<PAGE>
TELCO WEST, INC. PAY TELEPHONE DIVISION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS AND BASIS OF PRESENTATION:
The Company provides telecommunications services to the hospitality and
direct consumer markets in the Pacific Northwest. In January of 1997,
Intelliphone, Inc. purchased the pay telephone division of Telco West, Inc. The
financial statements include the results of operations of the pay telephone
division only and include any direct revenues and expenses of the division. The
revenues and expenses of Telco Hospitality division and Central Office expenses
of Telco West are not included in the financial statements.
DEPRECIATION EXPENSE:
Pay telephones and other assets are depreciated using an accelerated method
over their estimated useful lives of seven years.
USE OF ESTIMATES:
The timely preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Actual results
could differ from those estimates.
INCOME TAXES:
The Company's shareholders have elected to have the corporation taxed under
Subchapter "S" of the Internal Revenue Code. Therefore, no provision for income
taxes has been made on its earnings. The taxes, if any, are the liability of the
Company's shareholders.
2. LEASES:
The Company leases certain pay phones under two capital leases which expire
in 1997. Amortization expense for this equipment is included with depreciation
expense.
Future minimum lease payments under the capital leases and the net present
value of future minimum lease payments are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Year ending December 31, 1997..................................................... $ 331,380
Less amounts representing interest................................................ 13,637
----------
Net present value of future minimum lease payments................................ $ 317,743
----------
----------
</TABLE>
3. COMMITMENTS:
PHONE LOCATIONS:
The Company has entered into various contracts with merchants and property
owners of the pay phone locations with terms ranging from one to ten years,
cancelable upon 30 days notice by either party.
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
ChoiceTel Communications, Inc.
Minneapolis, Minnesota
We have audited the accompanying statements of operations of Computer Assisted
Technologies, Inc. for the years ended December 31, 1995 and 1996 and the
statement of assets to be acquired and liabilities to be assumed by ChoiceTel
Communications, Inc. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations of Computer Assisted
Technologies, Inc. for the years ended December 31, 1996 and 1995, and the
assets to be acquired and liabilities to be assumed by ChoiceTel Communications,
Inc. in conformity with generally accepted accounting principles.
/s/ Schechter Dokken Kanter
Andrews & Selcer, Ltd.
--------------------------------------------------------------------
SCHECHTER DOKKEN KANTER
ANDREWS & SELCER, LTD.
Minneapolis, Minnesota
May 16, 1997
F-17
<PAGE>
COMPUTER ASSISTED TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
---------- ------------
<S> <C> <C>
Revenues:
Coin collection....................................................................... $ 866,425 $ 1,374,286
Long distance......................................................................... 89,005 48,010
Other operating income................................................................ 3,292 57,041
---------- ------------
958,722 1,479,337
---------- ------------
---------- ------------
Expenses:
Depreciation and amortization......................................................... 59,000 158,044
Interest.............................................................................. 95,577 180,000
Other operating expenses.............................................................. 779,045 1,396,344
---------- ------------
933,622 1,734,388
---------- ------------
Income (loss) before pro forma income tax provision..................................... 25,100 (255,051)
Pro forma provision for income tax (credit) (unaudited)................................. 8,785 (89,267)
---------- ------------
Pro forma net income (loss) (unaudited)................................................. $ 16,315 $ (165,784)
---------- ------------
---------- ------------
</TABLE>
See notes to financial statements.
F-18
<PAGE>
COMPUTER ASSISTED TECHNOLOGIES, INC.
STATEMENT OF ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
BY CHOICETEL COMMUNICATIONS, INC.
<TABLE>
<S> <C>
Assets acquired (at cost to ChoiceTel Communications, Inc.):
Phones........................................................................ $1,725,165
Rental agreements and goodwill................................................ 545,135
---------
Total assets acquired........................................................... $2,270,300
---------
---------
Liabilities assumed:
Note payable at 8.5%.......................................................... $ 350,000
Lease payable................................................................. 1,121,900
---------
Total liabilities assumed....................................................... $1,471,900
---------
---------
</TABLE>
See notes to financial statements.
F-19
<PAGE>
COMPUTER ASSISTED TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS AND BASIS OF PRESENTATION:
The Company provides pay phone services to direct consumer markets mainly in
Minnesota. In January of 1997, the Company reached an agreement to sell its pay
telephone operations to ChoiceTel Communications, Inc.
The statement of operations includes all revenues and expenses of the
Company. The statement of assets to be acquired and liabilities to be assumed by
ChoiceTel Communications, Inc. is based upon the terms of the agreement for sale
and purchase of assets dated March 14, 1997.
DEPRECIATION EXPENSE:
Pay telephones and other assets are depreciated using a straight-line method
over their estimated useful lives of seven years.
USE OF ESTIMATES:
The timely preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Actual results
could differ from those estimates.
INCOME TAXES:
The Company's shareholders have elected to have the corporation taxed under
Subchapter "S" of the Internal Revenue Code. Therefore, no provision for income
taxes has been made on the earnings of the Company. The taxes, if any, are the
liability of the Company's shareholders.
2. LEASES:
The Company leases certain pay phones under three capital leases which
expire in 1999, 2000, and 2001. Amortization expense for this equipment is
included with depreciation expenses.
Net present value of future minimum lease payments under the capital leases
are as follows:
<TABLE>
<CAPTION>
AMOUNT
------------
<S> <C>
1997............................................................................ $ 345,396
1998............................................................................ 345,396
1999............................................................................ 341,011
2000............................................................................ 85,221
2001............................................................................ 80,301
------------
1,197,325
Less amounts representing interest.............................................. (276,979)
------------
Net present value of future minimum lease payments.............................. $ 920,346
------------
------------
</TABLE>
The leases are to be assumed by ChoiceTel Communications, Inc. upon the
completion of the acquisition.
F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO PURCHASE BY ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH AN OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Index of Certain Defined Terms............................................ 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 11
Dividend Policy........................................................... 12
Capitalization............................................................ 13
Dilution.................................................................. 14
Selected Combined Financial Data.......................................... 15
Reorganization............................................................ 16
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 17
Business.................................................................. 23
Management................................................................ 32
Certain Transactions...................................................... 34
Principal Shareholders.................................................... 35
Securities Eligible for Future Sale....................................... 36
Description of Securities................................................. 37
Underwriting.............................................................. 41
Legal Matters............................................................. 43
Experts................................................................... 43
Additional Information.................................................... 43
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS AND SALESPERSONS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES
OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
800,000 UNITS
EACH UNIT CONSISTING OF
ONE SHARE OF COMMON STOCK
AND
ONE REDEEMABLE
COMMON STOCK PURCHASE WARRANT
CHOICETEL
COMMUNICATIONS,
INC.
---------------------
PROSPECTUS
---------------------
EQUITY SECURITIES
INVESTMENTS, INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses of the
Registrant in connection with the offering described in the Registration
Statement other than the Underwriting Discount set forth on the cover page of
the Prospectus. All of the amounts shown are estimates except the SEC
registration fee, the NASD filing fee, and the Underwriter's non-accountable
expense allowance.
<TABLE>
<S> <C>
SEC filing fee................................................. $ 4,740.00
NASD filing fee................................................ 2,064.00
NASDAQ filing fee.............................................. 8,000.00
Transfer Agent fee............................................. 7,500.00
Legal fees and expenses........................................ 110,000.00
Accounting fees and expenses................................... 40,000.00
Printing and engraving expenses................................ 85,000.00
Blue Sky fees and expenses..................................... 20,000.00
Underwriter's non-accountable expense allowance................ 120,000.00(1)
Miscellaneous expenses......................................... 62,696.00
----------
Total...................................................... $460,000.00
----------
----------
</TABLE>
- ------------------------
(1) If the Underwriter's over-allotment option is exercised in full, the
Underwriter's non-accountable expense allowance will be $138,000.00 and
total expenses will be $478,000.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since June 1, 1994, the Registrant has issued or sold the securities
described below without registration under the Act. The transactions described
below are claimed to be exempt from registration pursuant to Section 4(2) of the
Securities Act as they were isolated transactions and did not involve any public
offering, and, in the case of the private placement described in Paragraph 7
below, under Rule 506 under Regulation D under the Act.
1. FEBRUARY 21, 1995 CONVERSION OF DEBT TO EQUITY: On February 21, 1995, an
officer and director of the Registrant converted $25,000 of the principal
balance of the Registrant's Promissory Note, issued to him in connection with a
loan made to the Registrant, into 25,000 shares of Common Stock.
2. FEBRUARY 21, 1995 ISSUANCE OF COMMON STOCK: On February 21, 1995, the
Registrant issued 6,000 shares of Common Stock valued at $6,000 to an officer of
the Registrant as compensation, in part, for services rendered.
3. OCTOBER 19, 1995 ISSUANCE OF COMMON STOCK: On October 15, 1995, the
Registrant issued 6,000 shares of Common Stock valued at $6,000 to an officer of
the Registrant as compensation, in part, for services rendered.
4. DECEMBER 27, 1995 CONVERSION OF DEBT TO EQUITY: On December 27, 1995, a
shareholder of the Registrant converted $25,000 of the principal balance of the
Registrant's Promissory Note, issued to him in connection with a loan made to
the Registrant, into 10,000 shares of Common Stock.
5. MARCH 1, 1996 ISOLATED SALE OF COMMON STOCK: On March 1, 1996, the
Registrant sold 8,000 shares of Common Stock to an officer and director of the
Registrant for $20,000.
II-1
<PAGE>
6. OCTOBER 15, 1996 ISSUANCE OF COMMON STOCK: On October 15, 1996, the
Registrant issued 6,000 shares of Common Stock valued at $15,000 to an officer
of the Registrant as compensation, in part, for services rendered.
7. DECEMBER 16, 1996 ISSUANCE OF STOCK OPTION: On December 16, 1996, the
Registrant granted to an employee an option to purchase 10,000 shares of Common
Stock with an exercise price of $4.00 per share.
8. JANUARY 15, 1997 PRIVATE PLACEMENT OF COMMON STOCK: On January 15, 1997,
the Registrant sold 223,750 shares of Common Stock to five accredited investors
for aggregate consideration of $895,000.
9. MARCH 1,1997 ISSUANCE OF STOCK OPTION: On March 1, 1996, the Registrant
granted to a consultant an option to purchase 12,500 shares of Common Stock with
an exercise price of $4.00 per share.
10. MAY 29, 1997 ISSUANCE OF COMMON STOCK: On May 29, 1997, the Registrant
issued 12,000 shares of Common Stock valued at $48,000 to an officer of the
Registrant as compensation, in part, for services rendered.
11. AUGUST 14, 1997 ISSUANCE OF COMMON STOCK: On August 14, 1997, in
connection with an acquisition of assets, the Registrant issued 186,240 shares
of Common Stock representing $698,400 of the purchase price for the assets and
an option to purchase 50,000 shares of Common Stock, with the options for 20,000
shares having an exercise price of $6.75 per share and the exercise prices of
the remaining options to be determined as of the date the options vest.
The purchasers of the securities described above represented that they
acquired them for their own account and not with a view to any distribution
thereof to the public. The Registrant made inquiries of purchasers of securities
in these transactions and obtained representations from such purchasers to
establish that such issuances qualified for an exemption from the registration
requirements of the Securities Act. The certificates representing the securities
bear legends stating that the shares are not to be offered, sold or transferred
other than pursuant to an effective registration statement under the Securities
Act or an exemption from such registration requirements.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION MANNER OF FILING
- ------------- ----------------------------------------------------------------------------------- ----------------
<S> <C> <C>
1.1 Revised Form of Underwriting Agreement, including Underwriter's Warrant Filed herewith
5 Opinion of Robins, Kaplan, Miller & Ciresi L.L.P. Filed herewith
10.21 Employment and Non-Competition Agreement with Dustin Elder, dated August 14, 1997 Filed herewith
10.22 Lease Filed herewith
23.1 Consent of Robins, Kaplan, Miller & Ciresi L.L.P. (included in Exhibit 5) Filed herewith
23.2 Consent of Schechter Dokken Kanter Andrews & Selcer, Ltd. Filed herewith
</TABLE>
II-2
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements of filing on Form SB-2 and authorized this
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, in the City of Minneapolis, State of Minnesota, on August 22, 1997.
CHOICETEL COMMUNICATIONS, INC.
By: /s/ JACK S. KOHLER
-----------------------------------------
Jack S. Kohler
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities indicated on August 22, 1997.
SIGNATURE TITLE
- ------------------------------ --------------------------
* President and Director
- ------------------------------ (principal executive
Jeffrey R. Paletz officer)
Vice President and Chief
/s/ JACK S. KOHLER Financial Officer
- ------------------------------ (principal financial and
Jack S. Kohler accounting officer)
*
- ------------------------------ Director
Gary S. Kohler
*
- ------------------------------ Director
Melvin Graf
- ------------------------------ Director
Robert A. Hegstrom
*By: /s/ JACK S. KOHLER
-------------------------
Jack S. Kohler
Attorney-in-Fact
II-3
<PAGE>
EXHIBIT INDEX
DOCUMENT DESCRIPTION
<TABLE>
<CAPTION>
FORM OF FILING
----------------
<S> <C> <C>
1.1 Revised Form of Underwriting Agreement, including Underwriter's Warrant Filed herewith
5 Opinion of Robins, Kaplan, Miller & Ciresi L.L.P. Filed herewith
10.21 Employment and Non-Competition Agreement with Dustin Elder, dated August 14, 1997 Filed herewith
10.22 Lease Filed herewith
23.1 Consent of Robins, Kaplan, Miller & Ciresi L.L.P. (included in Exhibit 5) Filed herewith
23.2 Consent of Schechter Dokken Kanter Andrews & Selcer, Ltd. Filed herewith
</TABLE>
<PAGE>
CHOICETEL COMMUNICATIONS, INC.
800,000 UNITS(1)
CONSISTING OF 800,000 SHARES OF COMMON STOCK AND
800,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
UNDERWRITING AGREEMENT
, 1997
------------
Equity Securities Investments, Inc.
2820 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
Ladies/Gentlemen:
ChoiceTel Communications, Inc., a Minnesota corporation (the
"Company"), hereby confirms its agreement to issue and sell to Equity
Securities Investments, Inc. (the "Underwriter") an aggregate of 800,000
units (the "Units"), each Unit consisting of one share of the Company's
common stock, $0.01 par value per share ("Common Stock"), and one
redeemable Common Stock purchase warrant of the Company (the "Redeemable
Warrants"). (Such 800,000 Units are collectively referred to in this
Agreement as the "Firm Units.") The Company also hereby confirms its
agreement to grant to the Underwriter an option to purchase up to 120,000
additional Units (the "Option Units") on the terms and for the purposes set
forth in Section 2(b) hereof. (As used in this Agreement, the term
"Units" shall consist of the Firm Units and the Option Units.) The Company
also hereby confirms its agreement to issue to the Underwriter warrants for
the purchase of a total of 80,000 Units as described in Section 6 hereof (the
"Underwriter's Warrants"), assuming purchase by the Underwriter of the Firm
Units. The Units issuable upon exercise of the Underwriter's Warrants are
referred to in this Agreement as the "Warrant Units."
1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY.
(a) The Company represents and warrants to and agrees with the
Underwriter as follows:
(i) A registration statement on Form SB-2 (File No.
333-29969) with respect to the Units, including a prospectus subject
to completion, has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "SEC")
thereunder and has been filed with the SEC under the Securities Act;
one or more amendments to such registration statement have also been
so prepared and have been, or will be, so filed. Copies of the
registration statement and amendments and each related preliminary
prospectus to date have been delivered by the Company to the
Underwriter, and, to the extent applicable, were identical to the
electronically transmitted copies thereof filed with the SEC pursuant
to the SEC's Electronic Data Gathering Analysis and Retrieval System
("EDGAR"), except to the extent permitted by Regulation S-T under the
Securities Act. If the Company has elected not to rely upon Rule 430A
of the Rules and Regulations, the Company has prepared and will
promptly file an amendment to the registration statement and an
amended prospectus. If the Company has elected to rely upon Rule 430A
of the Rules and Regulations, it will prepare and file a prospectus
pursuant to Rule 424(b) that discloses the information previously
omitted from the prospectus in reliance upon Rule
- ------------------------
(1) Plus an option to purchase up to 120,000 additional Units to cover
over-allotments.
<PAGE>
430A. Such registration statement as amended at the time it is or was
declared effective by the SEC and, in the event of any amendment
thereto after the effective date and prior to the "First Closing Date"
(as hereinafter defined), such registration statement as so amended
(but only from and after the effectiveness of such amendment),
including the information deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A(b), if
applicable, is hereinafter called the "Registration Statement." The
prospectus included in the Registration Statement at the time it is or
was declared effective by the SEC is hereinafter called the
"Prospectus," except that if any prospectus filed by the Company with
the SEC pursuant to Rule 424(b) of the Rules and Regulations or any
other prospectus provided to the Underwriter by the Company for use in
connection with the offering of the Units (whether or not required to
be filed by the Company with the SEC pursuant to Rule 424(b) of the
Rules and Regulations) differs from the prospectus on file at the time
the Registration Statement is or was declared effective by the SEC,
the term "Prospectus" shall refer to such differing prospectus from
and after the time such prospectus is filed with the SEC or
transmitted to the SEC for filing pursuant to such Rule 424(b) or from
and after the time it is first provided to the Underwriter by the
Company for such use. The term "Preliminary Prospectus" as used herein
means any preliminary prospectus included in the Registration
Statement prior to the time it becomes or became effective under the
Securities Act and any prospectus subject to completion as described
in Rule 430A of the Rules and Regulations. For purposes of this
Agreement, all references to the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement
to any of the foregoing shall be deemed to include the respective
copies thereof filed with the SEC pursuant to EDGAR.
(ii) At the time the Registration Statement is or was declared
effective by the SEC and at all times subsequent thereto up to the
"First Closing Date" and the "Second Closing Date" (as such terms are
hereinafter defined), the Registration Statement and Prospectus, and
all amendments thereof and supplements thereto, will comply or
complied with the provisions and requirements of the Securities Act
and the Rules and Regulations. Neither the SEC nor any state
securities authority has issued any order preventing or suspending the
use of any Preliminary Prospectus or requiring the recirculation of a
Preliminary Prospectus, or issued a stop order with respect to the
offering of the Units (if the Registration Statement has been declared
effective), or instituted or, to the Company's knowledge, threatened
the institution of, proceedings for any of such purposes. When the
Registration Statement shall become effective and when any
post-effective amendment thereto shall become effective, the
Registration Statement (as amended, if the Company shall have filed
with the SEC any post-effective amendments thereto) will not or did
not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were
made, not misleading. When the Registration Statement is or was
declared effective by the SEC and at all times subsequent thereto up
to the First Closing Date and the Second Closing Date, the Prospectus
(as amended or supplemented, if the Company shall have filed with the
SEC any amendment thereof or supplement thereto) will not or did not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances in which
they were made, not misleading. When any Preliminary Prospectus was
first filed with the SEC and when any amendment thereof or supplement
thereto was first filed with the SEC, such Preliminary Prospectus and
any amendment thereof and supplement thereto complied in all material
respects with the applicable provisions of the Securities Act and the
Rules and Regulations and did not contain an untrue statement of a
material fact and did not omit to state any material fact required to
be stated therein or necessary in order to make the statements therein
not misleading. None of the representations and warranties in this
Subsection 1(a) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus, or any amendment thereof or
supplement thereto, which are based upon and conform to written
information relating to the Underwriter furnished to the Company by
the Underwriter specifically for use in the preparation of the
Registration Statement or the Prospectus, or any such amendment or
supplement.
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(iii) The Company has no subsidiaries other than those
identified in Exhibit 21.1 to the Registration Statement (each one a
"Subsidiary" and collectively the "Subsidiaries") and is not
affiliated with any other company or business entity, except as
disclosed in the Prospectus. The Company and each Subsidiary has been
duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, with
full power and authority (corporate and other) to own, lease and
operate its properties and conduct its business as described in the
Registration Statement and Prospectus; the Company owns all of the
outstanding capital stock of each of the Subsidiaries free and clear
of any pledge, lien, security interest, encumbrance, claim or
equitable interest; the Company and each Subsidiary is duly qualified
to do business as a foreign corporation and is in good standing in
each jurisdiction in which the ownership or lease of its properties or
the conduct of its business requires such qualification and in which
the failure to be qualified or in good standing would have a material
adverse effect on the condition (financial or otherwise), earnings,
operations or business of the Company; and no proceeding has been
instituted in any such jurisdiction revoking, limiting or curtailing,
or seeking to revoke, limit or curtail, such power and authority or
qualification.
(iv) The Company and each Subsidiary has operated and is
operating in material compliance with all authorizations, licenses,
certificates, consents, permits, approvals and orders of and from all
state, federal and other governmental regulatory officials and bodies
necessary to own its properties and to conduct its business as
described in the Registration Statement and Prospectus, all of which
are, to the Company's knowledge, valid and in full force and effect;
the Company and each Subsidiary is conducting its business in
substantial compliance with all applicable laws, rules and regulations
of the jurisdictions in which it is conducting business; and neither
the Company nor any Subsidiary is in material violation of any
applicable law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any
Subsidiary or over their respective properties. Except as set forth in
the Registration Statement and Prospectus, (A) the Company is in
material compliance with all material rules, laws and regulations
relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment (the
"Environmental Laws") which are applicable to its business, (B) the
Company has received no notice from any governmental authority or
third party of an asserted claim under Environmental Laws, which claim
is required to be disclosed in the Registration Statement and the
Prospectus, (C) the Company will not be required to make any future
material capital expenditures to comply with Environmental Laws, and
(D) no property which is owned, leased or occupied by the Company has
been designated as a Superfund site pursuant to the Comprehensive
Response, Compensation and Liability Act of 1980, as amended (42
U.S.C. Section 9601, ET SEQ.), or otherwise designated as a
contaminated site under applicable state or local law.
(v) Neither the Company nor any Subsidiary is in violation of
its respective articles of incorporation or bylaws or in default in
the performance or observance of any obligation, agreement, covenant
or condition contained in any bond, debenture, note or other evidence
of indebtedness or in any contract, lease, indenture, mortgage, loan
agreement, joint venture or other agreement or instrument to which it
is a party or by which it or its respective properties are bound,
which default is material to the business of the Company and its
Subsidiaries taken as a whole.
(vi) The Company has full requisite power and authority to
enter into this Agreement and perform the transactions contemplated
hereby. This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement on the
part of the Company, enforceable against the Company in accordance
with its terms, except as enforceability may be limited by the
application of bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the rights of creditors generally and by
judicial limitations on the right of specific performance, and except
as the enforceability of the indemnification or contribution
provisions hereof may be affected by applicable law or the public
policies underlying such law. The performance of this Agreement and
the consummation of the
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<PAGE>
transactions herein contemplated will not result in a material breach
or violation of any of the terms and provisions of, or constitute a
material default under, (A) any indenture, mortgage, deed of trust,
loan agreement, bond, debenture, note, agreement or other evidence of
indebtedness, any lease, contract, joint venture or other agreement or
instrument to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary or their respective properties may
be bound, (B) the respective articles of incorporation or bylaws of
the Company or any Subsidiary, or (C) any material applicable law,
order, rule, regulation, writ, injunction, judgment or decree of any
court, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or any Subsidiary or over their
respective properties. No consent, approval, authorization or order of
or qualification with any court, governmental agency or body, domestic
or foreign, having jurisdiction over the Company or any Subsidiary or
over their respective properties is required for the execution and
delivery of this Agreement and the consummation by the Company of the
transactions herein contemplated, except such as may be required under
the Securities Act, the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or under state or other securities or Blue Sky
laws, all of which requirements have been satisfied.
(vii) Except as is otherwise expressly described in the
Registration Statement or Prospectus, there is neither pending nor, to
the best of the Company's knowledge, threatened, any action, suit,
claim or proceeding against the Company, any Subsidiary, or any of
their respective officers or any of their respective properties,
assets or rights before any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or
any Subsidiary or over their respective officers or properties or
otherwise which (i) might result in any material adverse change in the
condition (financial or otherwise), earnings, operations or business
of the Company and its Subsidiaries taken as a whole or might
materially and adversely affect their properties, assets or rights, or
(ii) might prevent consummation of the transactions contemplated
hereby.
(viii) The Company has, and at the First Closing Date and Second
Closing Date (collectively, the "Closing Dates") will have, the duly
authorized and outstanding capitalization set forth in the Prospectus.
All outstanding shares of capital stock of the Company are duly
authorized and validly issued, fully paid and non-assessable, have
been issued in compliance with all federal and state securities laws,
were not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities, and the
authorized and outstanding capital stock of the Company conforms in
all material respects with the statements relating thereto contained
in the Registration Statement and the Prospectus; the shares of Common
Stock included in the Units to be sold hereunder by the Company and
the shares of Common Stock issuable upon exercise of the Redeemable
Warrants have been duly authorized for issuance and sale to the
Underwriter pursuant to this Agreement and, when issued and delivered
by the Company against payment therefor in accordance with the terms
of this Agreement, will be duly and validly issued and fully paid and
non-assessable and will be sold free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest; and no
preemptive right, co-sale right, registration right, right of first
refusal or other similar right of shareholders exists with respect to
any of the shares of Common Stock included in the Units to be sold
hereunder by the Company or the shares of Common Stock issuable upon
exercise of the Redeemable Warrants or the issuance and sale thereof,
or the issuance and sale or exercise of the Redeemable Warrants, or
the issuance and sale or exercise of the Underwriter's Warrants and of
the Common Stock and Redeemable Warrants included in the Underwriter's
Warrants, or the issuance of the Common Stock issuable upon exercise
of the Redeemable Warrants included in the Underwriter's Warrants,
other than those that have been expressly waived prior to the date
hereof. Except as disclosed in the Prospectus, the Company has no
outstanding options to purchase, or any preemptive rights or other
rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible
securities or obligations. The certificates evidencing the shares of
Common Stock and the Redeemable Warrants comply as to form with all
applicable provisions of the laws of the State of Minnesota.
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<PAGE>
(ix) The Redeemable Warrants included in the Units to be sold
by the Company have been duly and validly authorized and, when
authenticated by Norwest Bank Minnesota, National Association (the
"Warrant Agent") and issued, delivered and sold in accordance with
this Agreement and the Warrant Agreement dated as of the date hereof,
between the Company and the Warrant Agent, will have been duly and
validly executed, authenticated, issued, and delivered and will
constitute valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms, except as
enforceability may be limited by the application of bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
the rights of creditors generally and by judicial limitations on the
right of specific performance. A sufficient number of shares of Common
Stock of the Company has been reserved for issuance by the Company
upon exercise of the Redeemable Warrants.
(x) The Underwriter's Warrants and the Common Stock and
Redeemable Warrants included in the Warrant Units have been duly
authorized. The Underwriter's Warrants, when issued and delivered to
the Underwriter, will constitute valid and binding obligations of the
Company in accordance with their terms, except as enforceability may
be limited by the application of bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the rights
of creditors generally and by judicial limitations on the right of
specific performance and except insofar as the indemnification
provisions thereof may be limited by applicable law and the policies
underlying such law. The Common Stock included in the Warrant Units,
when issued in accordance with the terms of this Agreement and
pursuant to the Underwriter's Warrants, will be fully paid and
non-assessable and subject to no preemptive rights or similar rights
on the part of any person or entity. The Redeemable Warrants included
in the Warrant Units, when authenticated by the Warrant Agent and
issued, delivered and sold in accordance with this Agreement, the
Warrant Agreement between the Company and the Warrant Agent, and the
Underwriter's Warrants, will have been duly and validly executed,
authenticated, issued and delivered and will constitute valid and
binding obligations of the Company, enforceable by the Company in
accordance with their terms, except as enforceability may be limited
by the application of bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the rights of creditors
generally and by judicial limitations on the right of specific
performance. The Common Stock issuable upon exercise of the Redeemable
Warrants included in the Warrant Units has been duly authorized and,
when issued and delivered upon such exercise, will be validly issued,
fully paid and non-assessable, and subject to no preemptive rights or
similar rights on the part of any person or entity. A sufficient
number of shares of Common Stock of the Company has been reserved for
issuance by the Company upon exercise of the Underwriter's Warrants.
(xi) Schechter Dokken Kanter Andrews & Selcer, Ltd., which has
expressed its opinion with respect to the financial statements filed
as part of the Registration Statement and included in the Registration
Statement and Prospectus, are independent accountants within the
meaning of the Securities Act and the Rules and Regulations. The
financial statements of the Company set forth in the Registration
Statement and Prospectus comply in all material respects with the
requirements of the Securities Act and fairly present the financial
position and the results of operations of the Company and the
Subsidiaries at the respective dates and for the respective periods to
which they apply in accordance with generally accepted accounting
principles consistently applied throughout the periods involved
(subject, in the case of unaudited financial statements, to normal
year-end adjustments which in the opinion of management of the Company
are not material, and except as otherwise stated therein); and the
supporting schedules included in the Registration Statement present
fairly the information required to be stated therein. The selected and
summary financial and statistical data included in the Registration
Statement present fairly the information shown therein and have been
compiled on a basis consistent with the audited financial statements
presented therein. No other financial statements or schedules are
required by the Securities Act or the Rules and Regulations to be
included in the Registration Statement.
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<PAGE>
(xii) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, and
at each Closing Date, except as is otherwise disclosed in the
Registration Statement or Prospectus, there has not been: (A) any
change in the capital stock or long-term debt (including any
capitalized lease obligation) or material increase in the short-term
debt of the Company or any Subsidiary (other than issuances of Common
Stock upon the exercise of options outstanding as of the Effective
Date and options granted under the Company's 1997 Long-Term Incentive
and Stock Option Plan (the "Stock Plan")); (B) any issuance of
options, warrants, convertible securities or other rights to purchase
the capital stock of the Company (other than options granted under the
Stock Plan); (C) any material adverse change, or any development
involving a material adverse change, in or affecting the condition
(financial or otherwise), earnings, operations, business, or business
prospects, management, financial position, stockholders' equity,
results of operations or general condition of the Company; (D) any
transaction entered into by the Company or any Subsidiary that is
material to the Company; (E) any obligation, direct or contingent,
incurred by the Company or any Subsidiary, except obligations incurred
in the ordinary course of business that, in the aggregate, are not
material; (F) any dividend or distribution of any kind declared, paid
or made on the capital stock of the Company; or (G) any loss or damage
(whether or not insured) to the property of the Company or any
Subsidiary which has been sustained which has a material adverse
effect on the condition (financial or otherwise), earnings, operations
or business of the Company or a Subsidiary.
(xiii) Except as is otherwise expressly disclosed in the
Registration Statement or Prospectus, (A) the Company and each
Subsidiary has good and marketable title to all of the property, real
and personal, and assets described in the Registration Statement or
Prospectus as being owned by it, free and clear of any and all
pledges, liens, security interests, encumbrances, equities, charges or
claims, other than such as would not have a material adverse effect on
the condition (financial or otherwise), earnings, operations or
business of the Company, (B) the agreements to which the Company or
any Subsidiary is a party described in the Registration Statement and
Prospectus are valid agreements, enforceable by the Company or the
Subsidiary (as applicable), except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors'
rights generally or by judicial limitations on the right of specific
performance, and (C) each of the Company and the Subsidiaries has
valid and enforceable leases for all properties described in the
Registration Statement and Prospectus as leased by it, except as the
enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally or by judicial limitations
on the right of specific performance. Except as set forth in the
Registration Statement and Prospectus, the Company owns or leases all
such properties as are necessary to its operations as now conducted.
(xiv) The Company and each Subsidiary has timely filed (or has
timely requested an extension of time to file) all necessary federal
and state income and franchise tax returns and has paid all taxes
shown thereon as due; there is no tax deficiency that has been or, to
the best of the Company's knowledge, could be asserted against the
Company or any Subsidiary that might have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business
or properties of the Company or a Subsidiary; and all tax liabilities
are adequately provided for in the books of the Company and each
Subsidiary.
(xv) No labor disturbance by the employees of the Company or
any Subsidiary exists or, to the best of the Company's knowledge, is
imminent. No collective bargaining agreement exists with any of the
employees of the Company or any Subsidiary and, to the best of the
Company's knowledge, no such agreement is imminent.
(xvi) The Company and each Subsidiary owns, or possesses
adequate rights to use, all patents, patent rights, inventions, trade
secrets, know-how, technology, service marks, trade names, copyrights,
trademarks and proprietary rights or information which are necessary
for the conduct of its present or intended business as described in
the Registration Statement or
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<PAGE>
Prospectus; the expiration of any patents, patent rights, trade
secrets, trademarks, service marks, trade names or copyrights would
not have a material adverse effect on the condition (financial or
otherwise), earnings, operations or business of the Company or any of
its Subsidiaries, taken as a whole; and the Company has not received
any notice of, and has no knowledge of, any infringement of or
conflict with the asserted rights of others with respect to any
patent, patent rights, inventions, trade secrets, know-how,
technology, trademarks, service marks, trade names or copyrights
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company or any Subsidiary. Except as
disclosed in the Registration Statement or Prospectus, the Company is
not obligated or under any liability whatsoever to make any payments
by way of royalties, fees or otherwise to any owner of, licensor of,
or other claimant to, any patent, patent rights, inventions, trade
secrets, know-how, technology, service marks, trade names, trademark,
copyright or other intangible asset, with respect to the use thereof
or in connection with the conduct of its business or otherwise.
(xvii) The Common Stock and the Redeemable Warrants have been
approved for quotation on The Nasdaq SmallCap Market.
(xviii) The Company has no defined benefit pension plan or other
pension benefit plan which is intended to comply with the provisions
of the Employee Retirement Income Security Act of 1974 as amended from
time to time, except as disclosed in the Registration Statement.
(xix) The Company has not taken and will not take, directly or
indirectly, any action (and does not know of any action by its
directors, officers, shareholders or others) which has constituted or
is designed to, or which might reasonably be expected to, cause or
result in stabilization or manipulation, as defined in the Exchange
Act or otherwise, of the price of any security of the Company to
facilitate the sale or resale of the Units. The Company has not
distributed and will not distribute prior to the later of (A) the
First Closing Date or the Second Closing Date, as the case may be, and
(B) completion of the distribution of the Units, any offering material
in connection with the offering and sale of the Units other than any
Preliminary Prospectus, the Prospectus, the Registration Statement and
other materials, if any, permitted by the Securities Act. Except as is
otherwise disclosed in the Registration Statement or Prospectus, and
to the best of the Company's knowledge, no person is entitled,
directly or indirectly, to compensation from the Company or the
Underwriter for services as a "finder" or otherwise in connection with
the transactions contemplated by this Agreement.
(xx) The Company and each Subsidiary maintains insurance,
which is in full force and effect, with insurers of recognized
financial responsibility of the types and in the amounts generally
deemed adequate for their respective businesses; and neither the
Company nor any Subsidiary has any reason to believe that it will not
be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not
materially and adversely affect the condition (financial or
otherwise), earnings, operations, business or business prospects of
the Company.
(xxi) Each executive officer and director of the Company and
each beneficial owner of five percent (5%) or more of the Common Stock
to be outstanding after the sale of the Firm Units (calculated in
accordance with Rule 13d-3 under the Exchange Act) has agreed pursuant
to the form of Two-Year Lock-up Agreement attached hereto as
APPENDIX A-1 (the "Two-Year Lock-up Agreement") that such person will
not, for a period of two years from the date (the "Effective Date")
that the Registration Statement is declared effective by the SEC (the
"Two-Year Lock-up Period"), without the prior written consent of the
Underwriter, offer to sell, contract to sell, sell, pledge,
hypothecate, transfer or otherwise dispose of, or grant any rights
with respect to (collectively, a "Disposition"), any shares of Common
Stock and any options, warrants and other rights to purchase any
shares of Common Stock or any securities convertible into or
exchangeable or exercisable for shares of Common Stock now owned or
hereafter acquired by
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<PAGE>
such person (collectively, "Securities"), or with respect to which
such person has or hereafter acquires the power of Disposition, other
than as permitted by the Two-Year Lock-up Agreement. In addition, each
other beneficial owner of Common Stock of the Company has agreed
pursuant to the Lock-up Agreement attached hereto as APPENDIX A-2 (the
"Six-Month Lock-up Agreement") that such person shall not, for a
period of six (6) months from the Effective Date ("Six-Month Lock-up
Period"), Dispose of any Securities now owned or hereafter acquired by
such person or with respect to which such person has or hereafter
acquires the power of Disposition, other than as permitted by the
Six-Month Lock-up Agreement. (The Two-Year Lock-up Agreement and the
Six-Month Lock-up Agreement shall hereinafter be collectively referred
to as the "Lock-up Agreements.") The Company has provided to counsel
for the Underwriter ("Underwriter's Counsel") true, accurate and
complete copies of all of the Lock-up Agreements. The Company has
provided to Underwriter's Counsel a complete and accurate list of all
holders of Securities of the Company and the number and type of
Securities held by each holder of Securities.
(xxii) Neither the Company nor any Subsidiary has at any time
during the last five (5) years (or, if formed during the last five
years, since its inception) made any unlawful contribution to any
candidate for an office or failed to disclose fully any contribution
in violation of law, or made any payment to any federal or state
governmental officer or official, domestic or foreign, or other person
charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof. The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that
transactions are executed in accordance with management's general or
specific authorizations, transactions are recorded as necessary to
permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain
accountability for assets, access to assets is permitted only in
accordance with management's general or specific authorization, and
the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(xxiii) Neither the Company nor any of its affiliates is
presently doing business with the government of Cuba or with any
person or affiliate located in Cuba.
(b) Any certificate signed by any officer of the Company and
delivered to you or to Underwriter's Counsel shall be deemed a
representation and warranty by the Company to the Underwriter as to the
matters covered thereby.
2. PURCHASE, SALE, DELIVERY AND PAYMENT.
(a) On the basis of the representations, warranties and agreements
herein contained, and subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriter, and the Underwriter
agrees to purchase from the Company, the Firm Units at a purchase price of
$__________ per Unit. The Underwriter will purchase all of the Firm Units
if any are purchased.
The Firm Units will be delivered by the Company to the Underwriter for the
account of the Underwriter against payment of the purchase price therefor
by wire transfer or other same-day funds payable to the order of the
Company at the offices of Equity Securities Investments, Inc., 2820 IDS
Center, 80 South Eighth Street, Minneapolis, Minnesota 55402 (or at such
other place as may be agreed upon by the Underwriter and the Company), at
9:00 a.m., Minneapolis, Minnesota time, on (i) the third (3rd) full
business day following the date hereof if the Registration Statement is
declared effective before 3:30 p.m., Minneapolis, Minnesota time on the
date hereof, (ii) the fourth (4th) full business day following the date
hereof if the Registration Statement is declared effective after 3:30
p.m., Minneapolis, Minnesota time on the date hereof, or (iii) such other
time and date as the Underwriter and the Company may determine, such time
and date of payment and delivery being herein called the "First Closing
Date." Delivery of the Firm Units will be made by credit to "full fast"
transfer to the account or accounts at The Depository Trust Company
designated by the Underwriter.
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<PAGE>
(b) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants an option to the Underwriter to purchase
an aggregate of up to 120,000 Option Units at the same purchase price as
the Firm Units, for use solely in covering any over-allotments made by the
Underwriter in the sale and distribution of the Firm Units. The option
granted hereunder may be exercised by the Underwriter at any time (but not
more than once), in whole or in part, during the period of forty-five (45)
days after the date of this Agreement by giving written notice to the
Company and the Company's counsel, which notice shall set forth the
aggregate number of Option Units as to which the Underwriter is exercising
the option, the names and denominations in which the Option Units are to
be registered, and the date and time, as determined by the Underwriter,
when the Option Units are to be delivered, such time and date being herein
referred to as the "Second Closing Date;" provided, however, that the
Second Closing Date shall not be earlier than the First Closing Date nor
earlier than the second business day after the date on which the option
shall have been exercised. No Option Units shall be sold and delivered
unless the Firm Units previously have been, or simultaneously are, sold
and delivered.
The Option Units will be delivered by the Company to the Underwriter for
the account of the Underwriter against payment of the purchase price
therefor by wire transfer or other same-day funds payable to the order of
the Company at the offices of Equity Securities Investments, Inc. 2820 IDS
Center, 80 South Eighth Street, Minneapolis, Minnesota 55402 (or at such
other place as may be agreed upon by the Underwriter and the Company) at
9:00 a.m., Minneapolis, Minnesota time, on the Second Closing Date.
Delivery of the Option Units will be made by credit to "full fast"
transfer to the account or accounts at The Depository Trust Company
designated by the Underwriter.
3. COVENANTS OF THE COMPANY. The Company hereby covenants and agrees with the
Underwriter as follows:
(a) If the Registration Statement has not already been declared
effective by the SEC, the Company will use its best efforts to cause the
Registration Statement and any post-effective amendments thereto to become
effective as promptly as possible; the Company will notify the Underwriter
promptly of the time when the Registration Statement or any post-effective
amendment to the Registration Statement has become effective or any
supplement to the Prospectus has been filed and of any request by the SEC
for any amendment or supplement to the Registration Statement or
Prospectus or additional information; if the Company has elected to rely
on Rule 430A of the Rules and Regulations, the Company will file a
Prospectus containing the information omitted therefrom pursuant to such
Rule 430A with the SEC within the time period required by, and otherwise
in accordance with the provisions of, Rules 424(b) and 430A of the Rules
and Regulations; the Company will prepare and file with the SEC, promptly
upon your request, any amendments or supplements to the Registration
Statement or Prospectus that, in your opinion, may be necessary or
advisable in connection with the distribution of the Units by the
Underwriter; and the Company will not file any amendment or supplement to
the Registration Statement or Prospectus to which the Underwriter shall
reasonably object by notice to the Company after having been furnished a
copy a reasonable time prior to the filing.
(b) The Company will advise the Underwriter, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance by the SEC of
any stop order suspending the effectiveness of the Registration Statement,
of the suspension of the qualification of the Units for offering or sale
in any jurisdiction, or of the initiation or threatening of any proceeding
for any such purpose; and the Company will promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if
such a stop order should be issued.
(c) Within the time during which a prospectus relating to the Units
is required to be delivered under the Securities Act, the Company will
comply as far as it is able with all requirements imposed upon it by the
Securities Act, as now and hereafter amended, and by the Rules and
Regulations, as from time to time in force, so far as necessary to permit
the continuance of sales of or dealings in the Units as contemplated by
the provisions hereof and the Prospectus. If, during such period, any
event occurs as a result of which the Prospectus would include an untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances then
existing, not misleading, or if, during such period, it is necessary to
amend the Registration Statement or
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supplement the Prospectus to comply with the Securities Act, the Company will
promptly notify the Underwriter and will amend the Registration Statement or
supplement the Prospectus (at the expense of the Company) so as to correct
such statement or omission or effect such compliance.
(d) The Company will use its best efforts to arrange for the
qualification of the Units for offering and sale under the securities laws of
such jurisdictions as the Underwriter may designate and to continue such
qualifications in effect for so long as may be required for purposes of the
distribution of the Units; provided, however, that in no event shall the
Company be obligated to qualify to do business in any jurisdiction where it
is not now so qualified or to take any action which would subject it to the
service of process in suits, other than those arising out of the offering or
sale of the Units, in any jurisdiction where it is not now so subject. In
each jurisdiction in which the Units shall have been qualified as herein
provided, the Company will make and file such statements and reports in each
year as are or may be reasonably required by the laws of such jurisdiction.
(e) The Company will furnish to the Underwriter copies of the
Registration Statement (two of which will be signed and will include all
exhibits), each Preliminary Prospectus, the Prospectus, and all amendments
and supplements to such documents, in each case as soon as available and in
such quantities as the Underwriter may from time to time reasonably request.
(f) For a period of five years from the Effective Date, the
Company will furnish directly to the Underwriter as soon as the same shall be
sent to its shareholders generally copies of all annual or interim
shareholder reports of the Company and will, for the same period, also
furnish the Underwriter with the following:
(i) One copy of any report, application or document (other
than exhibits, which, however, will be furnished on your request)
filed by the Company with the SEC, Nasdaq, the NASD or any securities
exchange;
(ii) As soon as the same shall be sent to shareholders
generally, copies of each communication sent to shareholders; and
(iii) From time to time, such other information concerning the
Company as the Underwriter may reasonably and specifically request,
provided that the Company shall not be required to furnish any
information pursuant hereto that is not furnished to its shareholders
or not otherwise made publicly available.
(g) The Company will, for a period of two (2) years from the
Effective Date, furnish directly to the Underwriter quarterly profit and loss
statements, reports of the Company's cash flow and statements of application
of the proceeds of the offering of the Units by the Company in such
reasonable detail as the Underwriter may request.
(h) The Company will make generally available to its security
holders as soon as practicable, but in any event not later than the fifteen
(15) months after the end of the Company's current fiscal quarter, an
earnings statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a) of the Securities Act
and Rule 158 of the Rules and Regulations and covering a twelve (12)-month
period beginning after the Effective Date of the Registration Statement.
(i) The Company will prepare and file with the SEC any required
reports on Form SR in accordance with the Securities Act and the Rules and
Regulations.
(j) After completion of the offering of the Units, the Company
will make all filings required to maintain the quotation of the Common Stock
and the Redeemable Warrants on The Nasdaq SmallCap Market, The Nasdaq
National Market, or any national stock exchange.
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(k) The Company will apply the net proceeds from the sale of
the Units substantially in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(l) For a period of six months after the Second Closing Date,
the Company will not, without the prior written consent of the Underwriter,
directly or indirectly, effect the Disposition of any Securities including,
without limitation, any Securities that are convertible into or exchangeable
or exercisable for Common Stock, and shall not accelerate the exercisability
of any Securities that are convertible into or exchangeable or exercisable
for Common Stock, except for the sale of Units by the Company pursuant to
this Agreement, the exercise of options granted under the Company's Stock
Plan and other options outstanding on the date of this Agreement, and the
grant of options under the Plan in the ordinary course.
(m) For a period of six months from the Effective Date, the
Company will not, without the prior written consent of the Underwriter, file
a registration statement with the SEC or any state securities or "Blue Sky"
law authority relating to any of the Company's Securities, whether such
shares are to be offered and sold by the Company or by its shareholders,
except for a Registration Statement on Form S-8 (or any successor or
replacement form of registration statement) relating only to shares of Common
Stock subject to options granted under the Stock Plan.
(n) The Company will not take, and will use its best efforts
to cause each of its officers and directors not to take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Units.
(o) The Company will inform the Florida Department of Banking
and Finance at any time prior to the consummation of the distribution of the
Units by the Underwriter if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba. Such
information shall be provided within ninety (90) days after the commencement
thereof or after a change occurs with respect to previously reported
information.
(p) For a period of three (3) years from the Effective
Date, the Underwriter shall have the right, but not the obligation, to act as
(i) managing underwriter or sole or lead selling agent in any public or
private offering of equity or debt securities by the Company, and (ii) the
Company's investment banker or financial advisor in connection with any
strategic partnership, sale of the Company or its assets, merger, acquisition
of stock or assets of another entity, or any similar transaction. If the
Company intends to consider or enter into any of the transactions described
in this Section 3(p), it will notify the Underwriter in writing, which
notification shall contain a description of such transaction in reasonable
detail.
(q) For a period of three years from the Effective Date, and
if the Underwriter so requests, the Company will use its best efforts to
secure the election to the Company's Board of Directors of a representative
selected by the Underwriter.
(r) The Company will cause the Common Stock, the Redeemable
Warrants and the Units to be registered under the Exchange Act, which
registrations shall be effective concurrently with the effectiveness of the
Registration Statement.
(s) Unless the Company's Common Stock and Redeemable Warrants
are listed on The Nasdaq National Market or other suitable secondary trading
exemptions are available, or if for any reason state Blue Sky or securities
laws do not apply to secondary trading of the Common Stock and Redeemable
Warrants, the Company will seek to become listed in Standard & Poors or
another recognized securities manual as soon as practicable after the
effective date of the Registration Statement and shall pay all filing fees in
connection therewith, for the purpose of facilitating secondary trading in
the Common Stock and Redeemable Warrants; and the Company shall also agree to
make appropriate filings to qualify the Common Stock and Redeemable Warrants
for secondary trading in states in which such filings are necessary to cause
the Common Stock and Redeemable Warrants to be qualified, provided that such
qualification may be obtained without causing the Company extraordinary cost
or hardship.
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<PAGE>
4. EXPENSES.
(a) The Company agrees with the Underwriter that:
(i) Whether or not this Agreement becomes effective or is
terminated or cancelled or the sale of the Units hereunder is
consummated, and regardless of the reason for or cause of any such
termination, cancellation, or failure to consummate, the Company
will pay or cause to be paid (A) all expenses (including any
transfer taxes) incurred in connection with the delivery to the
Underwriter of the Units, (B) all expenses and fees (including,
without limitation, fees and expenses of the Company's accountants
and of counsel to the Company, excluding, however, fees of
Underwriter's Counsel) in connection with the preparation, printing,
filing, delivery, and shipping of the Registration Statement
(including the financial statements therein and all amendments,
schedules, and exhibits thereto), each Preliminary Prospectus, the
Prospectus, and any amendment thereof or supplement thereto, (C) all
fees and reasonable expenses, including all reasonable counsel fees
of Underwriter's Counsel, incurred in connection with the
qualification of the Units for offering and sale by the Underwriter
or by dealers under the securities or Blue Sky laws of the states
and other jurisdictions which the Underwriter may designate in
accordance with Section 3(d) hereof, (D) all costs and expenses
incident to qualification with The Nasdaq SmallCap Market,
(E) postage and express charges and other expenses in connection with
delivery to the Underwriter of the Preliminary Prospectus and
Prospectus, and (F) all other costs and expenses incident to the
performance of the Company's obligations hereunder that are not
otherwise specifically described herein. In addition to and not
in lieu of the foregoing, the Company shall pay to the Underwriter
on each Closing Date for out-of-pocket expenses (including fees of
Underwriter's Counsel other than fees and expenses incurred in
connection with Blue Sky or state securities qualifications) a
nonaccountable expense allowance equal to two percent (2.0%) of the
aggregate Price to Public for all the Units sold to the Underwriter
on each Closing Date, including Units sold pursuant to orders
received through the Company. If the Underwriter withdraws from the
sale of the Units as herein proposed (A) for any reason within the
control of the Company such as, for example, the sale of the Units
as herein proposed is abandoned by the Company; (B) based upon the
fact that there has been a material adverse change in the financial
or other affairs of the Company since the date of the last financial
statements of the Company provided to the Underwriter; (C) because
any of the Company's representations or warranties in this Agreement
prove to be untrue; (D) because there shall have occurred any general
suspension of trading in securities on the New York Stock Exchange or
any limitation on prices for such trading or because any new
restrictions on the distribution of securities shall have been
established by the New York Stock Exchange or by the SEC or by any
federal or state agency, all to such a degree as, in the
Underwriter's judgment, would restrict materially a free market for
the Units, shares of Common Stock included in the Units, or the
Redeemable Warrants; (E) because there shall have occurred such a
materiel change in general economic, political or financial
conditions, or because the effect of international conditions on
the financial markets in the United States become such as, in the
Underwriter's judgment, makes it inadvisable to proceed with the sale
of the Units; (F) because the Company's financial condition or its
business prospects do not fulfill the Underwriter's expectations
based on representations made by the Company prior to March 3, 1997;
(G) because the offering of the Units lacks public interest prior to
the Effective Date; or (H) because adverse market or other conditions
make the offering of the Units not feasible in the Underwriter's
judgment, the Company will pay to the Underwriter the amount of all
actual accountable, out-of-pocket expenses (including fees and
disbursements of Underwriter's Counsel) incurred by the Underwriter
in connection with the contemplated purchase, offer and sale of the
Units, including, without limitation, expenses incurred in its
investigation, preparation to market, and marketing of the Units,
and in contemplation of performing and in performance of its
obligations hereunder, up to a maximum of $35,000.00. All
reimbursements pursuant to this Section 4(a)(i) shall occur within
ten (10) days after the Underwriter delivers to the Company a written
itemization of such expenses. The provisions of this Section 4(a)(i)
are intended to relieve the Underwriter from the
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payment of the expenses and costs which the Company hereby agrees to
pay and shall not impair the obligations of the Company hereunder to
the Underwriter.
(ii) In addition to its other obligations under Sections 7(a)
and 8 hereof, the Company agrees that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 7(a), it will reimburse the
Underwriter on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the Company's obligation to reimburse
the Underwriter for such expenses and the possibility that such
payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the
Underwriter shall promptly return such payment to the Company
together with interest, compounded daily, determined on the basis of
the prime rate (or other commercial lending rate for borrowers of
the highest credit standing) listed from time to time in The Wall
Street Journal which represents the base rate on corporate loans
posted by a substantial majority of the nation's thirty (30) largest
banks (the "Prime Rate"). Any such interim reimbursement payments
which are not made to the Underwriter within thirty (30) days of a
request for reimbursement shall bear interest at the Prime Rate from
the date of such request.
(b) It is agreed that any controversy rising out of the operation
of the interim reimbursement arrangements set forth in Section 4(a)(ii)
hereof, including the amounts of any requested reimbursement payments and
the method of determining such amounts, shall be settled by arbitration
conducted pursuant to the Code of Arbitration Procedure of the National
Association of Securities Dealers, Inc. ("NASD"). Any such arbitration must
be commenced by service of a written demand for arbitration or a written
notice of intention to arbitrate, therein electing the arbitration tribunal.
If the party demanding arbitration does not make such designation of an
arbitration tribunal in such demand or notice, then the party responding to
said demand or notice is authorized to do so. Any such arbitration will be
limited to the operation of the interim reimbursement provisions contained
in Section 4(a)(ii) hereof and will not resolve the ultimate propriety or
enforceability of the obligation to indemnify for expenses which is created
by the provisions of Sections 7(a) and 7(b) hereof or the obligation to
contribute to expenses which is created by the provisions of Section 8(a)
hereof.
5. CONDITIONS OF THE UNDERWRITER'S OBLIGATIONS. The obligation of the
Underwriter to purchase and pay for the Units as provided herein shall be
subject to the accuracy of the representations and warranties of the Company,
in the case of the Firm Units, as of the date hereof and the First Closing
Date (as if made on and as of the First Closing Date), and in the case of the
Option Units, as of the date hereof and the Second Closing Date (as if made
on and as of the Second Closing Date); to the performance by the Company of
its obligations hereunder; and to the satisfaction of the following
additional conditions on or before the First Closing Date in the case of the
Firm Units and on or before the Second Closing Date in the case of the Option
Units:
(a) The Registration Statement shall have become effective not
later than 4:00 p.m. Minneapolis, Minnesota time on the date of this
Agreement, or such later date or time as shall be consented to in writing
by you (the "Effective Date"); and no stop order suspending the
effectiveness thereof shall have been issued and no proceedings for that
purpose shall have been initiated or, to the knowledge of the Company, or
the Underwriter, threatened by the SEC or any state securities commission
or similar regulatory body; and any request of the SEC for additional
information (to be included in the Registration Statement or the Prospectus
or otherwise) shall have been complied with to the satisfaction of the
Underwriter and Underwriter's Counsel.
(b) The Underwriter shall not have advised the Company that the
Registration Statement or Prospectus, or any amendment thereof or supplement
thereto, contains any untrue statement of a fact which is material or omits
to state a fact which is material and is required to be stated therein or is
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that this Section 5(b) shall not apply to statements in, or omissions from,
the Registration Statement or Prospectus, or any amendment thereof or
supplement
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<PAGE>
thereto, which are based upon and conform to written information furnished
to the Company by the Underwriter specifically for use in the preparation of
the Registration Statement or the Prospectus, or any such amendment or
supplement.
(c) Subsequent to the Effective Date and prior to each Closing
Date, there shall not have occurred any change, or any development involving
a prospective change, which materially and adversely affects the Company's
condition (financial or otherwise), earnings, operations, properties,
business or business prospects from that set forth in the Registration
Statement or Prospectus, and which, in the Underwriter's sole judgment, is
material and adverse and that makes it, in the Underwriter's sole judgment,
impracticable or inadvisable to proceed with the public offering of the
Units as contemplated by the Prospectus and this Agreement.
(d) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery
of the Units shall have been reasonably satisfactory to Underwriter's
Counsel, and Underwriter's Counsel shall have been furnished with such
papers and information as it may reasonably have requested to enable it to
pass upon the matters referred to in this Section.
(e) On each Closing Date, the Underwriter shall have received the
opinion of Robins, Kaplan, Miller & Ciresi L.L.P., counsel for the Company,
dated as of such Closing Date, satisfactory in form and substance to the
Underwriter and Underwriter's Counsel, to the effect that:
(i) Each of the Company and the Subsidiaries has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation
and has the corporate power and authority to own, lease and operate
its properties and to conduct its business as currently being
carried on and as described in the Registration Statement and
Prospectus.
(ii) Each of the Company and the Subsidiaries is duly
qualified to do business as a foreign corporation and is in good
standing in each jurisdiction, if any, in which the ownership or
leasing of its properties or the conduct of its business requires
such qualification, except where the failure to be so qualified or
be in good standing would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations or
business of the Company and the Subsidiaries considered as one
enterprise. To the best of such counsel's knowledge, the Company
does not own or control, directly or indirectly, any corporation,
association or other entity other than the Subsidiaries.
(iii) The capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus
under the caption "Description of Securities." The issued and
outstanding Units of the Company have been duly and validly issued
and are fully paid and non-assessable, and the holders thereof are
not subject to any personal liability solely by reason of being
such holders.
(iv) The Units to be issued by the Company pursuant to the
terms of this Agreement have been duly authorized and, upon
issuance and delivery against payment therefor in accordance with
the terms hereof, will be duly and validly issued and fully paid
and non-assessable, and the holders thereof will not be subject to
personal liability solely by reason of being such holders. The
shares of Common Stock issuable upon exercise of the Redeemable
Warrants included in the Units have been duly authorized and, when
issued and delivered upon such exercise, will be duly and validly
issued and fully paid and non-assessable, and the holders thereof
will not be subject to personal liability solely by reason of being
such holders. Except as otherwise stated in the Registration
Statement and Prospectus, there are no preemptive rights or other
rights to subscribe for or to purchase, or any restriction upon the
voting or transfer of, any shares of capital stock pursuant to the
Company's articles of incorporation, bylaws or any agreement or
other instrument known to such counsel to which the Company is a
party or by which the Company is bound. To the best of such
counsel's knowledge, except as set forth in the
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Prospectus, neither the filing of the Registration Statement nor
the offering or sale of the Units as contemplated by this Agreement
gives rise to any rights for or relating to the registration of any
shares of capital stock or other securities of the Company and no
such rights exist, other than those rights described in Section
3(m) hereof. To the best of such counsel's knowledge, except as
described in the Registration Statement and Prospectus, there are
no options, warrants, agreements, contracts or rights in existence
to purchase or acquire from the Company any shares of capital stock
of the Company.
(v) The Redeemable Warrants included in the Units to be sold
by the Company have been duly and validly authorized and, when
authenticated by the Warrant Agent and issued, delivered and sold
in accordance with this Agreement and the Warrant Agreement dated
as of the date hereof between the Company and the Warrant Agent,
will have been duly and validly executed, authenticated, issued and
delivered and will constitute valid and binding obligations of the
Company, enforceable against the Company in accordance with their
terms, except as enforceability may be limited by the application
of bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the rights of creditors generally and by
judicial limitations on the right of specific performance. A
sufficient number of shares of Common Stock of the Company has been
reserved for issuance by the Company upon exercise of the
Redeemable Warrants.
(vi) The Underwriter's Warrants and the Common Stock and
Redeemable Warrants included in the Warrant Units have been duly
authorized. The Underwriter's Warrants, when issued and delivered
to the Underwriter, will constitute valid and binding obligations
of the Company in accordance with their terms, except as
enforceability may be limited by the application of bankruptcy,
insolvency, reorganization, moratorium, or other similar laws
affecting the rights of creditors generally and by judicial
limitations on the right of specific performance. The Common Stock
included in the Warrant Units, when issued in accordance with the
terms of this Agreement and pursuant to the Underwriter's Warrants,
will be fully paid and non-assessable and subject to no preemptive
rights or similar rights on the part of any person or entity. The
Redeemable Warrants included in the Warrant Units, when
authenticated by the Warrant Agent and issued, delivered and sold
in accordance with this Agreement, the Warrant Agreement between
the Company and the Warrant Agent, and the Underwriter's Warrants,
will have been duly and validly executed, authenticated, issued and
delivered and will constitute valid and binding obligations of the
Company, enforceable against the Company in accordance with their
terms, except as enforceability may be limited by the application
of bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the rights of creditors generally and by
judicial limitations on the right of specific performance. The
Common Stock issuable upon exercise of the Redeemable Warrants
included in the Warrant Units has been duly authorized and, when
issued and delivered upon such exercise, will be validly issued,
fully paid and non-assessable and, to such counsel's knowledge,
subject to no preemptive rights or similar rights on the part of
any person or entity. A sufficient number of shares of Common Stock
of the Company has been reserved for issuance by the Company upon
exercise of the Underwriter's Warrants and upon the exercise of the
Redeemable Warrants included in the Warrant Units.
(vii) The Company has the requisite corporate power and
authority to enter into this Agreement and to issue, sell and
deliver to the Underwriter the Units to be issued and sold by it
hereunder. This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly
executed and delivered by the Company and, assuming due
authorization, execution and delivery by the Underwriter, is a
valid, legal and binding agreement of the Company, enforceable in
accordance with its terms, except insofar as indemnification and
contribution provisions may be limited by applicable law or the
public policies underlying such law and except as enforceability
may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or similar laws relating to or
affecting creditors' rights generally or by general equitable
principles.
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<PAGE>
(viii) The Registration Statement has become effective under
the Securities Act and, to the best of such counsel's knowledge, no
stop order suspending the effectiveness of the Registration
Statement has been issued and no proceeding for that purpose has
been instituted or is pending or threatened under the Securities
Act.
(ix) The Registration Statement and the Prospectus, and each
amendment thereof or supplement thereto (other than the financial
statements, including the notes thereto and the supporting
schedules, and other financial, numerical, statistical and
accounting data derived therefrom, as to which such counsel need
express no opinion), comply as to form in all material respects
with the requirements of the Securities Act and the Rules and
Regulations.
(x) The forms of certificates evidencing the Common Stock
and the Redeemable Warrants and filed as exhibits to the Registration
Statement comply with Minnesota law.
(xi) The description in the Registration Statement and the
Prospectus of the Company's articles of incorporation and bylaws
and of statutes, legal and governmental proceedings, contracts and
other documents are accurate in all material respects and fairly
present the information required to be presented by the Securities
Act and the applicable Rules and Regulations; and such counsel does
not know of any statutes or legal or governmental proceedings
required to be described in the Prospectus that are not described
as required, or of any agreements, contracts, leases or documents
of a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit
to the Registration Statement which are not described or referred
to therein or filed as required.
(xii) The execution, delivery and performance of this
Agreement and the consummation of the transactions herein
contemplated (other than performance of the Company's
indemnification and contribution obligations hereunder, concerning
which no opinion need be expressed) do not result in any violation
of the Company's articles of incorporation or bylaws or result in a
breach or violation of any of the terms and provisions of, or
constitute a default under, any bond, debenture, note or other
evidence of indebtedness, or any material lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture
or other material agreement or instrument known to such counsel to
which the Company is a party or by which its properties are bound,
or any applicable statute, rule or regulation known to such counsel
or, to the best of such counsel's knowledge, any order, writ or
decree of any court, government or governmental agency or body
having jurisdiction over the Company or the Subsidiaries or other
any of their material properties or operations.
(xiii) No consent, approval, authorization or order of, or
filing with, or qualification with, any court, government or
governmental agency or body is necessary in connection with the
execution, delivery and performance of this Agreement or for the
execution, delivery and performance of this Agreement or for the
consummation of the transactions herein contemplated, except such
as have been obtained under the Securities Act or such as may be
required under state or other securities or Blue Sky laws in
connection with the purchase and the distribution of the Units by
the Underwriter.
(xiv) To the best of such counsel's knowledge, there are no
legal or governmental proceedings pending or threatened against the
Company or any of the Subsidiaries of a character required to be
disclosed in the Registration Statement or the Prospectus by the
Securities Act or the Rules and Regulations, other than those
described therein.
(xv) To the best of such counsel's knowledge, neither the
Company nor any of the Subsidiaries is presently (A) in violation
of its respective articles of incorporation or bylaws, (B) in
material breach or violation of any applicable statute, rule or
regulation known to such counsel or any order, writ or decree of
any court or governmental agency or body, or (C) in breach of or
otherwise in default in the performance of any material obligation,
agreement or condition contained in any bond, debenture, note, loan
agreement or any other material contract,
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lease or other instrument to which the Company is subject or by
which it may be bound, or to which any of the material assets or
property of the Company is subject.
(xvi) To the best of such counsel's knowledge, the Company
holds, and is operating in compliance in all material respects
with, all franchises, grants, authorizations, licenses, permits,
easements, consents, certificates and orders of any government or
self-regulatory body required for the conduct of its business, and
all such franchises, grants, authorizations, licenses, permits,
easements, consents, certifications and orders are valid and in
full force and effect.
(xvii) To the best of such counsel's knowledge, after due
inquiry, the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with the asserted
rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, technology, trade marks,
service marks, trade names, or copyrights which, singularly or in
the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or
business prospects of the Company.
(xviii) To the best of such counsel's knowledge, after due
inquiry, the Company owns, or possesses adequate rights to use, all
patents, patent rights, inventions, trade secrets, know-how,
technology, service marks, trade names, copyrights, trade marks and
proprietary rights or information which are necessary for the
conduct of its present or intended business as described in the
Registration Statement or Prospectus.
(xix) On the basis of information obtained as a result of
discussions and meetings with officers and other Underwriter of the
Company, discussions with Underwriter of the independent public
accountants for the Company in connection with the preparation of
the Registration Statement and the Prospectus, and the examination
of other information and documents requested by such counsel,
nothing has come to such counsel's attention that has caused them
to believe that the Registration Statement and any amendment
thereof, at the time it became effective and at all times
subsequent thereto up to and on that Closing Date, contained any
untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make
the statements therein not misleading, or that the Prospectus, and
any amendment or supplement thereto, at the first date of its
issuance and up to and at all times subsequent thereto up to and on
that Closing Date, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not
misleading. Such counsel may further state that in making the
foregoing comments, such counsel does not intend them to include or
cover the financial statements and notes thereto and related
schedules and other financial, numerical, statistical and
accounting data contained or omitted from the Registration
Statement and any amendment or supplement thereto and the
Prospectus.
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the State of
Minnesota upon opinions of local counsel, and, as to questions of fact,
upon representations or certificates of officers of the Company or its
Subsidiaries and of government officials, in which case their opinion is
to state the extent of such reliance. Copies of any opinion,
representation or certificate so relied upon shall be delivered to the
Underwriter and to Underwriter's Counsel.
(f) The Underwriter shall have received from Winthrop &
Weinstine, P.A., Underwriter's Counsel, such opinion or opinions as the
Underwriter may reasonably require, dated as of the First Closing Date and
the Second Closing Date, which are satisfactory in form and substance to
the Underwriter, with respect to the sufficiency of corporate proceedings
and other legal matters relating to this Agreement and the transactions
contemplated hereby, and the Company shall have furnished to
Underwriter's Counsel such documents as it may have requested for the
purpose of enabling it to pass upon such matters. In connection with
such opinion, as to matters of fact relevant to conclusions of law,
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Underwriter's Counsel may rely, to the extent that it deems proper, upon
representations or certificates of public officials and of responsible
officers of the Company.
(g) At the time of execution of this Agreement, the Underwriter
shall have received from Schechter Dokken Kanter Andrews & Selcer, Ltd.
a letter dated the date of such execution, in form and substance
satisfactory to the Underwriter, to the effect that they are independent
accountants with respect to the Company within the meaning of the
Securities Act and the applicable published instructions, and the Rules
and Regulations thereunder, and further stating in effect that:
(i) In their opinion, the audited financial statements
included in the Registration Statement and Prospectus covered by
their report included therein comply as to form in all material
respects with the applicable requirements of the Securities Act,
the published instructions and the Rule and Regulations.
(ii) On the basis of (A) a reading of the minutes of the
shareholders' and directors' meetings of the Company since January
1, 1994, (B) inquiries of certain officials of the Company
responsible for financial and accounting matters, (C) a reading of
the Company's monthly operating statements for the months beginning
on January 1, 1994, and (D) other specified procedures and
inquiries (but not an audit in accordance with generally accepted
accounting principles), nothing came to their attention causing
them to believe that:
(1) the unaudited consolidated financial statements of
the Company and its Subsidiaries contained in the Prospectus
and any amendment thereof or supplement thereto do not
comply as to form, in all material respects, with the
applicable accounting requirements of the Securities Act and
the published Rules and Regulations or were not prepared in
conformity with generally accepted accounting principles and
practices applied on a basis consistent in all material
respects with those followed in the preparation of the
audited consolidated financial statements of the Company and
its Subsidiaries included therein; or
(2) the unaudited consolidated amounts of revenues,
income before provision for income taxes, net income and
ratio of earnings to fixed charges of the Company and its
Subsidiaries, if any, contained in the Prospectus, or any
amendment thereof or supplement thereto, were not derived
from consolidated financial statements prepared in
conformity with generally accepted accounting principles and
practices applied on a basis consistent in all material
respects with those followed in the preparation of the
audited consolidated financial statements of the Company and
its Subsidiaries included therein; or
(3) the unaudited pro forma consolidated financial
statements of the Company and its Subsidiaries and
recently-acquired companies, if any, contained in the
Prospectus or any amendment thereof or supplement thereto,
were not properly compiled in accordance with generally
accepted accounting principles or did not provide for all
adjustments necessary for a fair presentation of the
information purported to be shown thereby; or
(4) with respect to the period subsequent to March 31,
1997, there were, at a specified date, not more than five
(5) business days prior to the date of the letter, any
changes or any material increases or decreases in capital
stock, long-term or short-term debt or shareholders' equity,
decreases in net assets, net current assets, or net worth or
any material decrease, as compared with the corresponding
period of the prior year, in revenues or net income of the
Company as compared with the amounts shown in the
consolidated balance sheet included in the Registration
Statement, except as disclosed or referred to in the
Prospectus and Registration Statement.
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(iii) Certain information set forth on the cover of the Prospectus
and in the Prospectus under the headings "Prospectus Summary"
(including the subheading "Summary Combined Financial Data"), "Risk
Factors," "Use of Proceeds," "Dividend Policy," "Capitalization,"
"Dilution," "Selected Combined Financial Data," "Recent
Acquisitions," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business," "Management,"
"Certain Transactions," "Principal Shareholders," "Shares Eligible
for Future Sale," and "Description of Securities" and that are
expressed in dollars (or percentages derived from dollar amounts) or
numbers have been compared to accounting records of the Company which
were subject to the internal accounting controls of the Company and
are in agreement with such records or computations made therefrom,
excluding any questions of legal interpretation.
(h) The Underwriter shall have received from Schechter Dokken Kanter
Andrews & Selcer, Ltd. a letter dated as of each Closing Date to the
effect that such accountants reaffirm, as of such Closing Date, and as
though made on such Closing Date, the statements made in the letter
furnished by such accountants pursuant to Section 5(g), except that the
specified date referred to in such letter will be a date not more than
five (5) business days prior to such Closing Date.
(i) The Underwriter shall have received from the Company a
certificate, dated as of the First Closing Date and the Second Closing
Date, of the principal executive officer and the principal financial or
accounting officer of the Company, to the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct as if made on and as of such Closing
Date, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at, or prior to, such Closing Date;
(ii) No stop order or other order suspending the effectiveness of
the Registration Statement or any amendment thereof or the
qualification of the Units for offering or sale have been issued, and
no proceedings for that purpose have been instituted or, to the best
of their knowledge, are contemplated by the SEC or any state or
regulatory body; and
(iii) The signers of said certificate have carefully examined the
Registration Statement and the Prospectus and any amendments thereof
or supplements thereto, and (A) such documents contain all
statements and information required to be included therein; the
Registration Statement, or any amendment thereof, does not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading; and the Prospectus, as amended or
supplemented, does not include any untrue statement of material fact
or omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; (B) since the Effective Date of the Registration
Statement, there has occurred no event required to be set forth in an
amended or supplemented Prospectus which has not been so set forth;
(C) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, the Company
has not incurred any material liabilities or material obligations,
direct or contingent, or entered into any material transactions, not
in the ordinary course of business consistent with past practice, or
declared or paid any dividends or made any distribution of any kind
with respect to its capital stock, and except as disclosed in the
Prospectus, there has not been any change in the capital stock (other
than a change in the number of outstanding shares of Common Stock due
to the offering of the Units or the issuance of shares upon the
exercise of options outstanding as of the Effective Date or options
granted pursuant to the Stock Plan described to in the Registration
Statement), or any material increase in the short-term debt or
long-term debt, or in the issuance of options, warrants, convertible
securities or other rights to purchase the capital stock, of the
Company, or any material adverse change or any development involving a
prospective material adverse change (whether or not arising in the
ordinary course of business) in the general affairs, condition
(financial or otherwise), business, key personnel, property,
prospects, net worth or results of operations of the Company, and
(D)
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except as stated in the Registration Statement and Prospectus,
there is not pending or, to their knowledge, threatened or
contemplated, any action, suit or proceeding to which the Company is a
party before or by any court or governmental agency, authority or
body, or any arbitrator, which might result in any material adverse
change of the condition, (financial or otherwise), business,
prospects, or results of operations of the Company.
(j) On each Closing Date, there shall have been furnished to you a
certificate of Secretary of the Company, dated as of such Closing Date,
with the documents listed herein attached, and to the effect and
certifying as follows:
(i) Attached thereto are true and correct copies of the articles
of incorporation of the Company, as amended to the date of the
certificate, and stating that there have been no changes or amendments
to the attached articles of incorporation of the Company, and no
resolutions have been adopted by the Board of Directors or
shareholders of the Company relating to (A) the amendment of said
articles of incorporation, (B) the merger, consolidation or
dissolution of the Company, or (C) the sale of all or substantially
all of the assets or business of the Company, and that the Company is
in good standing in the State of Minnesota and has paid all of its
corporate franchise taxes due as of the date of such certificate.
(ii) Attached thereto is a true and correct copy of the bylaws of
the Company as in effect as of the date of such certificate and no
resolutions have been adopted by the Board of Directors or
shareholders of the Company relating to changes or amendments to the
attached Bylaws.
(iii) Attached thereto are true and correct copies of the
resolutions of the Board of Directors of the Company relating to the
preparation and signing of the Registration Statement and this
Agreement, the issuance and sale of the Units and other related
matters, and such resolutions have not been amended, modified or
rescinded and are in full force and effect as of the date of such
certificate and are the only resolutions adopted by the Board of
Directors of the Company with respect to the offering contemplated by
the Registration Statement.
(iv) Attached thereto are true and correct copies of all material
correspondence with respect to the Registration Statement and
Prospectus and related matters between the Company, its counsel,
and/or Schechter Dokken Kanter Andrews & Selcer, Ltd., on the one
hand, and the SEC, on the other.
(v) This Agreement, as executed and delivered by the Company, is
in the form presented to and approved by officers authorized to do so
by the Board of Directors of the Company.
(vi) Attached thereto are specimens of the certificates for the
Common Stock and the Redeemable Warrants in the forms authorized and
approved for use by the Board of Directors of the Company.
(vii) The persons who have signed the Registration Statement and
all amendments thereto were duly elected at the respective times of
such signing and duly acting as officers and directors of the Company
or as an attorney-in-fact therefor, as set forth in the Registration
Statement.
(k) The Underwriter shall have received from each of the executive
officers and directors of the Company and each beneficial owner of five
percent (5%) or more of the Common Stock to be outstanding after the sale
of the Firm Units (calculated in accordance with Rule 13d-3 under the
Exchange Act) the Two-Year Lock-up Agreement in the form of APPENDIX A-1
hereto whereby each such person agrees that during the Two-Year Lock-up
Period such person will not, without the Underwriter's prior written
consent, effect the Disposition of any Securities except as permitted by
the Two-Year Lock-up Agreement, and the Underwriter shall have received
from each other shareholder of the Company the Six-
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Month Lock-up Agreement in the form of APPENDIX A-2 hereto whereby each
such person agrees that during the Six-Month Lock-up Period such person
will not, without the Underwriter's prior written consent, effect the
Disposition of any Securities other than as permitted by the Six-Month
Lock-up Agreement.
(l) The Common Stock of the Company shall be included and quoted on
The Nasdaq SmallCap Market.
(m) Winthrop & Weinstine, P.A. shall deliver to the Underwriter a
Blue Sky Memorandum reasonably satisfactory to the Underwriter confirming
that all requisite actions for the offer and sale of the Units in all
jurisdictions requested by the Underwriter have been taken.
(n) The Company shall have furnished to the Underwriter and to
Underwriter's Counsel such additional certificates, documents and
evidence as the Underwriter shall reasonably request.
All such opinions, certificates, letters and documents will be in compliance
with the provisions hereof only if they are reasonably satisfactory to the
Underwriter and Underwriter's Counsel. All statements contained in any
certificate, letter or other document delivered pursuant hereto by, or on
behalf of, the Company shall be deemed to constitute representations and
warranties of the Company.
The Underwriter may waive in writing the performance of any one or more of
the conditions specified in this Section 5 or extend the time for their
performance.
If any of the conditions specified in this Section 5 shall not have been
fulfilled when and as required by this Agreement to be fulfilled and if the
fulfillment of said condition has not been waived by the Underwriter, this
Agreement and all obligations of the Underwriter hereunder may be canceled
at, or at any time prior to, each Closing Date by the Underwriter. Any such
cancellation shall be without liability of the Underwriter to the Company and
shall not relieve the Company of its obligations under Section 4(a)
hereof. Notice of such cancellation shall be given to the Company at the
address specified in Section 12 hereof in writing, or by telegraph or
telephone confirmed in writing.
6. UNDERWRITER'S WARRANTS. In consideration of the agreement of the
Underwriter to act as Underwriter, and upon payment of a purchase price of
$100.00, on the First Closing Date the Company will issue and deliver to the
Underwriter, for its account, the Underwriter's Warrants to purchase the
Warrant Units in an amount equal to ten percent (10%) of the number of Firm
Units purchased by the Underwriter in the offering. The Underwriter's
Warrants shall be issued on the First Closing Date and shall be dated as of
the Effective Date. The Underwriter's Warrants shall be exercisable
commencing one year after the Effective Date and for a period ending five
years after the Effective Date at a price equal to 120% of the Per Unit Price
to Public set forth on the cover page of the Prospectus. As to other terms,
the Underwriter's Warrants shall be in form and substance substantially the
same as APPENDIX B hereto.
7. INDEMNIFICATION.
(a) The Company hereby agrees to indemnify and hold harmless the
Underwriter, and each person, if any, who controls the Underwriter within
the meaning of Section 15 of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which the
Underwriter or each such controlling person may become subject under the
Securities Act, the Exchange Act, the common law or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of, or are based upon, (i) any breach of any
representation, warranty, agreement or covenant of the Company contained
in this Agreement, (ii) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or
any amendment thereof or supplement thereto, or the omission or alleged
omission to state in the Registration Statement or any amendment thereof
or supplement thereto a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; (iii) any untrue statement or alleged untrue statement of
a material fact contained in any Preliminary Prospectus, if used prior to
the Effective Date of the Registration Statement, or in the Prospectus
(as amended or as supplemented, if the Company shall have filed with the
SEC any
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amendment thereof or supplement thereto), or the omission or
alleged omission to state therein a material fact necessary in order to
make the statements therein, in light of the circumstances under which
they were made, not misleading; or (iv) any untrue statement or
alleged untrue statement of a material fact contained in any application
or other statement executed by the Company or based upon written
information furnished by the Company filed in any jurisdiction in order
to qualify the Units under, or exempt the Units or the sale thereof from
qualification under, the securities laws of such jurisdiction, or the
omission or alleged omission to state in such application or statement 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. The Company will reimburse each Underwriter and
each such controlling person for any legal or other expenses reasonably
incurred by such Underwriter or controlling person in connection with
investigating or defending against any such loss, claim, damage,
liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in reliance
upon and in conformity with written information relating to the
Underwriter furnished to the Company by the Underwriter specifically for
use in the preparation of the Registration Statement or any such
post-effective amendment thereof, any such Preliminary Prospectus, or the
Prospectus, or any such amendment thereof or supplement thereto, or in
any application or other statement executed by the Company or the
Underwriter filed in any jurisdiction in order to qualify the Units
under, or exempt the Units or the sale thereof from qualification under,
the securities laws of such jurisdiction; and provided further that the
foregoing indemnity agreement is subject to the condition that, insofar
as it relates to any untrue statement, alleged untrue statement, omission
or alleged omission made in any Preliminary Prospectus but eliminated or
remedied in the Prospectus, such indemnity agreement shall not inure to
the benefit of the Underwriter (or to the benefit of any person who
controls the Underwriter) if the person asserting any loss, claim, damage
or liability purchased the Units from the Underwriter if a copy of the
Prospectus was not sent or given to such person with, or prior to, the
written confirmation of the sale of such Units to such person. This
indemnity agreement is in addition to any liability which the Company may
otherwise have.
(b) The Underwriter agrees to indemnify and hold harmless the Company,
each of its directors, each of its officers who has signed the
Registration Statement, and each person who controls the Company within
the meaning of Section 15 of the Securities Act against any losses,
claims, damages or liabilities to which the Company or any such director,
officer or controlling person may become subject under the Securities
Act, the Exchange Act, the common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of, or are based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement or any amendment thereof or supplement thereto, or the omission
or alleged omission to state in the Registration Statement or any
amendment thereof or supplement thereto, a material fact required to be
stated therein or necessary to make the statements therein not
misleading; (ii) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, if used prior to
the Effective Date of the Registration Statement, or in the Prospectus
(as amended or as supplemented, if the Company shall have filed with the
SEC any amendment thereof or supplement thereto), or the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading; or (iii)
any untrue statement or alleged untrue statement of a material fact
contained in any application or other statement executed by the Company
or by the Underwriter and filed in any jurisdiction in order to qualify
the Units under, or exempt the Units or the sale thereof from
qualification under, the securities laws of such jurisdiction, or the
omission or alleged omission to state in such application or statement 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; in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by, or on behalf of, the Underwriter
specifically for use in the preparation of the Registration Statement or
any such post-effective amendment thereof, any such Preliminary
Prospectus, or the Prospectus or any such amendment thereof or supplement
thereto, or in any application or other statement executed by the Company
or by the Underwriter and filed in any jurisdiction; and the Underwriter
will reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer, or controlling person in
connection with investigating or
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<PAGE>
defending against any such loss, claim, damage, liability or action. This
indemnity agreement is in addition to any liability which the
Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 7, notify in writing the
indemnifying party of the commencement thereof. The omission so to notify
the indemnifying party will relieve it from any liability under this
Section 7 as to the particular item for which indemnification is then
being sought, but not from any other liability which it may have to any
indemnified party. In case any such action is brought against any
indemnified party, and the indemnified party notifies an indemnifying
party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel who shall be reasonably satisfactory to
such indemnified party; and after notice from the indemnifying party to
such indemnified party of the indemnifying party's election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided,
however, that if the defendants in any such action include both the
indemnified party and the indemnifying party, and the indemnified party
shall have reasonably concluded that there may be legal defenses
available to it and/or other indemnified parties which are different from
or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate
counsel to assume such legal defenses and to otherwise participate in the
defense of such action on behalf of such indemnified party or parties, in
which event the fees and expenses of one such separate counsel shall be
borne by the indemnifying party. Any such indemnifying party shall not be
liable to any such indemnified party on account of any settlement of any
claim or action effected without the consent of such indemnifying party.
8. CONTRIBUTION.
(a) In order to provide for just and equitable contribution in any
action in which the Underwriter or the Company (or any person who
controls the Underwriter or the Company within the meaning of Section 15
of the Securities Act) makes claim for indemnification pursuant to
Section 7 hereof, but such indemnification is unavailable or insufficient
to hold harmless and indemnify a party under Section 7, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or
liabilities referred to in Section 7 above (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company
on the one hand and the Underwriter on the other from the offering of the
Units hereunder or (ii) if the allocation provided by the foregoing
clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in
such clause (i) but also the relative fault of the Company on the one
hand and the Underwriter on the other in connection with the statements
or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the
Underwriter on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering of the Units (before deducting
expenses) received by the Company bear to the total underwriting
discounts received by the Underwriter, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or the Underwriter and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The Company and the Underwriter agree that it
would not be just and equitable if contributions pursuant to this Section
8 were to be determined by pro rata allocation or by any other method of
allocation which does not take into account the equitable considerations
referred to in the first sentence of this Section 8. The amount paid by
an indemnified party as a result of the losses, claims, damages or
liabilities referred to in the first sentence of this Section 8 shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending against
any action or claim which is the subject of this Section 8.
Notwithstanding the provisions of this Section 8, the Underwriter shall
not be required to contribute any amount in excess of the amount by which
the total
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price at which the Units underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages
that the Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution
from any person who is not guilty of such fraudulent misrepresentation.
(b) Promptly after receipt by a party to this Agreement of notice of the
commencement of any action, suit or proceeding, such person will, if a claim for
contribution in respect thereof is to be made against another party (the
"Contributing Party"), notify the Contributing Party of the commencement
thereof; but the omission so to notify the Contributing Party will not relieve
the Contributing Party from any liability which it may have to any party other
than under this Section 8. Any notice given pursuant to Section 7 hereof shall
be deemed to be like notice hereunder. In case any such action, suit or
proceeding is brought against any party, and such person notifies a Contributing
Party of the commencement thereof, the Contributing Party will be entitled to
participate therein with the notifying party and any other Contributing Party
similarly notified.
9. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at immediately after the
time at which the Registration Statement shall become effective under the
Securities Act upon the Effective Date of the Registration Statement.
(b) Until the First Closing Date, this Agreement may be terminated by
the Underwriter, at its option, by giving notice to the Company, and the
option referred to in Section 2(b), if exercised, may be cancelled at any
time prior to the Second Closing Date, if (i) the Company shall have
failed, refused, or been unable, at or prior to such Closing Date, to
perform any agreement on its part to be performed hereunder, (ii) any
other condition of the Underwriter's obligations hereunder is not
fulfilled or waived by the Underwriter, (iii) trading in securities
generally on the New York Stock Exchange, the American Stock Exchange or
in the over-the-counter market shall have been suspended, (iv) minimum
or maximum prices for trading shall have been fixed, or maximum ranges
for prices for securities shall be required, on the New York Stock
Exchange, the American Stock Exchange, or in the over-the-counter market,
by such Exchange or by Nasdaq or by order of the SEC or any other
governmental authority having jurisdiction, (v) a banking moratorium
shall have been declared by federal, New York, or Minnesota authorities,
(vi) there shall have been such a serious, unusual and material change
in general economic, monetary, political or financial conditions, or the
effect of international conditions on the financial markets in the United
States shall be such as, in the judgment of the Underwriter, makes it
inadvisable to proceed with the delivery of the Units, (vii) the
enactment, publication, decree or other promulgation of any federal or
state statute, regulation, rule or order of any court or other
governmental authority which, in the judgment of the Underwriter,
materially and adversely affects or will materially and adversely affect
the business or operations of the Company, or (viii) there shall be a
material outbreak of hostilities or material escalation and deterioration
in the political and military situation between the United States and any
foreign power, or a formal declaration of war by the United States of
America shall have occurred. Any such termination shall be without
liability of any party to any other party, except as provided in Sections
7 and 8 hereof; provided, however, that the Company shall remain
obligated to pay costs and expenses to the extent provided in Section 4
hereof.
(c) If the Underwriter elects to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 9,
it shall notify the Company and the Company's counsel promptly by
telegram or telephone, confirmed by letter sent to the address specified
in Section 11 hereof. If the Company shall elect to prevent this
Agreement from becoming effective, it shall notify the Underwriter
promptly by telegram or telephone, confirmed by letter sent to the
addresses specified in Section 11 hereof.
10. SURVIVAL OF INDEMNITIES, CONTRIBUTION AGREEMENTS, WARRANTIES AND
REPRESENTATIONS. The respective indemnity and contribution agreements of the
Company and the Underwriter contained in Sections 7 and 8, the
representations and warranties of the Company set forth in Section 1 hereof,
and the covenants and agreements of
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the Company set forth in Section 3 hereof, shall remain operative and in full
force and effect, regardless of any investigation made by, or on behalf of,
the Underwriter, the Company, any of its officers and directors, or any
controlling person referred to in Sections 7 and 8, and shall survive the
delivery of and payment for the Units. The aforesaid indemnity and
contribution agreements shall also survive any termination or cancellation of
this Agreement. Any successor of any party or of any such controlling person,
or any legal representative of such controlling person, as the case may be,
shall be entitled to the benefit of the respective indemnity and contribution
agreements.
11. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be mailed,
delivered or telegraphed, and confirmed, as follows:
If to the Underwriter, to: Equity Securities Investments, Inc.
2820 IDS Center
80 South Eighth Street
Minneapolis, Minnesota 55402
Attention: Mr. Nathan Newman
with a copy to: Winthrop & Weinstine, P.A.
3000 Dain Bosworth Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
Attention: Michele D. Vaillancourt, Esq.
If to the Company, to: ChoiceTel Communications, Inc.
9724 10th Avenue North
Plymouth, MN 55441
Attention: Mr. Jack S. Kohler
with a copy to: Robins, Kaplan, Miller & Ciresi L.L.P.
2800 LaSalle Plaza
800 LaSalle Avenue
Minneapolis, Minnesota 55402
Attention: Robert T. Montague, Esq.
12. INFORMATION FURNISHED BY THE UNDERWRITER. The statements relating to the
stabilization activities of the Underwriter and the statements under the
caption "Underwriting" in any Preliminary Prospectus and in the Prospectus
constitute the written information furnished by, or on behalf of, the
Underwriter specifically for use with reference to the Underwriter referred
to in Section 1(a)(ii) and Sections 7(a) and 7(b) hereof.
13. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and
be binding upon the Underwriter and the Company and their respective
successors and assigns, and the officers, directors and controlling persons
referred to in Sections 7 and 8. Nothing expressed in this Agreement is
intended or shall be construed to give any person or corporation, other than
the parties hereto, their respective successors and assigns, and the
controlling persons, officers and directors referred to in Sections 7 and 8
any legal or equitable right, remedy or claim under, or in respect of, this
Agreement or any provision herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole
and exclusive benefit of the parties hereto and their respective executors,
administrators, successors, assigns and such controlling persons, officers
and directors, and for the benefit of no other person or corporation. No
purchaser of any Units from the Underwriter shall be construed a successor or
assign merely by reason of such purchase.
-25-
<PAGE>
14. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Minnesota.
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us the enclosed counterpart of this Agreement,
whereupon it will become a binding agreement between the Company and the
Underwriter in accordance with its terms.
Very truly yours,
CHOICETEL COMMUNICATIONS, INC.
By
--------------------------------------
Signature
--------------------------------------
Name Typed or Printed
Its
-----------------------------------
Title Typed or Printed
ACCEPTANCE
The foregoing Underwriting Agreement is
hereby confirmed and accepted by us
as of the date first above written.
Equity Securities Investments, Inc.
By
-------------------------------------
Signature
-------------------------------------
Name Type or Printed
Its
----------------------------------
Title Typed or Printed
-26-
<PAGE>
APPENDIX A-1
TWO-YEAR LOCK-UP AGREEMENT
Equity Securities Investments, Inc.
2800 IDS Center
80 South 8th Street
Minneapolis, MN 55402
Re: ChoiceTel Communications, Inc.
Ladies and Gentlemen:
The undersigned, a beneficial owner of common stock, $.01 par value per share
(the "Common Stock"), of ChoiceTel Communications, Inc. (the
"Company"), understands and acknowledges that the Company is intending to
file or has filed with the Securities and Exchange Commission a Registration
Statement on Form SB-2 (the "Registration Statement") for the registration
of the offer and sale of units (the "Units"), each Unit consisting of one
share of Common Stock of the Company and a redeemable warrant to purchase one
share of Common Stock, including units subject to the over-allotment option
described in the Registration Statement (collectively, the "Units"). The
undersigned further understands that the Company, as issuer, and Equity
Securities Investments, Inc., as the underwriter (the "Underwriter") to be
named in that certain proposed underwriting agreement expected to be entered
into in connection with the public offering of the Units by the Underwriter
(the "Underwriting Agreement"), contemplate entering into such Underwriting
Agreement.
In order to induce the Underwriter to proceed with the public offering, the
undersigned agrees, for the benefit of the Company and the Underwriter, that
should such public offering be effectuated, the undersigned will not, without
the prior written consent of the Underwriter, during the two years commencing
on the effective date of the Registration Statement ("Effective Date"):
(i) offer to sell, contract to sell, pledge, hypothecate, transfer or
otherwise dispose of, grant any rights with respect to (collectively,
a "Disposition"), any shares of Common Stock of the Company, and
options, warrants or other rights to purchase any shares of Common
Stock or any securities convertible into or exchangeable or
exercisable for shares of Common Stock (collectively, "Securities")
now owned or hereafter acquired by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of
Disposition; or
(ii) effect any Disposition of any Securities
other than by gifts to donees who agree in writing to be bound by the same
restrictions, or by will or the laws of descent and distribution; in which
case the Securities also will be subject to the same restriction.
Notwithstanding the foregoing, the Underwriter hereby agrees to release from
this Lock-up Agreement ten percent (10%) of the Securities beneficially owned
by the undersigned one (1) year following the Effective Date.
The undersigned hereby agrees to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of the Securities except in
compliance with this Agreement.
The undersigned hereby further agrees that during the two years commencing on
the Effective Date, the undersigned will effect all sales of Securities only
through the Underwriter.
Dated: ________________, 1997 Very truly yours,
___________________________________
Signature
___________________________________
Name Typed or Printed
A-1
<PAGE>
APPENDIX A-2
SIX-MONTH LOCK-UP AGREEMENT
Equity Securities Investments, Inc.
2800 IDS Center
80 South 8th Street
Minneapolis, MN 55402
Re: ChoiceTel Communications, Inc.
Ladies and Gentlemen:
The undersigned, a beneficial owner of common stock, $.01 par value per share
(the "Common Stock"), of ChoiceTel Communications, Inc. (the
"Company"), understands and acknowledges that the Company is intending to
file or has filed with the Securities and Exchange Commission a Registration
Statement on Form SB-2 (the "Registration Statement") for the registration
of the offer and sale of units (the "Units"), each Unit consisting of one
share of Common Stock of the Company and a redeemable warrant to purchase one
share of Common Stock, including Units subject to the over-allotment option
described in the Registration Statement (collectively, the "Units"). The
undersigned further understands that the Company, as issuer, and Equity
Securities Investments, Inc., as the underwriter (the "Underwriter") to be
named in that certain proposed underwriting agreement expected to be entered
into in connection with the public offering of the Units by the Underwriter
(the "Underwriting Agreement"), contemplate entering into such Underwriting
Agreement.
In order to induce the Underwriter to proceed with the public offering, the
undersigned agrees, for the benefit of the Company and the Underwriter, that
should such public offering be effectuated, the undersigned will not, without
the prior written consent of the Underwriter, for six months commencing on
the effective date of the Registration Statement ("Effective Date"):
(i) offer to sell, contract to sell, pledge, hypothecate, transfer or
otherwise dispose of, grant any rights with respect to (collectively,
a "Disposition"), any shares of Common Stock of the Company, and
options, warrants or other rights to purchase any shares of Common
Stock or any securities convertible into or exchangeable or
exercisable for shares of Common Stock (collectively, "Securities")
now owned or hereafter acquired by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of
Disposition; or
(ii) effect any Disposition of any Securities
other than by gifts to donees who agree in writing to be bound by the same
restrictions, or by will or the laws of descent and distribution; in which
case the Securities also will be subject to the same restriction.
The undersigned hereby agrees to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of the Securities except in
compliance with this Agreement.
The undersigned hereby further agrees that during the two years commencing on
the Effective Date, the undersigned will effect all sales of Securities only
through the Underwriter.
Dated: ________________, 1997 Very truly yours,
_________________________________
Signature
_________________________________
Name Typed or Printed
A-2
<PAGE>
APPENDIX B
FORM OF WARRANT
TO PURCHASE 80,000 UNITS
(EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT)
CHOICETEL COMMUNICATIONS, INC.
NO. ______ 80,000 UNITS
FOR GOOD AND VALUABLE CONSIDERATION, ChoiceTel Communications,
Inc., a Minnesota corporation (the "Company"), hereby certifies that Equity
Securities Investments, Inc., Minneapolis, Minnesota (the "Underwriter"),
or its registered assigns, is entitled to subscribe for and purchase from the
Company at any time or from time to time after ONE YEAR FROM EFFECTIVE
DATE, to and including [FIVE YEARS FROM EFFECTIVE DATE] Eighty Thousand
(80,000) Units (the "Units"), each Unit consisting of one share of the
Company's Common Stock and one redeemable Common Stock purchase warrant of
the Company. The per Unit exercise price of this Warrant is $___ (the
"Warrant Exercise Price"), subject to adjustment as provided herein.
This Warrant is one of the Underwriter's Warrants referred to in
the Underwriting Agreement dated_____________, 1997 by and between the
Company and the Underwriter (the "Offering") entered into in connection
with the offering by the Company of 800,000 Units (the "Units"), plus an
additional 120,000 Units solely to cover over-allotments.
As used herein, (i) this Warrant and all warrants hereafter
issued in exchange or substitution for this Warrant are referred to as the
"Warrants;" (ii) the Units which may be acquired upon exercise of the
Warrants are referred to herein as the "Warrant Units;" (iii) the term
"Holder" means the Underwriter, any party who acquires all or a part of
this Warrant as a registered transferee of the Underwriter, or any record
holder or holders of the Warrant Units issued upon exercise, whether in whole
or in part, of the Warrant; (iv) the term "Common Stock" means and
includes the Company's presently authorized common stock, par value $.01 per
share, together with any other equity securities which may be issued by the
Company with respect thereto or in substitution therefor; (v) the term
"Redeemable Warrants" means the redeemable common stock purchase warrants
subject to the Warrant Agreement dated __________, 1997 between the Company
and Norwest Bank Minnesota, National Association, as warrant agent (the
"Warrant Agent"), each Redeemable Warrant representing the right to
purchase at any time on or before _______, 2002 one share of Common Stock at
a price of $9.50 per share, subject to adjustment as provided in said Warrant
Agreement; and (vi) the term "Convertible Securities" means any stock or
other securities convertible into, or exchangeable for, Common Stock.
This Warrant is subject to the following provisions, terms and
conditions, to which each Holder hereof consents and agrees:
1. EXERCISE; TRANSFERABILITY.
(a) The rights represented by this Warrant may be exercised by
the Holder hereof, in whole or in part (but not as to a fractional Unit) by
written notice of exercise (in the form attached hereto) delivered to the
Company at the principal office of the Company prior to the expiration of
this Warrant and accompanied or preceded by the surrender of this Warrant
along with a check in payment of the Warrant Exercise Price for such Units.
B-1
<PAGE>
(b) If the Company has redeemed the Redeemable Warrants prior to
the date upon which this Warrant first becomes exercisable, the Holder may,
for a period of thirty (30) days beginning on the date on which this Warrant
first becomes exercisable, exercise the Redeemable Warrants included in the
Warrant Units.
(c) This Warrant may not be sold, assigned, hypothecated, or
otherwise transferred for a period of one year from the effective date of the
Offering (other than by will, pursuant to the operation of law, or where
directed by a court of competent jurisdiction upon the dissolution or
liquidation of a corporate Holder hereof), except to (i) a person who is
both an officer and a shareholder of the Underwriter, (ii) a successor in
interest to the business of the Underwriter, (iii) a person who is an
officer and a shareholder of a successor, or (iv) a person who is an
employee of the Underwriter or a successor, but only if such employee is also
an officer of the Underwriter or successor; such transfer to be by
endorsement (by the Holder hereof executing the form of assignment attached
hereto) and delivery in the same manner as in the case of a negotiable
instrument transferable by endorsement and delivery. Further, this Warrant
may not be sold, transferred, assigned, hypothecated or divided into two or
more Warrants of smaller denominations, nor may any shares of Common Stock or
Redeemable Warrants issued pursuant to exercise of this Warrant or shares of
Common Stock issued pursuant to exercise of the Redeemable Warrants be
transferred, except as provided in Section 7 hereof.
2. EXCHANGE AND REPLACEMENT. Subject to Sections 1 and 7 hereof, this
Warrant is exchangeable upon the surrender hereof by the Holder to the
Company at its office for new Warrants of like tenor and date representing in
the aggregate the right to purchase the number of Warrant Units purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of Warrant Units (not to exceed the aggregate total number purchasable
hereunder) as shall be designated by the Holder at the time of such
surrender. Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction, or mutilation of this Warrant, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and upon surrender and cancellation of this Warrant, if
mutilated, the Company will make and deliver a new Warrant of like tenor, in
lieu of this Warrant; provided, however, that if the Underwriter shall be
such Holder, an agreement of indemnity by such Holder shall be sufficient for
all purposes of this Section 2. This Warrant shall be promptly canceled by
the Company upon the surrender hereof in connection with any exchange or
replacement. The Company shall pay all expenses, taxes (other than stock
transfer taxes), and other charges payable in connection with the
preparation, execution, and delivery of Warrants pursuant to this Section 2.
3. ISSUANCE OF THE WARRANT UNITS.
(a) The Company agrees that the shares of Common Stock and the
Redeemable Warrants comprising the Warrant Units purchased upon exercise of
this Warrant shall be and are deemed to be issued to the Holder as of the
close of business on the date on which this Warrant shall have been
surrendered and the payment made for such Warrant Units as aforesaid. Subject
to the provisions of Section 3(b), certificates for the shares of Common
Stock and the Redeemable Warrants comprising the Warrant Units so purchased
shall be delivered to the Holder within a reasonable time, not exceeding
fifteen (15) days after the rights represented by this Warrant shall have
been so exercised, and, unless this Warrant has expired, a new Warrant
representing the right to purchase the number of Warrant Units, if any, with
respect to which this Warrant shall not then have been exercised shall also
be delivered to the Holder within such time.
(b) Notwithstanding the foregoing, the Company shall not be
required to deliver any shares of Common Stock or the Redeemable Warrants
comprising the Warrant Units upon exercise of this Warrant except in
accordance with exemptions from the applicable securities registration
requirements or registrations under applicable securities laws. Nothing
herein, however, shall obligate the Company to effect registrations under
federal or state securities laws, except as provided in Section 9. If
registrations are not in effect and if exemptions are not available when the
Holder seeks to exercise the Warrant, the Warrant exercise period will be
extended, if need be, to prevent the Warrant from expiring, until such time
as either registrations become effective or exemptions are available, and the
Warrant shall then remain exercisable for a period of at least thirty (30)
calendar days from the date the Company delivers to the Holder written notice
of the availability of such registrations or exemptions. The Holder agrees to
execute such documents and make such representations, warranties, and
agreements as may be reasonably required solely to comply with the exemptions
relied upon by the Company, or
B-2
<PAGE>
the registrations made, for the issuance of the shares of Common Stock and
the Redeemable Warrants comprising the Warrant Units.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees that (a)
all shares of Common Stock included in the Warrant Units will, upon issuance,
be duly authorized and issued, fully paid, non-assessable and free from all
taxes, liens and charges with respect to the issue thereof; (b) all
Redeemable Warrants included in the Warrant Units, when authenticated by the
Warrant Agent and issued, delivered and sold in accordance with this Warrant
and the Warrant Agreement between the Company and the Warrant Agent, will be
duly and validly executed, authenticated, issued and delivered and will
constitute valid and binding obligations of the Company, enforceable against
the Company in accordance with their terms, except as enforceability may be
limited by the application of bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the rights of creditors generally
and by judicial limitations on the right of specific performance; and (c) all
shares of Common Stock issuable upon exercise of the Redeemable Warrants
included in the Warrant Units will, upon issuance, be duly authorized and
issued, fully paid, non-assessable and free from all taxes, liens and charges
with respect to the issue thereof. The Company further covenants and agrees
that during the period within which the rights represented by this Warrant
may be exercised, the Company will at all times have authorized and reserved
for the purpose of issue or transfer upon exercise of the subscription rights
evidenced by this Warrant a sufficient number of shares of Common Stock and
Redeemable Warrants to provide for the exercise of the rights represented by
this Warrant.
5. ANTI-DILUTION ADJUSTMENTS. The provisions of this Warrant are
subject to adjustment as provided in this Section 5.
(a) The Warrant Exercise Price shall be adjusted from time to time
such that in case the Company shall hereafter:
(i) pay any dividends on any class of stock of the Company
payable in Common Stock or securities convertible into Common Stock;
(ii) subdivide its then outstanding shares of Common Stock into
a greater number of shares; or
(iii) combine outstanding shares of Common Stock, by
reclassification or otherwise;
then, in any such event, the Warrant Exercise Price in effect immediately
prior to such event shall (until adjusted again pursuant hereto) be adjusted
immediately after such event to a price (calculated to the nearest full cent)
determined by dividing (A) the number of shares of Common Stock outstanding
immediately prior to such event, multiplied by the then existing Warrant
Exercise Price, by (B) the total number of shares of Common Stock outstanding
immediately after such event (including in each case the maximum number of
shares of Common Stock issuable in respect of any securities convertible into
Common Stock), and the resulting quotient shall be the adjusted Warrant Exercise
Price per share. An adjustment made pursuant to this subsection shall become
effective immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination, reclassification or other event. If, as
a result of an adjustment made pursuant to this subsection, the Holder of any
Warrant thereafter surrendered for exercise shall become entitled to receive
shares of two or more classes of capital stock or shares of Common Stock and
other capital stock of the Company, the Board of Directors (whose determination
shall be conclusive) shall determine the allocation of the adjusted Warrant
Exercise Price between or among shares of such classes of capital stock or
shares of Common Stock and other capital stock. All calculations under this
subsection shall be made to the nearest cent or to the nearest 1/100 of a share,
as the case may be. In the event that at any time, as a result of an adjustment
made pursuant to this subsection, the holder of any Warrant thereafter
surrendered for exercise shall become entitled to receive any shares of the
Company other than shares of Common Stock, thereafter the Warrant Exercise Price
of such other shares so receivable upon exercise of any Warrant shall be subject
to adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to Common Stock contained in this
subsection.
B-3
<PAGE>
(b) If the Company shall distribute to all holders of Common
Stock (including any such distribution made to the shareholders of the
Company in connection with a consolidation or merger in which the Company is
the continuing corporation) evidences of its indebtedness, cash (other than
any cash dividend which, together with any cash dividends paid within the 12
months prior to the record date for such distribution, does not exceed 5% of
the "Current Market Price" (as hereinafter defined) at the record date for
such distribution) or assets (other than dividends payable in shares of its
capital stock), or rights, options, or warrants to subscribe for or purchase
Common Stock or securities convertible into or exchangeable for shares of
Common Stock, then, in each such case, the Warrant Exercise Price shall be
adjusted by multiplying the Warrant Exercise Price in effect immediately
prior to the record date for the determination of shareholders entitled to
receive such distribution by a fraction, the numerator of which shall be the
Current Market Price per share of Common Stock on such record date, less the
fair market value (as determined in good faith by the Company's Board of
Directors, whose determination shall be conclusive, absent manifest error) of
the portion of the evidences of indebtedness or assets so to be distributed,
or of such rights, options, or warrants or convertible or exchangeable
securities, or the amount of such cash, applicable to one share, and the
denominator of which shall be such Current Market Price per share of Common
Stock. Such adjustment shall be made whenever any such distribution is made,
and shall become effective on the record date for the determination of
shareholders entitled to receive such distribution.
(c) For the purpose of any computation under this Warrant, the
"Current Market Price" per share of Common Stock on any date shall be the
average of the daily closing prices for the 30 consecutive trading days
immediately preceding the date in question. The closing price for each day
shall be the last reported sales price regular way or, in case no such
reported sale takes place on such day, the closing bid price regular way, in
either case on the principal national securities exchange (including, for
purposes hereof, The Nasdaq National Market and The Nasdaq SmallCap Market)
on which the Common Stock is listed or admitted to trading or, if the Common
Stock is not listed or admitted to trading on any national securities
exchange, the highest reported bid price for the Common Stock as furnished by
the National Association of Securities Dealers, Inc. through Nasdaq or a
similar organization if Nasdaq is no longer reporting such information. If,
on any such date, the Common Stock is not listed or admitted to trading on
any national securities exchange and is not quoted by Nasdaq or any similar
organization, the fair value of a share of Common Stock on such date, as
determined in good faith by the Company's Board of Directors, whose
determination shall be conclusive, absent manifest error, shall be used.
(d) No adjustment in the Warrant Exercise Price shall be required
if such adjustment is less than $.05; provided, however, that any adjustments
which by reason of this Section 5 are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 5 shall be made to the nearest cent or to the
nearest whole share, as the case may be.
(e) In any case in which this Section 5 shall require that an
adjustment in the Warrant Exercise Price may be made effective as of a record
date for a specified event, the Company may elect to defer, until the
occurrence of such event, issuing to the Holder, if the Holder exercised or
converted this Warrant after such record date, the shares of Common Stock, if
any, issuable upon such exercise or conversion over and above the shares of
Common Stock, if any, issuable upon such exercise or conversion on the basis
of the Warrant Exercise Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to the Holder a due bill or other
appropriate instrument evidencing the Holder's right to receive such
additional shares upon the occurrence of the event requiring such adjustment.
(f) Upon each adjustment of the Warrant Exercise Price pursuant to
Section 5(a) above, the Holder of each Warrant shall thereafter (until
another such adjustment) be entitled to purchase at the adjusted Warrant
Exercise Price the number of Warrant Units, calculated to the nearest full
Unit, obtained by multiplying the number of Units specified in such Warrant
(as adjusted as a result of all adjustments in the Warrant Exercise Price in
effect prior to such adjustment) by the Warrant Exercise Price in effect
prior to such adjustment and dividing the product so obtained by the adjusted
Warrant Exercise Price.
(g) In case of any consolidation or merger to which the Company is
a party other than a merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or conveyance
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<PAGE>
to another corporation of the property of the Company as an entirety or
substantially as an entirety, or in the case of any statutory exchange of
securities with another corporation (including any exchange effected in
connection with a merger of a third corporation into the Company), there
shall be no adjustment under Subsection (a) of this Section above but the
Holder of each Warrant then outstanding shall have the right thereafter to
convert such Warrant into the kind and amount of shares of stock and other
securities and property which he would have owned or have been entitled to
receive immediately after such consolidation, merger, statutory exchange,
sale, or conveyance had such Warrant been converted immediately prior to the
effective date of such consolidation, merger, statutory exchange, sale, or
conveyance and in any such case, if necessary, appropriate adjustment shall
be made in the application of the provisions set forth in this subsection
with respect to the rights and interests thereafter of any Holders of the
Warrant, to the end that the provisions set forth in this subsection shall
thereafter correspondingly be made applicable, as nearly as may reasonably
be, in relation to any shares of stock and other securities and property
thereafter deliverable on the exercise of the Warrant. The provisions of this
subsection shall similarly apply to successive consolidations, mergers,
statutory exchanges, sales or conveyances.
(h) Upon any adjustment of the Warrant Exercise Price, then and in
each such case, the Company shall (i) give written notice thereof, by
first-class mail, postage prepaid, within ten (10) calendar days after the
date when the circumstances giving rise to the adjustment occurred, addressed
to the Holder as shown on the books of the Company, which notice shall state
the Warrant Exercise Price resulting from such adjustment and the increase or
decrease, if any, in the number of Units purchasable at such price upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based; and (ii)
prepare and retain on file a statement describing in reasonable detail the
method used in arriving at the new Warrant Exercise Price.
6. NO VOTING RIGHTS. This Warrant shall not entitle the Holder to any
voting rights or other rights as a shareholder of the Company.
7. NOTICE OF TRANSFER OF WARRANT OR RESALE OF THE SHARES OF COMMON
STOCK OR REDEEMABLE WARRANTS.
(a) Subject to the sale, assignment, hypothecation, or other
transfer restrictions set forth in Section 1 hereof, the Holder, by
acceptance hereof, agrees to give written notice to the Company before
transferring this Warrant, or any shares of Common Stock or Redeemable
Warrants comprising the Warrant Units, or any shares of Common Stock issuable
upon the exercise of the Redeemable Warrants included in the Warrant Units,
of such Holder's intention to do so, describing briefly the manner of any
proposed transfer. Promptly upon receiving such written notice, the Company
shall present copies thereof to the Company's counsel and to counsel to the
original purchaser of this Warrant. If, in the opinion of each such counsel,
the proposed transfer may be effected without registration or qualification
(under any federal or state securities laws), the Company, as promptly as
practicable, shall notify the Holder of such opinion, whereupon the Holder
shall be entitled to transfer this Warrant or to dispose of shares of Common
Stock and Redeemable Warrants comprising the Warrant Units received upon the
previous exercise of this Warrant or shares of Common Stock issuable upon
exercise of the Redeemable Warrants included in the Warrant Units, all in
accordance with the terms of the notice delivered by the Holder to the
Company; provided that an appropriate legend may be endorsed on this Warrant
or the certificates for such shares of Common Stock or Redeemable Warrants
comprising the Warrant Units or shares of Common Stock issuable upon exercise
of the Redeemable Warrants included in the Warrant Units, describing
restrictions upon transfer thereof necessary or advisable in the opinion of
counsel and satisfactory to the Company to prevent further transfers which
would be in violation of Section 5 of the Securities Act of 1933, as amended
(the "Securities Act"), and applicable state securities laws; and provided
further that the prospective transferee or purchaser shall execute such
documents and make such representations, warranties, and agreements as may be
required solely to comply with the exemptions relied upon by the Company for
the transfer or disposition of the Warrant or shares of Common Stock or
Redeemable Warrants comprising the Warrant Units or shares of Common Stock
issuable upon exercise of the Redeemable Warrants included in the Warrant
Units.
(b) If, in the opinion of either of the counsel referred to in
this Section 7, the proposed transfer or disposition of this Warrant or of
such shares of Common Stock or Redeemable Warrants comprising the
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Warrant Units, or of shares of Common Stock issuable upon exercise of the
Redeemable Warrants included in the Warrant Units, described in the written
notice given pursuant to this Section 7 may not be effected without
registration or qualification of this Warrant, or such shares of Common Stock
or Redeemable Warrants comprising the Warrant Units or the shares of Common
Stock issuable upon exercise of the Redeemable Warrants included in the
Warrant Units, the Company shall promptly give written notice thereof to the
Holder, and the Holder will limit its activities in respect to such transfer
or disposition as, in the opinion of both such counsel, are permitted by law.
(c) Until this Warrant is duly transferred on the books of the
Company, the Company shall treat the registered Holder of this Warrant as
absolute owner hereof for all purposes without being affected by any notice
to the Company.
8. FRACTIONAL UNITS. Fractional Units shall not be issued upon the
exercise of this Warrant, but in any case where the holder would, except for
the provisions of this Section, be entitled under the terms hereof to receive
a fractional Unit, the Company shall, upon the exercise of this Warrant for
the largest number of whole Units then called for, pay a sum in cash equal to
the sum of (a) the excess, if any, of the "Fair Market Value" (as defined
in Section 10(d) hereof) of such fractional Unit over the proportional part
of the Warrant Exercise Price represented by such fractional Unit, plus (b)
the proportional part of the Warrant Exercise Price represented by such
fractional Unit.
9. REGISTRATION RIGHTS.
(a) The Company agrees that, if at any time (but on a one-time
basis only) during the period commencing [ONE YEAR FROM EFFECTIVE DATE] and
ending [FIVE YEARS FROM EFFECTIVE DATE], the Holder of this Warrant and/or
the Holders of any other Warrants and/or shares of Common Stock included in
the Warrant Units, Redeemable Warrants included in the Warrant Units, and
shares of Common Stock issuable upon exercise of the Redeemable Warrants
included in the Warrant Units (collectively ""Registrable Securities'') who
collectively shall hold not less than 50% of the Warrants and/or Registrable
Securities outstanding at such time and not previously sold pursuant to this
Section 9 shall request that the Company file a registration statement
covering all or any part of the Registrable Securities:
(i) the Company will promptly notify the Holder and all other
registered Holders, if any, of other Warrants and of Registrable
Securities that such registration statement will be filed and that
Registrable Securities which are then held and/or which may be acquired
upon the exercise of the Warrants by the Holder and such other Holders
will be included in such registration statement at the Holder's and
such Holders' request; and
(ii) the Company will cause such registration statement to
include all Registrable Securities which it has been so requested to
include, will take all necessary steps to register or qualify such
Registrable Securities under the Securities Act and the securities laws
of such states as the Holders may reasonably request, and will use its
best efforts to cause such registration statement and qualifications to
become effective as soon as practicable; provided, however, that the
Company shall not be required to register any Registrable Securities
that are eligible for resale under Rule 144(k) promulgated under the
Securities Act.
The Company shall keep effective and maintain any registration,
qualification, notification, or approval specified in this Section 9(a) for
such period as may be reasonably necessary for such Holder or Holders of such
Registrable Securities to dispose thereof and from time to time shall amend
or supplement the prospectus used in connection therewith to the extent
necessary in order to comply with applicable law; provided, however, that the
Company need not maintain the effectiveness of any such registration,
qualification, notification or approval, whether or not at the request of the
Holders, more than nine (9) months following the effective date thereof.
With regard to and notwithstanding this Section 9(a), the Company may delay
filing a registration statement for a reasonable period of time, and may
withhold efforts to cause the registration statement to become effective for
a reasonable period of time, if the Company determines in good faith that
such registration might interfere with or
B-6
<PAGE>
affect the negotiation or completion of any transaction that is being
contemplated by the Company (whether or not a final decision has been made to
undertake such transaction) at the time the right to delay is exercised, or
involve initial or continuing disclosure obligations that might not be in the
best interest of the Company's shareholders.
(b) The Company agrees that, if at any time and from time to time
during the period commencing [ONE YEAR FROM EFFECTIVE DATE] and ending two
(2) years after complete exercise of this Warrant (but not later than [SEVEN
YEARS AFTER THE EFFECTIVE DATE]), the Company proposes to file a registration
statement under the Securities Act (other than a Form S-4 or Form S-8
Registration Statement or any successor or replacement forms thereto) with
respect to, or qualify for a public distribution under Section 3(b) of the
Securities Act, any of its securities in connection with the proposed offer
of such securities by the Company or any of its shareholders:
(i) the Company will promptly notify the Holder and all other
registered Holders, if any, of other Warrants, and of Registrable Securities,
at least thirty (30) days prior to each such filing, that it intends to file
such registration statement or effect such qualification, and that the
Registrable Securities which are then held and/or which may be acquired upon
the exercise of the Warrants by the Holder and such other Holders will be
included in such registration statement or qualification at the Holder's and
such Holders' request; and
(ii) the Company will use its best efforts to cause such
registration statement or qualification to include all Registrable Securities
which it has been so requested to include; provided, however, that if a
greater number of Registrable Securities is offered for participation in the
proposed offering than in the reasonable opinion of the managing underwriter
of the proposed offering can be accommodated without adversely affecting the
proposed offering, then the amount of Registrable Securities proposed to be
offered by such Holders for registration, as well as the number of securities
of any other selling shareholders participating in the registration (other
than selling shareholders participating in the registration as holders of
demand registration rights granted to them by the Company), shall be excluded
or proportionately reduced to a number deemed satisfactory by the managing
underwriter.
The Holder and such other Holders may request that their Registrable
Securities be included in such registration statement or qualification by making
written request to the Company specifying the number of shares of Common Stock
and/or Redeemable Warrants to be so included. Such request shall be made within
twenty (20) days after receipt from the Company of notice of such intended
registration or qualification.
(c) With respect to each inclusion of securities in a registration
or qualification pursuant to this Section 9, the Company shall bear all fees,
costs, and expenses thereof, including, without limitation, all filing fees,
fees imposed by the National Association of Securities Dealers, Inc.,
printing expenses, fees and disbursements of counsel and accountants for the
Company, fees and disbursements of counsel for the underwriter or Underwriter
of such securities (if the Company is required to bear such fees and
disbursements), all internal expenses, the premiums and other costs of
policies of insurance against liability arising out of the public offering,
and legal fees and disbursements and other expenses of complying with state
securities laws of any jurisdictions in which the securities to be offered
are to be registered or qualified. Fees and disbursements of special counsel
and accountants for the selling Holders, underwriting discounts and
commissions, and transfer taxes for selling Holders shall be borne by the
selling Holders.
(d) The Company will furnish the Holders whose Registrable
Securities are included in a registration or qualification pursuant to this
Section 9 with a reasonable number of copies of any prospectus and/or other
offering materials included in such filings and will amend or supplement the
same as required during the period of required use thereof. In connection
with any registration filed or qualification made pursuant to this Section 9
in which Registrable Securities are included, and to the extent permissible
under the Securities Act and controlling precedent thereunder, the Company
and each Holder whose Registrable Securities are so included in such
registration or qualification shall provide cross-indemnification agreements
to each other in customary scope covering the accuracy and completeness of
the information furnished by each in connection therewith.
B-7
<PAGE>
(e) Each Holder of Registrable Securities included in a
registration or qualification pursuant to this Section 9 agrees to cooperate
with the Company in the preparation and filing of any such registration
statement or other offering materials and in the furnishing of information
concerning the Holder for inclusion therein, or in any efforts by the Company
to establish that the proposed sale is exempt under the Securities Act as to
any proposed distribution.
(f) If, after any registration statement filed as required under
either (a) or (b) of this Section 9 becomes effective, the Company advises
Holder that the Company considers it appropriate for the registration
statement to be amended, the Company shall use its commercially reasonable
efforts to amend such registration statement as soon as practicable and the
holders of such shares shall suspend any further sales of their registered
shares until the Company advises them that the registration statement has
been so amended.
10. RIGHT TO CONVERT.
(a) The Holder of this Warrant shall have the right (but not the
obligation) to require the Company to convert this Warrant (the "Conversion
Right"), at any time after one year from the date of this Warrant and prior
to its expiration, into Warrant Units as provided for in this Section 10.
Upon exercise of the Conversion Right by the Holder, the Company shall
deliver to the Holder (without payment by the Holder of any exercise price)
that number of Warrant Units equal to the quotient obtained by dividing (i)
the value of the Warrant at the time the Conversion Right is exercised
(determined by subtracting the aggregate Warrant Exercise Price for the
Warrant Units in effect immediately prior to the exercise of the Conversion
Right from the aggregate "Fair Market Value" (as determined below) for the
Warrant Units immediately prior to the exercise of the Conversion Right) by
(ii) the Fair Market Value of one Unit immediately prior to the exercise of
the Conversion Right.
(b) The Conversion Right may be exercised by the Holder, at any
time or from time to time, prior to its expiration, on any business day, by
delivering a written notice (the "Conversion Notice") to the Company at the
offices of the Company exercising the Conversion Right and specifying (i) the
total number of Units the Holder will purchase pursuant to such conversion,
and (ii) a place, and a date not less than five (5) nor more than twenty (20)
business days from the date of the Conversion Notice, for the closing of such
purchase.
(c) At any closing under Section 10(b) hereof, (i) the Holder will
surrender the Warrant, (ii) the Company will deliver or cause to be delivered
to the Holder a certificate or certificates for the number of shares of
Common Stock and Redeemable Warrants comprising the Warrant Units issuable
upon such conversion, together with cash, in lieu of any fraction of a Unit,
and (iii) the Company will deliver to the Holder a new Warrant representing
the number of Units, if any, with respect to which the Warrant shall not have
been converted.
(d) "Fair Market Value" of a Unit as of a particular date (the
"Determination Date") shall mean the aggregate Fair Market Value of the
share of Common Stock and the Redeemable Warrant comprising that Unit as of
the Determination Date. "Fair Market Value" of a share of Common Stock or
of the Redeemable Warrants as of the Determination Date shall mean:
(i) If the Company's Common Stock and Redeemable Warrants are
traded on an exchange or are quoted on The Nasdaq National Market or The
Nasdaq SmallCap Market, then the average closing or last sale prices,
respectively, reported for the ten (10) business days immediately preceding
the Determination Date.
(ii) If the Company's Common Stock and Redeemable Warrants are
not traded on an exchange or on The Nasdaq National Market or The Nasdaq
SmallCap Market but are traded in the over-the-counter market, then the
average of the closing bid and asked prices as reported by Metro Data
Company, Inc. (or a similar organization) from quotations by market makers in
such Common Stock or Redeemable Warrants on the Minneapolis-St. Paul local
over-the-counter market for the ten (10) business days immediately preceding
the Determination Date.
B-8
<PAGE>
11. MISCELLANEOUS. The Company shall not, by amendment of its articles of
incorporation or through reorganization, consolidation, merger, dissolution or
sale of assets, or by any other voluntary act or deed, avoid or seek to avoid
the observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by the Company, but will, at
all times in good faith, assist, insofar as it is able, in the carrying out of
all provisions hereof and in the taking of all other action which may be
necessary in order to protect the rights of Holders against dilution.
Upon written request of the Holder of this Warrant, the Company will
promptly provide such Holder with a then current written list of the names and
addresses of all Holders of warrants originally issued under the terms of, and
concurrent with, this Warrant.
The representations, warranties and agreements herein contained shall
survive the exercise of this Warrant. This Warrant shall be interpreted under
the laws of the State of Minnesota.
IN WITNESS WHEREOF, ChoiceTel Communications, Inc. has caused this
Warrant to be signed by its duly authorized officer and to be dated
______________, 1997.
CHOICETEL COMMUNICATIONS, INC.
By
-----------------------------
Signature
-----------------------------
Name Typed or Printed
Its
----------------------------
Title Typed or Printed
B-9
<PAGE>
NOTICE OF EXERCISE OF WARRANT
(To be signed upon the exercise of the Warrant for cash or by check)
The undersigned hereby irrevocably elects to exercise the attached Warrant
and to purchase thereunder, for cash, ______________ of the Units of ChoiceTel
Communications, Inc. issuable upon the exercise of such Warrant, herewith
makes payment of $___________ therefor in cash or by check, and requests that
certificates for the shares of Common Stock and Redeemable Warrants comprising
such Units (together with a new Warrant to purchase the number of Units, if any,
with respect to which this Warrant is not exercised) be issued in the name set
forth below and be delivered to the address set forth below.
Dated:
-------------------------
------------------------------------------
(Signature)
------------------------------------------
(Name Typed or Printed)
------------------------------------------
(Address)
------------------------------------------
(Social Security or Tax Ident. No.)
* The signature on the Notice of Exercise of Warrant must exactly correspond
to the name as written upon the face of the Warrant in every particular
without alteration or any change whatsoever. When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
<PAGE>
NOTICE OF WARRANT CONVERSION
(To be signed only upon conversion of warrant)
The undersigned hereby irrevocably elects to exercise the conversion right
provided in Section 10 of the attached Warrant and to purchase thereunder
_______ Units of ChoiceTel Communications, Inc. to which such Warrant
relates and herewith tenders the Warrant in full payment of the shares and
requests that the certificates for the shares of Common Stock and Redeemable
Warrants comprising such Units be issued in the name of, and be delivered to
_______________________, whose address is set forth below the signature of
the undersigned.
Dated:
-------------------------
------------------------------------------
(Signature)
------------------------------------------
(Name Typed or Printed)
------------------------------------------
(Address)
* The signature on the Notice of Warrant Conversion must exactly correspond
to the name as written upon the face of the Warrant in every particular
without alteration or any change whatsoever. When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
<PAGE>
ASSIGNMENT OF WARRANT
(To be signed only upon authorized transfer of the Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
unto ____________________________ the right to purchase _______________ Units
of ChoiceTel Communications, Inc. to which the within Warrant relates and
appoints _________________________________, as attorney-in-fact, to transfer
said right on the books of ChoiceTel Communications, Inc. with full power
of substitution in the premises.
Dated:
-------------------------
------------------------------------------
(Signature)
------------------------------------------
(Name Typed or Printed)
------------------------------------------
(Address)
------------------------------------------
(Social Security or Tax Ident. No.)
* The signature on the Assignment of Warrant must exactly correspond to
the name as written upon the face of the Warrant in every particular
without alteration or any change whatsoever. When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
<PAGE>
RESTRICTION ON TRANSFER
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE DISTRIBUTED FOR VALUE
UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR LAWS
COVERING SUCH SECURITY OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE
COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT, PLEDGE OR DISTRIBUTION
IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE
SECURITIES ACT OF 1933 AND ALL APPLICABLE STATE SECURITIES LAWS.
<PAGE>
[LETTERHEAD]
August 22, 1997
ChoiceTel Communications, Inc.
9724 10th Avenue North
Plymouth, MN 55441
Gentlemen:
As counsel for ChoiceTel Communications, Inc. (the "Company"), we have
participated in the preparation of the Registration Statement on Form SB-2,
filed by the Company with the Securities and Exchange Commission on June 25,
1997, as amended by Amendment No. 1 dated as of the date hereof (the
"Registration Statement"), Registration No. 333-29969, with respect to the
issuance and sale of units (the "Units"), each Unit consisting of one share of
the Company's Common Stock, par value $0.01 per share (the "Common Stock"), and
one redeemable Common Stock Purchase Warrant entitling the holder thereof to
purchase one share of Common Stock (the "Redeemable Warrants"), and we have
examined the Company's Amended and Restated Articles of Incorporation, the form
of Redeemable Warrant Agreement with Norwest Bank Minnesota, National
Association, as warrant agent, included in the Registration Statement as Exhibit
4.2 thereto, pursuant to which the Redeemable Warrants will be issued (the
"Warrant Agreement"), and such other documents, corporate records and matters of
law as we have deemed necessary for purposes of this opinion. Based upon such
examination and review, it is our opinion that:
1. The Company has been duly incorporated and is validly existing under
the laws of the State of Minnesota.
2. When delivered and paid for as contemplated by the Registration
Statement, the issuance of the Units in a public offering pursuant to the
Registration Statement will have been duly authorized by all necessary corporate
action on the part of the Company and the shares of Common Stock comprising part
of the Units will be legally issued, fully paid and non-assessable.
3. When issued in accordance with the terms of Redeemable Warrants and
the Warrant Agreement, the issuance of the shares of Common Stock issuable
upon exercise of the Redeemable Warrants comprising part of the Units will
have been duly authorized by all necessary corporate action on the part of
the Company and such shares of Common Stock will be legally issued, fully
paid and non-assessable.
We hereby consent to being named in the Registration Statement, and in the
Prospectus which constitutes a part thereof, as counsel for the Company who have
passed upon legal matters in connection with the issuance of the Units, the
Common Stock and the Redeemable Warrants. We further consent to the filing of
this opinion as an exhibit to the Registration Statement.
Yours very truly,
/s/ Robins, Kaplan, Miller & Ciresi L.L.P.
<PAGE>
EMPLOYMENT
AND
NON-COMPETITION AGREEMENT
THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT (the "Agreement") is made
effective as of the 14th day of August, 1997, by and between CHOICETEL
COMMUNICATIONS, INC., a Minnesota corporation with offices at 9724 10th Avenue
North, Plymouth, MN 55441 (the "Company"), and DUSTIN ELDER, a resident of
Minnesota whose mailing address is 2745 Colfax Avenue South, Minneapolis,
Minnesota ("Employee").
RECITALS:
WHEREAS, the Company has entered into an Agreement for Sale and Purchase of
Assets by which it has agreed to purchase certain assets of Computer Assisted
Technologies, Inc., a Wisconsin corporation ("CAT");
WHEREAS, Employee has gained valuable experience and knowledge with respect
to CAT's business as an officer, director, shareholder and/or employee of CAT;
WHEREAS, Employee desires to commence his employment with the Company, and
the Company desires to employ Employee, on the terms and conditions set forth
below;
WHEREAS, Employee and the Company acknowledge that it is in their best
interests to establish formal severance arrangements for the benefit of
Employee, in partial consideration for which Employee has agreed to observe
certain nondisclosure and non-competition restrictions with respect to the
Company, as set forth herein.
NOW, THEREFORE, in consideration of the foregoing recital and the mutual
promises and agreements contained in this Agreement, the parties agree as
follows:
1. EMPLOYMENT. The Company hereby employs Employee and appoints him a
Vice President and Employee hereby accepts such employment with the Company, on
the terms and conditions set forth in this Agreement. Employee hereby
acknowledges and agrees that the Company has no obligation to retain Employee in
such position during the term of this Agreement, and that it may place Employee
in another position and/or reassign him different duties as the Board of
Directors may determine in its sole discretion.
2. TERM AND RENEWAL. Employee's employment by the Company shall commence
under the terms hereof as of August 14, 1997, and shall continue until April 15,
1999, unless such employment is terminated earlier as provided herein. The term
of this Agreement shall renew automatically for successive one (1) year terms
unless a party gives notice to the other not less than thirty (30) days prior to
the end of a term that this Agreement is not to be renewed, or unless this
Agreement is otherwise terminated as provided herein.
<PAGE>
3. DUTIES. Employee agrees to perform faithfully and to the best of his
abilities such duties as are reasonably assigned to him from time to time by the
Company's Board of Directors. Employee agrees to devote his entire business
time, and to apply his best efforts, energy and skills, to properly discharge
the duties of such employment, to promote the Company's interests, and to
participate in the active management of the Company while employed hereunder.
Employee shall report directly to the Company's Board of Directors or to such
other officer of the Company as the Board of Directors may determine in its sole
discretion.
4. COMPENSATION.
(a) Employee's compensation for the services performed under this
Agreement and for Employee's covenants and agreements hereinafter set forth
shall be a salary of Sixty-Five Thousand Dollars ($65,000) per year or Five
Thousand Four Hundred Sixteen Dollars and Sixty-Six Cents ($5,416.66) per month.
Employee's salary may be adjusted at the sole discretion of the Company's Board
of Directors. In the event of Employee's termination of employment without
cause as defined in Section 11 below, Employee shall be entitled to receive such
salary through the term of this Agreement then in effect.
(b) As additional compensation, Employee shall be entitled to the fringe
benefits described in Paragraph 5 below and may, in the sole discretion of the
Company's Board of Directors, receive such additional compensation, salary,
bonus or other benefits as the Company's Board of Directors shall determine from
time to time.
(c) As additional compensation, Employee shall be entitled to an initial
stock option to acquire up to 20,000 shares of the Company's common stock at an
exercise price of $6.75 per share. In addition, so long as he remains employed
hereunder or is terminated without cause, Employee shall be entitled to exercise
successive stock options for 10,000 each during the three (3) years following
the completion of the first year of employment hereunder all as set forth in the
Incentive Stock Option Agreement attached hereto as Exhibit A. In the event of
termination of employment without cause as defined in Section 11 below, Employee
shall be entitled to exercise the balance of any unexercised options held by him
at termination and to receive and exercise the stock options otherwise due to
him on February 1, 1998, February 1, 1999 and February 1, 2000 even if he is no
longer employed hereunder. Employee hereby acknowledges that the foregoing share
amounts assume that the Company will have effected a two-for-one split of its
common stock prior to the exercise of any such option. In the event such split
does not occur, all share amounts will be reduced to reflect the Company's then
existing capital structure.
5. FRINGE BENEFITS. Employee shall have the right to participate in the
fringe benefit plans generally provided by the Company to its officers, subject,
however, to Employee's qualification for participation in such benefit plans
pursuant to the terms and conditions under which such benefit plans are offered.
6. VACATION. Employee shall be entitled during each calendar year in
which this Agreement remains in effect such paid vacation time as the Company's
Board of Directors shall
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<PAGE>
determine in its sole discretion. Any vacation time not used during any such
calendar year may not be carried forward to any succeeding calendar year and
shall be forfeited. No vacation may be taken in advance. Employee shall not
be entitled to receive any payment in cash for vacation time remaining unused
at the end of any year or upon termination of this Agreement.
7. NON-COMPETITION. The parties also acknowledge and agree that the
Company's customer contacts and relations are established and maintained at
great expense and that Employee, by virtue of his employment under this
Agreement, will have unique and extensive exposure to, and personal contact
with, the Company's customers and that Employee will be able to establish a
unique relationship with those individuals that will enable him, both during and
after employment, to unfairly compete with the Company. In consideration of the
continued employment by the Company of Employee, and in consideration of the
compensation and newly established severance arrangement provided to Employee by
the Company under this Agreement, Employee agrees that he shall not do any of
the following at any time during the term of this Agreement, nor, after he
ceases to be employed by the Company, for a period of two (2) years with respect
to subparagraphs (a) and (b), and for a period of five (5) years with respect to
subparagraph (c):
(a) directly or indirectly, become a stockholder, partner, member or other
owner in any business or entity that is a business competitor of the Company,
provided, however, that Employee shall not be prohibited from, and the foregoing
restriction shall not apply to, Employee's ownership of less than a ten percent
(10%) interest in any company whose shares of stock are traded in a recognized
stock exchange or traded in the over-the-counter market; and/or
(b) in any manner induce, attempt to induce or assist others to induce any
customer, client, employee or other person or entity having a business or
employment relationship with the Company to terminate such relationship, or do
anything to interfere with the relationship of the Company with such person or
entity.
(c) communicate with any party with which the Company has a Site Agreement
until six (6) months after the expiration of any such Agreement. Employee
expressly agrees that in the event of a breach of the subparagraph (c), in
addition to any other remedies provided hereunder or by law, the Company will be
entitled to recover from Employee as liquidated damages, an amount equal to Five
Thousand Dollars ($5,000) for each phone located on any site where a
communication has been made in violation of this subparagraph (c).
8. CONFIDENTIAL INFORMATION. The parties agree that the Company's
customers, business connections, agreements, customer lists, procedures,
operations, business software and computer programs and printouts, techniques,
financial information and other aspects of the business are established at great
expense and protected as confidential information and provide the Company with a
substantial competitive advantage in conducting its business. The parties
further agree that by virtue of Employee's employment with the Company, Employee
will have access to, and be entrusted with, secret, confidential and proprietary
information, and that the Company would suffer great loss and injury if Employee
would disclose this information or use it to
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<PAGE>
compete with the Company. Therefore, in consideration of the compensation and
other benefits to be provided to Employee under this Agreement, including the
severance arrangement established herein, Employee agrees that during the
term of his employment, and for a period of one (1) year after the
termination of Employee's employment with the Company, Employee shall not,
directly or indirectly, either individually or as an employee, agent,
partner, shareholder, consultant or in any other capacity, use or disclose,
or cause to be used or disclosed, any secret, confidential or proprietary
information acquired by Employee during his employment with the Company,
whether owned by the Company prior to or discovered and developed by the
Company subsequent to Employee's employment, even though Employee may have
participated in the discovery or development of such information.
9. RELIEF FOR VIOLATIONS. Employee covenants and agrees that if he shall
violate any of the covenants and agreements under Paragraph 7 and/or Paragraph 8
or both, the Company shall be entitled to an accounting and repayment of all
profits, compensation, commissions, remuneration or benefits which Employee
directly or indirectly has realized and/or may realize as the result of, arising
out of, or in connection with, any such violation. Employee acknowledges that
an irreparable injury may result to the Company and its business in the event of
a breach of Employee's covenants contained in Paragraph 7 and/or Paragraph 8 of
this Agreement. Employee also acknowledges and agrees that the damages or
injuries which the Company may sustain as a result of Employee's breach of
Paragraphs 7 and/or Paragraph 8 of this Agreement are difficult to ascertain and
money damages alone may not be an adequate remedy to the Company. Employee,
therefore, agrees that if a controversy arises concerning the rights or
obligations of a party under this Agreement, such rights or obligations shall be
enforceable in a court of equity by a decree of specific performance and the
Company shall also be entitled to any injunctive relief necessary to prevent or
restrain any violation by Employee or any persons directly or indirectly acting
for or with Employee of the provisions of Paragraphs 7 and/or Paragraph 8 of
this Agreement. Such remedies, however, shall be cumulative and non-exclusive
and shall be in addition to any other remedy to which the parties may be
entitled.
10. REASONABLE RESTRICTIONS. Employee agrees that the terms and
conditions of Paragraphs 7, 8 and 9 of this Agreement are reasonable and
necessary for the protection of the Company's business, trade secrets and
confidential information and to prevent damage or loss to the Company as the
result of action taken by Employee. Employee acknowledges that the
consideration provided for herein is sufficient to fully and adequately
compensate Employee for agreeing to the restrictions set forth in Paragraphs 7,
8 and 9 of this Agreement. Employee acknowledges that he could continue to
actively pursue his career and earn sufficient compensation in business without
breaching any of the restrictions contained in this Agreement.
11. TERMINATION; SEVERANCE ARRANGEMENT.
(a) Except as otherwise set forth herein, if either party desires to
terminate Employee's employment with the Company, such party shall give written
notice of termination to the other party not less than thirty (30) days prior to
the effective date of termination.
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<PAGE>
(b) In the event of any termination of Employee's employment with the
Company except that "for cause" (as defined in Section 11(c) below), Employee
shall be entitled to continue receiving the full compensation and benefits set
forth in Section 4 above for a period of six (6) months following such
termination. If such termination is occasioned by Employee's death or
"disability," the continued compensation to which Employee is entitled shall be
paid to Employee's estate or personal representative, as the case may be. For
purposes of this Agreement, "disability" shall mean that Employee is unable to
perform substantially all of his duties for a period of one (1) year or for a
total of twelve (12) months in any two (2) year period.
(c) The Company shall have the right to terminate the employment of
Employee immediately "for cause" without notice upon the happening of any of the
following events:
(i) The breach by Employee of any provisions of Paragraph 7 or
Paragraph 8 of this Agreement;
(ii) The commission by Employee of any act of gross misconduct or
malfeasance with respect to the Company or its business; or
(iii) The conviction of Employee of a felony or misdemeanor which,
in the reasonable judgment of the Company's Board of Directors, is likely
to have a material adverse effect upon the business or reputation of
Employee or the Company or which substantially impairs Employee's ability
to perform his duties for the Company.
(d) Upon notice of termination of employment or at any time thereafter as
directed by the Company, Employee shall return to the Company any and all
property of the Company in Employee's possession or control. The agreements of
Employee pursuant to Paragraphs 7, 8, 9 and 10 shall survive the termination of
employment under this Agreement.
12. REIMBURSEMENT OF BUSINESS EXPENSES. The Company shall reimburse
Employee for the amount of expenses reasonably and necessarily incurred by
Employee in connection with the Company's business; provided, however, that no
single expenditure in excess of $100 shall be made without the Company's prior
approval. Employee shall submit an itemized accounting for all expenses for
which reimbursement is sought at such time and in such detail as the Company
shall reasonably require. The Company shall not be obligated to pay or reimburse
expenses for which adequate documentation is not furnished in the manner
directed by the Company.
13. WAIVER. The failure of either party to insist, in any one or more
instances, upon performance of the terms or conditions of this Agreement shall
not be construed as a waiver or a relinquishment of any right granted hereunder
or of the future performance of any such term, covenant or condition.
14. SEVERABILITY. In the event any provision of this Agreement is held to
be invalid or unenforceable for any reason whatsoever, such invalidity or
unenforceability shall not affect any other provision of this Agreement and the
remaining covenants, restrictions and provisions
-5-
<PAGE>
hereof shall remain in full force and effect and any court of competent
jurisdiction may so modify the objectionable provision as to make it valid,
reasonable and enforceable. FURTHERMORE, THE PARTIES SPECIFICALLY ACKNOWLEDGE
THE ABOVE COVENANT NOT TO COMPETE AND COVENANT NOT TO DISCLOSE CONFIDENTIAL
INFORMATION ARE SEPARATE AND INDEPENDENT AGREEMENTS.
15. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota.
16. BENEFIT. This Agreement shall be binding upon and inure to the
benefit of and shall be enforceable by and against the Company, its successors
and assigns, and Employee, his heirs, beneficiaries and legal representatives.
Employee's rights and obligations under this Agreement may not be delegated or
assigned except as specifically set forth herein.
17. NOTICES. Any notice to be given hereunder shall be deemed sufficient
if addressed in writing, and delivered by registered or certified mail or
delivered personally, in the case of the Company to its principal business
office, and in the case of Employee, to his address appearing on the Company's
records, or to such other address as he may designate in writing to the Company.
18. ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the entire
agreement and understanding between the parties hereto in reference to all of
the matters herein agreed upon, and no representations, promises, agreements or
understandings, whether written or oral, not herein contained shall be of any
force or effect. This Agreement may only be amended by an agreement in writing
signed by all of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day, month and year first above written.
EMPLOYEE COMPANY:
/S/ DUSTIN ELDER CHOICETEL COMMUNICATIONS, INC.
- ---------------------------- a Minnesota corporation
Dustin Elder
BY: /S/ JACK KOHLER
--------------------------------
Name: JACK KOHLER
--------------------------------
Title: VICE PRESIDENT AND
--------------------------------
CHIEF FINANCIAL OFFICER
--------------------------------
-6-
<PAGE>
EXHIBIT A
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT ("Agreement") is made as of the 14th day
of August, 1997, between Choicetel Communications, Inc. ("Corporation"), a
Minnesota corporation, and Dustin Elder ("Participant"), an employee of the
Corporation.
WHEREAS, the Corporation and Participant have entered into an
Employment and Non-Competition Agreement dated as of August 14, 1997 (the
"Employment Agreement"); and
WHEREAS, the Board of Directors of the Corporation has determined that
the Participant is to receive certain stock options to purchase shares of the
Corporation's common stock.
NOW, THEREFORE, in consideration of the foregoing, of the mutual
promises set forth later in this Agreement, and of other good and valuable
consideration, the receipt and sufficiency of which are acknowledged, the
parties to this Agreement, intending to be legally bound, agree as follows:
SECTION 1. GRANT OF INITIAL OPTION. Subject to the terms and
conditions set forth below in this Agreement, the Corporation hereby grants to
Participant an option (the "Option"), exercisable from and after this date, to
purchase Twenty Thousand (20,000) shares of the Corporation's common stock
("Shares") at a price of Six Dollars and Seventy-Five Cents ($6.75) per share
("Exercise Price").
SECTION 2. GRANT OF FUTURE OPTIONS. Subject to Participant's
continued employment or termination without cause in accordance with the terms
and conditions of the Employment Agreement, Participant shall have the right to
purchase Ten Thousand (10,000) additional Shares on each of the dates set forth
below:
February 1, 1998
February 1, 1999
February 1, 2000
The Exercise Price for the Shares shall in each instance be the fair market
value of the Shares as determined by the Board of Directors of the Corporation.
SECTION 3. EFFECT OF STOCK SPLIT; DURATION OF OPTIONS.
Participant hereby acknowledges that the number of Shares which he may purchase
under the options granted herein reflects the Corporation's effectuation of a
two-for-one split of its common stock prior to the exercise of any such option.
In the event such split does not occur, all Share amounts will be reduced to
reflect the Corporation's then existing capital structure. The Initial Option
shall be effective during the period commencing as of the date of this Agreement
and the Future Options will
<PAGE>
be effective as of the date of grant set forth in the preceding table. The
Options will end on the earliest of (i) the date all the Shares are purchased
pursuant to the terms of this Agreement or (ii) the date of the termination
of employment of the Participant "for cause" (as defined in Section 11 of the
Employment Agreement) or (iii) three (3) years after the date of grant. In
the event of a merger or consolidation to which the Corporation is a party
(other than as the surviving entity), or any other sale or transfer of a
majority of the outstanding shares of the Common Stock of the Corporation, or
any transfer of all or substantially all of the assets of the Corporation, or
of the Corporation's liquidation or dissolution, the Corporation shall give
the Participant at least ten (10) days' prior written notice of any event of
this type and the Option, to the extent that it is still in force and has not
been exercised, shall be accelerated, and the Participant may purchase any or
all of the Shares before the occurrence of any event of this type, and, to
the extent that the Option shall not be exercised, it shall expire upon any
event of this type becoming effective. Upon the expiration of that period of
the Option, the Option shall have no further effect, and the Participant
shall have no further rights in or under the Option or to the Shares that
shall not have been purchased at that time pursuant to the Option.
SECTION 4. EXERCISE OF OPTION.
a. Notwithstanding anything contained in this Agreement to the
contrary, the Option may be exercised only in amounts of one hundred (100)
Shares or multiples of one hundred (100); provided, however, that this
restriction shall not apply to the purchase by the Participant of all
Shares that are the subject of the Option that have not previously been
purchased by the Participant and as to which the Participant shall be
otherwise entitled to purchase. The Option may be exercised only if
compliance with all applicable federal and state securities laws can be
effected and only by (i) the Participant's completion, execution, and
delivery to the Corporation of a notice of exercise and "investment letter"
in the forms supplied by the Corporation, and (ii) the payment to the
Corporation, as provided in Section 3(b) of this Agreement, of an amount
equal to the amount obtained by multiplying the Exercise Price by the
number of Shares being purchased pursuant to that exercise, as shall be
specified by the Participant in that notice of exercise. Notwithstanding
any other provision of this Agreement, the Option shall not be exercisable,
in whole or in part, while there is outstanding, within the meaning of
Section 422A(c)(7) of the Internal Revenue Code of 1986, as amended
("Code"), any other stock option, as defined in Section 422A(b) of the
Code, that was granted, before the granting of that Option, to the
Participant to purchase stock in the Corporation. The Option or any of the
rights under the Option may be exercised by the Participant only and may
not be transferred or assigned, voluntarily, involuntarily, or by operation
of law including, without limitation, the laws of bankruptcy, intestacy,
descent and distribution, and succession.
b. Payment of the amount determined pursuant to Section 3(a) of this
Agreement shall be made by check.
2
<PAGE>
c. Upon the exercise of the Option by the Participant, or as soon
thereafter as is practicable, the Corporation shall issue and deliver to
the Participant a certificate or certificates evidencing the number of
Shares the Participant has elected to purchase. The certificate or
certificates shall be registered in the name of the Participant and shall
bear an appropriate investment legend, any legend required by federal or
state securities laws, rules, or regulations, and (if applicable) a legend
referring to the restrictions provided under this Agreement and under the
Plan. Upon the exercise of the Option and the issue of the certificate or
certificates, the Participant shall have all the rights of a stockholder
with respect to those Shares and to receive all dividends or other
distributions paid or made with respect to those Shares; provided, however,
that those Shares shall be subject to the restrictions under this Agreement
and in the Plan. In the event of a merger or consolidation to which the
Corporation is a party (other than as the surviving entity), any other sale
or transfer of a majority of the outstanding shares of Common Stock of the
Corporation, or any transfer of all or substantially all of the assets of
the Corporation, the acquiring corporation alone shall determine whether
the stock of the acquiring corporation so received, if any, shall be
subject to the restrictions set forth in this Agreement.
d. A Participant may elect to pay all or a part of the Exercise
Price of the Shares by having the Corporation withhold from the Shares, the
number of shares having a fair market value equal to the aggregate Option
Exercise Price for the Shares with respect to which such election is made.
SECTION 5. RESTRICTIONS ON TRANSFER OF SHARES.
a. The Participant hereby covenants and agrees that any Shares
acquired pursuant to the exercise of the Option shall be acquired solely
for investment and not for resale or other distribution.
b. Except as otherwise provided in this Agreement or in the Plan,
neither the Option nor any Shares shall or may be sold, exchanged,
delivered, assigned, bequeathed or given, pledged, mortgaged, hypothecated
or otherwise encumbered, transferred or permitted to be transferred, or
otherwise disposed of, whether voluntarily, involuntarily, or by operation
of law (including, without limitation, the laws of bankruptcy, intestacy,
descent and distribution, and succession).
SECTION 6. CHANGES IN CAPITAL STRUCTURE. The number of Shares
held by the Participant shall be adjusted in any manner for (i) a division or
combination of any of the outstanding shares of common stock of the Corporation,
(ii) a dividend payable in shares of common stock of the Corporation, (iii) a
reclassification of any outstanding shares of common stock of the Corporation,
or (iv) any other change of a similar nature in the capital structure of the
Corporation.
SECTION 7. RIGHTS BEFORE EXERCISE. The Participant shall not have
an equity interest in the Corporation or any voting, dividend, liquidation, or
dissolution rights with respect to
3
<PAGE>
any capital stock of the Corporation solely by reason of having an Option or
having executed this Agreement. Furthermore, prior to the exercise of the
Option, as set forth in Section 3(a) of this Agreement, the Participant shall
not have an interest in, or any voting, dividend, liquidation, or dissolution
rights with respect to, the Shares.
SECTION 8. TERMS AND CONDITIONS OF PLAN. The terms and conditions
included in the Plan are incorporated by reference in this Agreement, and, to
the extent that any conflict may exist between any term or provision of this
Agreement and any term or provision of the Plan, the term or provision of the
Plan shall control.
SECTION 9. HEADINGS. The headings and other captions contained in
this Agreement are for convenience and reference only and shall not be used in
interpreting, construing, or enforcing any of the provisions of this Agreement.
SECTION 10. ENTIRE AGREEMENT. This Agreement sets forth all of the
promises, agreements, conditions, understandings, warranties, and
representations between the parties to this Agreement with respect to the Option
and the Shares, and there are no promises, agreements, conditions,
understandings, warranties, or representations, oral or written, express or
implied, between them with respect to the Option or the Shares other than as set
forth in this Agreement. Any and all prior agreements between the parties to
this Agreement with respect to any stock purchase rights or stock option rights
regarding the shares of capital stock of the Corporation are hereby revoked.
This Agreement is, and is intended by the parties to be, an integration of any
and all prior agreements or understandings, oral or written, with respect to the
Option and the Shares.
SECTION 11. NOTICES. Any and all notices provided for in this
Agreement shall be addressed: (i) if to the Corporation, to the principal
executive office of the Corporation; and (ii) if to the Participant, to the
address of the Participant as reflected on the records of the Corporation.
SECTION 12. INVALID OR UNENFORCEABLE PROVISIONS. The invalidity or
unenforceability of any particular provision of this Agreement shall not affect
the other provisions of this Agreement, and this Agreement shall be construed in
all respects as if those invalid or unenforceable provisions were omitted.
SECTION 13. GOVERNING LAW. This Agreement shall be construed and
enforced in accordance with the laws of Minnesota.
SECTION 14. MODIFICATIONS Any modification of this Agreement must
be written and signed by the parties to this Agreement to be valid; provided,
however, that the Participant covenants and agrees to execute any amendment to
this Agreement that shall be required or desirable (in the opinion of the
Corporation or its counsel) to comply with any rule or regulation promulgated or
proposed under the Code by the Internal Revenue Service.
4
<PAGE>
THE SECURITIES REPRESENTED HEREBY ARE ISSUED WITHOUT REGISTRATION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND UPON REPRESENTATION
OF THE HOLDER HEREOF THAT SAID SECURITIES ARE BEING HELD FOR INVESTMENT AND NOT
WITH A VIEW TO DISTRIBUTION THEREOF, AND NO SALE, TRANSFER, OR OTHER DISPOSITION
MAY BE MADE EXCEPT IN COMPLIANCE WITH THE PROVISIONS OF THE ACT.
IN WITNESS WHEREOF, the Corporation and the Participant have executed
this Agreement as of the day and year first above written.
CHOICETEL COMMUNICATIONS, INC.,
a Minnesota corporation
By
----------------------------------------------
Jack Kohler, Vice President and Chief
Financial Officer
PARTICIPANT:
----------------------------------------------
Dustin Elder
2745 Colfax Avenue South
-------------------------------------------------
(Address)
###-##-####
-------------------------------------------------
(Social Security Number)
5
<PAGE>
LEASE
DATED: JULY 11, 1997
BETWEEN: PACIFIC REALTY ASSOCIATES, L.P.,
A DELAWARE LIMITED PARTNERSHIP LANDLORD
AND: INTELLIPHONE, INC.,
A MINNESOTA CORPORATION
dba TELCO NORTHWEST, INC. TENANT
Tenant wishes to lease from Landlord the following described property,
hereinafter referred to as "the Premises":
Approximately 2,250 square feet of warehouse and office space located in
Building C, Oregon Business Park II, 15838 S.W. Upper Boones Ferry Road, Lake
Oswego, Oregon 97035 and as further described on the attached Exhibits A and
B.
If the Premises consist of a portion but not all of a building, the
building housing the Premises is hereinafter referred to as "the Building."
Landlord leases the Premises to Tenant for a term of 12 months
commencing August 1, 1997 and continuing through July 31, 1998 at a base rent
of One Thousand Two Hundred and No/100 Dollars ($1,200.00) per month.
Rent for the first month of the Lease term shall be paid upon execution
of this Lease. All rent, including base rent together with the charges, taxes
and expenses to be paid to Landlord specified in Paragraphs 3 and 4 of this
Lease, is payable in advance on the first day of each calendar month. If
Landlord consents, Tenant may occupy the Premises prior to such commencement
date upon payment of rent on a prorated basis and compliance with all terms
of this Lease.
Delivery of possession shall occur when the Premises are occupied by
Tenant or are ready to be occupied by Tenant with all work to be performed by
Landlord substantially completed. No notice shall be required from Landlord
if the Premises are ready on the date set for commencement of the term or on
the first business day thereafter. If Landlord is unable to deliver
possession of the Premises to Tenant because of strikes, acts of God, or any
other cause beyond Landlord's control, then Tenant may take possession when
Landlord notifies Tenant that the Premises are ready for possession, and the
term of this Lease shall commence on the first day of the first month
following such date and continue for the specified number of months
thereafter, notwithstanding the commencement and termination dates stated
above. Tenant shall owe no rent until the Premises are ready for
possession. Landlord shall have no liability for such delays in delivery of
possession, and neither party shall have the right to terminate except that
Landlord may cancel this Lease without liability if permission to construct,
use, or furnish necessary utilities to the Premises is denied or revoked by
any governmental agency or public utility with such authority.
This Lease is subject to the following additional terms to which the
parties agree:
1. USE OF THE PREMISES.
1.1. Tenant shall use the Premises only for the purpose of conducting
the following business:
Sales, warehouse, and administration of pay telephone and related
items.
If such use is prevented by any law or governmental regulation,
Tenant may use the Premises for other reasonable uses.
<PAGE>
1.2. In connection with its use, Tenant shall at its expense comply with
all applicable laws, ordinances, and regulations of any public authority,
including those requiring alteration of the Premises because of Tenant's
specific use; shall create no nuisance nor allow any objectionable liquid,
odor, or noise to be emitted from the Premises; shall store no gasoline or
other highly combustible materials on the Premises which would violate any
applicable fire code or regulation nor conduct any operation that will
increase Landlord's fire insurance rates for the Premises; and shall not
overload the floors or electrical circuits of the Premises. Landlord shall
have the right to approve the installation of any power-driven machinery by
Tenant and may select a qualified electrician whose opinion will control
regarding electrical circuits and a qualified engineer or architect whose
opinion will control regarding floor loads. Allowable ground floor load
shall be 500 pounds per square foot.
1.3. Tenant may erect a sign stating its name, business, and product
after first securing Landlord's written approval of the size, color, design,
wording, and location, and all necessary governmental approvals. No signs
shall be painted on the Building or exceed the height of the Building. All
signs installed by Tenant shall be removed upon termination of this Lease
with the sign location restored to its former state.
1.4. Tenant shall make no alterations, additions, or improvements to the
Premises or change the color of the exterior without Landlord's prior written
consent and without a valid building permit issued by the appropriate
governmental agency. Upon termination of this Lease, any such alterations,
additions, or improvements (including without limitation all electrical,
lighting, plumbing, heating and air-conditioning equipment, doors, windows,
partitions, drapery, carpeting, shelving, counters, and physically attached
fixtures) shall at once become part of the realty and belong to Landlord
unless the terms of the applicable consent provide otherwise, or Landlord
requests that part of all of the additions, alterations, or improvements be
removed. In such case, Tenant shall at its sole cost and expense promptly
remove the specified additions, alterations, or improvements and repair and
restore the Premises to its original condition.
2. SECURITY DEPOSIT.
Upon execution of this Lease, Tenant shall deposit with Landlord the
sum of $1,200.00, hereinafter referred to as "the Security Deposit," to
secure the faithful performance by Tenant of each term, covenant, and
condition of this Lease. If Tenant shall at any time fail to make any
payment or fail to keep or perform any term, covenant, and condition on its
part to be made or performed or kept under this Lease, Landlord may, but
shall not be obligated to and without waiving or releasing Tenant from any
obligation under this Lease, use, apply or retain the whole or any part of
the Security Deposit (i) to the extent of any sum due to Landlord; or (ii) to
make any required payment on Tenant's behalf; or (iii) to compensate Landlord
for any loss, damage, attorneys' fees, or expense sustained by Landlord due
to Tenant's default. In such event, Tenant shall, within five (5) days of
written demand by Landlord, remit to Landlord sufficient funds to restore the
Security Deposit to its original sum; Tenant's failure to do so shall be a
material breach of this Lease. Landlord shall not be required to keep the
Security Deposit separate from its general funds, and Tenant shall not be
entitled to interest on such deposit. Should Tenant comply with all of the
terms, covenants, and conditions of this Lease and at the end of the term of
this Lease leave the Premises in the condition required by this Lease, then
the Security Deposit, less any sums owing to Landlord, shall be returned to
Tenant (or, at Landlord's option, to the last assignee of Tenant's interest
hereunder) within thirty (30) days after the termination of this Lease and
vacancy of the Premises by Tenant.
3. UTILITY CHARGES; MAINTENANCE.
3.1 Tenant shall pay when due all charges for electricity, natural
gas, water, garbage collection, janitorial service, sewer, and all other
utilities of any kind furnished to the Premises during the lease term. If
charges are not separately metered or stated, Landlord shall apportion the
utility charges on an equitable basis. Landlord shall have no liability
resulting from any interruption of utility services caused by fire or other
casualty, strike, riot, vandalism, the making of necessary repairs or
improvements, or any other cause beyond Landlord's reasonable control.
Tenant shall control the temperature in the Premises to prevent freezing of
any sprinkler system.
<PAGE>
3.2. Landlord shall repair and maintain the roof, gutters, downspouts,
exterior walls, building structure, foundation, exterior paved areas, and
curbs of the Premises in good condition. Except for such obligations of
Landlord and except for any repairs or maintenance necessitated by the neglect
or will misconduct of Landlord, Tenant shall keep the Premises neatly
maintained and in good order and repair. Tenant's responsibility shall
include any routine maintenance and repair of the electrical system,
plumbing, drainpipes to sewers, air-conditioning and heating systems,
overhead and personnel doors, and the replacement of all broken or cracked
glass with glass of the same quality. Tenant shall refrain from any discharge
that will damage the septic tank or sewers serving the Premises.
3.3. If the Premises have a separate entrance, Tenant shall keep the
sidewalks abutting the Premises or the separate entrance free and clear of
snow, ice, debris, and obstructions of every kind.
4. TAXES, ASSESSMENTS, AND OPERATING EXPENSES.
4.1. In conjunction with monthly rent payments, Tenant shall each month
pay a sum representing Tenant's proportionate share of real property taxes
and operating expenses for the Premises. Such amount shall annually be
estimated by Landlord in good faith to reflect actual or anticipated costs.
Upon termination of this Lease or at periodic intervals during the term
hereof, Landlord shall compute its actual costs for such expenses during such
period. Any overpayment by Tenant shall be credited to Tenant, and any
deficiency shall be paid by Tenant within fifteen (15) days after receipt of
Landlord's statement. Landlord's records of expenses for taxes and operating
expenses may be inspected by Tenant at reasonable times and intervals.
4.2. Tenant's proportionate share of real property taxes shall mean that
percentage of the total assessment affecting the Premises which is the same
as the percentage which the rentable area of the Premises bears to the total
rentable area of all buildings covered by the tax statement. Tenant's
proportionate share of operating expenses for the Building shall be computed
by dividing the rentable area of the Premises by the total rentable area of
the Building. If in Landlord's reasonable judgment either of these methods of
allocation results in an inappropriate allocation to Tenant, Landlord shall
select some other reasonable method of determining Tenant's proportionate
share.
4.3. Real property taxes charged to Tenant hereunder shall include all
general real property taxes assessed against the Premises or payable during
the lease term, installment payments on Bancrofted special assessments, and
any rent tax, tax on Landlord's interest under this Lease, or any tax in lieu
of the foregoing, whether or not any such tax is now in effect. Tenant shall
not, however, be obligated to pay any tax based upon Landlord's net income.
Operating expenses charged to Tenant hereunder shall include all usual and
necessary costs of operating and maintaining the Premises, Building, and any
surrounding common areas including, but not limited to, the cost of all
utilities or services not paid directly by Tenant, property insurance,
property management, maintenance and repair of landscaping, parking areas,
and any other common facilities. Operating expenses shall not include roof
replacement or correction of structural deficiencies of the Building.
Notwithstanding the above, the increase in Tenant's proportionate share of
operating expenses shall not exceed five percent (5%) annually, on a
cumulative basis, for the term of this Lease, exclusive of real estate taxes.
4.4.
5. PARKING AND STORAGE AREAS.
5.1. Tenant, its employees, and customers shall have the exclusive right
to use any private parking spaces immediately adjacent to the Premises.
Tenant shall control the use of such parking spaces so that there will be no
unreasonable interference with the normal traffic flow, and shall permit no
parking on any landscaped or unpaved surface. Under no circumstances shall
trucks serving the Premises be permitted to block streets.
<PAGE>
5.2. Tenant shall not store any materials, supplies, or equipment
outside in any unapproved or unscreened area. If Tenant erects any visual
barriers for storage areas, Landlord shall have the right to approve the
design and location. Trash and garbage receptacles shall be kept covered at
all times.
6. TENANT'S INDEMNIFICATION; LIABILITY INSURANCE.
6.1. Tenant shall not allow any liens to attach to the Premises as a
result of its activities. Tenant shall indemnify and defend Landlord from any
claim, liability, damage, or loss arising out of any activity on the Premises
by Tenant, its agents, or invitees or resulting from Tenant's failure to
comply with any term of this Lease.
6.2. Tenant shall carry general liability insurance on an occurrence
basis with combined single limits of not less than $1,000,000. Such insurance
shall be provided by an insurance carrier reasonably acceptable to Landlord
and shall be evidenced by a certificate delivered to Landlord stating that
the coverage will not be cancelled or materially altered without ten (10)
days' advance written notice to Landlord. Landlord shall be named as an
additional insured on such policy.
7. PROPERTY DAMAGE; SUBROGATION WAIVER.
7.1. If fire or other casualty causes damage to the Building or the
Premises in an amount exceeding thirty percent (30%) of the full
construction-replacement cost of the Building or Premises, respectively,
Landlord may elect to terminate this Lease as of the date of the damage by
notice in writing to Tenant within thirty (30) days after such date.
Otherwise, Landlord shall promptly repair the damage and restore the Premises
to their former condition as soon as practicable. Rent shall be reduced
during the period to the extent the Premises are not reasonably usable for
the use permitted by this Lease because of such damage and required repairs.
7.2. Landlord shall be responsible for insuring the Building, and Tenant
shall be responsible for insuring its personal property and trade fixtures
located on the Premises.
7.3. Landlord and Tenant each hereby releases the other, and the other's
partners, officers, directors, agents and employees, from any and all
liability and responsibility to the releasing party and to anyone claiming by
or through it or under it, by way of subrogation or otherwise, for all
claims, or demands whatsoever which arise out of damage or destruction of
property occasioned by perils which can be insured by an All Risk Property
Insurance Coverage Form. Landlord and Tenant grant this release on behalf of
themselves and their respective insurance companies and each represents and
warrants to the other that it is authorized by its respective insurance
company to grant the waiver of subrogation contained in this Paragraph 7.3.
This release and waiver shall be binding upon the parties whether or not
insurance coverage is in force at the time of the loss or destruction of
property referred to in this Paragraph 7.3.
8. CONDEMNATION.
If a condemning authority takes the entire Premises or a portion
sufficient to render the remainder unsuitable for Tenant's use, then either
party may elect to terminate this Lease effective on the date that title
passes to the condemning authority. Otherwise, Landlord shall proceed as
soon as practicable to restore the remaining Premises to a condition
comparable to that existing at the time of the taking. Rent shall be abated
during the period of restoration to the extent the Premises are not
reasonably usable by Tenant, and rent shall be reduced for the remainder of
the term in an amount equal to the reduction in rental value of the Premises
caused by the taking. All condemnation proceeds shall belong to Landlord.
9. ASSIGNMENT AND SUBLETTING.
9.1. Tenant shall not assign its interest under this Lease nor sublet
the Premises without first obtaining Landlord's consent in writing, which
consent shall not be unreasonably withheld or delayed. This provision shall
apply to all transfers by operation of law or through waivers and changes in
control of Tenant. No assignment shall relieve Tenant of its obligation to
<PAGE>
pay rent or perform other obligations required by this Lease and no one
assignment or subletting shall be a consent to any further assignment or
subletting. If Tenant assigns this Lease or sublets the Premises for an
amount in excess of the rent called for by this Lease, such excess shall be
paid to Landlord promptly as it is received by Tenant.
9.2. Subject to the above limitations on transfer of Tenant's interest,
this Lease shall bind and inure to the benefit of the parties, their
respective heirs, successors, and assigns.
10. DEFAULT.
Any of the following shall constitute a default by Tenant under this Lease:
10.1. Tenant's failure to pay rent or any other charge under this Lease
within ten (10) days after it is due, or failure to comply with any other
term or condition within twenty (20) days following written notice from
Landlord specifying the noncompliance. If such noncompliance cannot be cured
within the twenty (20) day period, this provision shall be satisfied if
Tenant commences correction within such period and thereafter proceeds in good
faith and with reasonable diligence to effect compliance as soon as possible.
10.2. Tenant's insolvency; assignment for the benefit of its creditors;
Tenant's voluntary petition in bankruptcy or adjudication as bankrupt, or the
appointment of a receiver for Tenant's properties.
11. REMEDIES FOR DEFAULT.
In case of default as described in Paragraph 10 above, Landlord shall
have the right to the following remedies which are intended to be cumulative
and in addition to any other remedies provided under applicable law:
11.1. Terminate this Lease without relieving Tenant from its obligation
to pay damages.
11.2. Retake possession of the Premises by summary proceedings or
otherwise, in which case Tenant's liability to Landlord for damages shall
survive the tenancy. Landlord may, after such retaking of possession, relet
the Premises upon any reasonable terms. No such reletting shall be construed
as an acceptance of a surrender of Tenant's leasehold interest.
11.3. Recover damages caused by Tenant's default which shall include
reasonable attorneys' fees at trial and on any appeal therefrom. Landlord may
sue periodically to recover damages as they occur throughout the lease term,
and no action for accrued damages shall bar a later action for damages
subsequently accruing. Landlord may elect in any one action to recover
accrued damages plus damages attributable to the remaining term of the Lease
equal to the difference between the rent under this Lease and the reasonable
rental value of the Premises for the remainder of the term, discounted to the
time of judgment at the rate of six (6%) percent per annum.
11.4. Make any payment or perform any obligation required of Tenant so
as to cure Tenant's default, in which case Landlord shall be entitled to
recover all amounts so expended from Tenant, plus interest at the rate of ten
percent (10%) per annum from the date of the expenditure.
12. SURRENDER ON TERMINATION.
12.1. On expiration or early termination of this Lease, Tenant shall
deliver all keys to Landlord, have final utility readings made on the date of
move out, and surrender the Premises clean and free of debris inside and out,
with all mechanical, electrical, and plumbing systems in good operating
condition, all signing removed and defacement corrected, and all repairs
called for under commencement of the term, subject only to depreciation and
wear from ordinary use. Tenant shall remove all of its furnishings and trade
fixtures that remain its property and restore all damage resulting from such
removal. Failure to remove said property shall be an abandonment of same, and
Landlord may dispose of its in any manner without liability.
<PAGE>
12.2 If Tenant fails to vacate the Premises when required, Landlord may
elect either to treat Tenant as a tenant from month to month, subject to all
provisions of this Lease except the provision for term, or to eject Tenant
from the Premises and recover damages caused by wrongful holdover.
13. LANDLORD'S LIABILITY.
13.1. Landlord warrants that so long as Tenant complies with all terms
of this Lease it shall be entitled to peaceable and undisturbed possession of
the Premises free from any eviction or disturbance by Landlord or persons
claiming through Landlord.
13.2. All persons dealing with Pacific Realty Associates, L.P.
("Partnership") must look solely to the property and assets of Partnership
for the payment of any claim against Partnership or for the performance or
any obligation of Partnership as neither the general partner, limited
partners, employees, nor agents of Partnership assume any personal liability
for obligations entered into on behalf of Partnership (or its predecessors in
interest) and their respective properties shall not be subject to the claims
of any person in respect of any such liability or obligation. As used herein,
the words "property and assets of partnership" exclude any rights of
Partnership for the payment of capital contributions or other obligations to
it by the general partner or any limited partner in such capacity.
14. MORTGAGE OR SALE BY LANDLORD; ESTOPPEL CERTIFICATES.
14.1. This Lease is and shall be prior to any mortgage or deed of trust
("Encumbrance") recorded after the date of this Lease and affecting the
Building and the land upon which the Building is located. However, if any
lender holding an Encumbrance secured by the Building and the land underlying
the Building requires that this Lease be subordinate to the Encumbrance, then
Tenant agrees that this Lease shall be subordinate to the Encumbrance if the
holder thereof agrees in writing with Tenant that so long as Tenant performs
its obligations under this Lease no foreclosure, deed given in lieu of the
foreclosure, or sale pursuant to the terms of the Encumbrance, or other steps
or procedures taken under the Encumbrance shall affect Tenant's rights under
this Lease. If the foregoing condition is met, Tenant shall execute the
written agreement and any other documents required by the holder of the
Encumbrance to accomplish the purposes of this paragraph.
14.2. If the Building is sold as a result of foreclosure of any
Encumbrance thereon or otherwise transferred by Landlord or any successor,
Tenant shall attorn to the purchaser or transferee, and the transferor shall
have no further liability hereunder.
14.3. Either party shall within twenty (20) days after notice from the
other execute and deliver to the other party a certificate stating whether or
not this Lease has been modified and is in full force and effect and
specifying any modifications or alleged breaches by the other party. The
certificate shall also state the amount of monthly base rent, the dates to
which rent has been paid in advance, and the amount of any security deposit
or prepaid rent. Failure to deliver the certificate within the specified time
shall be conclusive upon the party of whom the certificate was requested that
the Lease is in full force and effect and has not been modified except as may
be represented by the party requesting the certificate.
15. DISPUTES - ATTORNEYS' FEES.
In the event of any litigation arising out of this lease, the prevailing
party shall be entitled to recover from the other party, in addition to all
other relief provided by law or judgement, its reasonable costs and
attorneys' fees incurred both at and in preparation for trial and any appeal
or review, such amount to be as determined by the court(s) before which the
matter is hears. Disputes between the parties which are to be litigated shall
be tried before a judge without a jury.
16. SEVERABILITY.
If any provision of this Lease is held to be invalid, unenforceable or
illegal the remaining provisions shall not be affected and shall be enforced
to the fullest extent permitted by law.
<PAGE>
17. INTEREST AND LATE CHARGES.
Rent not paid within ten (10) days of when due shall bear interest from
the date due until paid at the rate of ten percent (10%) per annum. Landlord
may at its option impose a late charge of $.05 for each $1.00 of rent for
rent payments made more than ten (10) days late in addition to interest and
other remedies available for default.
18. GENERAL PROVISIONS.
18.1 Waiver by either party of strict performance of any provision of
this Lease shall not be a waiver of nor prejudice the party's right otherwise
to require performance of the same provision or any other provision.
18.2 Subject to the limitations on transfer of Tenant's interest, this
Lease shall bind and inure to the benefit of the parties, their respective
heirs, successors, and assigns.
18.3 Landlord shall have the right to enter upon the Premises at any
time to determine Tenant's compliance with this Lease, to make necessary
repairs to the Building or the Premises, or to show the Premises to any
prospective tenant or purchasers, provided that in doing so Landlord shall
exercise reasonable efforts to minimize disruptions to Tenant's business.
During the last two months of the term, Landlord may place and maintain upon
the Premises notices for leasing or sale of the Premises.
18.4 If this Lease commences or terminates at a time other than the
beginning or end of one of the specified rental periods, then the rent
(including Tenant's share of real property taxes, if any) shall be prorated as
of such date, and in the event of termination for reasons other than default
all prepaid rent shall be refunded to Tenant or paid on its account.
18.5 Tenant shall within ten (10) days following Landlord's written
request deliver to Landlord a written statement specifying the dates to which
the rent and other charges have been paid, whether the Lease is unmodified
and in full force and effect, and any other matters that may reasonably be
requested by Landlord.
18.6 Notices between the parties relating to this Lease shall be in
writing, effective when delivered, or if mailed, effective on the second day
following mailing, postage prepaid, to the address for the party stated in
this Lease or to such other address as either party may specify by notice to
the other. Rent shall be payable to Landlord at the same address and in the
same manner.
19. ENVIRONMENTAL.
19.1 DEFINITIONS. The term "Environmental Law" shall mean any federal,
state or local statute, regulation or ordinance or any judicial or other
governmental order pertaining to the protection of health, safety or the
environment. The term "Hazardous Substance" shall mean any hazardous, toxic,
infectious or radioactive substance, waste and material as defined or listed
by any Environmental Law and shall include, without limitation, petroleum oil
and its fractions.
19.2 USE OF HAZARDOUS SUBSTANCES. Tenant shall not cause or permit any
Hazardous Substance to be spilled, leaked, disposed of or otherwise released
on or under the Premises. Tenant may use and sell on the Premises only those
Hazardous Substances typically used and sold in the prudent and safe
operation of the business permitted by Paragraph 1 of this Lease. Tenant may
store such Hazardous Substances on the Premises, but only in quantities
necessary to satisfy Tenant's reasonably anticipated needs. Tenant shall
comply with all Environmental Laws and exercise the highest degree of care in
the use, handling and storage of Hazardous Substances and shall take all
practicable measures to minimize the quantity and toxicity of Hazardous
Substances used, handled or stored on the Premises.
19.3 NOTICES. Tenant shall immediately notify Landlord upon becoming
aware of the following: (a) any spill, leak, disposal or other release of a
Hazardous Substance on, under or adjacent to the Premises; (b) any notice or
communication from a governmental agency or any other
<PAGE>
person relating to any Hazardous Substance on, under or adjacent to the
Premises; or (c) any violation of any Environmental Law with respect to the
Premises or Tenant's activities on or in connection with the Premises.
19.4 SPILLS AND RELEASES. In the event of a spill, leak, disposal or
other release of a Hazardous Substance on or under the Premises caused by
Tenant or any of its contractors, agents or employees or invitees, or the
suspicion or threat of the same, Tenant shall (i) immediately undertake all
emergency response necessary to contain, cleanup and remove the released
Hazardous Substance, (ii) promptly undertake all investigatory, remedial,
removal and other response action necessary or appropriate to ensure that any
Hazardous Substances contamination is eliminated to Landlord's reasonable
satisfaction, and (iii) provide Landlord copies of all correspondence with
any governmental agency regarding the release (or threatened or suspected
release) or the response action, a detailed report documenting all such
response action, and a certification that any contamination has been
eliminated. All such response action shall be performed, all such reports
shall be prepared and all such certifications shall be made by an
environmental consultant reasonably acceptable to Landlord.
19.5 CONDITION UPON TERMINATION. Upon expiration of this Lease or sooner
termination of this Lease for any reason, Tenant shall remove all Hazardous
Substances and facilities used for the storage or handling of Hazardous
Substances from the Premises and restore the affected areas by repairing any
damage caused by the installation or removal of the facilities. Following
such removal, Tenant shall certify in writing to Landlord that all such
removal is complete.
19.6 ASSIGNMENT AND SUBLETTING. Notwithstanding the provisions of
Paragraph 9 of this Lease, it shall not be unreasonable for Landlord to
withhold its consent to any assignment, sublease or other transfer of the
Tenant's interest in this Lease if a proposed transferee's anticipated use of
the Premises involves the generation, storage, use, sale, treatment, release
or disposal of any Hazardous Substance.
19.7 Indemnity.
19.7.1 BY TENANT. Tenant shall indemnify, defend and hold harmless
Landlord, its employees and agents, any persons holding a security interest
in the Premises, and the respective successors and assigns of each of them
from and against any and all claims, demands, liabilities, damages, fines,
losses, costs (including without limitation the cost of any investigation,
remedial, removal or other response action required by Environmental Law) and
expenses (including without limitation attorneys' fees and expert fees in
connection with any trial, appeal, petition for review or administrative
proceeding) arising out of or in any way relating to the use, treatment,
storage, generation, transport, release, leak, spill, disposal or other
handling of Hazardous Substances on the Premises by Tenant or any of its
contractors, agents or employees or invitees. Tenant's obligations under this
paragraph shall survive the expiration or termination of this Lease for any
reason. Landlord's rights under this paragraph are in addition to and not in
lieu of any other rights or remedies to which Landlord may be entitled under
this agreement or otherwise.
19.7.2. BY LANDLORD. Landlord shall indemnify, defend and hold
harmless Tenant and its employees and agents and the respective
successors and assigns of each of them from and against any and all
claims, demands, liabilities, damages, fines, losses, costs (including
without limitation the cost of any investigation, remedial, removal or
other response action required by Environmental Law) and expenses
(including without limitation) attorneys' fees and expert fees in
connection with any trial, appeal, petition for review or administrative
proceeding) arising out of or in any way relating to the actual or
alleged use, treatment, storage, generation, transport, release, leak,
spill, disposal or other handling of Hazardous Substances on the
Premises by Landlord, or any of its contractors, agents or employees or
by Landlord's previous tenants of the Premises. Landlord's obligations
under this paragraph shall survive the expiration or termination of this
Lease for any reason. Tenant's rights under this paragraph are in
addition to and not in lieu of any other rights or remedies to which
Tenant may be entitled under this Agreement or otherwise.
<PAGE>
20. OPTION TO REVIEW.
If not then in default, Tenant shall have the option to renew this
Lease for two additional 1-year terms by giving Landlord written notice of
intent to extend at least 120 days prior to expiration of the proceeding
term. All provisions of this Lease shall apply during the extended term,
except that rent for the renewal periods shall be as follows:
BASE RENT
PERIOD PER MONTH
---------------------------------------------------------
August 1, 1998 through July 31, 1999 $1,200.00
---------------------------------------------------------
August 1, 1999 through July 31, 2000 $1,250.00
---------------------------------------------------------
If Tenant elects not to exercise the first 1-year renewal period, then
the second 1-year renewal period shall be null and void.
21. TENANT IMPROVEMENTS.
The Premises shall be taken by Tenant in "as-is" condition with
existing improvements configured generally as shown on the attached Exhibit B.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the respective dates set opposite their signatures below, but this Agreement
on behalf of such party shall be deemed to have been dated as of the date
first above written.
LANDLORD:
PACIFIC REALTY ASSOCIATES, L.P.,
a Delaware limited partnership
By: PacTrust Realty, Inc.,
a Delaware corporation,
its General Partner
Date: Aug 2 , 1997 By: /s/ David G. Hicks
----------------- ----------------------------
David G. Hicks
Vice President
Address for Notices/Rent Payments to Landlord:
15350 S.W. Sequoia Parkway, #300-WMPC
Portland, OR 97224
TENANT:
INTELLIPHONE, INC.,
A MINNESOTA CORPORATION
dba TELCO NORTHWEST, INC.
Date: 7/25 , 1997 By: /s/ Melvin Graf
----------------- --------------------------
Name: Melvin Graf
------------------------
Title: Exec V.P.
-----------------------
Date: , 1997 By: /s/ Jack Kohler
----------------- --------------------------
Name: Jack Kohler
------------------------
Title: CFO
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Address for Legal Notices to Tenant:
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Address for Invoices to Tenant:
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Tenant Employer Identification Number:
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<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Amendment No. 1 to Registration Statement
on Form SB-2, Reg. No. 333-29969, of (i) our report dated March 20, 1997 except
for Note 7 for which the date is July 31, 1997 relating to the combined
financial statements of Intelliphone, Inc. and Choicetel, Inc., (ii) our report
dated April 30, 1997 relating to the statements of revenue and direct expenses
for the Telco West, Inc. pay telephone division and the statement of assets
acquired by Intelliphone, Inc. on January 2, 1997, (iii) our report dated May
16, 1997 relating to the statements of operations for Computer Assisted
Technologies, Inc. and the statement of assets to be acquired and liabilities to
be assumed by ChoiceTel Communications, Inc., (iv) the reference to our Firm
under the caption "Selected Combined Financial Data" in the Prospectus included
therein and (v) the reference to our Firm under the caption "Experts" in such
Prospectus.
/s/ Schechter Dokken Kanter Andrews &
Selcer, Ltd.
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SCHECHTER DOKKEN KANTER
ANDREWS & SELCER, LTD.
Minneapolis, Minnesota
August 22, 1997
