<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
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 ERIC O. MADSON
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/
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share...... 920,000(2) $7.49 $ 6,890,800 $ 2,088
Redeemable Common Stock Purchase Warrants... 920,000(2) $0.01 $ 9,200 $ 3
Common Stock, par value $.01 per share,
underlying Redeemable Common Stock
Purchase Warrants......................... 920,000 $9.50 $ 8,740,000 $ 2,649
Total..................................... $ 15,640,000 $ 4,740
</TABLE>
(1) Estimated for purposes of computing the registration fee in accordance with
Rule 457. Of the total Unit price of $7.50, $7.49 has been assigned to the
share of Common Stock and $0.01 to the Redeemable Warrant included therein
solely for purposes of calculating the registration fee.
(2) Includes 120,000 shares of Common Stock and 120,000 Redeemable Warrants,
respectively, subject to the Underwriter's over-allotment option.
--------------------------
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 JUNE 25, 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 30 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 13.
---------------------
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
$400,000, 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,
subject to prior sale, when, as and if delivered to and accepted by it, subject
to the Underwriter's right to reject orders in whole or in part and to certain
other conditions. 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......................................... 10
CAT.......................................... 10
ChoiceTel.................................... 14
CI........................................... 14
Common Stock................................. 1
Company...................................... 1, 3
Dial-Around.................................. 23
Effective Date............................... 1
FCC.......................................... 6
independent pay telephones................... 21
interLATA.................................... 21
intraLATA.................................... 7, 21
LATA......................................... 21
LEC.......................................... 6, 21
MBCA......................................... 30
MN Act....................................... 16, 26
MNPUC........................................ 10
OSP.......................................... 17
<CAPTION>
DEFINED TERM PAGE
- --------------------------------------------- ---------
<S> <C>
PAL.......................................... 25
PSP.......................................... 6, 21
public pay telephones........................ 21
PUC.......................................... 6
RBOC......................................... 6, 21
Redeemable Warrant........................... 1
Registration Statement....................... 1
ROI.......................................... 18
SEC.......................................... 31
Securities Act............................... 1
Site Agreements.............................. 25
Site Providers............................... 6
smart phones................................. 22
Telco West................................... 10
Telecom Act.................................. 26
Underwriter.................................. 39
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 "RECENT ACQUISITIONS" TO BE EFFECTIVE PRIOR TO THE SALE OF THE UNITS
PURSUANT TO THE REGISTRATION STATEMENT. 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 a significant 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
and six new states for the Company. 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 growth in the pay telephone
industry will continue 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 30 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)(2)
Before the Offering.................... 1,928,766 shares of Common Stock
After the Offering..................... 2,728,766 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 172,500 shares of Common Stock reserved for issuance
pursuant to options, consisting of outstanding options covering 72,500
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. See "Management," "Certain Transactions,"
"Description of Securities" and "Underwriting."
(2) Does not include 186,240 shares of Common Stock to be issued in connection
with a pending acquisition and up to 57,521 shares issuable upon conversion
of a note to be issued in connection therewith. See "Recent Acquisitions."
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 13.
4
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
(UNAUDITED)
FISCAL YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
----------------------------------------- --------------------------
1996 1997
----------------------------- -------------
1995 ACTUAL PRO FORMA(1) 1996 ACTUAL
---------- ------------- ------------- ---------- -------------
(DOLLARS IN 000S, EXCEPT PER SHARE FIGURES)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue................................... $2,817 $3,562 $7,705 $ 779 $1,728
Cost of service................................... 1,785 1,987 4,181 494 802
Net income (loss) before pro forma income tax
provision....................................... 122 (605)(2) (375)(2) (14 ) 172(2)
Pro forma provision for income taxes (credit)
(unaudited)..................................... 43 (212) (131) (5 ) 60
Pro forma net income (loss) (unaudited)........... 79 (393) (244) (9 ) 112(2)
Pro forma net income (loss) per share
(unaudited)..................................... $ 0.04 $(0.20)(2) $(0.11)(2) $(0.01 ) $0.06(2)
Pro forma weighted shares outstanding
(unaudited)..................................... 1,935,189 1,948,489 2,134,729 1,930,489 1,948,489
<CAPTION>
PRO FORMA(1)
-------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue................................... $1,841
Cost of service................................... 876
Net income (loss) before pro forma income tax
provision....................................... 169(2)
Pro forma provision for income taxes (credit)
(unaudited)..................................... 59
Pro forma net income (loss) (unaudited)........... 110(2)
Pro forma net income (loss) per share
(unaudited)..................................... $0.05(2)
Pro forma weighted shares outstanding
(unaudited)..................................... 2,134,729
</TABLE>
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, 1996 MARCH 31, 1997
---------------------- -------------------------------------
PRO PRO PRO FORMA AS
ACTUAL FORMA(1) ACTUAL FORMA(1) ADJUSTED(1)(3)
--------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.......................................... $ 1,210 $ 1,371 $ 1,313 $ 1,471 $ 3,616
Total assets............................................ 2,969 8,440 6,679 8,846 10,991
Current liabilities..................................... 1,736 4,404 4,710 5,284 2,734
Long-term debt.......................................... 570 2,673 1,117 2,014 1,649
Shareholders' equity.................................... 664 1,362 852 1,547 6,607
Working capital (deficit)............................... (526) (3,033) (3,397) (3,813) 882
</TABLE>
- --------------------------
(1) Gives effect to the acquisitions described under "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 $51,075
for the quarter ended March 31, 1997. See "Business - Legal Proceedings -
Minnesota Sales Tax" and the Combined Financial Statements of the Company
and notes thereto.
(3) 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 customers 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 "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 location
owners ("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."
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 Federal Communications Commission, which
administers the interstate common carriage of telecommunications (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."
6
<PAGE>
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.
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 payphone order of November 6, 1996 had the effect of significantly
increasing the amount of Dial-Around compensation to be paid to the Company and
other payphone service providers. See "Business - Government Regulation -
Dial-Around Compensation." An appeal of this order is pending before the U.S.
Court of Appeals for the D.C. Circuit and a decision is expected before the
August 1997 recess. While the Company believes that the Court will not rescind
the order, a rescission of the order would have a material adverse impact on the
Company's business and financial prospects.
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." This deregulation
provision of the FCC order is also under appeal. The Company believes that
deregulation of rates for local pay telephone calls would result in increased
rates. If the appeal of the deregulation order is successful, the rates will
likely remain at their current levels.
State regulatory commissions are primarily responsible for regulating the
rates, terms and conditions for intrastate telephone services available from
public 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 federal Telecommunications Act of 1996. 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.
7
<PAGE>
SERVICE INTERRUPTIONS; EQUIPMENT FAILURES. The Company's long-distance
operations require that its switching equipment and 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 became 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.
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 and Jack S. Kohler and certain other
management personnel. Each of the officers has entered into an employment
agreement with the Company having a term that expires in March 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 covering its three officers in the aggregate amount of $1,850,000. 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 $5.48 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
8
<PAGE>
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 30 or more days after the Effective Date, on 30 days' written notice, if
the closing bid price of the 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 61.9% 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 $2,145,000, or 42.4%, 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
9
<PAGE>
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."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units are estimated to
be approximately $5,060,000 (or approximately $5,861,000 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......................................................... $ 2,550,000
Retirement of acquisition debt.................................................. 365,000
Acquisitions and expansion...................................................... 2,000,000
Working capital and general corporate purposes.................................. 145,000
------------
Total....................................................................... $ 5,060,000
------------
------------
</TABLE>
RETIREMENT OF BANK DEBT. Approximately $2,550,000 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 "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 "Recent Acquisitions."
ACQUISITIONS AND EXPANSION. The Company will reserve $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 consummated the Telco West acquisition in
January 1997 and has agreed to acquire substantially all of the assets of
Computer Assisted Technologies, Inc. ("CAT"), subject to prior approval of the
Minnesota Public Utilities Commission ("MNPUC"). Although the Company routinely
explores acquisition opportunities, no other 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 $145,000, 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."
10
<PAGE>
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 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. 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.
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. The principal purpose of paying dividends has been to provide funds to
shareholders of the Company to pay the income taxes incurred by them with
respect to the net income of the Company due to the status of the Company as an
"S corporation" under the Internal Revenue Code of 1986, as amended. The
Company's status as an S corporation will be terminated in connection with this
offering. It is the Company's intention to declare and pay a dividend to the
existing shareholders immediately prior to the Effective Date in an aggregate
amount equal to approximately 35% of the estimated taxable net income of the
Company for the current fiscal year through such date.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 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>
MARCH 31, 1997 (UNAUDITED)
-----------------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA(1) ADJUSTED(2)
------------ ------------ -------------
<S> <C> <C> <C>
Short-term debt....................................................... $ 3,352,980 $ 3,927,360 $ 1,377,360
Long-term debt, net of current maturities............................. 1,116,657 2,014,177 1,649,177
Shareholders' equity:(3)(4)
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.................... 1,431,892 2,130,292 7,190,292
Accumulated deficit................................................. (579,591) (583,253) (583,253)
------------ ------------ -------------
Total shareholders' equity........................................ 852,301 1,547,039 6,607,039
------------ ------------ -------------
Total capitalization............................................ $ 5,321,938 $ 7,488,576 $ 9,633,576
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
- --------------------------
(1) Gives effect to the acquisitions described under "Recent Acquisitions" as
if they were completed acquisitions as of March 31, 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 172,500 shares of Common Stock reserved for issuance
pursuant to options, consisting of outstanding options covering 72,500
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," "Certain Transactions,"
"Description of Securities" and "Underwriting."
(4) Does not include 186,240 shares of Common Stock to be issued in connection
with a pending acquisition and up to 57,521 shares of Common Stock issuable
upon conversion of a note to be issued in connection therewith. See "Recent
Acquisitions."
12
<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 March 31, 1997 was
$456,414, or $0.24 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 March
31, 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 March 31, 1997 would have been $5,516,414,
or $2.02 per share. This represents an immediate increase in the net tangible
book value per share of Common Stock to the present shareholders of $1.78 and an
immediate dilution of $5.48 per share to investors purchasing Units in this
offering. The following table illustrates this dilution per share:
<TABLE>
<CAPTION>
Initial public offering price................................. $ 7.50
<S> <C> <C>
Net tangible book value at March 31, 1997................... $ 0.24
Increase in net tangible book value attributable to new
investors................................................. 1.78
---------
Pro forma net tangible book value after the offering.......... 2.02
---------
Dilution to new investors..................................... $ 5.48
---------
---------
</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 172,500 shares of Common Stock
reserved for issuance pursuant to options, consisting of outstanding options
covering 72,500 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,
800,000 shares of Common Stock issuable upon exercise of the Redeemable
Warrants, nor 186,240 shares to be issued in connection with a pending
acquisition or up to 57,521 shares issuable upon conversion of a note to be
issued in connection therewith. 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 "Recent Acquisitions," "Management," "Certain
Transactions," "Description of Securities" and "Underwriting."
13
<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 quarters ended March 31, 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 quarter ended March 31, 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>
(UNAUDITED)
FISCAL YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
------------------------------------- -------------------------------------
1996 1997
------------------------ ------------------------
PRO PRO
1995 ACTUAL FORMA(1) 1996 ACTUAL 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 $ 779 $ 1,728 $ 1,841
Cost of service..................... 1,785 1,987 4,181 494 802 876
----------- ----------- ----------- ----------- ----------- -----------
Gross margin........................ 1,032 1,575 3,524 285 926 966
----------- ----------- ----------- ----------- ----------- -----------
Selling, general and administrative
expenses........................... 573 830 1,911 194 351 360
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) before pro
forma income tax provision......... 122 (605)(2) (375)(2) (14) 172(2) 169(2)
----------- ----------- ----------- ----------- ----------- -----------
Pro forma provision for income taxes
(credit) (unaudited)............... 43 (212) (131) (5) 60 59
----------- ----------- ----------- ----------- ----------- -----------
Pro forma net income (loss)
(unaudited)........................ 79 (393) (244) $ (9) $ 112(2) $ 110(2)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Pro forma net income (loss) per
share (unaudited).................. $ 0.04 $ (0.20)(2) $ (0.11 (2) $ (0.01 ) $ 0.06 (2) $ 0.05 (2)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Pro forma weighted shares
outstanding (unaudited)..... 1,935,189 1,948,489 2,134,729 1,930,489 1,948,489 2,134,729
OPERATING DATA (AT END OF
PERIOD):
Number of phones in
service..................... 1,013 1,219 2,824 1,054 2,880 2,880
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, 1996 MARCH 31, 1997
---------------------- -------------------------------------
PRO PRO PRO FORMA AS
ACTUAL FORMA(1) ACTUAL FORMA(1) ADJUSTED(1)(3)
--------- ----------- --------- ----------- -------------
(DOLLARS IN 000S, EXCEPT PER SHARE FIGURES)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets........................................... $ 1,210 $ 1,371 $ 1,313 $ 1,471 $ 3,616
Total assets............................................. 2,969 8,440 6,679 8,846 10,991
Current liabilities...................................... 1,736 4,404 4,710 5,284 2,734
Long-term debt........................................... 570 2,673 1,117 2,014 1,649
Total liabilities........................................ 2,305 7,077 5,827 7,298 4,383
Shareholders' equity..................................... 664 1,362 852 1,547 6,607
Working capital (deficit)................................ (526) (3,033) (3,397) (3,813) 882
</TABLE>
- --------------------------
(1) Gives effect to the acquisitions described under "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 $51,075 for
the quarter ended March 31, 1997. See "Business - Legal Proceedings -
Minnesota Sales Tax" and the Combined Financial Statements of the Company
and notes thereto.
(3) 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."
15
<PAGE>
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 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, has been approved to compete with Nevada Bell and sell
pay telephone lines in Nevada, and has filed to compete with U.S. West in
Oregon. 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.
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 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 February 1997, the Company entered into an agreement to acquire from CAT
585 pay telephone site contracts and related assets, as well as site contracts
only for the installation of an additional 100 pay telephones, all located in
Minnesota and Wisconsin, subject to approval of the MNPUC. The purchase price
for the assets is $2,270,300, consisting of $100,000 payable in cash, the
Company's assumption of $1,121,900 of debt to two equipment leasing companies,
the assumption of $350,000 of debt to CAT's principal shareholder, and the
balance of $698,400 by delivery to CAT of 186,240 shares of unregistered Common
Stock. In connection with the Company's assumption of CAT's debt to its
principal shareholder, the Company will issue a convertible note bearing
interest at the rate of 8% per annum with interest only payable for the first
six months thereunder and the entire principal balance due at the end of such
period. The note will be convertible into Common Stock on the basis of one share
of stock for each $6.33 of principal and accrued interest due. However, if at
August 1, 1997, any of the 685 acquired site contracts are not in service, or
the average cash flow therefrom is less than the average of all of the Company's
payphones in Minnesota and Wisconsin, then the purchase price for CAT's site
contracts and related assets is subject to adjustment based on the performance
of the payphones during July 1997. In connection with the transaction, CAT and
its principal shareholder will enter into a two-year non-compete agreement with
the Company covering the states of Minnesota and Wisconsin. The president of CAT
will enter into employment, non-compete and incentive stock option agreements
with the Company. Pending approval of the acquisition of the CAT assets by the
MNPUC and 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 is managing and servicing 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.
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 customers access a long-distance carrier directly
by dialing an access number or an 800 number or 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 quarters ended March 31, 1996 and 1997:
<TABLE>
<CAPTION>
QUARTER
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
REVENUE
Coin revenue................................................. 81.4% 83.3% 78.9% 84.0% 65.9%
Non-coin revenue............................................. 17.2 14.9 14.1 13.8 12.5
Dial-Around compensation..................................... 1.4 1.8 7.0 2.2 21.3
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% 41.8% 25.8%
Commissions.................................................. 18.3 18.0 16.3 18.0 16.1
Collection, repair and maintenance(1)........................ 7.1 7.5 8.5 12.0 10.1
--------- --------- --------- --------- ---------
Total cost of service.................................... 68.4% 68.0% 61.0% 71.8% 52.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Gross margin................................................. 31.6% 32.0% 39.0% 28.2% 48.0%
Selling, general and administrative expenses(1).............. 15.9 15.7 18.1 16.3 14.3
Interest..................................................... 3.7 3.2 3.4 4.8 8.4
Depreciation and amortization................................ 8.2 8.8 10.2 8.7 12.2
--------- --------- --------- --------- ---------
Net income (loss) before pro forma
income tax provision(2)..................................... 3.8% 4.3% 7.3% (1.6)% 13.1%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- --------------------------
(1) A portion of the expenses classified as "Collection, repair and
maintenance," above, are classified as "Selling, general and administrative
expenses" in the Combined Financial Statements of the Company and notes
thereto.
(2) Before reserve for Minnesota sales tax contingency of $865,000 established
December 31, 1996 for the years prior thereto and $51,075 for the quarter
ended March 31, 1997. See "Business - Legal Proceedings - Minnesota Sales
Tax" and the Combined Financial Statements and notes thereto.
17
<PAGE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996. Total revenue for the three months ended March 31, 1997, increased
approximately $949,000, or 121.8%, compared to the three months ended March 31,
1996. This growth was primarily attributable to the increase in the average
number of pay telephones in service from 1,046 during the 1996 quarter to 2,643
(including 602 phones in service pursuant to the Route Service Agreement with
CAT) during the 1997 quarter and the increased Dial-Around compensation. Of the
increase in revenue, $350,000, or 36.8%, 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 $6.00 per phone per
month to approximately $45.00 per phone per month. See "Business - Government
Regulation - Dial-Around Compensation." Coin revenue increased $468,000, but
declined to 64.9% of total revenue for the period compared to 84.0% in the
previous year, as a result of the increase in the Dial-Around compensation, as
well as 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 26.8% of total revenue for
the 1997 period, as compared to 41.8% the previous year, due to the growth in
Dial-Around compensation and a reduction in line charges in Minnesota in June
1996 from approximately $90.00 per line to $52.00 per line. Site Provider rent
and collection, service and repair costs decreased from 18.0% and 12.0% of
revenue, respectively, in 1996, to 15.8% and 10.0% of revenue, respectively, in
1997. Selling, general and administrative ("SG&A") expenses increased by
$116,000 but, when expressed as a percentage of revenue, declined from 16.3% in
the first three months of 1996 to 14.1% for the same period in 1997.
Interest expense for the first three months in 1997 increased to 8.3% of
revenue as compared to 4.8% of revenue in the prior year due to increased
borrowing to finance the acquisition of a route in Oregon and new installations.
Depreciation and amortization for the 1997 quarter increased to 12.1% of revenue
from 8.7% of revenue as a result of the amortization associated with the
acquired contracts.
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 is 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 June 1996, which had the effect of reducing the Company's
line charges in Minnesota to $52.00 per line.
Rents 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 rent calculations for
Site Providers) and to the phones added in 1996 which generated less revenue
and, therefore, lower Site Provider rents than the phones put into service in
prior years. As part of its growth strategy and in order to take advantage of
lower line rates, the Company knowingly installed pay telephones that, while
meeting the Company's return on investment ("ROI") objective, would under
perform its existing phones.
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.
18
<PAGE>
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 the Nevada acquisition and new installations. 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. Rents paid to Site Providers and
collection, repair and maintenance costs remained relatively constant.
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 $51,075 for
the quarter ended March 31, 1997. The effect of these reserves is considered
extraordinary and is not included in this "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1997, the Company's operating
activities provided $13,000, net long- and short-term financing provided
$3,275,000, and the sale of shares of Common Stock provided $16,000. The Company
invested $3,831,000 in acquisitions and new installations, resulting in a
$594,300 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
19
<PAGE>
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.
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.
20
<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 602 payphones located in Minnesota
and Wisconsin presently under a Route Service Agreement with CAT and to be
acquired, together with site contracts only for the installation of an
additional 83 payphones, following MNPUC approval and the satisfaction of
customary closing conditions.
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 1995, 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
21
<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.
22
<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 its price sensitive customers 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 will 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-distance carrier in order to
reach another long-distance carrier. The user deposits no money for the call
23
<PAGE>
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. While the Company could route all of these calls to a single OSP,
and perhaps maximize the commission
24
<PAGE>
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 602 phones owned by CAT, from which the Company derives revenue
pursuant to a Route Service Agreement. See "Recent Acquisitions."
(2) Does not include 12 phones 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 pay
telephones. No single Site Provider accounted for more than 5% of the Company's
pay telephones or revenue in the years ended December 31, 1995 and 1996, or the
three months ended March 31, 1997.
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 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
25
<PAGE>
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 at
a fixed monthly rate of $52 per phone. 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 cost of
telephone lines in Minnesota, which results in a fixed 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 is sometimes 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 25 field service
technicians, each of whom collects money, cleans phones and responds to trouble
calls made by either a customer 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 Telecommunications Act of 1996 (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 its
pay telephone services and to treat its 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
companies have in competing with regulated monopolies, the compensation of
independent pay telephone companies for calls made from their
26
<PAGE>
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 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. The Telecom Act recognized that
it is a burden to pay telephone companies to provide such access and that the
compensation for pay telephone companies for this access should be greater.
Since the infrastructure to track and compensate for these calls does not
currently exist, the FCC raised the flat rate of compensation for the
Dial-Around service to approximately $45 per payphone per month, based on $0.35
per call times the national average of 131 monthly Dial-Around calls placed per
payphone. In October 1997, the method of compensating payphone companies will
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 will 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. An
appeal of the 1996 FCC order implementing the increased Dial-Around compensation
is presently pending in the U.S. Court of Appeals for the D.C. Circuit. See
"Risk Factors - Regulatory Factors."
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 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
27
<PAGE>
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 30 employees, 22 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 believes that its current facilities
will be 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 defend its position that coin-operated payphone receipts are not subject to
sales tax. Nonetheless, in order to take the most conservative financial
position possible, the Company has established a reserve of $916,075 as of March
31, 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
28
<PAGE>
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.
29
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the Company's
executive officers and directors as of March 31, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- -----------------------------------------------------
<S> <C> <C>
Gary S. Kohler 40 Chairman of the Board of Directors
Jeffrey R. Paletz 40 President and Director
Melvin Graf 41 Executive Vice President and Director
Jack S. Kohler 41 Vice President and Chief Financial Officer
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 has been
employed full-time since 1981 as Vice President of Okabena Company, a private
holding company. Mr. Kohler serves on the board of Audio King Corporation, an
electronics retailer; NeoVision Corporation, a medical device manufacturer; and
Payless Cashways, Inc., a building materials specialty retailer. 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 and has been President and a director of the
Company since its inception, 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 and has been Executive Vice President and a
director of the Company since its inception, overseeing all marketing and
leasing activities. 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.
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, independent, non-employee
directors 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 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.
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
30
<PAGE>
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 May 31, 1997.
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.
31
<PAGE>
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
which provide for an initial two-year term, with successive 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 borrowed money from members of the Topp family (or a trust
for the benefit thereof), who are in-laws of Gary S. Kohler, the Chairman of the
Company's Board of Directors. 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.
32
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of May 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>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
NUMBER OF SHARES ------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(2) OWNED OFFERING OFFERING
- ----------------------------------------------------------------- ----------------- ----------- -----------
<S> <C> <C> <C>
Gary S. Kohler(3)(4)............................................. 1,032,784 53.5% 37.8%
Jeffrey R. Paletz................................................ 347,398 18.0% 12.7%
Melvin Graf(5)................................................... 213,334 11.1% 7.8%
Jack S. Kohler(4)(6)............................................. 321,500 16.2% 11.6%
Robert A. Hegstrom............................................... 0 -- --
All directors and executive officers
as a group (5 persons)(3)(4)(5)(6).............................. 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 which does not include
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) The figure includes 40,000 shares held by Gary S. Kohler as custodian for
the benefit of his children.
(4) 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.
(5) The figure includes 13,334 shares of Common Stock held in the name of the
wife of Melvin Graf, the Company's Executive Vice President and a director.
(6) The figure includes options granted to Jack S. Kohler by the Company,
available for exercise within 60 days, to purchase 50,000 shares.
33
<PAGE>
SECURITIES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 2,728,766 shares of
Common Stock outstanding not including the additional 800,000 shares of Common
Stock issuable upon exercise of the Redeemable Warrants. In addition, the
Company has reserved 172,500 shares of Common Stock for issuance pursuant to
options, consisting of outstanding options covering 72,500 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 "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 1,928,766 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 27,287
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, 1,804,891 shares of
Common Stock will be eligible for sale in the public market under Rule 144,
subject to the volume limitations and other requirements described above.
Notwithstanding the above, Gary S. Kohler, Jeffrey R. Paletz, Melvin Graf and
Jack S. Kohler, who in the aggregate beneficially own 1,671,016 outstanding
shares of Common Stock and options to acquire an additional 250,000 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 the remaining 257,750 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.
34
<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 May
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. In addition, 100,000
shares were reserved for issuance under the Stock Option Plan, 186,240 shares
were reserved for issuance in connection with a pending acquisition and up to
57,521 shares were reserved for issuance upon conversion of a note to be 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 "Recent Acquisitions," "Management - Stock Option
Plan" and "Underwriting." No shares of Preferred Stock were outstanding as of
May 31, 1997. There will be 2,728,766 shares of Common Stock issued and
outstanding upon completion of this offering 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 to purchase a total of 72,500 shares of Common Stock range
from $1.50 to $4.00 per share.
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 61.9% 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 offered hereby will be, fully paid and non-assessable.
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
35
<PAGE>
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 30 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 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
36
<PAGE>
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 whether the shares of Common Stock or the Redeemable
Warrants are held for more than one year. 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.
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
12,096,634 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 186,240 shares
of Common Stock to be issued in connection with a pending acquisition and up to
57,521 shares issuable upon conversion of a note to be issued in connection
therewith, the Company does not currently have any plans to issue additional
shares of Common Stock
37
<PAGE>
(other than shares of Common Stock 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 "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 ceratin 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.
38
<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, 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 (except to
officers or partners of the Underwriter, members of the selling group, and
officers or partners of members of the selling group). 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.
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
39
<PAGE>
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 and Jack S. Kohler, who in
the aggregate beneficially own 1,671,016 outstanding shares of Common Stock and
options to acquire an additional 250,000 shares (which includes 200,000 shares
that are currently outstanding), 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 257,750 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, 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 three months after the date of
this Prospectus.
The Company granted demand registration rights, exercisable beginning 90
days after the date of this Prospectus, to five shareholders who own 111,875
shares of Common Stock in the aggregate. The holders of a majority of such
shares may require the Company to file a registration statement under the
Securities Act covering all or part of such securities, the expenses of which
(other than underwriting discounts and commissions) will be paid by the Company.
Notwithstanding their registration rights, as a condition of the underwriting,
these shareholders 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.
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.
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.
40
<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, the Financial Statements
for the pay telephone division of TelcoWest and the Financial Statements for
CAT, all as of December 31, 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.
41
<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 March 31, 1997 (unaudited).................. F-3
Combined Statements of Operations for the Years Ended December 31, 1995 and 1996 and for the Quarters
Ended March 31, 1996 and 1997 (unaudited).............................................................. F-4
Combined Statements of Shareholders' Equity for the Years Ended December 31, 1995 and 1996 and the
Quarter Ended March 31, 1997 (unaudited)............................................................... F-5
Combined Statements of Cash Flows for the Years Ended December 31, 1995 and 1996 and the Quarters Ended
March 31, 1996 and 1997 (unaudited).................................................................... F-6
Notes to Combined Financial Statements for the Years Ended December 31, 1995 and 1996 and the Quarter
Ended March 31, 1997 (unaudited)....................................................................... F-7
FINANCIAL STATEMENTS FOR TELCO WEST, INC. - PAY TELEPHONE DIVISION
Independent Auditors' Report............................................................................. F-12
Statements of Revenues and Direct Expenses for the Years Ended December 31, 1995 and 1996................ F-13
Notes to Financial Statements for the Years Ended December 31, 1995 and 1996............................. F-14
FINANCIAL STATEMENTS FOR COMPUTER ASSISTED TECHNOLOGIES, INC.
Independent Auditors' Report............................................................................. F-15
Statements of Operations for the Years Ended December 31, 1995 and 1996.................................. F-16
Notes to Financial Statements for the Years Ended December 31, 1995 and 1996............................. F-17
</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 May 31, 1997
F-2
<PAGE>
INTELLIPHONE, INC. AND CHOICETEL, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................................................. $ 29,146 $ 875,150 $ 348,465
Accounts receivable, considered fully collectible.................... 35,289 172,934 604,371
Prepaid:
Rent............................................................... 90,285 78,732 72,281
Other.............................................................. 62,851 82,874 288,257
------------ ------------ -------------
Total current assets............................................. 217,571 1,209,690 1,313,374
------------ ------------ -------------
Property and equipment:
Phones and related equipment......................................... 1,964,289 2,373,199 5,859,640
Accumulated depreciation............................................. (594,959) (845,176) (1,034,676)
------------ ------------ -------------
1,369,330 1,528,023 4,824,964
------------ ------------ -------------
Office equipment and improvements.................................... 60,174 66,548 66,548
Accumulated depreciation............................................. (23,739) (36,239) (40,739)
------------ ------------ -------------
36,435 30,309 25,809
------------ ------------ -------------
1,405,765 1,558,332 4,850,773
------------ ------------ -------------
Other assets:
Prepaid rents........................................................ 197,232 134,443 118,843
Rental agreements, net of accumulated amortization of $75,719 in
1995, $111,073 in 1996 and $126,673 at March 1997.................. 91,914 65,632 395,887
Deferred financing, net of accumulated amortization of $4,975 in
1995, $33,870 in 1996 and $35,252 at March 1997.................... 30,277 1,382 0
------------ ------------ -------------
319,423 201,457 514,730
------------ ------------ -------------
$ 1,942,759 $ 2,969,479 $ 6,678,877
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable........................................................ $ 335,000 $ 360,000 $ 2,985,000
Current portion of long-term debt.................................... 100,572 265,931 367,980
Accounts payable..................................................... 183,800 136,298 211,966
Accrued expenses..................................................... 2,127 957,242 1,140,113
Unearned line charge received........................................ 0 16,218 4,860
------------ ------------ -------------
Total current liabilities........................................ 621,499 1,735,689 4,709,919
Long-term debt, net of current portion................................. 828,530 569,702 1,116,657
Shareholders' equity................................................... 492,730 664,088 852,301
------------ ------------ -------------
$ 1,942,759 $ 2,969,479 $ 6,678,877
------------ ------------ -------------
------------ ------------ -------------
</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
QUARTERS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
DECEMBER 31, MARCH 31,
-------------------------- --------------------------
1995 1996 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Service revenue.......................................... $ 2,817,446 $ 3,561,902 $ 779,197 $ 1,728,362
Cost of service.......................................... 1,785,062 1,986,985 493,754 802,091
------------ ------------ ------------ ------------
Gross margin............................................. 1,032,384 1,574,917 285,443 926,271
------------ ------------ ------------ ------------
Selling, general and administrative expenses:
Salary and benefits.................................... 402,268 559,494 147,146 248,488
Travel and related..................................... 38,895 58,351 13,162 26,123
Office and overhead.................................... 132,331 212,506 33,496 76,868
------------ ------------ ------------ ------------
573,494 830,351 193,805 351,494
------------ ------------ ------------ ------------
Income before depreciation, amortization, interest and
sales tax contingency.................................. 458,890 744,566 91,638 574,777
------------ ------------ ------------ ------------
Depreciation and amortization............................ 247,039 364,849 67,985 208,445
Interest................................................. 90,276 119,649 37,166 143,034
Sales tax contingency.................................... 0 865,000 0 51,075
------------ ------------ ------------ ------------
337,315 1,349,498 105,151 402,554
------------ ------------ ------------ ------------
Net income (loss) before pro forma income tax
provision.............................................. 121,575 (604,932) (13,513) 172,223
Pro forma provision for income taxes (credit)
(unaudited)............................................ 42,550 (211,725) (4,730) 60,278
------------ ------------ ------------ ------------
Pro forma net income (loss) (unaudited).................. $ 79,055 $ (393,207) $ (8,783) $ 111,945
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Pro forma net income (loss) per share (unaudited)........ $ .04 $ (.20) $ (.01) $ .06
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Pro forma weighted shares outstanding (unaudited)........ 1,935,189 1,948,489 1,930,489 1,948,489
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</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
QUARTER ENDED MARCH 31, 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 1,910,266 1,459,473 (751,814) (44,571) 664,088
Collection of subscription
receivable................... 5,990 5,990
Issuance of stock.............. 9,500 10,000 10,000
Dividends......................
Net income..................... 172,223 172,223
--------- ----------- --------- --------- ------------ ------------ ---------
Balance, March 31, 1997........ 846,508 $ 1,000 1,928,766 $1,469,473 $ (579,591) $ (38,581) $ 852,301
--------- ----------- --------- --------- ------------ ------------ ---------
--------- ----------- --------- --------- ------------ ------------ ---------
</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
QUARTERS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
DECEMBER 31, MARCH 31,
-------------------------- --------------------------
1995 1996 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income...................................... $ 121,575 $ (604,932) $ (13,513) $ 172,223
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation......................................... 213,924 300,600 59,600 194,000
Amortization......................................... 33,115 64,249 8,385 14,445
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable.............................. (1,257) (137,645) (38,015) (431,437)
Prepaid rent and other........................... (184,901) 54,319 (53,115) (183,332)
Increase (decrease) in:
Accounts payable................................. (13,594) (47,502) 52,855 75,668
Accrued expenses................................. (8,258) 955,115 0 182,871
Unearned line charge received.................... 0 16,218 0 (11,358)
------------ ------------ ------------ ------------
Net cash provided by operating activities................ 160,604 600,422 16,197 13,080
------------ ------------ ------------ ------------
Cash flows used in investing activities, purchase of
equipment and rental contracts......................... (623,008) (462,239) 52,505 3,831,141
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from
Issuance of:
Long-term debt..................................... 813,102 7,103 0 1,206,500
Common stock....................................... 0 910,000 20,000 10,000
Payments of subscription receivable.................. 0 10,000 0 5,990
Principal payments on long-term debt................. (324,026) (100,572) (20,966) (556,114)
Dividends paid....................................... (33,120) (143,710) (16,690) 0
Net change in notes payable.......................... 5,000 25,000 (2,373) 2,625,000
Deferred financing costs............................. (35,252) 0 0 0
------------ ------------ ------------ ------------
Net cash provided by financing activities............ 425,704 707,821 (20,029) 3,291,376
------------ ------------ ------------ ------------
Net increase (decrease) in cash.......................... (36,700) 846,004 (56,337) (526,685)
Cash, beginning balance.................................. 65,846 29,146 29,146 875,150
------------ ------------ ------------ ------------
Cash, ending balance..................................... $ 29,146 $ 875,150 $ (27,191) $ 348,465
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for interest................................. $ 96,486 $ 121,530 $ 37,166 $ 143,034
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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
QUARTER ENDED MARCH 31, 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 of the related assets.
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 shareholders of an "S"
corporation are taxed individually on their proportionate share of the Company's
taxable income or loss.
F-7
<PAGE>
INTELLIPHONE, INC. AND CHOICETEL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
QUARTER ENDED MARCH 31, 1997 (UNAUDITED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
Immediately prior to registration and issuance of securities in the proposed
initial public offering, the Companies will terminate their "S" corporation
status and be 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 quarter ended March 31, 1997 are computed on the basis of the number of
shares of common stock outstanding during 1995 and 1996 and the quarter ended
March 31, 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.
2. NOTES PAYABLE:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31
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 March 31, 1997)
guaranteed by shareholders and secured by equipment.
Due January 1998..................................... 0 0 2,900,000
Note payable, interest only payable monthly at 8.75%.
Due on demand........................................ 0 50,000 50,000
Note payable, interest only payable monthly at 12%. Due
on demand............................................ 35,000 35,000 35,000
---------- ---------- ------------
$ 335,000 $ 360,000 $ 2,985,000
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
F-8
<PAGE>
INTELLIPHONE, INC. AND CHOICETEL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
QUARTER ENDED MARCH 31, 1997 (UNAUDITED)
3. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1995 1996 1997
---------- ---------- ------------
<S> <C> <C> <C>
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 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 50,000
Notes payable, interest only payable monthly at 12% with various maturing
dates from March 1997 through December 1997............................ 150,000 150,000 158,853
Note payable, interest at 12% compounded quarterly. Interest due on
demand, principal due February 1998.................................... 60,823 67,926 69,626
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(B)....................... 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(B)............................ 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(A)............................................... 0 0 841,262
---------- ---------- ------------
929,102 835,633 1,484,637
Less current portion..................................................... 100,572 265,931 367,980
---------- ---------- ------------
$ 828,530 $ 569,702 $ 1,116,657
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
- ------------------------
(A) Notes are secured by certain assets of Intelliphone and guaranteed by
certain of its shareholders.
(B) 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.
At December 31, 1995 and 1996, and March 31, 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-9
<PAGE>
INTELLIPHONE, INC. AND CHOICETEL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
QUARTER ENDED MARCH 31, 1997 (UNAUDITED)
3. LONG-TERM DEBT: (CONTINUED)
Future maturities of long-term debt as of December 31, 1996, and March 31,
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 MARCH 31, MARCH 31, 1997
- --------------------------------------------------------------------------- -----------------
<S> <C>
1998....................................................................... $ 367,980
1999....................................................................... 602,832
2000....................................................................... 214,377
2001....................................................................... 236,826
2002....................................................................... 62,622
-----------------
$ 1,484,637
-----------------
-----------------
</TABLE>
4. COMMITMENTS AND CONTINGENCY:
PHONE LOCATIONS:
Intelliphone, Inc. rents phone locations from merchants and property owners
under varying lease terms, usually seven 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, and March 31, 1997, Intelliphone, Inc. had cash of
approximately $765,000 and $95,387, respectively, in excess of FDIC insurance
limits in one financial institution. No losses have been experienced from such
deposits.
F-10
<PAGE>
INTELLIPHONE, INC. AND CHOICETEL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
QUARTER ENDED MARCH 31, 1997 (UNAUDITED)
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.
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 May 31, 1997, no options had been granted under the Plan.
F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Intelliphone, Inc.
Minneapolis, Minnesota
We have audited the accompanying statements of revenues and direct expenses
of the pay telephone division of Telco West, Inc. for the years ended December
31, 1995 and 1996. 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 then ended, in conformity with
generally accepted accounting principles.
The statements of revenues and direct expenses are intended to be part of a
filing for Intelliphone, 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-12
<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.................................................. $ 563,873 $ 382,538
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
F-13
<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.
DEPRECIATION EXPENSE:
Pay telephones and other assets are depreciated using an accelerated method
over their estimated useful lives.
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.
4. SUBSEQUENT EVENT:
In January 1997, the Company sold substantially all of the assets of its pay
telephone division to Intelliphone, Inc. for $3,300,000. The sale was accounted
for under the purchase method and included seller financing for a portion of the
sale price.
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Intelliphone, 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. 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 then ended, 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-15
<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
---------- ------------
Net income (loss)....................................................................... $ 25,100 $ (255,051)
---------- ------------
---------- ------------
</TABLE>
See notes to financial statements.
F-16
<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 February of 1997, the Company reached an agreement to sell its pay
telephone operations to Intelliphone, Inc.
DEPRECIATION EXPENSE:
Pay telephones and other assets are depreciated using a straight-line method
over their estimated useful lives.
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>
F-17
<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........................................................... 10
Dividend Policy........................................................... 11
Capitalization............................................................ 12
Dilution.................................................................. 13
Selected Combined Financial Data.......................................... 14
Reorganization............................................................ 16
Recent Acquisitions....................................................... 16
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 17
Business.................................................................. 21
Management................................................................ 30
Certain Transactions...................................................... 32
Principal Shareholders.................................................... 33
Securities Eligible for Future Sale....................................... 34
Description of Securities................................................. 35
Underwriting.............................................................. 39
Legal Matters............................................................. 41
Experts................................................................... 41
Additional Information.................................................... 41
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 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 302A.521 of the Minnesota Business Corporation Act provides that a
corporation organized under Minnesota law shall indemnify any director, officer,
employee or agent of the corporation made or threatened to be made a party to a
proceeding by reason of the former or present official capacity (as defined) of
the person against judgments, penalties, fines, settlements and reasonable
expenses incurred by the person in connection with the proceedings if certain
statutory standards are met. "Proceeding" means a threatened, pending or
completed civil, criminal, administrative, arbitration or investigative
proceeding, including one by or in the right of the corporation. Section
302A.521 contains detailed terms regarding such rights of indemnification and
reference is made thereto for a complete statement of such indemnification
rights.
Reference is made to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement for a description of indemnification arrangements related
to this offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised 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. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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........................................ 100,000.00
Accounting fees and expenses................................... 20,000.00
Printing and engraving expenses................................ 75,000.00
Blue Sky fees and expenses..................................... 20,000.00
Underwriter's non-accountable expense allowance................ 120,000.00(1)
Miscellaneous expenses......................................... 42,696.00
----------
Total...................................................... $400,000.00
----------
----------
</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 $418,000.00
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since June 1, 1994, the Registrant has 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.
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. JANUARY 15, 1997 PRIVATE PLACEMENT OF COMMON STOCK: On January 15, 1997,
the Registrant sold 111,875 shares of Common Stock to five accredited investors
for aggregate consideration of $895,000.
8. 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.
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.
II-2
<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION MANNER OF FILING
- ------------- ----------------------------------------------------------------------------------- ----------------
<S> <C> <C>
1.1 Form of Underwriting Agreement, including Underwriter's Warrant Filed herewith
1.2 Form of Selected Dealer Agreement Filed herewith
3.1 Amended and Restated Articles of Incorporation Filed herewith
3.2 By-laws Filed herewith
4.1 Specimen Certificate representing the Common Stock Filed herewith
4.2 Form of Redeemable Warrant Agreement with Norwest Bank
Minnesota, National Association, including certificate
representing the Redeemable Warrants Filed herewith
5 Opinion of Robins, Kaplan, Miller & Ciresi L.L.P. *
10.1 1997 Long-Term Incentive and Stock Option Plan Filed herewith
10.2 Lease Agreement Filed herewith
10.3 Bonus Program Filed herewith
10.4 Amended and Restated Loan Agreement with National
City Bank, dated as of January 2, 1997 Filed herewith
10.5 Promissory Note payable to Serene Paletz, dated April 10, 1995 Filed herewith
10.6 Promissory Note payable to William Opsahl, dated,
April 18, 1995 Filed herewith
10.7 Promissory Note payable to Miriam Graf, dated
November 3, 1995 Filed herewith
10.8 Promissory Note payable to William Opsahl, dated
December 2, 1995 Filed herewith
10.9 Promissory Note payable to Ronald M. Gross and
Elaine Weitzman, dated December 7, 1995 Filed herewith
10.10 Promissory Note payable to William B. Topp and
Norma Topp, dated July 7, 1996 Filed herewith
10.11 Promissory Note payable to The Topp Family Trust,
dated July 27, 1996 Filed herewith
10.12 Agreement for Sale and Purchase of Business Assets
with Telco West, Inc. ("Telco"), dated January 2, 1997 Filed herewith
10.13 Installment Collateral Note payable to Telco, dated
January 2, 1997 Filed herewith
10.14 Installment Collateral Note payable to Telco, dated
January 2, 1997 Filed herewith
10.15 Agreement for Sale and Purchase of Assets with
Computer Assisted Technologies, Inc. ("CAT"),
dated as of March 14, 1997 Filed herewith
10.16 Route Service Agreement with CAT, dated as of
February 1, 1997 Filed herewith
10.17 Employment Agreement with Jeffrey R. Paletz, dated
as of April 15, 1997 Filed herewith
10.18 Employment Agreement with Melvin Graf, dated
as of April 15, 1997 Filed herewith
10.19 Employment Agreement with Jack S. Kohler, dated
as of April 15, 1997 Filed herewith
10.20 Agreement for Service Resale with U.S. West
Communications, Inc., undated Filed herewith
21 Subsidiaries of the Registrant Filed herewith
23.1 Consent of Robins, Kaplan, Miller & Ciresi L.L.P. (included in Exhibit 5) *
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION MANNER OF FILING
- ------------- ----------------------------------------------------------------------------------- ----------------
<S> <C> <C>
23.2 Consent of Schechter Dokken Kanter Andrews & Selcer, Ltd. Filed herewith
24 Power of Attorney (included on signature page) Filed herewith
27 Financial Data Schedule Filed herewith
</TABLE>
- ------------------------
* To be filed by amendment.
ITEM 28. UNDERTAKINGS.
(a) RULE 415 OFFERING
The Registrant will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement.
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) EQUITY OFFERINGS OF NON-REPORTING SMALL BUSINESS ISSUERS
The Registrant will provide to the Underwriter at the closing specified in
the Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser.
(c) INDEMNIFICATION
See Item 24.
(d) RULE 430A
The Registrant will:
(1) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
small business issuer under Rule 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this Registration Statement as of the time the SEC
declared it effective.
(2) For determining any liability under the Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the securities offered in the Registration Statement, and that offering of the
securities at that time as the initial bona fide offering of those securities.
II-4
<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
Registration Statement to be signed on its behalf by the undersigned, in the
City of Minneapolis, State of Minnesota, on June 23, 1997.
CHOICETEL COMMUNICATIONS, INC.
By: /s/ JEFFREY R. PALETZ
-----------------------------------------
Jeffrey R. Paletz
PRESIDENT
Each person whose signature appears below constitutes and appoints Jeffrey
R. Paletz and Jack S. Kohler, and each of them, his true and lawful
attorney-in-fact and agents, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments (including post-effective amendments) to the Registration
Statement on Form SB-2, and to file the same, with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on June 23, 1997.
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ JEFFREY R. PALETZ President and Director
- ------------------------------ (principal executive
Jeffrey R. Paletz officer)
Vice President and Chief
/s/ JACK KOHLER Financial Officer
- ------------------------------ (principal financial and
Jack S. Kohler accounting officer)
/s/ GARY S. KOHLER
- ------------------------------ Director
Gary S. Kohler
/s/ MELVIN GRAF
- ------------------------------ Director
Melvin Graf
- ------------------------------ Director
Robert A. Hegstrom
II-5
<PAGE>
EXHIBIT INDEX
DOCUMENT DESCRIPTION
<TABLE>
<CAPTION>
FORM OF FILING
----------------
<S> <C> <C>
1.1 Form of Underwriting Agreement, including Underwriter's Warrant Filed herewith
1.2 Form of Selected Dealer Agreement Filed herewith
3.1 Amended and Restated Articles of Incorporation Filed herewith
3.2 By-laws Filed herewith
4.1 Specimen Certificate representing the Common Stock Filed herewith
4.2 Form of Redeemable Warrant Agreement with Norwest Bank Minnesota, National
Association, including certificate representing the Redeemable Warrants Filed herewith
5 Opinion of Robins, Kaplan, Miller & Ciresi L.L.P. *
10.1 1997 Long-Term Incentive and Stock Option Plan Filed herewith
10.2 Lease Agreement Filed herewith
10.3 Bonus Program Filed herewith
10.4 Amended and Restated Loan Agreement with National City Bank, dated as of January 2,
1997 Filed herewith
10.5 Promissory Note payable to Serene Paletz, dated April 10, 1995 Filed herewith
10.6 Promissory Note payable to William Opsahl, dated, April 18, 1995 Filed herewith
10.7 Promissory Note payable to Miriam Graf, dated November 3, 1995 Filed herewith
10.8 Promissory Note payable to William Opsahl, dated December 2, 1995 Filed herewith
10.9 Promissory Note payable to Ronald M. Gross and Elaine Weitzman, dated December 7,
1995 Filed herewith
10.10 Promissory Note payable to William B. Topp and Norma Topp, dated July 7, 1996 Filed herewith
10.11 Promissory Note payable to The Topp Family Trust, dated July 27, 1996 Filed herewith
10.12 Agreement for Sale and Purchase of Business Assets with Telco West, Inc. ("Telco"),
dated January 2, 1997 Filed herewith
10.13 Installment Collateral Note payable to Telco, dated January 2, 1997 Filed herewith
10.14 Installment Collateral Note payable to Telco, dated January 2, 1997 Filed herewith
10.15 Agreement for Sale and Purchase of Assets with Computer Assisted Technologies, Inc.
("CAT"), dated as of March 14, 1997 Filed herewith
10.16 Route Service Agreement with CAT, dated as of February 1, 1997 Filed herewith
10.17 Employment Agreement with Jeffrey R. Paletz, dated as of April 15, 1997 Filed herewith
10.18 Employment Agreement with Melvin Graf, dated as of April 15, 1997 Filed herewith
10.19 Employment Agreement with Jack S. Kohler, dated as of April 15, 1997 Filed herewith
10.20 Agreement for Service Resale with U.S. West Communications, Inc., undated Filed herewith
21 Subsidiaries of the Registrant Filed herewith
23.1 Consent of Robins, Kaplan, Miller & Ciresi L.L.P. (included in Exhibit 5) *
23.2 Consent of Schechter Dokken Kanter Andrews & Selcer, Ltd. Filed herewith
24 Power of Attorney (included on signature page) Filed herewith
27 Financial Data Schedule Filed herewith
</TABLE>
- ------------------------
* To be filed by amendment.
<PAGE>
ITEM 27. EXHIBITS
EXHIBIT NO. DESCRIPTION MANNER OF FILING
- ----------- ------------ ----------------
1.1 Form of Underwriting Agreement Filed herewith
1.2 Form of Selected Dealers Agreement Filed herewith
1.3 Form of Underwriter's Warrant Filed herewith
3.1 Amended and Restated Articles of Filed herewith
Incorporation
3.2 By-laws Filed herewith
4.1 Specimen Certificate representing the Filed herewith
Common Stock
5 Opinion of Robins, Kaplan, Miller & *
Ciresi L.L.P.
10.1 1997 Long-Term Incentive and Stock Filed herewith
Option Plan
10.2 Lease Agreement Filed herewith
10.3 Bonus Program Filed herewith
10.4 Amended and Restated Loan Agreement Filed herewith
with National City Bank, dated as of
January 2, 1997
10.5 Promissory Note payable to Serene Paletz, Filed herewith
dated April 10, 1995
10.6 Promissory Note payable to William Opsahl, Filed herewith
dated April 18, 1995
10.7 Promissory Note payable to Miriam Graf, Filed herewith
dated November 3, 1995
10.8 Promissory Note payable to William Opsahl, Filed herewith
dated December 2, 1995
10.9 Promissory Note payable to Ronald M. Gross Filed herewith
and Elaine Weitzman, dated December 7, 1995
10.10 Promissory Note payable to William B. Topp Filed herewith
and Norma Topp, dated July 7, 1996
10.11 Promissory Note payable to The Topp Filed herewith
Family Trust, dated July 27, 1996
10.12 Agreement for Sale and Purchase of Business Filed herewith
Assets with Telco West, Inc. ("Telco"),
dated January 2, 1997
10.13 Installment Collateral Note payable to Telco, Filed herewith
dated January 2, 1997
<PAGE>
10.14 Installment Collateral Note payable to Filed herewith
Telco, dated January 2, 1997
10.15 Agreement for Sale and Purchase of Assets
with Computer Assisted Technologies, Inc. Filed herewith
("CAT"), dated as of March 14, 1997
10.16 Route Service Agreement with CAT, dated as Filed herewith
of February 1, 1997
10.17 Employment Agreement with Jeffrey R. Paletz, Filed herewith
dated as of April 15, 1997
10.18 Employment Agreement with Melvin Graf, Filed herewith
dated as of April 15, 1997
10.19 Employment Agreement with Jack S. Kohler, Filed herewith
dated as of April 15, 1997
11 Statement re computation of per share earnings Filed herewith
21 Subsidiaries of the Registrant Filed herewith
23.1 Consent of Robins, Kaplan, Miller & *
Ciresi L.L.P. (included in Exhibit 5)
23.2 Consent of Schechter, Dokken, Kanter, Filed herewith
Andrews & Selcer, Ltd.
24 Power of Attorney (included on signature page) Filed herewith
27 Financial Data Schedule Filed herewith
-----------------------------
* To be filed by amendment.
<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-
______) 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
- -----------------------
(1) Plus an option to purchase up to 120,000 additional Units to cover over-
allotments.
<PAGE>
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 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
-2-
<PAGE>
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.
(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
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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
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 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 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, 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
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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.
(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 and upon exercise of the Redeemable Warrants included in
the Warrant Units.
(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.
(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
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<PAGE>
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. Except as disclosed in the Registration Statement and
the Prospectus, 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 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
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<PAGE>
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, to the best of
the Company's knowledge, in line with the insurance maintained by
similar companies and 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
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<PAGE>
exchangeable or exercisable for shares of Common Stock now owned or
hereafter acquired by 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."
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<PAGE>
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.
(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,
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<PAGE>
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 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.
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(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.
(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;
provided, however, that the Company may file a registration statement at
any time beginning ninety (90) days after the Effective Date if the
holders of certain demand registration rights granted by the Company to
shareholders who purchased shares of Common Stock from the Company in an
unregistered private placement completed on January 15, 1997 properly
exercise such demand registration rights. Notwithstanding the foregoing,
all of the shares of Common Stock owned by such holders shall remain
subject to either the Six-Month Lock-up Agreement or the Two-Year Lock-up
Agreement executed by such holders.
(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.
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(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.
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,
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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 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.
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<PAGE>
(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 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
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<PAGE>
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 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 of 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 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.
(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
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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, 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,
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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, 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.
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(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.
(iii) Certain information set forth on the cover of the
Prospectus and in the Prospectus under the headings "Prospectus
Summary" (including the subheading "Summary
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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," "Securities 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
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<PAGE>
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-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.
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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,
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: Eric O. Madson, 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.
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<PAGE>
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, administra-tors, 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.
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 under-standing 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
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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
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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)
OF
CHOICETEL COMMUNICATIONS, INC.
N0. ______ 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 share of
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) 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 an
officer or partner of the Underwriter, (ii) a successor in interest to the
business of the Underwriter, (iii) a person who is an officer or partner of a
successor, (iv) a member of the selling group, or (v) a person who is an officer
or partner of a member of the selling group; 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
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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 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 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:
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(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 sub-section, 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) 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
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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 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.
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7. NOTICE OF TRANSFER OF WARRANT OR RESALE OF THE SHARES OR
REDEEMABLE WARRANTS COMPRISING WARRANT UNITS.
(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, 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 Warrant Units received upon the previous exercise of this Warrant,
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 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.
(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 Warrant
Units, Warrant Shares 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, 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 or Redeemable
Warrants comprising Warrant Units who collectively shall hold not less than
50% of the Warrants, shares of Common Stock or Redeemable Warrants comprising
Warrant Units 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 shares of Common Stock or Redeemable Warrants
comprising Warrant Units:
(i) the Company will promptly notify the Holder and all
other registered Holders, if any, of other Warrants, shares of Common
Stock, and/or Redeemable Warrants comprising Warrant Units that such
registration statement will be filed and that the shares of Common
Stock or Redeemable Warrants comprising Warrant Units 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
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(ii) the Company will cause such registration statement to
include all shares of Common Stock and/or Redeemable Warrants
comprising Warrant Units which it has been so requested to include,
will take all necessary steps to register or qualify such shares of
Common Stock and/or Redeemable Warrants 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 shares of Common Stock and/or Redeemable Warrants
comprising Warrant Units 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
shares of Common Stock and/or Redeemable Warrants 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.
(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, shares of Common
Stock and/or Redeemable Warrants comprising Warrant Units 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
shares of Common Stock and/or Redeemable Warrants comprising Warrant
Units 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 shares of
Common Stock and/or Redeemable Warrants comprising Warrant Units which
it has been so requested to include; provided, however, that if a
greater number of shares of Common Stock and/or Redeemable Warrants
comprising Warrant Units 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 shares of Common Stock
and/or Redeemable Warrants comprising Warrant Units 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 shares of Common
Stock and/or Redeemable Warrants comprising Warrant Units 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 comprising Warrant Units 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
B-6
<PAGE>
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 shares of
Common Stock and/or Redeemable Warrants comprising Warrant Units 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 shares of Common Stock and/or
Redeemable Warrants comprising Warrant Units are included, and to the
extent permissible under the Securities Act and controlling precedent
thereunder, the Company and each Holder whose shares of Common Stock
and/or Redeemable Warrants comprising Warrant Units 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.
(e) Each Holder of shares of Common Stock and/or
Redeemable Warrants comprising Warrant Units 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.
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 shares of 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 market price
of shares of Common Stock and Redeemable Warrants comprising the Units
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 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
B-7
<PAGE>
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.
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-8
<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>
CHOICETEL COMMUNICATIONS, INC.
800,000 UNITS(1)
CONSISTING OF 800,000 SHARES OF COMMON STOCK AND
800,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
SELECTED DEALER AGREEMENT
__________, 1997
- --------------------
- --------------------
- --------------------
Ladies and Gentlemen:
1. We are the Underwriter named in the Prospectus relating to the above
securities (the "Underwriter"). As the Underwriter, we have agreed, on certain
terms and subject to certain conditions, to purchase from ChoiceTel
Communications, Inc., a Minnesota corporation (the "Company"), 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, and, for purposes of covering
over-allotments in connection with the sale of the Firm Units, up to 120,000
additional Units (the "Option Units"), all as set forth in the Prospectus. The
Firm Units and any Option Units purchased by us are referred to herein as the
"Units." The Units and the shares of Common Stock and the common stock purchase
warrants comprising the Units are collectively referred to herein as the
"Securities." The Securities and the terms under which they are to be offered
for sale are more particularly described in the Prospectus.
2. As the Underwriter, we are offering to you and certain other
securities dealers ("Selected Dealers") the right as set forth herein to
purchase, as principals, from us, certain of the Units subject to their receipt
and acceptance by us and upon the terms and subject to the conditions set forth
herein and in the Prospectus, at the Price to Public (as set forth on the cover
page of the Prospectus) for such Units, less a selling concession of $____ per
Unit, payable as herein provided. Each Selected Dealer shall be a member of the
National Association of Securities Dealers, Inc. (the "NASD") who has agreed to
comply with the provisions of Rule 2740 of the NASD's Conduct Rules (or a
foreign dealer who is not eligible for membership in the NASD but who agrees to
conform to the NASD's Conduct Rules and agrees in writing to comply with the
NASD's Interpretation on "Free-Riding and Withholding" (IM-2110-1) and with the
provisions of Rules 2730, 2740, 2750 and 2420 (as such Rule applies to foreign
nonmembers) of the NASD's Conduct Rules), acting as principal or as buyer's
agent.
3. All orders are subject to confirmation and allotment by us. We
reserve the right to reject any order in whole or in part, or to allot less than
the amount applied for, and to close the subscription books at any time without
notice. The number of Units allotted to you will be confirmed, subject to the
terms and conditions of this Agreement.
4. Please confirm your agreement to purchase Units on the terms and
subject to the conditions hereof by completing and signing the form for that
purpose on the enclosed counterpart of this Agreement and returning such
counterpart to us, even though you may have previously advised us thereof by
telephone or telegraph. Our signatures herein may be by facsimile.
- ------------------------------
(1) Plus an option to purchase up to 120,000 additional Units to cover over-
allotments.
<PAGE>
5. Any Securities purchased by you under the terms of this Agreement may
immediately be re-offered to the public in accordance with the terms of the
offering thereof set forth herein and in the Prospectus, subject to the
securities or Blue Sky laws of the various states or other jurisdictions.
Neither you nor any other person is or has been authorized to give any
information or to make any representation in connection with the sale of the
Securities other than as contained in the Prospectus. You will not bid for,
purchase or attempt to induce others to purchase or sell, directly or
indirectly, any Securities except as contemplated by this Agreement.
6. You agree, upon our request, to deliver to us payment in the form and
at the time, date and place specified in such request, for the Units to be
purchased by you under this Agreement. Units accepted or allotted hereunder
shall be paid for in full at the Price to Public less the above-mentioned
selling concession, by certified or official bank check payable in Minneapolis
clearing house funds or the equivalent thereof, to our order against delivery of
certificates for the Securities. If you are a member of, or clear through a
member of, The Depository Trust Company ("DTC"), we may, in our discretion,
deliver your Securities through the facilities of DTC. If you are not a member
of DTC, such delivery shall be made through a correspondent who is such a
member, if you shall have furnished instructions to us naming such
correspondent, unless you are otherwise notified by us in our discretion.
7. You agree to pay us on demand an amount equal to the above-mentioned
selling concession as to Units purchased by you hereunder which, prior to the
termination of this Agreement, we may purchase or contract to purchase and, in
addition, we may charge you with any broker's commission and transfer tax paid
in connection with such purchase or contract to purchase. Certificates for
Securities delivered on such repurchases need not be the identical certificates
originally purchased.
8. For the purpose of stabilizing the market in the Units, we have been
authorized to make purchases and sales of the Securities, in the open market or
otherwise, and, in arranging for sales, to over-allot.
9. You agree to advise us from time to time, upon request, of the
aggregate number of Units purchased by you hereunder and remaining unsold at the
time of such request, and, if in our opinion any such Units shall be needed to
make delivery of the Units sold or over-allotted, you will, forthwith upon our
request, grant to us the right, exercisable promptly after receipt of notice
from you that such right has been granted, to purchase, at the Price to Public
less the above-mentioned selling concession or such part thereof as we shall
determine, such aggregate number of Units owned by you as shall have been
specified in our request.
10. We hereby confirm that we will make available to you such number of
copies of the Prospectus (as amended or supplemented) as you may reasonably
request for the purposes contemplated by the Securities Act of 1933, as amended
("1933 Act"), or the Securities Exchange Act of 1934, as amended ("1934 Act"),
or the rules and regulations thereunder.
11. No Selected Dealer is authorized to act as our agent, or otherwise to
act on our behalf, in offering or selling the Units to the public or otherwise
or to furnish any information or make any representation except as contained in
the Prospectus. Nothing will constitute the Selected Dealers an association or
other separate entity or partners with us, or with each other, but you will be
responsible for your share of any liability or expense based on any claim to the
contrary.
12. We shall not be under any liability for or in respect of the value,
validity or form of the Securities, or the delivery of the certificates for the
Securities, or the performance by anyone of any agreement on its part, or the
qualification of the Securities for offer or sale under the laws of any
jurisdiction, or for or in respect of any other matter relating to this
Agreement, except for lack of good faith and for obligations expressly assumed
by us in this Agreement, and no obligation on our part shall be implied
herefrom. The foregoing provisions shall not be deemed a waiver of any
liability imposed under the 1933 Act.
13. You, by your confirmation below, represent that neither you nor any of
your directors, officers, partners, nor any "person associated with" (as defined
in the By-Laws of the NASD) you, nor, to your knowledge,
2
<PAGE>
any "related person" (as defined in Rule 2710 of the NASD's Conduct Rules (the
"Corporate Financing Rule")) has participated or intends to participate in any
transaction or dealing as to which documents or information is required to be
filed with the NASD pursuant to the Corporate Financing Rule, and as to which
such documents or information have not been so filed in a timely manner. By
such confirmation you also represent that either (a) you are a member in good
standing of the NASD who agrees to comply with all applicable rules of the NASD
including, but not limited to, Rule 2740 of the NASD's Conduct Rules, or (b) you
are a foreign dealer not eligible for membership in the NASD and you agree not
to make any sales within the United States, its territories, or its possessions,
or to persons who are citizens thereof or residents therein, and in making other
sales of the Units, you agree to comply with the NASD's Interpretation on
"Free-Riding and Withholding" (IM-2110-1) and to comply, as if you were an NASD
member, with the provisions of Rules 2730 and 2750 of the NASD's Conduct Rules
and with Rule 2420 of such Conduct Rules as it applies to a nonmember foreign
broker/dealer in a foreign country.
14. On becoming a Selected Dealer, and in offering and selling the Units,
you agree to comply with all the applicable requirements of the 1933 Act and the
1934 Act including, but not limited to, Regulation M under the 1934 Act. You
confirm that you are familiar with Rule 15c2-8 under the 1934 Act relating to
the distribution of preliminary and final prospectuses for securities of an
issuer (whether or not the issuer is subject to the reporting requirements of
Section 13 or 15(d) of the 1934 Act) and confirm that you have complied and will
comply therewith.
15. No expenses shall be charged to Selected Dealers. A single transfer
tax, if payable, upon the sale of the Units to you will be paid when such Units
are delivered to you. You shall, however, pay any transfer tax on sales of
Units by you and you shall pay our proportionate share of any transfer tax
(other than the single transfer tax described above) in the event that any such
tax shall from time to time be assessed against you and other Selected Dealers
as a group or otherwise.
16. The provisions of this Agreement will terminate when we shall have
determined that the public offering of the Units has been completed and upon
notice to you by telegraph or telecopy of such termination, but if not
theretofore terminated, this Agreement will terminate at 5:00 p.m., Minneapolis
time, thirty (30) days after the initial public offering of the Units; provided,
however, that we shall have the right to extend this Agreement for a further
period or periods, not exceeding thirty (30) calendar days in the aggregate,
upon notice to you by telegraph or telecopy.
17. Notices to us should be addressed to us, as the Underwriter, at our
offices at 2820 IDS Center, 80 South Eighth Street, Minneapolis, Minnesota
55402; Attention: Syndicate Department. Notices to you shall be deemed to have
been duly given if telegraphed, telecopied or mailed to you at the address to
which this Agreement is sent.
Very truly yours,
EQUITY SECURITIES INVESTMENTS, INC.
By
------------------------------------------
Authorized Officer
3
<PAGE>
EQUITY SECURITIES INVESTMENTS, INC.
2820 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
RE: CHOICETEL COMMUNICATIONS, INC.
Ladies and Gentlemen:
We hereby confirm our agreement to purchase ___________ Units, each Unit
consisting of one share of common stock and one redeemable common stock purchase
warrant, of ChoiceTel Communications, Inc., subject to your acceptance or
rejection in whole or in part in the case of a subscription in excess of any
reservation and subject to the other terms and conditions stated in the Selected
Dealer Agreement and in your telegram or telecopy to us referred to therein.
We hereby acknowledge receipt of the Prospectus referred to in the first
paragraph thereof relating to said Units. We further confirm that in purchasing
said Units we have relied upon the Prospectus and upon no other statement
whatsoever, whether written or oral.
We hereby confirm that we are (a) a member in good standing of the NASD who
agrees to comply with all applicable rules of the NASD including, but not
limited to, Rule 2740 of the NASD's Conduct Rules, or (b) a foreign dealer not
eligible for membership in the NASD who agrees not to make any sales within the
United States, its territories, or its possessions, or to persons who are
citizens thereof or residents therein, and in making other sales of the Units,
who hereby agrees to comply with Rule 2740 of the NASD's Conduct Rules and the
NASD's Interpretation on "Free-Riding and Withholding" (IM-2110-1) and to
comply, as if we were an NASD member, with the provisions of Rules 2730 and 2750
of the NASD's Conduct Rules and with Rule 2420 of such Conduct Rules as it
applies to a nonmember foreign broker/dealer in a foreign country.
Corporate or firm name of Dealer:
----------------------------------------------
By:
----------------------------------------------
Signature of Authorized Representative
Its:
----------------------------------------------
Title of person signing
Address:
--------------------------------------------------
--------------------------------------------------
Dated: _______, 1997
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
INTELLIPHONE, INC.
The following Amended and Restated Articles of Incorporation shall
supersede and take the place of the existing Articles of Incorporation and all
amendments thereto:
ARTICLE 1. NAME
The name of the corporation is ChoiceTel Communications, Inc.
ARTICLE 2. REGISTERED OFFICE
The address of the registered office of the corporation is 800 LaSalle
Avenue, Suite 2800, Minneapolis, Minnesota 55402-2015.
ARTICLE 3. AUTHORIZED SHARES
The total number of shares of capital stock which the corporation is
authorized to issue shall be 20,000,000 shares, consisting of 15,000,000 shares
of common stock, par value $.01 per share ("Common Stock"), and 5,000,000 shares
of undesignated preferred stock, par value $.01 per share ("Preferred Stock").
The board of directors of the corporation is hereby authorized to provide, by
resolution or resolutions adopted by such board, for the issuance of Preferred
Stock from time to time in one or more classes and/or series, to establish the
designation and number of shares of each such class or series, and to fix the
relative rights and preferences of the shares of each such class or series, all
to the full extent permitted by the Minnesota Business Corporation Act, Section
302A.401, or any successor provision.
ARTICLE 4. NO CUMULATIVE VOTING
No holder of shares of capital stock of the corporation shall have any
cumulative voting rights.
ARTICLE 5. NO PREEMPTIVE RIGHTS
The shareholders of the corporation shall not have any preemptive
rights to subscribe for or acquire securities or rights to purchase securities
of any class, kind or series of the corporation.
ARTICLE 6. DIRECTOR LIABILITY
To the fullest extent permitted by the Minnesota Business Corporation
Act as the same exists or may hereafter be amended, a director of this
corporation shall not be liable to this corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director. Any
<PAGE>
repeal or modification of the foregoing provisions of this Article 6 by the
shareholders of the corporation shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification.
ARTICLE 7. WRITTEN ACTION BY DIRECTORS
Any action required or permitted to be taken at a meeting of the Board
of Directors of the corporation may be taken by a written action signed, or
counterparts of a written action signed in the aggregate, by all of the
directors unless the action need not be approved by the shareholders of the
corporation, in which case the action may be taken by a written action signed,
or counterparts of a written action signed in the aggregate, by the number and
type of directors that would be required to take the same action at a meeting of
the Board of Directors of the corporation at which all of the directors were
present.
The undersigned, as Vice President and Chief Financial Officer of
Intelliphone, Inc., certifies that the attached Amended and Restated Articles of
Incorporation were approved by the Board of Directors and adopted by the
Shareholders of Intelliphone, Inc. on April 18, 1997, in accordance with
302A.135 of the Minnesota Statutes.
IN WITNESS WHEREOF, the undersigned has executed these Amended and
Restated Articles this 18th day of April, 1997.
By: /s/ Jack Kohler
----------------------------------
Jack Kohler, Vice President and
Chief Financial Officer
State of Minnesota )
) ss
County of Hennepin )
On this 18th day of April, 1997 appeared before me, a Notary Public
within and for said County and State, Jack Kohler, to me known to be the Vice
President and Chief Financial Officer of Intelliphone, Inc., the person named
in and who executed the foregoing Articles of Amendment and acknowledged to
me that he executed the same as his true act and deed.
/s/ Jill L. Noreen
-------------------------------------
Notary Public
<PAGE>
BYLAWS
ARTICLE I. NAME AND LOCATION
Section 1. The name of this corporation shall be
Intelliphone, Inc.
Section 2. Its principal office shall be located at 965 Decatur
Avenue North, Minneapolis, Minnesota 55427.
Section 3. Other offices for the transaction of business shall be
located at such places as the Board of Directors may from time to time
determine.
ARTICLE II. SHAREHOLDERS' MEETING
Section 1. The annual meetings of the shareholders shall be held
on the 1st day of October in each year at ten o'clock a.m., at the registered
office of the corporation or at such other place as may be designated by the
Board of Directors; provided, however, that whenever such day shall fall upon a
Sunday or a legal holiday, the meeting shall be held on the next succeeding
business day. At such meeting, the shareholders shall elect directors to serve
for one year or until their successors are duly elected and qualified.
Section 2. A special meeting of the shareholders, to be held at
the same place as the annual meeting, may be called at any time by the
president, and in his absence by the vice-president or by the directors. It
shall be the duty of the directors, president or the vice-president, to call
such a meeting whenever so requested by shareholders holding ten percent or more
of the voting power of the shareholders of the corporation.
Section 3. Notice of the time and place of all annual and special
meetings shall be mailed by the secretary to each shareholder to the last known
address of said shareholder as the same appears on the books of the corporation
at least seven (7) days before the date of all annual and special meetings.
Section 4. The president or, in his absence the vice-president,
shall preside at all such meetings.
Section 5. At every such meeting, each shareholder shall be
entitled to cast one vote for each share of voting stock held in his name, which
vote may be cast by him either in person or by proxy. All proxies shall be in
writing and shall be filed with the secretary and by him entered of record in
the minutes of the meeting.
Section 6. Every shareholder shall have the right to vote in
person or by proxy for the number of shares owned by him for as many persons as
there are directors to be elected; or
<PAGE>
upon written notice to the president or secretary of the corporation not less
than twenty-four hours before the time fixed for holding a meeting for the
election of directors, a shareholder may cumulate said shares and give one
candidate as many votes as the number of directors multiplied by the number of
his shares shall equal, or to distribute them on the same principal among as
many candidates as he shall think fit. If a notice of intention to cumulate
shares has been received, it shall be the duty of the presiding officer, upon
the convening of the meeting, to announce that such notice has been given.
Section 7. A quorum for the transaction of business at such
meeting shall consist of a number of members representing a majority of the
shares issued and outstanding; but the shareholders present at any meeting,
though less than a quorum, may adjourn the meeting to a future time without
notice other than an announcement at the meeting.
ARTICLE III. BOARD OF DIRECTORS
Section 1. The business and property of the corporation shall be
managed by a Board of three (3) or more directors, who shall be elected annually
by the shareholders at the annual meeting and shall hold office for one year or
until their successors are duly elected and qualified. The number of directors
of the corporation shall be as determined from time to time by the shareholders.
Section 2. The annual meetings of the directors shall be held
without notice immediately after the adjournment of each stockholders' meeting
or at such time as may be provided by the Board of Directors.
Section 3. Special meetings of the Board of Directors may be
called by the president and, in his absence, by the vice president or by any
member of the Board of Directors. By unanimous consent of the directors,
special meetings of the Board may be held without notice at any time and place.
Section 4. Notice of all regular and special meetings, except
those specified in the second sentence of Section 3 of this Article, shall be
mailed or telegraphed to each director by any director, at least two (2) days
previous to the time fixed for the meeting. All notices of special meetings
shall state the purpose thereof.
Section 5. A quorum for the transaction of business at any regular
or special meeting of the directors shall consist of a majority of the members
of the Board.
Section 6. The directors shall elect the officers of the
corporation and fix their salaries; such election to be held at the directors'
meeting following each annual shareholders' meeting.
Section 7. Vacancies in the Board of Directors may be filled for
the unexpired terms by the remaining directors at any regular or special
directors' meeting.
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Section 8. The directors may by resolution appoint two or more
members of the Board as an executive committee to manage the business of the
corporation during the interim between meetings of the Board.
Section 9. At each annual shareholders' meeting, the directors
shall submit a statement of the business done during the preceding year together
with a report of the general financial condition of the corporation and of the
condition of its tangible property.
ARTICLE IV. OFFICERS
Section 1. The Board of Directors shall elect a Chief Executive
Officer and Chief Financial Officer, and may elect such other officers as it may
deem necessary for the operation and management of the corporation, each of whom
shall have the duties and responsibilities incident to the offices which they
hold or as determined by the Board. Officers need not be directors or
shareholders. Without limiting the foregoing, the Board may elect a Chairman of
the Board, President, one or more Vice Presidents, a Treasurer, a Secretary and
such assistant officers as it may designate with titles to describe their
duties, functions or special responsibilities. Officers shall hold office at
the will of the Board for an indefinite term until their successors are elected
and qualified. Any officer elected or appointed by the Board of Directors may
be removed by the Board at any time with or without cause.
ARTICLE V. SHARES
Section 1. All certificates of shares shall be signed by the
president and secretary and shall be sealed with the corporate seal if the
corporation shall have adopted a corporate seal.
Section 2. Transfers of stock shall be made only on the books of
the corporation and the old certificate properly endorsed shall be surrendered
and canceled before a new certificate is issued. The stock books of the
corporation shall be closed against transfer for a period of ten (10) days
before the date of payment of a dividend and for ten (10) days before each
annual meeting of the stockholders.
Section 3. In case of loss or destruction of a certificate of
stock, no new certificate shall be issued in lieu thereof except upon
satisfactory proof to the Board of Directors of such loss or destruction and
upon the giving of satisfactory security, by bond or otherwise, against loss to
the corporation.
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ARTICLE VI. DIVIDENDS AND FINANCE
Section 1. The Board of Directors may from time to time declare
dividends to be paid by the corporation.
Section 2. The funds of the corporation shall be deposited in such
bank or trust company as the directors shall designate and shall be withdrawn
only upon the check or order of the treasurer and countersigned by the
president.
ARTICLE VII. INDEMNIFICATION
Section 1. The corporation shall indemnify persons for such
expenses and liabilities in such manner, under such circumstances, and to the
extent required by Minnesota Statutes Section 302A.521.
ARTICLE VIII. AMENDMENTS
Section 1. Amendments to these Bylaws may be made by a vote of the
shareholders representing a majority of all issued and outstanding shares at any
annual shareholders' meeting or at any special shareholders' meeting when the
proposed amendment has been set out in the notice of such meeting.
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INCORPORATED UNDER THE LAWS
OF THE STATE OF MINNESOTA
NUMBER [LOGO] SHARES
________________ ________________
CUSIP ________________
CHOICETEL COMMUNICATIONS, INC.
THIS CERTIFIES THAT _________________________________________ IS THE
REGISTERED HOLDER OF ________________________________________FULLY PAID AND
NON-ASSESSABLE COMMON SHARES, $.01 PAR VALUE, OF CHOICETEL COMMUNICATIONS,
INC. AND TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY THE HOLDER
HEREOF IN PERSON OR BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF THIS
CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNLESS
COUNTERSIGNED BY THE TRANSFER AGENT OF THE CORPORATION.
IN WITNESS WHEREOF, THE CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED ON ITS BEHALF BY THE FACSIMILE SIGNATURES OF ITS DULY AUTHORIZED
OFFICERS.
this ________________________ day of __________________________ , 19 ___________
______________________________________ ______________________________________
Secretary President
<PAGE>
FOR VALUE RECEIVED the undersigned hereby sells, assigns, and transfers unto
________________________________________________________________________________
(Name and address of transferee)
________________________________________________________________________________
__________________________________________________ Shares registered in the name
of the undersigned on the books of the Corporation named on the face of this
certificate and represented hereby, and irrevocably constitutes and appoints:
__________________________________________________ the attorney of the
undersigned to transfer the said shares on the register of transfers and
books of the Corporation with full power of substitution hereunder.
DATED:
______________________________________ ______________________________________
(Signature of Witness) (Signature of Shareholder)
NOTICE: The signature of this assignment must correspond with the names
as written upon the face of the certificate, in every particular, without
alteration or enlargement, or any change whatsoever, and must be guaranteed by a
bank, trust company or a member of a recognized stock exchange.
Signature Guaranteed By: _______________________________________________________
<PAGE>
EXH. 4.2
REDEEMABLE WARRANT AGREEMENT
DATE: _________, 1997
PARTIES: ChoiceTel Communications, Inc.
9724 10th Avenue North
Plymouth, Minnesota 55441
Norwest Bank Minnesota, National Association
Shareowner Services
161 North Concord Exchange
P.O. Box 738
South Saint Paul, Minnesota 55075-0738
RECITALS:
A. ChoiceTel Communications, Inc., a Minnesota corporation (the
"Company"), proposes to issue at least 800,000 and up to 920,000 Redeemable
Common Stock Purchase Warrants (the "Warrants") evidencing the right to purchase
an aggregate of up to 920,000 authorized but previously unissued shares of
Common Stock, $.01 par value, of the Company (the "Common Stock"). The Warrants
would be issued in connection with the issuance by the Company of at least
800,000 and up to 920,000 Units, each Unit consisting of one share of Common
Stock and one Warrant, in connection with the Company's Registration Statement
on Form SB-2.
B. The Company desires Norwest Bank Minnesota, National Association (the
"Warrant Agent") to act on behalf of the Company, and the Warrant Agent desires
so to act, in connection with the issuance, registration, transfer, exchange and
exercise of the Warrants.
AGREEMENT:
The Company and the Warrant Agent, each intending to be legally bound,
hereby covenant and agree as follows:
ARTICLE I.
APPOINTMENT OF WARRANT AGENT;
ISSUANCE, FORM AND EXECUTION OF WARRANT CERTIFICATES
SECTION 1.1. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints
the Warrant Agent to act as agent for the Company, and the Warrant Agent hereby
accepts the agency established herein and agrees to perform its agency duties in
accordance with the terms and conditions of this Warrant Agreement.
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SECTION 1.2. WARRANT CERTIFICATES. The Company shall execute and deliver
to the Warrant Agent certificates which the Company has authorized to represent
the Warrants ("Warrant Certificates"). The Warrant Certificates shall be
substantially as set forth in Exhibit A hereto and may have such legends,
summaries or endorsements printed, lithographed or engraved thereon as the
Company may deem appropriate and as are not inconsistent with the provisions of
this Warrant Agreement, or as may be required to comply with any law or with any
rule or regulation relating to listing of the Warrants on the NASDAQ system,
including the Nasdaq National Market, or on any stock exchange or to conform to
usage. The Warrant Certificates shall be dated with the date of their issuance.
SECTION 1.3. EXECUTION OF WARRANT CERTIFICATES. The Warrant Certificates
shall be executed on behalf of the Company by a duly authorized officer of the
Company, either manually or by facsimile signature printed thereon. The Warrant
Certificates shall be manually countersigned by the Warrant Agent and shall not
be valid for any purpose unless so countersigned. Any Warrant Certificate may be
signed on behalf of the Company by the person who at the actual date of the
signing of such Warrant Certificate shall have been the proper officer of the
Company, although at the date of issuance of such Warrant Certificate any such
person has ceased to be such officer of the Company.
ARTICLE II.
EXERCISE OF WARRANTS
SECTION 2.1. EXERCISE. Any or all of the Warrants represented by each
Warrant Certificate may be exercised by the holder thereof on or before 5:00
p.m., Minneapolis time, on _________, 2002 unless extended by the Company, by
surrender of the Warrant Certificate with the Purchase Form, which is printed on
the reverse thereof (or a reasonable facsimile thereof), duly executed by such
holder, to the Warrant Agent at its principal office in Minneapolis, Minnesota,
accompanied by payment, in cash or by certified or official bank check payable
to the order of the Company, in an amount equal to the product of the number of
shares of Common Stock issuable upon exercise of the Warrant represented by such
Warrant Certificate, as adjusted pursuant to the provisions of Article III
hereof, multiplied by the exercise price of $9.50, as adjusted pursuant to the
provisions of Article III hereof (such price as so adjusted from time to time
being herein called the "Purchase Price"), and such holder shall be entitled to
receive such number of fully paid and nonassessable shares of Common Stock, as
so adjusted, at the time of such exercise.
SECTION 2.2. TIME OF EXERCISE. Each exercise of Warrants shall be deemed
to have been effective immediately prior to the close of business on the
business day on which the Warrant Certificate relating to such Warrants shall
have been surrendered to the Warrant Agent as provided in Section 2.1, and at
such time the person or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon such exercise as
provided in Section 2.3 shall be deemed to have become the holder or holders of
record thereof.
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SECTION 2.3. ISSUANCE OF SHARES OF COMMON STOCK; NO FRACTIONAL SHARES. As
soon as practicable after the exercise of any Warrant, and in any event within
ten (10) days after receipt by the Company of the notice of exercise under
Section 2.1, the Company at its expense (including the payment by it of any
applicable issue taxes) will cause to be issued in the name of and delivered to
the holder thereof or as such holder (upon payment by such holder of any
applicable transfer taxes) may direct,
(a) a certificate or certificates for the number of fully paid and
nonassessable shares of Common Stock to which such holder shall be entitled
upon such exercise plus, in lieu of any fractional share to which such
holder would otherwise be entitled, an amount in cash equal to such
fraction multiplied by the then current value of a share of Common Stock,
such current value to be determined as follows:
(i) if the Common Stock shall be listed or admitted to unlisted
trading privileges on any single national securities exchange, then
such current value shall be computed on the basis of the last reported
sale price of the Common Stock on such exchange on the last business
day prior to the date of the exercise of such Warrant upon which a
sale shall have been effected; or
(ii) if the Common Stock shall not be so listed or admitted to
unlisted trading privileges and bid and asked prices therefor in the
over-the-counter market shall be reported by NASDAQ, including the
Nasdaq National Market, then such current value shall be computed on
the basis of the Last Reported Sale Valuation Method or, in the event
such method is not then used by NASDAQ, the average of the closing bid
and asked prices on the last business day prior to the date of the
exercise of such Warrant as so reported; or
(iii) if the Common Stock shall be listed or admitted to
unlisted trading privileges on more than one national securities
exchange or one or more national securities exchanges and in the over-
the-counter market, then such current value shall, if different as a
result of calculation under the applicable method(s) described above
in this Section, be deemed to be the higher number calculated in
connection therewith; or
(iv) if the Common Stock shall not be so listed or admitted to
unlisted trading privileges and such bid and asked prices shall not be
so reported, then such current value shall be computed on the basis of
the book value of Common Stock as of the close of business on the last
day of the month immediately preceding the date upon which such
Warrant was exercised, as determined by the Company; and
(b) in case such exercise includes only part of the Warrants
represented by any Warrant Certificate, a new Warrant Certificate or
Warrant Certificates of like tenor, calling in the aggregate on the face or
faces thereof for the number of shares of Common Stock equal (without
giving effect to any adjustment therein) to the number of such
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<PAGE>
shares called for on the face of such Warrant Certificate minus the number
of such shares designated by the holder for such exercise as provided in
Section 2.1. Warrants represented by a properly assigned Warrant
Certificate may be exercised by a new holder without first having a new
Warrant Certificate issued.
SECTION 2.4. EXTENSION OF EXERCISE PERIOD; CHANGE OF EXERCISE PRICE. The
Company may, upon notice given to the Warrant Agent, and without the consent of
the holders of the Warrant Certificates, (a) reduce the Purchase Price during
all or any portion of the originally stated exercise period or (b) extend the
period over which the Warrants are exercisable beyond _________, 2002 and
increase or decrease the Purchase Price for any period the Warrant exercise
period is extended. In the case of the extension of the exercise period or a
change in the Purchase Price, the Company must provide the Warrant Agent and the
Warrantholders of record notice of such extension of the exercise period,
specifying, as the case may be, the time to which such exercise period is
extended, or specifying the new Purchase Price and the periods for which such
new Purchase Price is in effect, a reasonable time prior to the date such
extension or new Purchase Price is to take effect, such reasonable time to be
commercially reasonable and consistent with applicable securities laws and
regulations.
ARTICLE III.
ANTIDILUTION PROVISIONS
SECTION 3.1. ADJUSTMENT OF PURCHASE PRICE.
(a) The Purchase Price shall be subject to the following
adjustments. In the event that:
(i) any dividends on any class of stock of the Company payable
in Common Stock or securities convertible into Common Stock shall be
paid by the Company;
(ii) the Company shall subdivide its then outstanding shares
of Common Stock into a greater number of shares; or
(iii) the Company shall combine outstanding shares of Common
Stock, by reclassification or otherwise;
then, in any such event, the Purchase 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 Purchase 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 Purchase Price per share.
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(b) No adjustment of the Purchase Price shall be made if the amount
of such adjustments shall be less than $.05 per share, but in such case any
adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which, together with any adjustment or adjustments so
carried forward, shall amount to not less than $.05 per share.
SECTION 3.2. ADJUSTMENT OF NUMBER OF SHARES PURCHASABLE ON EXERCISE OF
WARRANTS. Upon each adjustment of the Purchase Price pursuant to Section 3.1
above, the registered holder of each Warrant shall thereafter (until another
such adjustment) be entitled to purchase at the adjusted Purchase Price the
number of shares, calculated to the nearest full share, obtained by multiplying
the number of shares specified in such Warrant (as adjusted as a result of all
adjustments in the Purchase Price in effect prior to such adjustment) by the
Purchase Price in effect prior to such adjustment and dividing the product so
obtained by the adjusted Purchase Price.
SECTION 3.3. NOTICE AS TO ADJUSTMENT. Upon any adjustment of the Purchase
Price and an increase or decrease in the number of shares of Common Stock
purchasable upon the exercise of the Warrants, then, and in each such case, the
Company shall within ten (10) days after the effective date of such adjustment
give written notice thereof, by first class mail, postage prepaid, addressed to
each registered Warrantholder at the address of such Warrantholder as shown on
the books of the Company, which notice shall state the adjusted Purchase Price
and the increased or decreased number of shares purchasable upon the exercise of
the Warrants, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based.
SECTION 3.4. EFFECT OF REORGANIZATION, RECLASSIFICATION, MERGER, ETC. If
at any time while any Warrant is outstanding there should be any capital
reorganization or reclassification of the capital stock of the Company (other
than the issue of any shares of Common Stock in subdivision of outstanding
shares of Common Stock by reclassification or otherwise and other than a
combination of shares provided for in Section 3.1 hereof) or any consolidation
or merger of the Company with another corporation or any sale, conveyance, lease
or other transfer by the Company of all or substantially all of its property to
any other corporation, the holder of any Warrant shall, during the remainder of
the period such Warrant is exercisable, be entitled to receive, upon payment of
the Purchase Price, the number of shares of stock or other securities or
property of the Company, or of the successor corporation resulting from such
consolidation or merger, or of the corporation to which the property of the
Company has been sold, conveyed, leased or otherwise transferred, as the case
may be, to which the Common Stock (and any other securities and property) of the
Company, deliverable upon the exercise of such Warrant, would have been entitled
upon such capital reorganization, reclassification of capital stock,
consolidation, merger, sale, conveyance, lease or other transfer if such Warrant
had been exercised immediately prior to such capital reorganization,
reclassification of capital stock, consolidation, merger, sale, conveyance,
lease or other transfer; and, in any such case, appropriate adjustment (as
determined by the Board of Directors of the Company) shall be made in the
application of the provisions set forth in this Warrant Agreement with respect
to the rights
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and interests thereafter of the Warrantholders to the end that the provisions
set forth in this Warrant Agreement (including the adjustment of the Purchase
Price and the number of shares issuable upon the exercise of the Warrants) shall
thereafter be applicable, as near as may be reasonably practicable, in relation
to any shares or other property thereafter deliverable upon the exercise of the
Warrants as if the Warrants had been exercised immediately prior to such capital
reorganization, reclassification of capital stock, consolidation, merger, sale,
conveyance, lease or other transfer and the Warrantholders had carried out the
terms of the exchange as provided for by such capital reorganization,
reclassification, consolidation or merger. The Company shall not effect any such
capital reorganization, consolidation, merger or transfer unless, upon or prior
to the consummation thereof, the successor corporation or the corporation to
which the property of the Company has been sold, conveyed, leased or otherwise
transferred shall assume by written instrument the obligation to deliver to the
holder of each Warrant such shares of stock, securities, cash or property as in
accordance with the foregoing provisions such holder shall be entitled to
purchase.
SECTION 3.5. PRIOR NOTICE AS TO CERTAIN EVENTS. In case at any time:
(a) the Company shall pay any dividend upon its Common Stock payable
in stock or make any distribution (other than cash dividends) to the
holders of its Common Stock; or
(b) the Company shall offer for subscription pro rata to the holders
of its Common Stock any additional shares of stock of any class or any
other rights; or
(c) there shall be any capital reorganization or reclassification of
the capital stock of the Company, or consolidation or merger of the Company
with, or sale, conveyance, lease or other transfer of all or substantially
all of its assets to, another corporation; or
(d) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then in any one or more of such cases, the Company shall give prior written
notice, by first class mail, postage prepaid, addressed to each registered
Warrantholder at the address of such Warrantholder as shown on the books of the
Company, of the date on which (x) the books of the Company shall close or a
record shall be taken for such stock dividend, distribution or subscription
rights or (y) such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up shall take place, as the case may
be. Such notice shall also specify the date as of which the holders of the
Common Stock of record shall participate in such dividend, distribution or
subscription rights or shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding up, as the case may be. Such written notice shall be given at least
twenty (20) days prior to the action in question and not less than twenty (20)
days prior to the record date or the date on which the Company's transfer books
are closed in respect thereto.
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SECTION 3.6. CERTAIN OBLIGATIONS OF THE COMPANY. The Company will not, by
amendment of its articles of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant Agreement or the Warrant
Certificate, but will at all times in good faith assist in the carrying out of
all such terms. Without limiting the generality of the foregoing, the Company
(a) will take all such action as may be necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable shares of
such stock upon the exercise of all Warrants from time to time outstanding, and
(b) will not (i) transfer all or substantially all of its properties and assets
to any other person or entity, or (ii) consolidate with or merge into any other
entity where the Company is not the continuing or surviving entity, or (iii)
permit any other entity to consolidate with or merge into the Company where the
Company is the continuing or surviving entity but, in connection with such
consolidation or merger, the Common Stock then issuable upon the exercise of the
Warrants shall be changed into or exchanged for shares or other securities or
property of any other entity unless, in any such case, the other entity
acquiring such properties and assets, continuing or surviving after such
consolidation or merger or issuing or distributing such shares or other
securities or property, as the case may be, shall expressly assume in writing
and be bound by all the terms of this Warrant Agreement and the Warrant
Certificates.
SECTION 3.7. RESERVATION AND LISTING OF COMMON STOCK. The Company will at
all times reserve and keep available, solely for issuance and delivery upon the
exercise of the Warrants, all shares of Common Stock from time to time issuable
upon such exercise. All such shares shall be authorized and, when issued upon
such exercise, shall be validly issued, fully paid and nonassessable with no
liability on the part of the holder thereof. The Company, at its expense, will
list on the NASDAQ system, including the Nasdaq National Market, if applicable,
and on each national securities exchange on which any Common Stock may at any
time be listed, subject to official notice of issuance, and will maintain such
listing of, the shares of Common Stock from time to time issuable upon the
exercise of the Warrants.
SECTION 3.8. REGISTRATION OR EXEMPTION FOR COMMON STOCK. The Company will
use its best efforts (a) at all times the Warrants are exercisable to maintain
an effective registration statement under the Securities Act of 1933, as amended
(the "Act"), covering Common Stock issuable upon exercise of the Warrants, (b)
from time to time to amend or supplement the prospectus contained in such
registration statement to the extent necessary in order to comply with
applicable law, (c) to qualify for exemption from the registration requirements
of the Act the Common Stock issuable upon exercise of the Warrants, and (d) to
maintain exemptions or qualifications, in those jurisdictions in which the
original registration statement relating to the Warrants was initially
qualified, to permit the exercise of the Warrants and the issuance of the Common
Stock pursuant to such exercise. The Warrant Agent shall have no responsibility
for the maintenance of such exemptions or qualifications or for liabilities
arising from the exercise or attempted exercise of Warrants in jurisdictions
where exemptions or qualifications have not been maintained or are otherwise
unavailable.
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ARTICLE IV.
REDEMPTION OF WARRANTS
SECTION 4.1. REDEMPTION PRICE. The Warrants may be redeemed at the option
of the Company in whole, at any time on or after _________, 1997, and on or
before _________, 2002, upon notice as set forth in Section 4.2, and at a
redemption price equal to $.01 per Warrant, provided that (a) the last reported
sale price of the Common Stock on a national securities exchange, if the Common
Stock shall be listed or admitted to unlisted trading privileges on a national
securities exchange, or (b) the closing bid price of the Common Stock on the
NASDAQ system, if the Common Stock is not so listed or admitted to unlisted
trading privileges, exceeds $10.00 per share (such price subject to adjustment
from time to time in the same manner as the Purchase Price pursuant to the
provisions of Article III hereof) for any 10 consecutive trading days prior to
the date such notice of redemption is given.
SECTION 4.2. NOTICE OF REDEMPTION. In the case of any redemption of
Warrants, the Company or, at its request, the Warrant Agent in the name of and
at the expense of the Company, shall give notice of such redemption to the
holders of the Warrants to be redeemed as hereinafter provided in this Section
4.2. Notice of redemption to the holders of Warrants shall be given by mailing
by first-class mail a notice of such redemption not less than 30 days prior to
the date fixed for redemption. Any notice which is given in the manner herein
provided shall be conclusively presumed to have been duly given, whether or not
the holder receives the notice. In any case, failure duly to give such notice,
or any defect in such notice, to the holder of any Warrant Certificate shall not
affect the validity of the proceedings for the redemption of Warrants
represented by any other Warrant Certificate. Each such notice shall specify the
date fixed for redemption, the place of redemption and the redemption price of
$.01 at which each Warrant is to be redeemed, and shall state that payment of
the redemption price of the Warrants will be made on surrender of the Warrants
at such place of redemption, and that if not exercised by the close of business
on the date fixed for redemption, the exercise rights of the Warrants identified
for redemption shall expire unless extended by the Company. Such notice shall
also state the current Purchase Price and the date on which the right to
exercise the Warrants will expire unless extended by the Company.
SECTION 4.3. PAYMENT OF WARRANTS ON REDEMPTION; DEPOSIT OF REDEMPTION
PRICE. If notice of redemption shall have been given as provided in Section 4.2,
the redemption price of $.01 per Warrant shall, unless the Warrant is
theretofore exercised pursuant to the terms hereof, become due and payable on
the date and at the place stated in such notice. On and after such date of
redemption, provided that cash sufficient for the redemption thereof shall then
be deposited by the Company with the Warrant Agent for that purpose, the
exercise rights of the Warrants identified for redemption shall expire. On
presentation and surrender of Warrant Certificates at such place of payment
specified in such notice, the Warrants identified for redemption shall be paid
and redeemed at the redemption price of $.01 per Warrant. Prior to the date
fixed for redemption, the Company shall deposit with the Warrant Agent an amount
of money sufficient to pay the redemption price of all the Warrants identified
for redemption. Any monies which shall have been deposited with the Warrant
Agent for redemption of Warrants and which are not
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required for that purpose by reason of exercise of Warrants shall be repaid to
the Company upon delivery to the Warrant Agent of evidence satisfactory to it of
such exercise.
ARTICLE V.
CERTAIN OTHER PROVISIONS RELATING TO
RIGHTS OF HOLDERS OF WARRANT CERTIFICATES
SECTION 5.1. NO RIGHTS OF SHAREHOLDERS. The Warrant Certificates shall be
issued in registered form only. No Warrant Certificate shall entitle the holder
thereof to any of the rights of a holder of shares of Common Stock of the
Company, including, without limitation, the right to vote, to receive dividends
and other distributions, or to receive any notice of, or to attend, meetings of
holders of Common Stock or any other proceedings of the Company.
SECTION 5.2. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
CERTIFICATES. Upon receipt by the Warrant Agent of evidence reasonably
satisfactory to the Warrant Agent of the loss, theft, destruction or mutilation
of any Warrant Certificate, and (a) in the case of any such loss, theft, or
destruction, upon delivery to the Warrant Agent of an indemnity bond in form and
amount, and issued by a bonding company, reasonably satisfactory to the Company,
or (b) in the case of any such mutilation, upon surrender to and cancellation by
the Warrant Agent of such Warrant Certificate, the Company at its expense will
execute and cause the Warrant Agent to countersign and deliver, in lieu thereof,
a new Warrant Certificate of like tenor.
SECTION 5.3. TRANSFER AGENT; CANCELLATION OF WARRANT CERTIFICATES;
UNEXERCISED WARRANTS. Norwest Bank Minnesota, National Association (and any
successor), as transfer agent (the "Transfer Agent"), is hereby irrevocably
authorized and directed at all times to reserve such number of authorized and
unissued shares of Common Stock as shall be sufficient to permit the exercise in
full of all Warrants from time to time outstanding. The Company will keep a copy
of this Agreement on file with the Transfer Agent. The Warrant Agent, and any
successor thereto, is hereby irrevocably authorized to requisition from time to
time from the Transfer Agent certificates for shares of Common Stock required
for exercise of Warrants. The Company will supply the Transfer Agent with duly
executed certificates for shares of Common Stock for such purpose and will make
available any cash required in settlement of fractional share interests. All
Warrant Certificates surrendered upon the exercise or redemption of Warrants
shall be cancelled by the Warrant Agent and shall thereafter be delivered to the
Company; such cancelled Warrant Certificates, with the Purchase Form on the
reverse thereof duly filled in and signed, shall constitute conclusive evidence
as between the parties hereto of the numbers of shares of Common Stock which
shall have been issued upon exercises of Warrants. Promptly after the last day
on which the Warrants are exercisable (set forth in Section 2.1 above), the
Warrant Agent shall certify to the Company the aggregate number of Warrants then
outstanding and unexercised. No shares of Common Stock shall be subject to
reservation with respect to Warrants not exercised prior to the time and date
identified in Section 2.1 above as the last time and date at which Warrants may
be exercised.
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ARTICLE VI.
TRANSFER AND EXCHANGE OF WARRANT CERTIFICATES
SECTION 6.1. WARRANT REGISTER; TRANSFER OR EXCHANGE OF WARRANT
CERTIFICATES. The Warrant Agent shall cause to be kept at the principal office
of the Warrant Agent a register (the "Warrant Register") in which, subject to
such reasonable regulations as the Company may prescribe, provisions shall be
made for the registration of transfers and exchanges of Warrant Certificates.
Upon surrender for transfer or exchange of any Warrant Certificates, properly
endorsed, to the Warrant Agent, the Warrant Agent at the Company's expense will
issue and deliver to or upon the order of the holder thereof a new Warrant
Certificate or Warrant Certificates of like tenor, in the name of such holder or
as such holder (upon payment by such holder of any applicable transfer taxes)
may direct, calling in the aggregate on the face or faces thereof for the number
of shares of Common Stock called for on the face of the Warrant Certificate so
surrendered. Any Warrant Certificate surrendered for transfer or exchange shall
be cancelled by the Warrant Agent and shall thereafter be delivered to the
Company.
SECTION 6.2. IDENTITY OF WARRANTHOLDERS. Until a Warrant Certificate is
transferred in the Warrant Register, the Company and the Warrant Agent may treat
the person in whose name the Warrant Certificate is registered as the absolute
owner thereof and of the Warrants represented thereby for all purposes,
notwithstanding any notice to the contrary, except that, if and when any Warrant
Certificate is properly assigned in blank, the Company and the Warrant Agent may
(but shall not be obligated to) treat the bearer thereof as the absolute owner
of the Warrant Certificate and of the Warrants represented thereby for all
purposes, notwithstanding any notice to the contrary.
ARTICLE VII.
CONCERNING THE WARRANT AGENT
SECTION 7.1. TAXES. The Company will, from time to time, promptly pay to
the Warrant Agent, or make provision satisfactory to the Warrant Agent for the
payment of, all taxes and charges that may be imposed by the United States or
any State upon the Company or the Warrant Agent upon the transfer or delivery of
shares of Common Stock upon the exercise of Warrants, but the Company shall not
be obligated to pay any tax imposed in connection with any transfer involved in
the delivery of a certificate for shares of Common Stock in any name other than
that of the registered holder of the Warrant Certificate surrendered in
connection with the purchase thereof.
SECTION 7.2. REPLACEMENT OF WARRANT AGENT IN CERTAIN CIRCUMSTANCES.
(a) The Warrant Agent may resign its duties and be discharged from
all further duties and liabilities hereunder after giving thirty (30) days
notice in writing to the Company, except that such shorter notice may be
given as the Company shall, in writing, accept as sufficient. The Company
may discharge the Warrant Agent at any time with or without reason,
effective upon thirty (30) days written notice to the Warrant Agent or
10
<PAGE>
such shorter period as the Warrant Agent shall, in writing, accept as
sufficient. If the office of Warrant Agent becomes vacant by resignation,
discharge, incapacity to act or otherwise, the Company shall appoint in
writing a new Warrant Agent, the principal office of which shall be in
Minnesota. If the Company shall fail to make such appointment within a
period of thirty (30) days after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Warrant Agent
or by the holder of a Warrant Certificate, then the holder of any Warrant
Certificate may apply to any court of competent jurisdiction for the
appointment of a new Warrant Agent. Any new Warrant Agent, whether
appointed by the Company or by such a court, shall be a corporation
organized and doing business under the laws of the United States or of the
State of Minnesota, of good standing, and having its principal office in
Minnesota, which is authorized under such laws to exercise corporate trust
powers and is subject to supervision or examination by Federal or State
authority. Any new Warrant Agent appointed hereunder shall execute,
acknowledge and deliver to the Company an instrument accepting such
appointment hereunder and thereupon such new Warrant Agent without any
further act or deed shall become vested with all the rights, powers, duties
and responsibilities of the Warrant Agent hereunder with like effect as if
it had been named as the Warrant Agent; but if for any reason it becomes
necessary or expedient to have the former Warrant Agent execute and deliver
any further assurance, conveyance, act or deed, the same shall be done and
shall be legally and validly executed and delivered by the former Warrant
Agent. Not later than the effective date of any such appointment the
Company shall file notice thereof with the former Warrant Agent. The
Company shall promptly give notice of any such appointment to the holders
of the Warrant Certificates by mail to their addresses as shown in the
Warrant Register. Failure to file or give such notice, or any defect
therein, shall not affect the legality or validity of the appointment of
the successor Warrant Agent.
(b) Any company into which the Warrant Agent or any new Warrant
Agent may be merged or converted or with which it may be consolidated or
any company resulting from any merger, conversion or consolidation to which
the Warrant Agent or any new Warrant Agent shall be a party shall be the
successor Warrant Agent under this Warrant Agreement without any further
act; provided that if such company would not be eligible for appointment as
a successor Warrant Agent under the provisions of paragraph (a) of this
Section 7.2 the Company shall forthwith appoint a new Warrant Agent in
accordance with such provisions. Any such successor Warrant Agent may adopt
the prior countersignature of any predecessor Warrant Agent and deliver
Warrant Certificates countersigned and not delivered by such predecessor
Warrant Agent or may countersign Warrant Certificates either in the name of
any predecessor Warrant Agent or the name of the successor Warrant Agent.
SECTION 7.3. REMUNERATION OF WARRANT AGENT. The Company will pay the
Warrant Agent reasonable remuneration for its services as Warrant Agent
hereunder and will reimburse the Warrant Agent upon demand for all expenditures
that the Warrant Agent may reasonably incur in the execution of its duties
hereunder.
11
<PAGE>
SECTION 7.4. FURTHER ASSURANCES. The Company will perform, exercise,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Warrant Agent for the carrying out or performing
by the Warrant Agent of the provisions of this Warrant Agreement.
SECTION 7.5. LIMITATIONS ON LIABILITIES OF THE WARRANT AGENT.
(a) The Warrant Agent may consult with legal counsel (who may be
legal counsel for the Company), and the opinion of such counsel shall be
full and complete authorization and protection of the Warrant Agent as to
any action taken or omitted by it in good faith and in accordance with such
opinion.
(b) Whenever, in the performance of its duties under this Warrant
Agreement, the Warrant Agent shall deem it necessary or desirable that any
matter be proved or established, or that any instructions with respect to
the performance of its duties hereunder be given, by the Company prior to
taking or suffering any action hereunder, such matter (unless other
evidence in respect thereof be herein specifically prescribed) may be
deemed to be conclusively proved and established, or such instructions may
be given, by a certificate or instrument signed by an officer of the
Company and delivered to the Warrant Agent; and such certificate or
instrument shall be full authorization to the Warrant Agent for any action
taken or suffered in good faith by it under the provisions of this Warrant
Agreement in reliance upon such certificate or instrument; but in its
discretion the Warrant Agent may in lieu thereof accept other evidence of
such matter or may require such further or additional evidence as it may
deem reasonable.
(c) The Warrant Agent shall be liable hereunder only for its own
negligence or willful misconduct. The Warrant Agent shall act hereunder
solely as agent, and its duties shall be determined solely by the
provisions hereof. The Company agrees to indemnify the Warrant Agent and
save it harmless against any and all liabilities, including judgments,
costs and counsel fees, for anything done or omitted by the Warrant Agent
in the execution of this Warrant Agreement except as a result of the
Warrant Agent's negligence or willful misconduct.
(d) The Warrant Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Warrant Agreement or
in the Warrant Certificates (except its countersignature thereof) or be
required to verify the same, but all such statements and recitals are and
shall be deemed to have been made by the Company only.
(e) The Warrant Agent shall not be under any responsibility in
respect to the validity or execution of any Warrant Certificate (except its
countersignature thereof); nor shall it be responsible for any breach by
the Company of any covenant or condition contained in this Warrant
Agreement or in any Warrant Certificate; nor shall it be responsible for
the making of any adjustment in the Purchase Price, or number of shares
12
<PAGE>
issuable upon exercise of the Warrant Certificates or responsible for the
manner, method or amount of any such adjustment or the facts that would
require any such adjustment; nor shall it by any act hereunder be deemed to
make any representation or warranty as to the authorization or reservation
of any shares of Common Stock to be issued pursuant to this Warrant
Agreement or any Warrant Certificate or as to whether any shares of Common
Stock or other securities are or will be validly authorized and issued and
fully paid and nonassessable.
SECTION 7.6. AMENDMENT AND MODIFICATION. The Warrant Agent may, without
the consent or concurrence of the holders of the Warrant Certificates, by
supplemental agreement or otherwise, join with the Company in making any changes
or corrections in this Warrant Agreement that they shall have been advised by
counsel (a) are required to cure any ambiguity or to correct any defective or
inconsistent provision or clerical omission or mistake or manifest error herein
contained, (b) add to the obligations of the Company in this Warrant Agreement
further obligations thereafter to be observed by it, or surrender any right or
power reserved to or conferred upon the Company in this Warrant Agreement, or
(c) do not or will not adversely affect, alter or change the rights, privileges
or immunities of the holders of Warrant Certificates not provided for under this
Warrant Agreement; provided, however, that any term of this Warrant Agreement or
any Warrant Certificate may be changed, waived, discharged or terminated by an
instrument in writing signed by each party against which enforcement of such
change, waiver, discharge or termination is sought, or by which the same is to
be performed or observed.
ARTICLE VIII.
OTHER MATTERS
SECTION 8.1. SUCCESSORS AND ASSIGNS. All the covenants and provisions of
this Warrant Agreement by or for the benefit of the Company or the Warrant Agent
shall bind and inure to the benefit of their respective successors and assigns.
SECTION 8.2. NOTICES. Any notice or demand authorized by this Warrant
Agreement to be given or made by the Warrant Agent or by the holder of any
Warrant Certificate to or on the Company shall be sufficiently given or made if
sent by first class or registered mail, postage prepaid, addressed (until
another address is filed in writing by the Company with the Warrant Agent) as
follows:
ChoiceTel Communications, Inc.
9724 10th Avenue North
Plymouth, Minnesota 55441
Attention: Chief Financial Officer
Any notice or demand authorized by this Warrant Agreement to be given or made by
the holder of any Warrant Certificate or by the Company to or on the Warrant
Agent shall be sufficiently given or made if sent by first class or registered
mail, postage prepaid, addressed (until another address is filed in writing by
the Warrant Agent with the Company) as follows:
13
<PAGE>
Norwest Bank Minnesota, National Association
Shareowner Services
161 North Concord Exchange
P.O. Box 738
South Saint Paul, Minnesota 55075-0738
SECTIONS 8.3. GOVERNING LAW. This Warrant Agreement and the Warrant
Certificates are being delivered in the State of Minnesota and shall be
construed and enforced in accordance with and governed by the laws of such
State.
SECTION 8.4. NO BENEFITS CONFERRED. Nothing in this Warrant Agreement
expressed and nothing that may be implied from any of the provisions hereof is
intended, or shall be construed, to confer upon, or give to, any person or
corporation other than the Company, the Warrant Agent, and the holders of the
Warrant Certificates, any right, remedy or claim under or by reason of this
Agreement or of any covenant, condition, stipulation, promise or agreement
herein; and all covenants, conditions, stipulations, promises and agreements in
this Warrant Agreement contained shall be for the sole and exclusive benefit of
the Company, the Warrant Agent, their respective successors and the holders of
the Warrant Certificates.
SECTION 8.5. HEADINGS. The descriptive headings used in this Warrant
Agreement are inserted for convenience only and shall not control or affect the
meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, this Warrant Agreement has been duly executed by the
parties hereto as of the day and year first above written.
CHOICETEL COMMUNICATIONS, INC.
By _______________________________________
Its _______________________________________
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By _______________________________________
Its _______________________________________
14
<PAGE>
EXHIBIT A
THIS WARRANT CERTIFICATE MAY BE
TRANSFERRED SEPARATELY FROM THE COMMON STOCK CERTIFICATE
WITH WHICH IT IS INITIALLY ISSUED
EXERCISABLE ON OR BEFORE, AND VOID AFTER,
5:00 P.M. MINNEAPOLIS TIME, _________, 2002
No. W- _____ Certificate for __________ Warrants
--------------------------------------------
WARRANT CUSIP
--------------------------------------------
WARRANTS TO PURCHASE COMMON STOCK OF
CHOICETEL COMMUNICATIONS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
THIS CERTIFIES that ___________________________________________ or assigns,
is the owner of the number of Warrants set forth above, each of which represents
the right to purchase from ChoiceTel Communications, Inc., a Minnesota
corporation (the "Company"), at any time on or before 5:00 p.m., Minneapolis
time, _________, 2002, upon compliance with and subject to the conditions set
forth herein and in the Warrant Agreement hereinafter referred to, one share
(subject to adjustments referred to below) of the Common Stock of the Company
(such shares or other securities or property purchasable upon exercise of the
Warrants being herein called the "Shares"), by surrendering this Warrant
Certificate, with the Purchase Form on the reverse side duly executed, at the
principal office of Norwest Bank Minnesota, National Association, or its
successor, as warrant agent (the "Warrant Agent"), and by paying in full, in
cash or by certified or official bank check payable to the order of the Company,
the purchase price of $9.50 per share.
Upon any exercise of less than all the Warrants evidenced by this Warrant
Certificate, there shall be issued to the holder a new Warrant Certificate in
respect of the Warrants as to which this Warrant Certificate was not exercised.
Upon the surrender for transfer or exchange hereof, properly endorsed, to
the Warrant Agent, the Warrant Agent at the Company's expense will issue and
deliver to the order of the holder hereof a new Warrant Certificate or Warrant
Certificates of like tenor, in the name of such holder or as such holder (upon
payment by such holder of any applicable transfer taxes) may direct, calling in
the aggregate on the face or faces thereof for the number of shares of Common
Stock called for on the face hereof.
A-1
<PAGE>
The Warrant Certificates are issued only as registered Warrant
Certificates. Until this Warrant Certificate is transferred in the Warrant
Register, the Company and the Warrant Agent may treat the person in whose name
this Warrant Certificate is registered as the absolute owner hereof and of the
Warrants represented hereby for all purposes, notwithstanding any notice to the
contrary.
This Warrant Certificate is issued under the Warrant Agreement dated as of
_________, 1997, between the Company and the Warrant Agent and is subject to the
terms and provisions contained in said Warrant Agreement, to all of which terms
and provisions the registered holder of this Warrant Certificate consents by
acceptance hereof. Copies of said Warrant Agreement are on file at the principal
office of the Warrant Agent in Minneapolis, Minnesota, and may be obtained by
writing to the Warrant Agent.
The number of Shares receivable upon the exercise of the Warrants
represented by this Warrant Certificate and the purchase price per share are
subject to adjustment upon the happening of certain events specified in the
Warrant Agreement (which provisions are contained in Article III of the Warrant
Agreement and are hereby incorporated by reference).
No fractional Shares of the Company's Common Stock will be issued upon the
exercise of Warrants. As to any final fraction of a share which a holder of
Warrants exercised in the same transaction would otherwise be entitled to
purchase on such exercise, the Company shall pay a cash adjustment in lieu of
any fractional Share determined as provided in the Warrant Agreement.
The Warrants may be redeemed by the Company, in whole, at any time on or
after _________, 1997, and on or before _________, 2002, at a redemption price
of $.01 per Warrant, upon notice of such redemption as set forth below, provided
that (a) the last reported sale price of the Common Stock on a national
securities exchange, if the Common Stock shall be listed or admitted to unlisted
trading privileges on a national securities exchange, or (b) the closing bid
price of the Common Stock on the NASDAQ system, if the Common Stock is not so
listed or admitted to unlisted trading privileges, exceeds $10.00 per share
(subject to adjustment as provided in the Warrant Agreement) for any 10
consecutive trading days prior to the date such notice of redemption is given.
Notice of redemption shall be mailed not less than thirty (30) days prior to the
date fixed for redemption to the holders of Warrants at their last registered
addresses. If notice of redemption shall have been given as provided in the
Warrant Agreement and cash sufficient for the redemption be deposited by the
Company for that purpose, the exercise rights of the Warrants identified for
redemption shall expire at the close of business on such date of redemption
unless extended by the Company.
This Warrant Certificate shall not entitle the holder hereof to any of the
rights of a holder of Common Stock of the Company, including, without
limitation, the right to vote, to receive dividends and other distributions, to
exercise any preemptive right, or to receive any notice of, or to attend
meetings of holders of Common Stock or any other proceedings of the Company.
A-2
<PAGE>
This Warrant Certificate shall be void and the Warrants and any rights
represented hereby shall cease unless exercised on or before 5:00 P.M.
Minneapolis time on _________, 2002, unless extended by the Company.
This Warrant Certificate shall not be valid for any purpose until it shall
have been countersigned by the Warrant Agent.
WITNESS the facsimile signatures of the Company's duly authorized officers.
Dated: ______________ CHOICETEL COMMUNICATIONS, INC.
By ______________________________________
Its ______________________________________
Attest:
__________________________
Secretary
COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
as Warrant Agent
By __________________________
Authorized Signature
A-3
<PAGE>
[REVERSE OF WARRANT CERTIFICATE]
THE ARTICLES OF INCORPORATION OF THE CORPORATION GRANT TO THE BOARD OF DIRECTORS
THE POWER TO ESTABLISH MORE THAN ONE CLASS OR SERIES OF SHARES AND TO FIX THE
RELATIVE RIGHTS AND PREFERENCES OF ANY SUCH DIFFERENT CLASS OR SERIES. THE
CORPORATION WILL FURNISH TO ANY SHAREHOLDER UPON REQUEST AND WITHOUT CHARGE A
FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS
OF THE SHARES OF EACH CLASS OR SERIES AUTHORIZED TO BE ISSUED, SO FAR AS THEY
HAVE BEEN DETERMINED, AND THE AUTHORITY OF THE BOARD TO DETERMINE THE RELATIVE
RIGHTS AND PREFERENCES OF SUBSEQUENT CLASSES OR SERIES.
THE HOLDER OF THIS WARRANT CERTIFICATE WILL BE ABLE TO EXERCISE THE WARRANTS
ONLY IF A CURRENT PROSPECTUS RELATING TO THE SHARES UNDERLYING THE WARRANTS IS
THEN IN EFFECT AND ONLY IF SUCH SHARES ARE QUALIFIED FOR SALE OR EXEMPT FROM
QUALIFICATION UNDER THE APPLICABLE SECURITIES LAWS OF THE STATES IN WHICH THE
HOLDER OF THIS WARRANT CERTIFICATE RESIDES. ALTHOUGH THE COMPANY WILL USE ITS
BEST EFFORTS TO MAINTAIN THE EFFECTIVENESS OF A CURRENT PROSPECTUS COVERING THE
SHARES UNDERLYING THE WARRANTS, THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL
BE ABLE TO DO SO, OR TO GET ANY REQUIRED AMENDMENTS DECLARED EFFECTIVE BY
FEDERAL OR STATE AUTHORITIES IN A TIMELY MANNER. THE COMPANY WILL BE UNABLE TO
ISSUE SHARES TO THOSE PERSONS DESIRING TO EXERCISE THEIR WARRANTS IF A CURRENT
PROSPECTUS COVERING THE SHARES ISSUABLE UPON THE EXERCISE OF THE WARRANTS IS NOT
KEPT EFFECTIVE OR IF SUCH SHARES ARE NOT QUALIFIED NOR EXEMPT FROM QUALIFICATION
IN THE STATES IN WHICH THE HOLDERS OF THE WARRANTS RESIDE.
TO: ChoiceTel Communications, Inc.
c/o Norwest Bank Minnesota, National Association
Warrant Agent
PURCHASE FORM
(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO EXERCISE WARRANT
CERTIFICATES)
The undersigned hereby irrevocably elects to exercise _____________* of the
Warrants represented by the Warrant Certificate and to purchase for cash the
Shares issuable upon the exercise of said Warrants, and herewith makes payment
of $__________ therefor, and requests that certificates for such Shares shall be
issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER OF
A-4
<PAGE>
REGISTERED HOLDER OF CERTIFICATE
- ----------------------------------
- ----------------------------------
_____________________________
(Print Name)
_____________________________
(Address)
_____________________________
Dated: __________________ Signature(s) ________________
________________
__________________
* Insert here the number of Warrants evidenced on the face of this Warrant
Certificate (or, in the case of a partial exercise, the portion thereof being
exercised), in either case without making any adjustment for additional Common
Stock or any other securities or property or cash which, pursuant to the
adjustment provisions referred to in this Warrant Certificate, may be
deliverable upon exercise.
A-5
<PAGE>
ASSIGNMENT FORM
(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO TRANSFER WARRANT
CERTIFICATES)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
____________________** of the Warrants represented by this Warrant Certificate
unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------
- ----------------------------------
_________________________________________
(Print name)
_________________________________________
(Address)
_________________________________________
and does hereby irrevocably constitute and appoint ____________________________
Attorney to transfer this Warrant Certificate on the records of the Company with
full power of substitution in the premises.
Dated: _________________ Signature(s) _________________________
_______________________
Signature(s)
Guaranteed: _________________________________________
- -----------------
** Insert here the number of Warrants evidenced on the face of this Warrant
Certificate (or, in the case of a partial assignment, the portion thereof being
assigned), in either case without making any adjustment for additional Common
Stock or any other securities or property or cash which, pursuant to the
adjustment provisions referred to in this Warrant Certificate, may be
deliverable upon exercise.
NOTICE
The Signature(s) to the Purchase Form or the Assignment Form must
correspond to the name(s) as written upon the face of this Warrant Certificate
in every particular without alteration or enlargement or any change whatsoever.
A-6
<PAGE>
INTELLIPHONE, INC.
1997 LONG-TERM INCENTIVE
AND
STOCK OPTION PLAN
SECTION 1. PURPOSE OF PLAN. This Plan shall be known as the
"INTELLIPHONE, INC. 1997 LONG-TERM INCENTIVE AND STOCK OPTION PLAN" and upon
approval of the pending name change of the corporation to "ChoiceTel
Communications, Inc.," the Plan shall be known as the "CHOICETEL
COMMUNICATIONS, INC. 1997 LONG-TERM INCENTIVE AND STOCK OPTION PLAN" and is
hereinafter referred to as the "Plan". The purpose of the Plan is to aid in
maintaining and developing personnel capable of assuring the future success
of Intelliphone, Inc., a Minnesota corporation (the "Company"), to offer such
personnel additional incentives to put forth maximum efforts for the success
of the business, and to afford them an opportunity to acquire a proprietary
interest in the Company through stock options and other long-term incentive
awards as provided herein. Options granted under this Plan may be either
incentive stock options ("Incentive Stock Options") within the meaning of
Section 422 of the Internal Revenue Code of 1986 (the "Code"), or options
that do not qualify as Incentive Stock Options. Awards granted under this
Plan shall be SARs, restricted stock or performance awards as hereinafter
described.
SECTION 2. STOCK SUBJECT TO PLAN. Subject to the provisions of
Section 16 hereof, the stock to be subject to options or other awards under the
Plan shall be the Company's authorized common shares, no par value(the "Common
Shares"). Such Common Shares may be either authorized but unissued shares, or
issued shares which have been reacquired by the Company. Subject to adjustment
as provided in Section 16 hereof, the maximum number of shares on which options
may be exercised or other awards issued under this Plan shall be 100,000 shares.
If an option or award under the Plan expires, or for any reason is terminated or
unexercised with respect to any shares, such shares shall again be available for
options or awards thereafter granted during the term of the Plan.
SECTION 3. ADMINISTRATION OF PLAN.
(a) The Plan shall be administered by the Board of Directors of the
Company or a committee thereof. The members of any such committee shall be
appointed by and serve at the pleasure of the Board of Directors. (The
group administering the Plan shall hereinafter be referred to as the
"Committee".)
(b) The Committee shall have plenary authority in its discretion, but
subject to the express provisions of the Plan: (i) to determine the
purchase price of the Common Stock covered by each option or award, (ii) to
determine the employees to whom and the time or times at which such options
and awards shall be granted and the number of shares to be subject to each,
(iii) to determine the form of payment to be made upon the exercise of an
SAR or in connection with performance awards, either cash, Common Shares of
the Company
<PAGE>
or a combination thereof, (iv) to determine the terms of exercise of each
option and award, (v) to accelerate the time at which all or any part of an
option or award may be exercised, (vi) to amend or modify the terms of any
option or award with the consent of the optionee, (vii) to interpret the
Plan, (viii) to prescribe, amend and rescind rules and regulations relating
to the Plan, (ix) to determine the terms and provisions of each option and
award agreement under the Plan (which agreements need not be identical),
including the designation of those options intended to be Incentive Stock
Options, and (x) to make all other determinations necessary or advisable
for the administration of the Plan, subject to the exclusive authority of
the Board of Directors under Section 17 herein to amend or terminate the
Plan. The Committee's determinations on the foregoing matters, unless
otherwise disapproved by the Board of Directors of the Company, shall be
final and conclusive.
(c) The Committee shall select one of its members as its Chair and
shall hold its meetings at such times and places as it may determine. A
majority of its members shall constitute a quorum. All determinations of
the Committee shall be made by not less than a majority of its members. Any
decision or determination reduced to writing and signed by all of the
members of the Committee shall be fully effective as if it had been made by
a majority vote at a meeting duly called and held. The grant of an option
or award shall be effective only if a written agreement shall have been
duly executed and delivered by and on behalf of the Company following such
grant. The Committee may appoint a Secretary and may make such rules and
regulations for the conduct of its business as it shall deem advisable.
SECTION 4. ELIGIBILITY AND GRANT.
(a) ELIGIBILITY. Incentive Stock Options may only be granted under
this Plan to any full or part-time employee (which term as used herein
includes, but is not limited to, officers and directors who are also
employees) of the Company and of its present and future subsidiary
corporations within the meaning of Section 424(f) of the Code (herein
called "subsidiaries"). Full or part-time employees, directors who are not
employees, consultants or independent contractors to the Company or one of
its subsidiaries or affiliates shall be eligible to receive options which
do not qualify as Incentive Stock Options and awards. In determining the
persons to whom options and awards shall be granted and the number of
shares subject to each, the Committee 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 Committee in its discretion shall deem relevant.
(b) GRANT OF ADDITIONAL OPTIONS. A person who has been granted an
option or award under this Plan may be granted additional options or awards
under the Plan if the Committee shall so determine; provided, however, that
to the extent the aggregate fair market value (determined at the time the
Incentive Stock Option is granted) of the Common Shares with respect to
which all Incentive Stock Options are exercisable for the first time by an
employee during any calendar year (under all plans described in subsection
(d) of Section 422
2
<PAGE>
of the Code of his or her employer corporation and its parent and
subsidiary corporations) exceeds $100,000, such options shall be treated
as options that do not qualify as Incentive Stock Options. Nothing in the
Plan or in any agreement thereunder shall confer on any employee any right
to continue in the employ of the Company or any of its subsidiaries or
affect, in any way, the right of the Company or any of its subsidiaries to
terminate his or her employment at any time.
SECTION 5. PRICE. The option price for all Incentive Stock Options
granted under the Plan shall be determined by the Committee but shall not be
less than 100% of the fair market value of the Common Shares at the date of
grant of such option. The option price for options granted under the Plan that
do not qualify as Incentive Stock Options and, if applicable, the price for all
awards shall also be determined by the Committee. For purposes of the preceding
sentence and for all other valuation purposes under the Plan, the fair market
value of the Common Shares shall be as reasonably determined by the Committee.
If on the date of grant of any option or award hereunder the Common Shares are
not traded on an established securities market, the Committee shall make a good
faith attempt to satisfy the requirements of this Section 5 and in connection
therewith shall take such action as it deems necessary or advisable.
SECTION 6. TERM. Each option and award and all rights and
obligations thereunder shall expire on the date determined by the Committee and
specified in the option or award agreement. The Committee shall be under no duty
to provide terms of like duration for options or awards granted under the Plan,
but the term of an Incentive Stock Option may not extend more than ten (10)
years from the date of grant of such option and the term of options granted
under the Plan which do not qualify as Incentive Stock Options may not extend
more than fifteen (15) years from the date of granting of such option.
SECTION 7. EXERCISE OF OPTION OR AWARD.
(a) EXERCISABILITY. The Committee shall have full and complete
authority to determine whether an option or award will be exercisable in
full at any time or from time to time during the term thereof, or to
provide for the exercise thereof in such installments, upon the occurrence
of such events (such as termination of employment for any reason) and at
such times during the term of the option as the Committee may determine and
specify in the option or award agreement.
(b) NO VIOLATION OF STATE OR FEDERAL LAWS. The exercise of any
option or award granted hereunder shall only be effective at such time that
the sale of Common Shares pursuant to such exercise will not violate any
state or federal securities or other laws.
(c) METHOD OF EXERCISE. An optionee or grantee electing to exercise
an option or award shall give written notice to the Company of such
election and of the number of shares subject to such exercise. The full
purchase price of such shares shall be tendered with such notice of
exercise. Payment shall be made to the Company in cash (including bank
check,
3
<PAGE>
certified check, personal check, or money order), or, at the
discretion of the Committee and as specified by the Committee, (i) by
delivering certificates for the Company's Common Shares already owned by
the optionee or grantee having a fair market value as of the date of grant
equal to the full purchase price of the shares, or (ii) relinquishing the
right to acquire by exercise of any option, such number of the Company's
Common Shares otherwise issuable to the optionee which in the aggregate
have a fair market value equal to the amount of the full purchase price
("cashless exercise") or (iii) by delivering the optionee's or grantee's
promissory note, which shall provide for interest at a rate not less than
the minimum rate required to avoid the imputation of income, original issue
discount or a below- market-rate loan pursuant to Sections 483, 1274 or
7872 of the Code or any successor provisions thereto, or (iv) a combination
of cash, the optionee's or grantee promissory note, a cashless exercise and
such owned shares. The fair market value of such tendered shares shall be
determined as provided in Section 5 herein. The optionee's or grantee's
promissory note shall be a full recourse liability of the optionee and may,
at the discretion of the Committee, be secured by a pledge of the shares
being purchased. Until such person has been issued the shares subject to
such exercise, he or she shall possess no rights as a shareholder with
respect to such shares.
SECTION 8. RESTORATION OPTIONS. The Committee may grant "restoration"
options, separately or together with another option, pursuant to which, subject
to the terms and conditions established by the Committee and any applicable
requirements of Rule 16b-3 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act") or any other applicable law, the optionee
would be granted a new option when the payment of the exercise price of the
option to which such "restoration" option relates is made by the delivery of
shares of the Company's Common Shares owned by the optionee, as described in
this Section 8, which new option would be an option to purchase the number of
shares not exceeding the sum of (a) the number of shares of the Company's Common
Shares tendered as payment upon the exercise of the option to which such
"restoration" option relates and (b) the number of shares of the Company's
Common Shares, if any, tendered as payment of the amount to be withheld under
applicable income tax laws in connection with the exercise of the option to
which such "restoration" option relates, as described in Section 12 hereof.
"Restoration" options may be granted with respect to options previously granted
under this Plan or any prior stock option plan of the Company, and may be
granted in connection with any option granted under this Plan at the time of
such grant. The purchase price of the Common Shares under each such new option,
and the other terms and conditions of such option, shall be determined by the
Committee, consistent with the provisions of the Plan.
SECTION 9. STOCK APPRECIATION RIGHTS.
(a) GRANT. At the time of grant of an option or award under the Plan
(or at any other time), the Committee, in its discretion, may grant a Stock
Appreciation Right ("SAR") evidenced by an agreement in such form as the
Committee shall from time to time approve. Any such SAR may be subject to
restrictions on the exercise thereof as may be set forth in the agreement
representing such SAR, which agreement shall comply with and be subject to
the
4
<PAGE>
following terms and conditions and any additional terms and conditions
established by the Committee that are consistent with the terms of the
Plan.
(b) EXERCISE. An SAR shall be exercised by the delivery to the
Company of a written notice which shall state that the holder thereof
elects to exercise his or her SAR as to the number of shares specified in
the notice and which shall further state what portion, if any, of the SAR
exercise amount (hereinafter defined) the holder thereof requests is to be
paid in cash and what portion, if any, is to be paid in Common Shares of
the Company. The Committee promptly shall cause to be paid to such holder
the SAR exercise amount either in cash, in Common Shares of the Company, or
any combination of cash and shares as the Committee may determine. Such
determination may be either in accordance with the request made by the
holder of the SAR or in the sole and absolute discretion of the Committee.
The SAR exercise amount is the excess of the fair market value of one share
of the Company's Common Shares on the date of exercise over the per share
exercise price in respect of which the SAR was granted, multiplied by the
number of shares as to which the SAR is exercised. For the purposes hereof,
the fair market value of the Company's shares shall be determined as
provided in Section 5 herein.
SECTION 10. RESTRICTED STOCK AWARDS. Awards of Common Shares subject to
forfeiture and transfer restrictions may be granted by the Committee. Any
restricted stock award shall be evidenced by an agreement in such form as the
Committee shall from time to time approve, which agreement shall comply with and
be subject to the following terms and conditions and any additional terms and
conditions established by the Committee that are consistent with the terms of
the Plan:
(a) GRANT OF RESTRICTED STOCK AWARDS. Each restricted stock award
made under the Plan shall be for such number of Common Shares as shall be
determined by the Committee and set forth in the agreement containing the
terms of such restricted stock award. Such agreement shall set forth a
period of time during which the grantee must remain in the continuous
employment of the Company in order for the forfeiture and transfer
restrictions to lapse. If the Committee so determines, the restrictions may
lapse during such restricted period in installments with respect to
specified portions of the shares covered by the restricted stock award. The
agreement may also, in the discretion of the Committee, set forth
performance or other conditions that will subject the Common Shares to
forfeiture and transfer restrictions. The Committee may, at its discretion,
waive all or any part of the restrictions applicable to any or all
outstanding restricted stock awards.
(b) DELIVERY OF COMMON SHARES AND RESTRICTIONS. At the time of a
restricted stock award, a certificate representing the number of Common
shares awarded thereunder shall be registered in the name of the grantee.
Such certificate shall be held by the Company or any custodian appointed by
the Company for the account of the grantee subject to the terms and
conditions of the Plan, and shall bear such a legend setting forth the
restrictions imposed thereon as the Committee, in its discretion, may
determine. The grantee shall have
5
<PAGE>
all rights of a shareholder with respect to the Common Shares, including
the right to receive dividends and the right to vote such shares, subject
to the following restrictions: (i) the grantee shall not be entitled to
delivery of the stock certificate until the expiration of the restricted
period and the fulfillment of any other restrictive conditions set forth
in the restricted stock agreement with respect to such Common Shares; (ii)
none of the Common Shares may be sold, assigned, transferred, pledged,
hypothecated or otherwise encumbered or disposed of during such restricted
period or until after the fulfillment of any such other restrictive
conditions; and (iii) except as otherwise determined by the Committee, all
of the Common Shares shall be forfeited and all rights of the grantee to
such Common Shares shall terminate, without further obligation on the part
of the Company, unless the grantee remains in the continuous employment of
the Company for the entire restricted period in relation to which such
Common Shares were granted and unless any other restrictive conditions
relating to the restricted stock award are met. Any Common Shares, any
other securities of the Company and any other property (except for cash
dividends) distributed with respect to the Common Shares subject to
restricted stock awards shall be subject to the same restrictions, terms
and conditions as such restricted Common Shares.
(c) TERMINATION OF RESTRICTIONS. At the end of the restricted period
and provided that any other restrictive conditions of the restricted stock
award are met, or at such earlier time as otherwise determined by the
Committee, all restrictions set forth in the agreement relating to the
restricted stock award or in the Plan shall lapse as to the restricted
Common Shares subject thereto, and a stock certificate for the appropriate
number of Common Shares, free of the restrictions and the restricted stock
legend, shall be delivered to the grantee or his or her beneficiary or
estate, as the case may be.
SECTION 11. PERFORMANCE AWARDS. The Committee is further
authorized togrant performance awards. Subject to the terms of this Plan and
any applicable award agreement, a performance award granted under the Plan
(i) may be denominated or payable in cash, Common Shares (including, without
limitation, restricted stock), other securities, other awards, or other
property and (ii) shall confer on the holder thereof rights valued as
determined by the Committee, in its discretion, and payable to, or
exercisable by, the holder of the Performance awards, in whole or in part,
upon the achievement of such performance goals during such performance
periods as the Committee, in its discretion, shall establish. Subject to the
terms of this Plan and any applicable award agreement, the performance goals
to be achieved during any performance period, the length of any performance
period, the amount of any Performance award granted, and the amount of any
payment or transfer to be made by the grantee and by the Company under any
Performance award shall be determined by the Committee.
SECTION 12. INCOME TAX WITHHOLDING AND TAX BONUSES.
(a) WITHHOLDING OF TAXES. In order to comply with all applicable
federal or state income tax laws or regulations, the Company may take such
action as it deems appropriate to ensure that all applicable federal or
state payroll, withholding, income or other taxes, which
6
<PAGE>
are the sole and absolute responsibility of an optionee or grantee under
the Plan, are withheld or collected from such optionee or grantee. In
order to assist an optionee or grantee in paying all federal and state
taxes to be withheld or collected upon exercise of an option or award which
does not qualify as an Incentive Stock Option hereunder, the Committee, in
its absolute discretion and subject to such additional terms and conditions
as it may adopt, shall permit the optionee or grantee to satisfy such tax
obligation by (i) electing to have the Company withhold a portion of the
shares otherwise to be delivered upon exercise of such option or award with
a fair market value, determined in accordance with Section 5 herein, equal
to such taxes or (ii) delivering to the Company
Common Shares other than the shares issuable upon exercise of such
option or award with a fair market value, determined in accordance with
Section 5, equal to such taxes.
(b) TAX BONUS. The Committee shall have the authority, at the time
of grant of an option under the Plan or at any time thereafter, to approve
tax bonuses to designated optionees or grantees to be paid upon their
exercise of options or awards granted hereunder. The amount of any such
payments shall be determined by the Committee. The Committee shall have
full authority in its absolute discretion to determine the amount of any
such tax bonus and the terms and conditions affecting the vesting and
payment thereafter.
SECTION 13. ADDITIONAL RESTRICTIONS. The Committee shall have full
and complete authority to determine whether all or any part of the Common
Shares of the Company acquired upon exercise of any of the options or awards
granted under the Plan shall be subject to restrictions on the
transferability thereof or any other restrictions affecting in any manner the
optionee's or grantee's rights with respect thereto, but any such restriction
shall be contained in the agreement relating to such options or awards.
SECTION 14. TEN PERCENT SHAREHOLDER RULE. Notwithstanding any
other provision in the Plan, if at the time an option is otherwise to be
granted pursuant to the Plan the optionee owns directly or indirectly (within
the meaning of Section 424(d) of the Code) Common Shares of the Company
possessing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or its parent or subsidiary corporations,
if any (within the meaning of Section 422(b) (6) of the Code), then any
Incentive Stock Option to be granted to such optionee pursuant to the Plan
shall satisfy the requirements of Section 422(c)(5) of the Code, and the
option price shall be not less than 110% of the fair market value of the
Common Shares of the Company determined as described herein, and such option
by its terms shall not be exercisable after the expiration of five (5) years
from the date such option is granted.
SECTION 15. NON-TRANSFERABILITY. No option or award granted under the
Plan shall be transferable by an optionee or grantee, otherwise than by will or
the laws of descent or distribution. Except as otherwise provided in an option
or award agreement, during the lifetime of an optionee or grantee, the option
shall be exercisable only by such optionee or grantee.
7
<PAGE>
SECTION 16. DILUTION OR OTHER ADJUSTMENTS. If there shall be any
change in the Common Shares through merger, consolidation, reorganization,
recapitalization, dividend in the form of stock (of whatever amount), stock
split or other change in the corporate structure, appropriate adjustments in
the Plan and outstanding options and awards shall be made by the Committee.
In the event of any such changes, adjustments shall include, where
appropriate, changes in the aggregate number of shares subject to the Plan,
the number of shares and the price per share subject to outstanding options
and awards and the amount payable upon exercise of outstanding awards, in
order to prevent dilution or enlargement of option or award rights.
SECTION 17. AMENDMENT OR DISCONTINUANCE OF PLAN. The Board of
Directors may amend or discontinue the Plan at any time. Subject to the
provisions of Section 16 no amendment of the Plan, however, shall without
shareholder approval: (i) increase the maximum number of shares under the
Plan as provided in Section 2 herein, (ii) decrease the minimum price
provided in Section 5 herein, (iii) extend the maximum term under Section 6,
or (iv) modify the eligibility requirements for participation in the Plan.
The Board of Directors shall not alter or impair any option or award
theretofore granted under the Plan without the consent of the holder of the
option.
SECTION 18. TIME OF GRANTING. Nothing contained in the Plan or in
any resolution adopted or to be adopted by the Board of Directors or by the
shareholders of the Company, and no action taken by the Committee or the Board
of Directors (other than the execution and delivery of an option or award
agreement), shall constitute the granting of an option or award hereunder.
SECTION 19. EFFECTIVE DATE AND TERMINATION OF PLAN.
(a) The Plan was approved by the Board of Directors on April 11,
1997, and shall be approved by the shareholders of the Company within
twelve (12) months thereof.
(b) Unless the Plan shall have been discontinued as provided in
Section 16 hereof, the Plan shall terminate April 10, 2007. No option or
award may be granted after such termination, but termination of the Plan
shall not, without the consent of the optionee or grantee, alter or impair
any rights or obligations under any option or award theretofore granted.
8
<PAGE>
LEASE AGREEMENT
PROJECT: 9724 10TH AVE. NORTH, PLYMOUTH, MN. 55441 DATE: 4-16-97
------------------------------------------- ----------
UNIT NO: SEE BELOW OCCUPANCY TERM: 3 YEARS FROM 6-1-97 TO: 5-31-2000
--------- ------- ------ ---------
MONTHLY RENT: SEE BELOW ANNUAL RENT: EXPENSE SHARE: 15%
--------- --- --
PARKING STALLS: AS LAID OUT BY LANDLORD
-----------------------
TENANT: OWNER/LANDLORD:
INTELLIPHONE, INC. ROBERT E. NELSON
--------------------------- ------------------------------
9724 10TH AVE. NORTH 6324 LAKELAND AVE. NORTH
--------------------------- ------------------------------
PLYMOUTH, MINNESOTA 55441 BROOKLYN PARK, MINNESOTA 55428
--------------------------- ------------------------------
1. LEASE. In consideration of these mutual agreements and provisions,
Owner/Landlord hereby leases to Tenant and Tenant hereby leases from the
Owner/Landlord the above unit(s) for Industrial Use, subject to all
Federal, State or Local regulations, together with fixtures, for the above
term. All parties listed as Tenant are herein referred to individually and
collectively as Tenant, respectively.
2. RENT.
a. Tenant shall pay to Owner/Landlord, in advance, the above monthly rent
on the first day of each month. The first month's rent shall be be paid
upon execution of this Lease, receipt of which is hereby acknowledged.
RENT BREAKDOWN FOR THREE YEARS
JUNE 1 1997 THRU MAY 31, 1998 $3,524.00 PER MONTH
JUNE 1 1998 THRU MAY 31, 1999 $3,675.00 PER MONTH
JUNE 1 1999 THRU MAY 31, 2000 $3,859.00 PER MONTH
TENANT TO HAVE TWO ONE YEAR OPTIONS WITH 5% INCREASE PER YEAR IF
DESIRED AND 90 DAYS NOTICE TO LANDLORD PRIOR TO LEASE END.
LANDLORD WILL BILL TENANT 15% OF SEWER AND WATER BILL MONTHLY.
PARKING STALLS AND NEW LOADING DOCK DOOR ON EAST WALL NEED TO BE LAID
OUT BY LANDLORD SO NO PARKING OR TRAFFIC FLOW WILL BE CREATED.
LANDLORD TO INSTALL DOOR ON EAST WALL COMPLETE AT HIS EXPENSE.
LANDLORD WILL ALSO INSTALL OPENING ON SECOND LEVEL AT HIS EXPENSE.
TENANT MAY OCCUPY PREMISES AS SOON AS LANDLORD HAS MADE IMPROVEMENTS
AND UPON SECURITY DEPOSIT BEING MADE AND UTILITYS BEING TRANSFERRED
AND INSURANCE CERTIFICATE TO LANDLORD.
3. SECURITY DEPOSIT. Upon the date hereof, the Tenant shall pay to
Owner/Landlord an amount equal to one (1) month's rent as a Security Deposit
to guarantee the performance of all the terms of this Lease, and the payment
of rent. Upon the occurrence of any default by Tenant, Owner/Landlord may use
said Security Deposit to the extent necessary to make good any arrearages of
rent or any other expense. Any remaining balance of said Security Deposit
shall be returned to Tenant upon compliance with terms herein and acceptance
of the vacated premises by Owner/Landlord. Tenant understands that its
liability is not limited to the amount of the Security Deposit and its use by
Owner/Landlord shall not constitute a waiver, but is in addition to
Owner/Landlord's other remedies under this Lease and law. Receipt of said
Security Deposit is hereby acknowledged.
4. OCCUPANCY. Owner/Landlord agrees to deliver the unit(s) in a safe, broom
clean and useable condition, in compliance with all applicable building
codes. In the event Tenant is prevented from occupying the unit(s) at the
start of the above term due to delays by Owner/Landlord, the rent shall be
abated for each day occupancy is delayed.
5. UTILITIES. The Tenant shall pay for all utilities, including gas,
electricity, water and telephone service for its unit(s) during the term of
this Lease.
6. STRUCTURAL MAINTENANCE. The Owner/Landlord shall, at its expense, keep the
structural parts of the building in good repair including the exterior walls,
roof, floor, foundation, and interior columns, except that the Owner/Landlord
shall not be responsible for repairs caused by the fault or negligence of the
Tenant, its employees, or invitees.
7. INTERIOR MAINTENANCE. Tenant shall be responsible for the interior
maintenance and repair of the premises, including entrance doors, overhead
warehouse doors, heating, plumbing, electrical and mechanical fixtures and
equipment, replacement of all glass broken and expendable. Tenant further
agrees to keep the premises in as good a condition as when turned over to it,
reasonable wear and tear and the elements excepted. SEE ADDENDUM
8. ALTERATIONS. No interior alterations, connection, painting or decorating
of a permanent nature may be done to the unit(s) without written approval of
Owner/Landlord. Tenant agrees that all such approved work shall be done in a
workmanlike manner and in conformance with applicable building codes; that no
liens shall attach to the premises by reason thereof; and that the premises
shall be restored to their original condition by the Tenant prior to the
expiration of this Lease. Failure to remove fixtures and equipment shall
constitute abandonment to the Owner/Landlord who may remove said fixtures and
equipment and restore the premises to their original condition, all at
Tenant's expense. APPROVAL WILL NOT BE UNREASONABLY WITHHELD.
9. INSURANCE. Owner/Landlord shall maintain, at its own expense, fire and
extended coverage insurance on the property. It is understood that the
Owner/Landlord and Tenant shall look solely to their respective insuring
agents in the event of casualty. Tenant will maintain in force during the
term of this Lease a contents and public liability insurance policy with
Owner/Landlord named as co-insured. Said insurance shall afford protection of
not less than $300,000.00 for injury or death, $300,000.00 for any one
accident, and $100,000.00 for property damage. Tenant agrees to deliver to
Owner/Landlord a certificate of insurance with a 10 day cancellation clause,
prior to occupancy, with the Owner/Landlord named as an additional insured.
Owner/Landlord will require each of its other Tenants to carry the same
insurance on their contents and property and will not permit any practice by
any Tenant that may cause an increase in the rate of insurance on the
building without charging said increase to the causing Tenant for the benefit
of all other Tenants.
10. LOSS PROTECTION. Unless the liability for damage or loss is caused by the
negligence of Owner/Landlord, Owner/Landlord shall be held harmless by
Tenant from any liability for damages to any person or property in or upon
the leased premises or common areas, including the person or property of
Tenant and its employees and all persons in the building at its or their
invitation. All property kept, stored or maintained on the leased premises
shall be so kept, stored or maintained at the sole risk of the Tenant.
<PAGE>
11. FIXTURES AND EQUIPMENT. All fixtures and equipment considered necessary
to the general operation and maintenance of the property, shall be the
property of the Owner/Landlord, except that any "trade fixtures" provided by
Tenant, at its own expense, shall remain the property of the Tenant and will
be removed by Tenant upon termination of this Lease. The Tenant grants to
the Owner/Landlord a lien upon all personal property of the Tenant on said
premises to secure payment of the rent, and agrees that no such property
shall be removed from said premises while any installment of rent is past
due, and/or any other default existing under this Lease.
12. ACCESS. Owner/Landlord or its authorized agent, has the right to enter
the unit(s) at any reasonable time to inspect, make repairs or alterations
as needed, and three (3) months prior to the termination of this Lease to
show the unit(s) to prospective Tenants, and to place on doors and windows
appropriate notice that the premises are for rent. SEE ADDENDUM
13. LOCKS. No additional locks will be placed on any of the doors in the
building without Owner/Landlord's prior written approval, and unless
Owner/Landlord receives an access key to such locks.
14. STORAGE. PARAGRAPH #14 HAS BEEN DELETED.
15. SUBLETTING OR ASSIGNMENT. No subletting or other assignment by Tenant is
allowed without written consent of Owner/Landlord, which consent shall not
release the assigning party of any obligation or liability arising under the
terms of this Lease. This Lease and the deposits shall be assignable by
Owner/Landlord, provided the assignee assumes all of Owner/Landlord's
obligations hereunder.
16. DEFAULT. A breach of this Lease shall exist if at any time during the
term of this Lease Tenant shall: (a) Vacate said premises or default in the
payment of rent or in the performance of any of these provisions; or (b)
Shall make an assignment for the benefit of creditors; or (c) File or have
filed against it, a petition for bankruptcy, or arrangement in settlement of
liabilities, or reorganization. In such an event, Owner/Landlord is
authorized to take possession of the unit(s), eject the Tenant, terminate
this Lease and re-lease said premises, remove and sell all personal property
and use all sums for rent and expenses then in arrears or past due. No such
acts by the Owner/Landlord shall be construed as a waiver of
Owner/Landlord's right to collect rent for the remainder of the term. Tenant
agrees to reimburse Owner/Landlord for reasonable attorney's fees and costs
for any proceedings necessary to enforce these terms. If the Tenant should
default in any respect, Tenant confirms onto Owner/Landlord the statutory
lien for rent and all statutory rights under the laws of the State of
Minnesota. No forebearance by the Owner/Landlord to exercise any right
accruing to the Owner/Landlord hereunder shall be construed as a waiver of
any such rights.
17. IMPAIRMENT OF USE. In the event the demised premises shall be untenable
or unfit for occupancy, in whole or in part by the total or partial
destruction of the building by fire or other casualty, this Lease may, at
the option of the Owner/Landlord, cease and terminate. Tenant shall have no
claim against Owner/Landlord for the value of any unexpired term of said
lease or for any damages. SEE ADDENDUM
18. CONDEMNATION. In the event that the whole or any part of the demised
premises shall be acquired or condemned by eminent domain for any public or
quasi-public use or purpose, then, in that event, this Lease, may at the
option of the Owner/Landlord, cease and terminate, and Tenant shall have no
claim against Owner/Landlord for the value of any unexpired term of this
Lease or for any damages.
19. ACCEPTANCE OF LEASE BY MORTGAGEE. This Lease is subject to acceptance by
Owner/Landlord's mortgagee and such acceptance is a condition precedent to
such agreement becoming effective. Further, this Lease is subject to the
terms and the liens of present and future mortgage deeds securing the
premises.
20. ADDITIONAL AGREEMENTS (IF ANY).
RULES AND REGULATIONS (For All Tenants)
Tenant further agrees to be bound by and comply with the Rules and
Regulations, as follows:
a. TRASH. Each Tenant shall provide its own dumpster for trash and agrees
not to leave or store any materials, litter or trash on the grounds or
parking areas.
b. DISTURBANCE. No noise or conduct shall be permitted at any time which
will disturb or annoy other Tenants.
c. PARKING. The use of parking shall be subject to Rules and Regulations as
the Owner/Landlord may promulgate from time to time. Tenant agrees that it
will not use more than its prescribed number of stalls at any one time, and
will not use or permit the use by its employees of the parking area for the
overnight storage of automobiles or other vehicles which would interfere
with maintenance, snow removal, traffic flow or emergency vehicles.
SEE ADDENDUM
d. SIGNS. The Tenant shall not erect, place, or display or allow to be
erected, placed, or displayed any lettering, sign, advertisement, awning,
or other projection in or on the leased property or in or on the building
of which it forms a part without the Owner/Landlord's written consent.
Owner/Landlord has the sole right of approval relating, but not limiting
to size, type, materials and location.
e. FIXTURE MOVEMENT. Tenant agrees that any and all furniture, fixtures and
goods will be moved by the Tenant whenever such moving is necessary for
purposes of building repair and/or maintenance by Owner/Landlord.
f. These Rules and Regulations may be added to or amended from time-to-time
by the Owner/Landlord and such amendments will become effective immediately
upon notification. SEE ADDENDUM
Tenant has read and agrees to abide by all Rules and Regulations and
acknowledges that any violation of any provision of this Lease, or Rules
and Regulations constitutes a breach.
IN WITNESS WHEREOF, the parties have caused this Lease to be signed by
their proper officers and/or representatives and represent that the have
the authority to bind same.
OWNER/LANDLORD: TENANT:
/s/ Robert E. Nelson INTELLIPHONE, INC.
-------------------------- -----------------------------
ROBERT E. NELSON
By: By: /s/ Melvin Graf
------------------------- --------------------------
Authorized Representative MELVIN GRAF
Real Estate Broker Its:
By: -------------------------
-----------------------
GUARANTEE
The undersigned hereby guarantees the payment of rent and performance to this
Lease.
<PAGE>
1997 Incentive Compensation Plan (Bonus Plan)
The 1997 bonus plan is tied to various company and individual performance
objectives.
President:
Maximum Bonus is 40% of base salary:
50% based upon completion of I.P.O.
50% based upon achieving E.P.S. target, excluding
additional 1997 acquisitions.
Executive Vice President:
Maximum bonus of 40% of base salary:
25% based upon achieving E.P.S. target,
excluding additional 1997 acquisitions.
37.50% based upon rate of installations
of new payphones in the Northwest.
37.50% based upon rate of installations
of new payphones in the Midwest.
<PAGE>
Vice President and Chief Financial Officer:
Maximum bonus of 40% of base salary:
25% based upon achieving E.P.S. target, excluding
additional 1997 acquisitions.
50% based upon completion of I.P.O.
25% based upon number of acquisitions in 1997.
Other Employees:
At the discretion of the Board of Directors.
<PAGE>
AMENDED AND RESTATED LOAN AGREEMENT
Dated as of January 2, 1997
Intelliphone, Inc., a Minnesota corporation (the "Borrower"), located at
6801 Wayzata Boulevard, St. Louis Park, Minnesota 55426, and National City Bank
of Minneapolis, a national banking association (the "Bank"), located at 651
Nicollet Mall, Minneapolis, Minnesota 55402-1611, agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.1 DEFINITIONS. As used in this Agreement the following terms
shall have the following meanings (such meanings to be equally applicable to
singular and plural forms of the terms defined):
(a) "Affiliates" shall mean any of the following Persons:
(i) any director, officer or employee of the Borrower;
(ii) any person who, individually or with his immediate
family, beneficially owns or holds 5% or more of voting
interest of the Borrower; or
(iii) any company in which any Person described
above owns a 5% or greater equity interest;
(b) "Base Rate" shall mean the rate established by the Bank
from time to time as its base rate.
(c) "Business Day" shall mean any day other than a
Saturday, Sunday or a public holiday or the equivalent under the
laws of the State of Minnesota or the United States of America.
<PAGE>
(d) "Debt" shall mean (i) indebtedness for borrowed money
or for the deferred purchase price of property or services, (ii)
obligations as lessee under leases which shall have been or
should be, in accordance with generally accepted accounting
principles, recorded as capital leases, (iii) obligations under
direct or indirect guaranties in respect of, and obligations
(contingent or otherwise) to purchase or otherwise acquire, or
otherwise to assure a creditor against loss in respect of,
indebtedness or obligations of others of the kinds referred to in
clause (i) or (ii) above, and (iv) liabilities in respect of
unfunded vested benefits under plans covered by Title IV of
ERISA.
(e) "Debt Service Coverage Ratio" for any time period shall
mean a ratio the numerator of which is the sum of the Borrower's
net income during that period plus interest, depreciation and
income tax expense during that period and the denominator of
which is the sum of interest expense during that period plus that
portion of the principal of the Borrower's Debt coming due during
that period.
(f) "Event of Default" shall mean one of the events
specified in Section 6.1.
(g) "Loan Documents" shall mean this Agreement, the Note,
the Security Agreement, the Guaranty and all other documents to
be executed in connection with this Agreement.
(h) "Loan Party" shall mean any Person obligated under any
Loan Document.
(i) "Note" shall mean the Note described in Section 2.2.
(j) "Person" shall mean an individual, corporation,
partnership, joint venture, trust or unincorporated organization
or governmental agency or political subdivision thereof.
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(k) "Subordinated Debt" shall mean Debt of the Borrower which is
subordinated both as to principal and as to interest to the extent
required by the Bank in accordance with a written subordination
agreement executed by the holder of that Debt and delivered to the
Bank.
(l) "Subsidiary" shall mean any corporation of which more
than 50% of the outstanding capital stock having ordinary voting
power to elect a majority of the Board of Directors of such
corporation (irrespective of whether or not at the time capital
stock or any other class or classes of stock of such corporation
shall or might have voting power upon the occurrence of any
contingency) is at the time directly or indirectly owned by the
Borrower, by the Borrower and one or more other Subsidiaries, or
by one or more other Subsidiaries.
(m) "Tangible Net Worth" shall mean the aggregate of the
capital stock, paid in surplus, Subordinated Debt and retained
earnings of the Borrower (excluding stock of the Borrower held by
the Borrower), determined and computed in accordance with
generally accepted accounting principles consistently applied
from year to year, less the book value of all assets of the
Borrower that would be treated as intangibles under generally
accepted accounting principles including without limitation, such
items as goodwill, trademarks, tradenames, service marks,
copyrights, patents and licenses and less the book value of all
obligations owed to the Borrower by any of its Affiliates.
(n) "Total Liabilities" shall mean the aggregate of the
liabilities of the Borrower determined and computed in accordance
with generally accepted accounting principles consistently
applied from year to year.
Section 1.2 ACCOUNTING AND OTHER TERMS. All accounting terms not
specifically defined in this Agreement shall be construed in accordance with
generally accepted accounting
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principles consistently applied as such principles may change from time to time.
Other terms defined herein shall have the meanings ascribed to them herein.
ARTICLE II.
TERM LOAN
Section 2.1 COMMITMENT FOR TERM LOAN. The Bank hereby lends to the
Borrower, and the Borrower hereby borrows from the Bank, the amount of
$3,000,000.00 (the "Term Loan").
Section 2.2 THE NOTE. The Term Loan shall be evidenced by a promissory
note (the "Note") which is in substantially the form of Exhibit A attached
hereto and is delivered to the Bank pursuant to Article III.
Section 2.3 INTEREST AND PAYMENTS. The Borrower shall repay, and shall
pay interest on, the aggregate unpaid principal amount of the Term Loan in
accordance with the Note. All payments of principal, interest and fees under
this Agreement shall be made when due to the Bank in immediately available
funds. All computations of interest shall be made by the Bank on the basis of
the actual number of days elapsed in a year of 360 days. Whenever any such
payment shall be due on a non-Business Day, such payment shall be made on the
next succeeding Business Day, and such extension of time shall be included in
the computation of interest or fees, as the case may be. The Bank is expressly
authorized to charge any principal, interest or fee payment, when due, to
Borrower's demand deposit account maintained at the Bank, or, if that account
shall not contain sufficient funds, to any other account maintained by the
Borrower at the Bank.
Section 2.4 VOLUNTARY PREPAYMENT. The Borrower may prepay the Note in
whole or in part; PROVIDED, HOWEVER, that each partial prepayment shall be in a
principal amount of not less than $10,000.00; and PROVIDED FURTHER, HOWEVER,
that any prepayment of the Notes shall be applied to principal installments of
the Notes in the inverse order of their maturities.
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Section 2.5. USE OF PROCEEDS. The proceeds of the Term Loan shall be used
to refinance existing Debt at the Bank and to fund the acquisition of certain
assets from Telco West.
Section 2.6. FACILITY FEE. In consideration of the Term Loan, the
Borrower agrees to pay to the Bank a facility fee in the amount of $21,490.00.
This fee shall be paid in two installments of $10,745.00 each payable on the
date of this Agreement and on May 1, 1997.
ARTICLE III.
CONDITIONS OF LENDING
Section 3.1 CONDITIONS PRECEDENT TO TERM LOAN ADVANCE. The Bank shall
have no obligation to make the Term Loan unless the Bank shall have received on
or before the date of disbursement the following documents:
(a) The Note, properly executed and delivered on behalf of
the Borrower.
(b) A security agreement (the "Security Agreement"), in a
form acceptable to the Bank, properly executed and delivered on
behalf of the Borrower, granting to the Bank a security interest
in all of the Borrower's inventory, accounts, equipment, general
intangibles and other property described therein as security for
the performance of the Borrower's obligations under this
Agreement and the Note, together with any UCC-1 Financing
Statement or other document deemed necessary or desirable by the
Bank to perfect the security interest granted by the Security
Agreement. The Bank and the Borrower agree that the Security
Agreement dated September 20, 1995, as amended on the date
hereof, executed by the Borrower in favor of the Bank shall
constitute the Security Agreement under this Agreement.
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(c) A certified copy of the resolutions of the Board of
Directors of the Borrower, approving the execution and delivery
of the Loan Documents to which it is a party and approving all
other matters contemplated by this Agreement.
(d) A certificate by the Secretary or any Assistant
Secretary of the Borrower certifying the names of the officer or
officers of the Borrower authorized to sign the Loan Documents to
which it is a party, together with a sample of the true signature
of such officer.
(e) A guaranty (the "Guaranty") of Gary S. Kohler, Jeffrey
R. Paletz, Melvin W. Graf (collectively, the "Guarantor"), in a
form satisfactory to the Bank, securing the Borrower's
obligations under this Agreement and the Note.
(f) Payment of the first installment of the fee required to
be paid under Section 2.6.
In addition, the Bank shall have no obligation to make the Term Loan if on
or before the date of disbursement, any event has occurred and is continuing, or
will result from such Term Loan, which constitutes an Event of Default or would
constitute an Event of Default but for the requirement that notice be given or
time elapse or both.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
Section 4.1 REPRESENTATIONS AND WARRANTIES OF THE BORROWER. To induce the
Bank to make the Term Loan, the Borrower represents and warrants as follows:
(a) EXISTENCE OF BORROWER. The Borrower is a corporation
duly incorporated, validly existing and in good standing under
the laws of the state indicated at the beginning of this
Agreement.
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(b) AUTHORITY TO EXECUTE. The execution, delivery and
performance by the Borrower of the Loan Documents to which it is
a party are within the Borrower's corporate powers, have been
duly authorized by all necessary corporate action, do not and
will not conflict with any provision of law or of the charter or
bylaws of the Borrower or of any agreement or contractual
restriction binding upon or affecting the Borrower or any of its
property, and need no further shareholder or creditor consent.
(c) BINDING OBLIGATION. This Agreement is, and the other
Loan Documents when delivered hereunder will be, legal, valid and
binding obligations of the Loan Parties enforceable against such
Persons in accordance with their respective terms.
(d) GOVERNMENTAL APPROVAL. No consent of, or filing with,
any governmental authority is required on the part of any Loan
Party in connection with the execution, delivery or performance
of any Loan Documents.
(e) FINANCIAL STATEMENTS. The audited financial statements
of the Borrower as of December 31, 1995 and the unaudited
financial statements as of November 30, 1996, copies of which
have been furnished to the Bank, have been prepared in conformity
with generally accepted accounting principles consistently
applied and present fairly the financial condition of the
Borrower as of such dates, and the results of the operations of
the Borrower for the financial periods then ended, and since such
dates, there has been no materially adverse change in such
financial condition.
(f) LITIGATION. No litigation or governmental proceeding
is pending or threatened against the Borrower which may have a
materially adverse effect on the financial condition or
operations of the Borrower.
(g) TITLE TO ASSETS. The Borrower has good and marketable
title to all assets used in connection with its trades or
businesses, and none of such assets is subject to
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any mortgage, pledge, lien, security interest or encumbrance of any
kind, except for current taxes not delinquent, and except as has been
disclosed in writing to the Bank contemporaneously with this
Agreement.
(h) TAXES. The Borrower has filed all federal and state
income and excess profits tax returns which are required to be
filed, and has paid all taxes shown on such returns to be due
and all other tax assessments received by it to the extent that
such assessments have become due.
(i) ERISA. No plan (as that term is defined in the
Employee Retirement Income Security Act of 1974 ("ERISA")) of the
Borrower (a "Plan") which is subject to Part 3 of Subtitle B of
Title 1 of ERISA had an accumulated funding deficiency (as such
term is defined in ERISA) as of the last day of the most recent
fiscal year of such Plan ended prior to the date hereof, or would
have had such an accumulated funding deficiency on such date if
such year were the first year of such Plan, and no material
liability to the Pension Benefit Guaranty Corporation has been,
or is expected by the Borrower to be, incurred with respect to
any such Plan. No Reportable Event (as defined in ERISA) has
occurred and is continuing in respect to any such Plan.
(j) DEFAULTS. The Borrower is not in default in the
payment of principal or interest on any indebtedness for borrowed
money and is not in default under any instrument or agreement
under or subject to which any indebtedness for borrowed money has
been issued, and no event has occurred and is continuing which,
with or without the lapse of time or the giving of notice, or
both, constitutes or would constitute an event of default under
any such instrument or agreement or an Event of Default
hereunder.
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(k) SUBSIDIARIES. The Borrower has no Subsidiaries.
(l) PATENTS TRADEMARKS, ETC. The Borrower has good and
marketable title to all patents, trademarks, processes,
copyrights, franchises and licenses title to which is necessary
for the operation of the Borrower's businesses.
(m) USE OF PROCEEDS FOR SECURITIES TRANSACTIONS. No
proceeds of the Term Loan will be used to acquire any security in
any transaction which is subject to Sections 13 and 14 of the
Securities Exchange Act of 1934.
(n) REGULATION U. The Borrower is not engaged in the
business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulation U issued
by the Board of Governors of the Federal Reserve System), and no
proceeds of the Term Loan will be used to purchase or carry any
margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock.
ARTICLE V.
COVENANTS OF THE BORROWER
Section 5.1 AFFIRMATIVE COVENANTS. So long as the Note shall remain
unpaid, the Borrower will, unless the Bank shall give its prior written consent:
(a) FINANCIAL REPORTING. Furnish to the Bank: (i) as soon
as available and in any event within 30 days after the end of
each month of each fiscal year of the Borrower, balance sheets of
the Borrower as of the end of such month and statements of income
and retained earnings of the Borrower for the period commencing
at the end of the previous fiscal year and ending with the end of
such month, certified by the chief financial officer of the
Borrower; (ii) as soon as available and in any event within 90
days after the end of each fiscal year of the Borrower, (A) a
copy of the annual report for such year for the Borrower,
containing financial statements for such year certified in a
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manner acceptable to the Bank by independent public accountants
acceptable to the Bank and (B) a budget and projections prepared by
the Borrower in a form acceptable to the Bank for the following fiscal
year; (iii) promptly upon the sending or filing thereof copies of all
public reports issued by the Borrower to any of its security holders,
to the Securities and Exchange Commission or to any national
securities exchange; (iv) promptly upon the filing or receiving
thereof, copies of all reports which the Borrower files under ERISA or
which the Borrower receives from the Pension Benefit Guaranty
Corporation if such report shows any material violation or potential
violation by the Borrower of its obligations under ERISA; (v) such
other information concerning the conditions or operations, financial
or otherwise, of the Borrower as the Bank from time to time may
reasonably request; (vi) by April 15 of each year, a signed personal
financial statement of each Guarantor dated as of a date not earlier
than the immediately preceding December 31; and (vii) within 45 days
after the end of each quarter, a certificate of the Borrower listing
all of the Borrower's customers as of the end of the quarter most
recently ended and listing the cash receipts from the Borrower's 50
largest customers during that quarter.
(b) VISITATION RIGHTS. At any reasonable time and from
time to time, permit the Bank or any agents or representatives
thereof, to examine and make copies of and abstracts from the
records and books of account of, and visit the properties of, the
Borrower, and to discuss the affairs, finances and accounts of
the Borrower with any of its officers or directors. The Borrower
will reimburse the Bank for its reasonable costs and expenses of
conducting such periodic examinations.
(c) NOTIFICATION OF DEFAULT, ETC. Notify the Bank as
promptly as practicable (but in any event not later than 5
Business Days) after the Borrower obtains knowledge
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of: (i) the occurrence of any event which constitutes an Event of
Default or which would constitute an Event of Default with the passage
of time or the giving of notice or both; or (ii) the commencement
of any litigation or governmental proceedings of any type which could
materially adversely affect the financial condition or business
operations of the Borrower.
(d) COMPLIANCE CERTIFICATE. At the time any financial
statement is required to be provided to Bank under this
Agreement, the Borrower will provide to Bank a certificate of the
chief financial officer of the Borrower substantially in the form
of Exhibit B attached hereto (appropriately completed). If that
certificate shows that an Event of Default or any event which
would constitute an Event of Default with the passage of time or
the giving of notice or both, has occurred, the certificate shall
state in reasonable detail the circumstances surrounding such
event and action proposed by the Borrower to cure such event.
(e) KEEPING OF FINANCIAL RECORDS AND BOOKS OF ACCOUNT.
Maintain proper financial records in accordance with generally
accepted accounting principles consistently applied which fully
and correctly reflect all financial transactions and all assets
and liabilities of the Borrower.
(f) TANGIBLE NET WORTH. Maintain Tangible Net Worth of not
less than the following amounts during the time periods
indicated:
--------------------------------------------------
PERIOD MINIMUM
TANGIBLE NET
WORTH
--------------------------------------------------
From Completion of Telco West $1,500,000
Acquisition through June 29, 1997
--------------------------------------------------
June 30, 1997 through December 30, $2,000,000
1997
--------------------------------------------------
After December 30, 1997 $2,500,000
--------------------------------------------------
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Maintain at all times a ratio of Total Liabilities to Tangible
Net Worth of not more than 2.0 to 1.
(g) DEBT SERVICE COVERAGE RATIO. Maintain as of the end of
each 12-month period measured as of the end of each month, a Debt
Service Coverage Ratio of not less than 1.25 to 1.
(h) SUBORDINATED DEBT. Maintain at all times Subordinated
Debt of not less than $1,562,000 and comply with the terms of
each subordination agreement executed in connection with
Subordinated Debt.
(i) MAINTENANCE OF INSURANCE. Maintain such insurance with
reputable insurance carriers as is normally carried by companies
engaged in similar businesses and owning similar property, and
name the Bank as loss payee on all policies insuring personal
property in which the Bank has a security interest and provide
the Bank with certificates of insurance evidencing its status as
a loss payee. The loss payee endorsement shall provide for
payment to the Bank notwithstanding any acts or omissions of the
Borrower and shall require notice to the Bank 30 days prior to
the expiration or cancellation of the insurance.
(j) MAINTENANCE OF PROPERTIES, ETC. Maintain and preserve
all of its properties, necessary or useful in the proper conduct
of its business in good working order and condition, ordinary
wear and tear excepted.
(k) PAYMENT OF TAXES. Pay all taxes, assessments and
governmental charges of any kind payable by it as such taxes,
assessments and charges become due and before any penalty shall
be imposed, except as the Borrower shall contest in good faith
and by appropriate proceedings providing such reserves as are
required by generally accepted accounting principles.
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(l) COMPLIANCE WITH ERISA. Cause each benefits Plan to
comply and be administered in accordance with those provisions of
ERISA which are applicable to such Plan.
(m) MAINTENANCE OF ACCOUNTS. Maintain its corporate bank
accounts at the Bank except for such incidental accounts that
reasonable business judgment requires to be maintained elsewhere,
and either (A) keep collected demand deposit balances in such
accounts in the amount necessary to compensate the Bank for
applicable activity charges in such accounts, as calculated by
the Bank and applied to such balances in a manner consistent with
all similar accounts or (B) pay such applicable activity charges.
(n) PRESERVATION OF CORPORATE EXISTENCE, ETC.
Preserve and maintain its corporate existence, rights, franchises
and privileges in the jurisdiction of its incorporation, and
qualify and remain qualified, as a foreign corporation in each
jurisdiction in which such qualification is necessary or
desirable in view of its business and operations or the ownership
of its properties.
Section 5.2 NEGATIVE COVENANTS. So long as the Note shall remain
unpaid, the Borrower will not, unless the Bank shall give its prior written
consent:
(a) LIENS. Create or suffer to exist any mortgage, pledge,
lien, security interest or other encumbrance with respect to any
assets now owned or hereafter acquired by the Borrower except
those encumbrances made in favor of the Bank and existing or
future subordinated encumbrances held by Serene Paletz, Ronald
Gross, Elaine Weitzman and Telco West.
(b) DEBT. Create or suffer to exist any Debt except the
Debt under this Agreement or the Note, Subordinated Debt and
other Debt secured by liens permitted under Section 5.2(a).
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(c) GUARANTIES, ETC. Assume, guarantee, endorse or
otherwise become liable upon the obligation of any Person except
by endorsement of negotiable instruments for collection in the
ordinary course of business.
(d) MERGER, ETC. Merge or consolidate with any other
Person; sell, transfer, convey, lease or otherwise dispose of
(whether in one transaction or in a series of transactions) all
or a substantial portion of its assets (whether now owned or
hereafter acquired) to any other Person.
(e) COMPENSATION. Pay a salary or other compensation to
any of its officers, directors, employees or stockholders in an
amount which is in excess of a reasonable salary or other
compensation paid for similar services by similar businesses.
(f) TRANSACTIONS WITH AFFILIATES. Engage in any
transaction (including, without limitation, loans or financial
accommodations of any kind) with any Affiliate, provided that
such transactions are permitted if they are on terms no less
favorable to the Borrower than would be obtainable if no such
relationship existed.
(g) INVESTMENTS IN OTHER PERSONS. Make any loan or advance
to any Person; or purchase or otherwise acquire the capital
stock, assets, or obligations of, or any interest in, any other
Person other than (i) readily marketable direct obligations of
the United States of America, (ii) certificates of time deposits
issued by commercial banks of recognized standing operating in
the United States of America, (iii) prepayments of lease
obligations for the placement of telephone units in the ordinary
course of business not in excess of $100,000.00 outstanding at
any one time for any one customer and (iv) advances to employees
in the ordinary course of business.
(h) CHANGE IN NATURE OF BUSINESS. Make any material change
in the nature of the business of the Borrower, taken as a whole,
as carried on at the date hereof.
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(i) DIVIDENDS, ETC. Purchase or redeem any of its capital
stock, declare or pay any dividends (other than stock dividends)
thereon, make any cash or property distribution to shareholders,
or set aside any funds for such purpose, except for cash
dividends and distributions in any fiscal quarter not to exceed 2
cents for each share of common stock outstanding in that fiscal
quarter.
ARTICLE VI.
DEFAULT
Section 6.1 EVENTS OF DEFAULT. "Events of Default" in this Agreement
means any of the following events:
(a) Failure of the Borrower to pay the principal of the
Note when due or, if payable on demand, upon demand;
(b) Failure of the Borrower to pay any interest or fees
required to be paid hereunder or under the Note when due;
(c) Any representation or warranty made by, or on behalf
of, any Loan Party in, or pursuant to, any Loan Document shall
prove to have been incorrect in any material respect when made;
(d) Default in performance of any other covenant or
agreement of any Loan Party in, or pursuant to, any Loan Document
and continuance of such default or breach for a period of 30 days
after written notice thereof to such Person by the Bank;
(e) Any Loan Party shall generally not pay its or his
debts as such debts become due, or shall admit in writing its or
his inability to pay its or his debts generally, or shall make a
general assignment for the benefit of creditors; or any
proceeding shall be instituted by or against any Loan Party
seeking to adjudicate it or him a bankrupt or insolvent, or
seeking liquidation, winding up, reorganization, arrangement,
adjustment,
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custodianship, protection, relief, or composition of it or him or its
or his debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors, or seeking the entry of an order
for relief, or the appointment of a receiver, custodian, trustee, or
other similar official for it or him or for any substantial part of
its or his property; or any Loan Party shall take any corporate action
to authorize any of the actions set forth above in this subsection;
and in the case of a proceeding of the type described in this
paragraph commenced against any Loan Party, that proceeding shall not
be dismissed within 60 days or that Loan Party shall consent to that
proceeding;
(f) The Borrower shall fail to pay any Debt (but excluding Debt
evidenced by the Note) of the Borrower, or any interest or premium
thereon, when due (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise) and such failure shall
continue after the applicable grace period, if any, specified in the
agreement or instrument relating to such Debt; or any other default
under any agreement or instrument relating to any such Debt, or any
other event, shall occur and shall continue after the applicable
grace period, if any, specified in such agreement or instrument, if
the effect of such default or event is to accelerate, or to permit
the acceleration of, the maturity of such Debt; or any such Debt
shall be declared to be due and payable, or required to be prepaid
(other than by a regularly scheduled required prepayment), prior to
the stated maturity thereof;
(g) Any guaranty or any third party security interest
securing any indebtedness of the Borrower to the Bank shall be
repudiated or revoked, or purported to be repudiated or revoked;
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(h) The entry against any Loan Party of a final judgment,
decree or order for the payment of money in excess of $50,000.00
and the continuance of such judgment, decree or order unsatisfied
for a period of 30 days without a stay of execution;
(i) Any Reportable Event (as defined in ERISA) shall have
occurred with respect to a Plan and continue for 30 days; or any
Plan shall have been terminated by the Borrower not in compliance
with ERISA, or a trustee shall have been appointed by a court to
administer any Plan, or the Pension Benefit Guaranty Corporation
shall have instituted proceedings to terminate any Plan or to
appoint a trustee to administer any Plan;
(j) The Bank shall at any time have reasonable grounds to
believe that the prospect of due and punctual payment of any of
the obligations of the Borrower now or hereafter existing under,
or pursuant to, this Agreement is impaired.
Section 6.2 RIGHTS AND REMEDIES. If any Event of Default shall occur
and be continuing, the Bank may exercise any or all of the following rights and
remedies:
(a) Declare the Note, all interest thereon, and all other
obligations under, or pursuant to, any Loan Document to be
immediately due and payable, and upon such declaration such Note,
interest and other obligations shall immediately be due and
payable, without presentment, demand, protest or any notice of
any kind, all of which are expressly waived;
(b) Exercise any right or remedy under the Security
Agreement, or any other right or remedy of a secured party under
the Uniform Commercial Code as in effect in Minnesota or in any
other State in which any collateral under the Security Agreement
is located;
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(c) Exercise any other right or remedy available to the
Bank at law or in equity.
ARTICLE VII.
MISCELLANEOUS
Section 7.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on
the part of the Bank in exercising any right or remedy under, or pursuant to,
any Loan Document shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, remedy or power preclude other or further
exercise thereof, or the exercise of any other right, remedy or power. The
remedies in the Loan Documents are cumulative and are not exclusive of any
remedies provided by law.
Section 7.2 AMENDMENTS AND WAIVERS. No amendment or waiver of any
provision of any Loan Document shall be effective unless such amendment or
waiver is in writing and is signed by the Bank, and such amendment or waiver
shall be effective only in the specific instance and for the specific purpose
for which it was given.
Section 7.3 NOTICES, ETC. All notices and other communications
provided for hereunder shall be in writing (including telecopier communication)
and mailed or telecopied or delivered, if to the Borrower, at its address stated
in the preamble hereof, Attention: Jack Kohler; if to the Bank, at its address
stated in the preamble hereof, Attention: Nancy Madsen; or, as to each party, at
such other address as shall be designated by such party in a written notice to
the other party. All such notices and communications shall, when mailed or
telecopied, be effective when deposited in the mails or transmitted by
telecopier, respectively, addressed as aforesaid, except that notices to the
Bank pursuant to the provisions of Article II shall not be effective until
received by the Bank.
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Section 7.4 COSTS AND EXPENSES. The Borrower agrees to pay on demand
all costs and expenses of the Bank in connection with the preparation of the
Loan Documents, including reasonable attorneys fees and legal expenses, as well
as all costs and expenses of the Bank, including reasonable attorneys fees and
expenses, in connection with the administration and enforcement of the Loan
Documents (whether suit is commenced or not).
Section 7.5 RIGHT OF SET-OFF. Upon the occurrence and during the
continuance of any Event of Default the Bank is hereby authorized at any time
and from time to time, to the fullest extent permitted by law, to set off and
apply any and all deposits (general or special, time or demand, provisional or
final) at any time held and other indebtedness at any time owing by the Bank to
or for the credit or the account of the Borrower or any Guarantor against any
and all of the obligations of the Borrower now or hereafter existing under any
Loan Document, irrespective of whether or not the Bank shall have made any
demand under any Loan Document and although such obligations may be unmatured.
The Bank agrees promptly to notify the Borrower after any such set-off and
application, provided that the failure to give such notice shall not affect the
validity of such set-off and application. The rights of the Bank under this
Section are in addition to other rights and remedies (including, without
limitation, other rights of set-off) which the Bank may have.
Section 7.6 GOVERNING LAW. All Loan Documents shall be governed by
the laws of the State of Minnesota. Any term used in this Agreement and not
otherwise defined shall have the definition given that term in the Uniform
Commercial Code as in effect in the State of Minnesota from time to time. If
any term in this Agreement shall be held to be illegal or unenforceable, the
remaining portions of this Agreement shall not be affected, and this Agreement
shall be construed and enforced as if this Agreement did not contain the term
held to be illegal or unenforceable. The Borrower hereby irrevocably submits to
the jurisdiction of
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the Minnesota District Court, Fourth District, and the Federal District Court,
District of Minnesota, Fourth Division, over any action or proceeding arising
out of or relating to this Agreement and agrees that all claims in respect of
such action or proceeding may be heard and determined in any such court.
Section 7.7 BINDING EFFECT; ASSIGNMENT. All Loan Documents shall be
binding upon and inure to the benefit of the Loan Parties and the Bank and their
respective successors and assigns. No Loan Party shall have the right to assign
its rights or interest under any such agreement without the prior written
consent of the Bank.
Section 7.8 AMENDED AND RESTATED AGREEMENT. This Agreement is a
complete amendment and restatement of a Revolving Credit Agreement (the "Prior
Agreement") dated as of September 20, 1995, as amended, between the Borrower and
the Bank. The Prior Agreement remains in effect as to all transactions which
occurred prior to the date hereof. In the event of a conflict between the terms
of this Agreement and the terms of the Prior Agreement, the terms of this
Agreement shall govern.
20
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the date first above written.
INTELLIPHONE, INC.
By /s/ Jeffrey R. Paletz
----------------------------------
Its President
-----------------------------
NATIONAL CITY BANK OF MINNEAPOLIS
By /s/ Nancy G. Madsen
----------------------------------
Its AVP
-----------------------------
21
<PAGE>
EXHIBIT A
PROMISSORY NOTE
$3,000,000.00 Dated: January 2, 1997
For value received, Intelliphone, Inc., a Minnesota corporation (the
"Borrower") promises to pay to the order of National City Bank of Minneapolis
(the "Bank"), at its offices in Minneapolis, Minnesota, in lawful money of the
United States of America, the principal amount of Three Million and no/100
Dollars ($3,000,000.00); together with interest on any and all principal amounts
remaining unpaid hereon from the date of this Note until said principal amounts
are fully paid at a fluctuating annual rate equal to 2.0% above the rate of
interest established by the Bank from time to time as its base rate (the "Base
Rate"). Principal and interest shall be due and payable on the 15th day of each
calendar month starting on February 15, 1997. The monthly payment shall be
$50,000.00 in February, March, April, June, July, September, October and
December of 1997, $100,000.00 in May and August of 1997 and $150,000.00 in
November of 1997. All unpaid principal and interest shall come due and payable
in full on January 15, 1998. Each change in the fluctuating interest rate shall
take effect simultaneously with the corresponding change in the Base Rate.
This Note is the Note referred to in, and is entitled to the benefits of,
the Amended and Restated Loan Agreement dated as of the date hereof (the "Loan
Agreement") between the Borrower and the Bank, which Loan Agreement, among other
things, contains provisions for the acceleration of the maturity of this Note
upon the happening of certain stated events and also for prepayments of the
principal amount due under this Note upon stated terms and conditions.
This Note is a renewal and replacement of three promissory notes from the
Borrower to the Bank in the principal amount of $300,000.00 dated as of
September 20, 1995, in the
A-1
<PAGE>
principal amount of $500,000.00 dated as of September 20, 1995 and in the
principal amount of $200,000.00 dated as of December 18, 1995, respectively,
which prior notes remain partially unpaid but the principal balances of which
have been incorporated into this Note.
Intelliphone, Inc.
By
------------------------------------
Its
--------------------------------
A-2
<PAGE>
EXHIBIT B
FORM OF COMPLIANCE CERTIFICATE
I, the _________________________ of Intelliphone, Inc. (the "Borrower"),
hereby provide this Compliance Certificate in accordance with Section 5.1(d) of
the Amended and Restated Loan Agreement (the "Agreement") dated as of January 2,
1997 between the Borrower and National City Bank of Minneapolis.
I certify that as of the date hereof:
(1) The representations and warranties of the Borrower contained in
Article IV of the Agreement are correct as though made on the date
hereof.
(2) No event has occurred and is continuing which constitutes an Event of
Default under the Agreement or would constitute and Event of Default
but for the requirement that notice be given or time elapse or both.
I further certify that as of _____________________, 19__:
(1) Tangible Net Worth as defined in the Agreement was $_________________.
(2) The ratio of Total Liabilities to Tangible Net Worth as defined in the
Agreement was _______________________.
(3) The Debt Service Coverage Ratio as defined in the Agreement was
________________.
(4) Subordinated Debt as defined in the Agreement was $__________________.
Dated: _______________________________ __________________________________
Title: __________________________
B-1
<PAGE>
INTELLIPHONE, INC.
6801 WAYZATA BLVD.
ST. LOUIS PARK, MINNESOTA 55426
PHONE 544-1260 FAX 544-1281
PROMISSORY NOTE
April 10, 1995
$50,000.00 Saint Louis Park, Minnesota
FOR VALUE RECEIVED, Intelliphone, Inc., a Minnesota Corporation whose principle
place of business is located at 6801 Wayzata Blvd., St. Louis Park, Minnesota,
55426 promises to pay to the order of Serene Paletz of 4740 S. Ocean Blvd. Apt.
814, Highland Beach, Florida Fifty Thousand ($50,000.00) Dollars with interest
from the above date at the rate of twelve percent (12%) per annum.
Payments will start on May 10, 1995. For the first 24 months, payments will be
$500 interest only. Over the next 24 months Intelliphone will fully amortize
this note; principal and interest payments to be $2,353.67 monthly.
In the event of a failure to make payment when due, the undersigned shall be
liable for all costs of collection including reasonable attorney fees.
/s/ Jack Kohler
-------------------------------
INTELLIPHONE, INC.
Jack Kohler - Chief Financial Officer
<PAGE>
INTELLIPHONE, INC.
6801 WAYZATA BLVD.
ST. LOUIS PARK, MINNESOTA 55426
PHONE 544-1260 FAX 544-1281
PROMISSORY NOTE
April 18, 1995
$25,000.00 Saint Louis Park, Minnesota
FOR VALUE RECEIVED, Intelliphone, Inc., a Minnesota Corporation whose principal
place of business is located at 6801 Wayzata Blvd., St. Louis Park, Minnesota,
55426 promises to pay to the order of William Opsahl of 5075 Norwest Center,
Minneapolis, Minnesota Twenty Five Thousand ($25,000.00) Dollars with interest
from the above date at the rate of twelve percent (12%) per annum.
Monthly interest payments of $250.00 will start on May 18, 1995. The entire
principal amount will be due September 30, 1997 and will not be repaid earlier
without the written prior approval of both parties.
In the event of a failure to make payment when due, the undersigned shall be
liable for all costs of collection including reasonable attorney fees.
/s/ Jack Kohler
-------------------------------
INTELLIPHONE, INC.
Jack Kohler - Chief Financial Officer
<PAGE>
INTELLIPHONE, INC.
6801 WAYZATA BLVD.
ST. LOUIS PARK, MINN. 55426
PHONE (612) 544-1260 FAX (612) 544-1281
PROMISSORY NOTE
$35,000.00 November 3, 1995
In place of our promissory note for $35,000 dated May 3, 1995, Intelliphone,
Inc., a Minnesota Corporation whose principal place of business is located at
6801 Wayzata Blvd., St. Louis Park, Minnesota, 55426 promises to pay to the
order of Miriam Graf of 13104 Sheffield Curve, Minnetonka, Minnesota Thirty-five
Thousand ($35,000.00) Dollars with interest from the above date at the rate of
twelve percent (12%) per annum.
Monthly payments of $350 for interest only will start on December 3, 1995. The
entire principal amount will be due two years from the above date.
In the event of a failure to make payment when due, the undersigned shall be
liable for all costs of collection including reasonable attorney fees.
/s/ Jack Kohler
-------------------------------
INTELLIPHONE, INC.
Jack Kohler
Chief Financial Officer
<PAGE>
INTELLIPHONE, INC.
6801 WAYZATA BLVD.
ST. LOUIS PARK, MINNESOTA 55426
PHONE 544-1260 FAX 544-1281
PROMISSORY NOTE
December 2, 1995
$25,000.00 Saint Louis Park, Minnesota
In return for our note dated December 2, 1993, Intelliphone, Inc., a Minnesota
Corporation whose principal place of business is located at 6801 Wayzata Blvd.,
St. Louis Park, Minnesota, 55426 promises to pay to the order to William Opsahl
of 5075 Norwest Center, Minneapolis, Minnesota Twenty Five Thousand ($25,000.00)
Dollars with interest from the date hereinabove set forth at the rate of twelve
percent (12%) per annum.
Monthly interest payments of $250.00 will start on January 2, 1996. The entire
principal amount will be due December 2, 1997 and will not be repaid earlier
without the written prior approval of both parties.
In the event of a failure to make payment when due, the undersigned shall be
liable for all costs of collection including reasonable attorney fees.
/s/ Jack Kohler
----------------------------------------
INTELLIPHONE, INC.
Jack Kohler - Chief Financial Officer
<PAGE>
INTELLIPHONE, INC.
6801 WAYZATA BLVD.
ST. LOUIS PARK, MINNESOTA 55426
PHONE (612) 544-1260 FAX (612) 544-1281
PROMISSORY NOTE
$50,000.00 December 7, 1995
In place of our promissory note for $75,000 and in consideration for receiving
5,000 shares of Intelliphone common stock at $5.00 per share, Intelliphone Inc.,
a Minnesota Corporation whose principal place of business is located at 6801
Wayzata Blvd., St. Louis Park, Minnesota, 55426 promises to pay to the order of
Ronald M. Gross and Elaine Weitzman of 4606 West 28th Street, St. Louis Park,
Minnesota Fifty Thousand ($50,000.00) Dollars with interest at the rate of
twelve percent (12%) per annum.
Monthly payments of $500 for interest only will start on January 7, 1996. The
entire principal will be due two years from the above date.
In the event of a failure to make payment when due, the undersigned shall be
liable for all costs of collection including reasonable attorney fees.
/s/ Jack Kohler
-------------------------------
INTELLIPHONE, INC.
Jack Kohler
Chief Financial Officer
<PAGE>
INTELLIPHONE, INC.
6801 WAYZATA BLVD.
ST. LOUIS PARK, MINNESOTA 55426
PHONE (612) 544-1260 FAX (612) 544-1281
PROMISSORY NOTE
$64,669.45 July 7, 1996
In place of our promissory note for $54,690.63 dated February 7, 1994 and
accumulated interest totaling $9,978.82 Intelliphone, Inc., a Minnesota
Corporation whose principal place of business is located at 6801 Wayzata Blvd.,
St. Louis Park, Minnesota, 55426 promises to pay to the order of William B.
Topp and Normal Topp of PO Box 191558 San Juan, Puerto Rico 00919 Sixty-four
Thousand Six Hundred Sixty-nine dollars and 45 cents ($64,669.45) plus interest
from the above date at the rate of twelve percent (12%) per annum compounded
quarterly. Note holder may draw upon the accumulating interest as needed. The
entire principal amount plus the unpaid accumulated interest will be due on
February 7, 1998.
In the event of a failure to make payment when due, the undersigned shall be
liable for all costs of collection including reasonable attorney fees.
/s/ Jack Kohler
---------------------
INTELLIPHONE, INC.
Jack Kohler
Chief Financial Officer
<PAGE>
INTELLIPHONE, INC.
6801 WAYZATA BLVD.
ST. LOUIS PARK, MINNESOTA 55426
PHONE (612) 544-1260 FAX (612) 544-1281
PROMISSORY NOTE
$50,000.00 July 27, 1996
In place of our promissory note for $50,000 dated September 27, 1994,
Intelliphone, Inc., a Minnesota Corporation whose principal place of business is
located at 6801 Wayzata Blvd., St. Louis Park, Minnesota, 55426 promises to pay
to the order of The Topp Family Trust, PO Box 191558 San Juan, Puerto Rico
00919 Fifty Thousand ($50,000.00) Dollars with interest from the above date at
the rate of twelve percent (12%) per annum. Monthly payments of $500 for
interest only will start on August 27, 1996. The entire principal will be due
September 27, 1997.
In the event of a failure to make payment when due, the undersigned shall be
liable for all costs of collection including reasonable attorney fees.
/s/ Jack Kohler
---------------------
INTELLIPHONE, INC.
Jack Kohler
Chief Financial Officer
<PAGE>
AGREEMENT FOR SALE AND PURCHASE
OF BUSINESS ASSETS
DATE: JANUARY 2, 1997
PARTIES: TELCO WEST, INC.
AN OREGON CORPORATION ("SELLER")
15838 S.W. Upper Boones Ferry Rd.
Lake Oswego, Oregon 97035
INTELLIPHONE, INC.
a Minnesota corporation ("Buyer")
6801 Wayzata Blvd.
St. Louis Park, Minnesota 55426
RECITALS:
A. Seller operates a business primarily engaged in providing and
servicing public pay telephones in several Western states. Seller owns
equipment, contract rights, leasehold interests, tools, inventories, account
receivables, operating accounts, prepaid insurance, advertising and sales
materials and miscellaneous assets used in connection with the operation of its
business.
B. Buyer desires to acquire site contracts for 1,019 payphones
located in the Colorado, Idaho, Oregon, Washington and Wyoming and all
equipment located at the respective sites identified in Exhibit #1 and #2
hereto together with all telephones, computer boards, telephone enclosures,
cash contents of the pay telephone at 11:59 p.m. on January 1, 1997, permits,
contract rights and intangibles related thereto including all good will and
rights associated the potential continuation of the contracts after the
expiration of the term of the site agreement contracts and Seller desires to
sell all of such assets to Buyer.
AGREEMENT:
SECTION 1. ASSETS PURCHASED.
1.1 ASSETS PURCHASED. Seller agrees to sell to Buyer, and Buyer agrees
to purchase from Seller, on the terms and conditions set forth in this
Agreement, the following assets ("Assets"):
1.1.1 The option to purchase from Berthel Fisher "Site Agreement" contents
and any modifications thereto described on Exhibit #1 attached hereto and made a
part hereof by reference, together with all equipment located at the sites
identified in the contracts, including telephones, computer boards used in
relation to the telephones, telephone enclosures, the cash contents of any pay
telephones at 11:59 p.m. upon January 1, 1997 , contract rights identified
therein and any intangibles related thereto. The options to purchase from
Berthel Fisher shall be exercised by Buyer for the following consideration which
shall be paid in cash to Berthel Fisher at closing:
<PAGE>
Lease-Option Price to be Applicable Pre-Paid
Lease/Option Number Paid to Berthel Fisher Sales Tax Property Taxes
- ------------------- ---------------------- ---------- --------------
07676001 - 000 $ 303,919.08 $ 8,076.24 $ 8,108.99
0747601 - 001 126,490.78 668.43 2,639.06
---------- -------- --------
Total $ 430,409.86 $ 8,744.67 $10,748.05
The sums stated above include sales tax applicable to the equipment
purchased by Buyer directly from Berthel Fisher. Buyer shall pay to Berthel
Fisher the applicable sales tax and pre-paid property taxes as stated above.
Seller guarantees delivery unto Buyer of title to the "Site Agreement" contents
and equipment by Berthel Fisher.
1.1.2 All of the Seller's right, title and interest in the "Site
Agreement" contracts and any modifications thereto described on Exhibit #2
attached hereto and made a part hereof by reference, together with all equipment
located at the sites identified in the contracts, including telephones, computer
boards used in relation to the telephones, telephone enclosures, the cash
contents of any pay telephones at 11:59 p.m. upon January 1, 1997 , contract
rights identified therein and any intangibles related thereto.
1.1.3 Seller represents that there are not less than 1,019 pay telephones
with "Site Agreements" which are being purchased by buyer either directly from
Seller or by exercise of the option to purchase conveyed by Seller to Buyer. In
the event the number of pay telephones is less than 1015 at closing, the
purchase price set forth herein will be reduced accordingly at the rate of $3300
per pay telephone not delivered. Further, during the two year period following
closing, if any of the approximately 32 telephones located in various "Shari's"
restaurants are removed (which notice of intent has been given to Seller), then
the purchase price due hereunder shall be further reduced at the rate of $2,000
for each telephone reduced in the first year and $1,000 for each phone removed
in the second year. Buyer may deduct any amounts due to such removals from the
next monthly payment due to Seller under the promissory note described at
Section 3.2.1. Except for the "Shari's" restaurant locations there shall be no
reduction for cancellation of any "Site Agreements" if at lease 1015 pay
telephones were delivered upon the date of closing.
1.1.4 All manuals, warranties, sales materials and telephone books at the
identified sites.
1.1.5 All inventories of Seller's pay telephone equipment, computer
systems related only to pay telephones, spare parts, materials and supplies used
by Seller in the ordinary course of Seller's business to maintain, service,
repair and replace the equipment located at the site locations identified in the
above paragraphs. Excluded from the equipment sold are 27 new telephone
enclosures, the new copier, fax machine and equipment associated with Seller's
presubscription or hotel/motel business.
<PAGE>
1.1.6 Seller's goodwill for pay telephone operations within the states
identified at B. above, and all files or other business records to handle
accounts identified above.
1.1.7 All warranties, contract rights, claims, licenses, prepaid
insurance, and renewal rights, rights to receive income or to continue
contracts, options, grants and all assets of Seller associated with the
equipment listed on Exhibits #1 and #2 of whatever kind, whether known or
unknown (except as specifically excluded), are included as part of this sale.
1.1.8 Seven (7) pickup trucks described by year, make, model, V.I.N., and
location at the time of closing on Exhibit #3 attached hereto and as made a part
hereof by reference, all trucks are sold in "AS-IS" and "WHERE-IS" condition.
Buyer shall insure the trucks effective at 11:59 p.m. upon January 1, 1997 , at
which time, Seller will cancel insurance on said vehicles. Any refunds on
insurance shall belong to Seller.
1.1.9 The tradename "Telco Northwest" and any associated logos or
servicemarks except the trade name "Telco West".
1.1.10 Twenty-Five (25) uninstalled payphones.
1.2 EXCLUDED ASSETS. Excluded from this sale and purchase are other
telephone equipment and site location agreements owned by Seller and not listed
on Exhibits #1 and #2, all of Seller's accounts for hotel and motel long
distance telephones, all pre-subscription agreements for LEC-owned payphones
wherever located and Seller's accounts receivable, collected cash on hand, notes
receivable, prepaid accounts, and the following:
1.2.1 All of Seller's cash on hand, bank accounts and operational accounts
of January 1, 1997 , except for the cash deposited in all payphones being
purchased at 11:59 p.m. on January 1, 1997,
1.2.2 Any prepaid taxes (personal property taxes on equipment sold to be
pro rated at closing), tax deposits and prepaid rent,
1.2.3 No licenses or permits required to own and/or operate the equipment
are being purchased by the Buyer. Buyer shall be solely responsible for
obtaining all necessary permits and licenses as may be required to own and
operate the telephone equipment, however Seller agrees to cooperate and to
execute any documents which may be necessary to effect the transfer or
assignment of any permits and licenses required by regulatory or government
agencies.
1.2.4 Any claims for dial around compensation for Seller's pay telephones
in continuous operation prior to January 1, 1997.
1.2.5 Any proceeds on account of litigation brought by Seller against
Fearless Farris Stinker Stations, Inc. and/or Mountain Phone Company, Inc. in
the District Court for the State of Idaho, Ada County, Case #CVOC9604405D.
<PAGE>
1.2.6 Office equipment and furnishings used by Seller in relation to
Seller's business in presubscription, hotel/motel business.
1.2.7 Any proceeds on account of litigation brought by Seller against U.S.
West in Federal District Court, Seattle, Washington, Case #C951622WD.
1.2.8 Any motor vehicles owned by Seller except those sold to Buyer and
identified in Exhibit #3.
SECTION 2. LIABILITIES ASSUMED AND NOT ASSUMED
2.1 BUYER'S LIABILITIES ASSUMED.
2.1.1 CONTRACT OBLIGATIONS. Buyer shall accept the assignment and assume
responsibility for the obligations of Seller under the contracts identified in
Section 1.1.1 and Section 1.1.2.
2.2 BUYER'S LIABILITIES NOT ASSUMED.
2.2.1 CORPORATE OBLIGATIONS. Notwithstanding that Buyer is acquiring the
trade name "Telco Northwest", it is not assuming any liabilities of Seller or
"Telco Northwest" except for those described at Section 2.1.1 above.
2.2.2 EMPLOYEES. Buyer shall have no responsibility to hire or pay any
employee or independent contractor of Seller compensation, sales commissions,
sick pay, retirement or other compensation, except, that if Buyer installs
telephones under contracts which have been assigned to Buyer, Buyer shall be
responsible for any commission due to any person by reason of said installation.
Should Buyer elect to hire former employees of Seller, Buyer shall be
responsible for any employment compensation offered by Buyer subsequent to
January 1, 1997 .
2.2.3 TRANSFER TAXES. Buyer shall pay to Seller at closing all transfer
taxes and sales taxes arising from this sale as follows:
State # of Telephones Tax Rate Tax
----- --------------- -------- ---
Oregon 51 0% $ 0
Washington 35 6.5% $ 6,015.10
Idaho 63 5.0% $ 8,328.60
Colorado 21 4.0% $ 2,220.96
Wyoming 3 6.0% $ 475.92
TOTAL $ 17,040.58
and upon collection of said taxes, Seller shall pay said sales and excise taxes
arising from this sale. Buyer acknowledges that all assets purchased herein
except otherwise identified are being purchased in Oregon for use within the
State of Oregon. Buyer shall pay to Berthel Fisher the applicable excise and
sales taxes identified by Berthel Fisher for equipment being purchased by Buyer
directly from Berthel Fisher in exercise of the option to purchase identified in
section 1.1.1. Buyer shall reimburse Seller for prepaid
<PAGE>
personal property taxes for equipment sold to Buyer in the sum of $442.50 to be
paid at closing.
2.2.4 LEASED OFFICE. Buyer has agreed to sublease from Seller
approximately 1/2 of the office space currently occupied by Seller at 15838 S.W.
Upper Boones Ferry Rd., Lake Oswego, Oregon on a month-to-month basis for base
rent equal to one-half of the base rent paid by Seller to Seller's landlord.
Rent shall be paid in advance.
2.2.5 GENERAL LIMITS. Except as set forth herein Buyer shall not be
liable for any indebtedness of Seller. Buyer assumes no liabilities except as
stated above.
2.3 SELLER'S OBLIGATIONS.
2.3.2 INCOME TAXES. Seller shall pay any State, Federal or Local income
taxes of Seller after application of all loss carry forwards, credits,
deductions or other tax offsets available to Seller and shall be responsible for
the cost of preparation of said tax returns and for all accounting fees
associated with the preparation of said tax returns.
2.2.3 COMMISSIONS AND CONTRACT OBLIGATIONS PAYABLE. Seller shall remain
liable for and shall pay when due any and all obligations arising from payments
and/or commissions due to customers under the "Pay Telephone Agreements",
"Customer Service Agreements" and "Site Agreements" through January 1, 1997 and
shall further pay all telephone bills and the cost of long distance or other
telephone service charges calculated through January 1, 1997 . Buyer shall have
the right but not the obligation to cure any of Seller's defaults under such
agreements and to set off against its obligations under the note described at
Section 3.1.1 any amounts paid to so cure Seller's defaults.
SECTION 3. PURCHASE PRICE FOR ASSETS
The purchase price for the assets is Two Million Nine Hundred Thirty-Five
Thousand Five Hundred Ninety-Two and 00/100 Dollars ($2,935,592.00) plus
interest at the rate of 10% per annum from January 1, 1997 until paid plus
payment to Berthel Fisher as the sum due to them to exercise Seller's option to
purchase the contracts and equipment as specified in Section 1.1.1. Security
deposits paid by Seller to Berthel Fisher shall be returned to Seller and are
not included in the purchase price. Seller accepts the consideration as full
and sufficient consideration for the assets identified above. The purchase
price shall be paid upon execution of this Agreement at closing in the following
manner:
3.1 Upon the execution of this Agreement, Buyer shall pay Berthel Fisher
the sum of $430,409.86 plus recalculated lease-option charges to update the
balance due from the January 1, 1997 calculation date to the date of payment
plus applicable sales tax in the sum of $8,744.67 plus pre-paid personal
property taxes in the sum of $10,748.05, all in relation to the leased
equipment. This sum is in addition to the purchase price agreed to above. Upon
closing, Buyer shall pay Berthel Fisher the sum of $169,047.18 plus interest
to update the balance due from the January 1, 1997 calculation date to the date
<PAGE>
of payment all to pay off a loan made by Berthel Fisher to Seller under Loan
#079-76001-002 which sum shall be a credit toward the purchase price herein.
3.2 Upon the execution of this Agreement, Buyer shall issue a good and
sufficient check to Buyer in the sum of One Million, Five Hundred Sixty Thousand
Forty-Two and 96/100 Dollars ($1,560,042.96) plus interest at the rate of 10%
per annum from January 1, 1996 until paid.
3.2.1 At closing, Buyer shall deliver its promissory note in the form
attached hereto as Exhibit #4 in the principal face amount of $841,500 (or such
lesser face amount if less than 1,015 phones are purchased as set forth in
Section 1.1.1 above), bearing interest at the rate of 10% per annum, payable as
follows: six (6) monthly interest payments commencing February 2, 1997 of
$7,012.50 each followed by forty-eight (48) monthly payments of principal and
interest in the aggregate amount of $21,342.61 per month. The obligations
arising under the promissory note shall be secured by Buyer granting to Seller a
security interest in all telephones owned by Buyer, except for any phones
presently located in and on Indian-owned gaming casino property as identified in
exhibit "7". The security interest shall be subordinate to the first lien
security position held by Buyer's primary lender, National City Bank,
Minneapolis, MN. or their assigns in an amount not to exceed $3,000,000. At
such time as the remaining unpaid principal balance due on the promissory note
is reduced to an amount less than $420,000, and if all sums have been paid on
the Note identified in Section 3.2.2 herein, then Seller will release its
security interest in all telephones owned by Buyer other than those acquired by
Buyer from Seller under this Agreement. The Security Agreements, attached
hereto as Exhibit #5 and Exhibit #5(a), giving rise to the security interest
described hereunder, will be executed by the parties hereto at closing.
3.2.2 Buyer also shall deliver an additional promissory note in the form
attached as Exhibit #4(a) in the principal face amount of Three Hundred Sixty
Five Thousand ($365,000), bearing interest at the rate of ten percent (10%) per
annum. Interest only at the rate of $3,042 per month shall commence on February
1, 1997 and continue monthly until April 1, 1998 when the entire principal
amount will be due. This promissory note shall also be secured pursuant to the
Security Agreements described in Section 3.2.1 above.
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
<PAGE>
3.3 The purchase price allocations shall be as follows:
ITEM PURCHASED LOCATION PURCHASE PRICE ALLOCATION
- -------------- -------- -------------------------
Berthel Fisher
Lease - Option Oregon $2,363,180.00
Vehicles Oregon $ 37,000.00
Office Equipment Oregon $ 10,000.00
Inventory & Supplies Oregon $ 53,000.00
Non-Competition Agree Oregon $ 10,000.00
Goodwill Oregon $ 5,000.00
Telephones per 2.2.3 Oregon $ 134,844.00
Telephones per 2.2.3 Wash. $ 92,540.00
Telephones per 2.2.3 Idaho $ 166,572.00
Telephones per 2.2.3 Colorado $ 55,524.00
Telephones per 2.2.3 Wyoming $ 7,932.00
TOTAL $2,935,592.00
SECTION 4. ADJUSTMENTS
The operation of telephone equipment identified on Exhibits #1 and #2 and
related income and expenses up to 11:59 p.m. on January 1, 1997, shall be for
the account of Seller and thereafter for the account of Buyer. Seller shall pay
all expenses of the equipment through January 1, 1997 , including but not
limited to site commissions, utilities, advertising, personal property taxes,
rents and lease payments, real property taxes, wages, and payroll taxes of
Seller. Buyer shall pay all expenses of the equipment after January 1, 1997,
including but not limited to site commissions, utilities, advertising, payroll
for employees of Seller who directly service said equipment including all
applicable benefits, workers compensation premiums, insurance, withholding taxes
and related charges. Cash from the telephones will be calculated electronically
on 11:59 p.m. (local time in each location) on January 1, 1997 and any cash in
the telephones thereafter shall belong to the Buyer. In addition to the
purchase price, Buyer shall pay to Seller any
<PAGE>
personal property tax that Seller has paid on the pay telephone equipment pro
rated through January 1, 1997.
SECTION 5. OTHER AGREEMENTS
5.1 NON-COMPETE AGREEMENT. Seller, Buyer and Evert Brown will enter into
an Agreement prohibiting certain competition by Seller and Evert Brown without
the prior consent of Buyer.
5.2 ASSIGNMENT OF CONTRACTS. Seller shall execute and deliver at closing
separate assignments of the Pay Telephone Agreements and Telephone Site
Agreements and after closing any additional documentation as may be requested by
Buyer it being the intention of the parties hereto that Seller shall cooperate
as is hereinafter necessary to perfect the Buyer's interest in all assets
purchased hereunder and that the obligations of Seller to execute assignments of
said contracts shall survive the closing.
SECTION 6. COLLECTION OF SELLER'S ACCOUNTS RECEIVABLE.
Seller shall take such action as is necessary to collect accounts
receivable due to Seller on account of telephone services provided prior to
January 1, 1997 . Buyer shall cooperate with seller as is necessary to provide
Seller with information from the files purchased by Buyer in order for Seller to
collect the accounts receivable. All commissions due to site owners prorated as
11:59 p.m. on January 1, 1997 shall be paid by Seller.
SECTION 7. SELLER'S REPRESENTATIONS AND WARRANTIES
Seller represents and warrants to Buyer as follows:
7.1 CORPORATE EXISTENCE. Seller represents that Telco West, Inc. is an
Oregon corporation duly organized and validly existing and in good standing and
is authorized to transact business in the state of Oregon and such other states
as the nature of its business requires it to be duly qualified to transact
business therein. Seller has all requisite power and authority to own, operate
and/or lease the assets, as the case may be, and to carry on its business as now
being conducted.
7.2 AUTHORIZATION. The execution, delivery and performance of this
Agreement have been duly authorized and approved by the Board of Directors and
the requisite number of the shareholders of Seller, the lawful owner of all the
assets described herein, that no further approval for sale and transfer of the
assets to Buyer is required and this Agreement constitutes a valid and binding
Agreement of Seller in accordance with its terms.
<PAGE>
7.3 FINANCIAL STATEMENTS. Seller has delivered to Buyer a list of site
revenues through September 30, 1996. To the best of Seller's knowledge the site
revenues are in accordance with the books and records of Seller and are true,
correct, and complete.
7.4 TITLE TO ASSETS. Seller holds good and marketable title to the
Assets, free and clear of restrictions on or conditions to transfer or
assignment, and free and clear of liens, pledges, charges, or encumbrances
except as described on Exhibit #5 attached hereto and made in part hereof by
reference. Buyer is under no obligations whatsoever to use operator service
providers or long distance providers previously used by Seller and Seller agrees
to indemnify Buyer from any and all claims of any person who may claim a right,
title or interest in the assets transferred by this agreement.
7.5 BROKERS AND FINDERS. Seller has not employed a broker or finder in
connection with the transactions contemplated by this Agreement, or taken any
action that would give rise to a valid claim against Buyer or any party for a
brokerage commission, finder's fee, or other like payment.
7.6 TRANSFER NOT SUBJECT TO ENCUMBRANCES OR THIRD-PARTY APPROVAL. The
execution and delivery of this Agreement by Seller, and the consummation of the
contemplated transactions, will not result in the creation or imposition of any
valid lien, charge, or encumbrance on any of the Assets by any person, and will
not require the authorization, consent, or approval of any third party,
including any governmental subdivision, court or regulatory agency.
7.7 LABOR AGREEMENTS AND DISPUTES. Seller is neither a party to, nor
otherwise subject to any collective bargaining or other agreement governing the
wages, hours, and terms of employment of Seller's employees. Seller is not
aware of any labor dispute or labor trouble involving employees of Seller, nor
has there been any such dispute or trouble during the three years preceding the
date of this Agreement.
7.8 NONCANCELABLE CONTRACTS. At the time of closing, there will be no
material leases, employment contracts, contracts for services or maintenance, or
other similar contracts existing or relating to or connected with the operation
of Seller's business not cancelable within 30 days, except the telephone site
agreements.
7.9 LITIGATION. Seller has no knowledge of any claim, litigation,
proceeding, or investigation pending or threatened against Seller that might
result in any material adverse change in the business or condition of the Assets
being conveyed under this Agreement. Buyer has been advised concerning the
status of Seller's suit against Fearless Ferris Stinker Stations, Ada County,
Idaho, Case #CVOC9604405D which may effect continuation of not more than
three(3) pay telephones and related contracts with the defendant therein.
/ / /
<PAGE>
7.10 NO MATERIAL ADVERSE CHANGE. Since December 3, 1996 there has not
been an adverse change in any of the assets or in the business in which the
assets are employed except as described on Exhibit 6 attached hereto and made a
part hereof by reference.
7.11 ACCURACY OF REPRESENTATIONS AND WARRANTIES. None of the
representations or warranties of Seller contain or will contain any untrue
statement of a material fact or omit or will omit or misstate a material fact
necessary in order to make statements in this Agreement not misleading. Seller
knows of no fact that has resulted, or that in the reasonable judgment of Seller
will result in a material change in the business, operations, or assets of
Seller that has not been set forth in this Agreement or otherwise disclosed to
Buyer.
7.12 SELLER'S OPERATION OF BUSINESS PRIOR TO CLOSING. Seller represents
that between December 3, 1996 and the closing date, Seller has: (a) operated the
business that in the usual and ordinary course and in substantial conformity
will all applicable laws, ordinances, regulation, rules, or orders, and has used
its best efforts to preserve its business organization and preserve the
continued operation of its business with its customers, suppliers, and others
having business relations with Seller and b) not assigned, sold, leased, or
otherwise transferred or disposed of any of the assets used in the performance
of its business, whether now owned or hereafter acquired, except in the normal
and ordinary course of business and in connection with its normal operation.
SECTION 8. COVENANTS OF SELLER
8.1 EMPLOYEE MATTERS
8.1.1 Seller has delivered to Buyer a list of the names and addresses of
all persons on the payroll of Seller having information concerning the site
agreements transferred to Buyer which list is satisfactory to Buyer. Seller
represents that seller is unaware of any person who has confidential
information concerning the site agreements that would assist that person in
interfering with the contract rights being assigned.
8.2 CONDITIONS AND BEST EFFORTS. Seller will use their best efforts to
effectuate the transactions contemplated by this Agreement and to fulfill all
the conditions and obligations of Seller under this Agreement, and will do all
acts and things as may be required to carry out their respective obligations
under this Agreement and to consummate and complete this Agreement. Seller
agrees to execute such additional documents as may be required to transfer all
assets identified by this Agreement.
SECTION 9. COVENANTS OF BUYER
9.1 CONDITIONS AND BEST EFFORTS. Buyer will use its best efforts to
effectuate the transactions contemplated by this Agreement and to fulfill all
the conditions of Buyer's obligations under this Agreement.
<PAGE>
9.2 CONFIDENTIAL INFORMATION. If for any reason the sale of Assets is
not closed, Buyer will not disclose to third parties any confidential
information received from Seller in the course of investigating, negotiating,
and performing the transactions contemplated by this Agreement.
SECTION 10. CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS. The obligation of
Buyer to purchase the Assets is subject to the fulfillment, before or at the
closing date, of each of the following conditions, any one or portion of which
may be waived in writing by Buyer:
10.1 REPRESENTATIONS, WARRANTIES, AND COVENANTS OF SELLER. All
representations and warranties made in this Agreement by Seller shall be true as
of the closing date as fully as though such representations and warranties had
been made on and as of the closing date, and, as of the closing date, neither
Seller nor Selling Shareholders shall have violated or shall have failed to
perform in accordance with any covenant contained in this Agreement.
10.2 CONDITIONS OF THE BUSINESS. There shall have been no material
adverse change in the manner of operation of Seller's business before the
closing date.
10.3 NO SUITS OR ACTIONS. At the closing date no suit, action, or other
proceeding shall have been threatened or instituted to restrain, enjoin, or
otherwise prevent the consummation of this Agreement or the contemplated
transactions.
10.4 FINANCING. Buyer has arranged for financing (other than the Notes to
be delivered to Seller by Buyer) on terms and conditions deemed acceptable to
Buyer in its sole discretion and Buyer has obtained an enforceable commitment to
lend from such lender.
SECTION 11. CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS
11.1 Buyer must provide Seller with satisfactory personally guarantees
from Buyer's shareholders to secure the obligations of Buyer as set forth
herein.
11.2 Buyer must provide Seller with a form of Subordination Agreement that
is reasonably acceptable to Seller and to Buyer's primary lender.
SECTION 12. BUYER'S ACCEPTANCE
Buyer represents and acknowledges that it has entered into this Agreement
on the basis of its own examination, personal knowledge, and opinion of the
value of the business. Buyer has not relied on any representations made by
Seller other than those specified in this Agreement. Buyer further acknowledges
that Seller has made no agreement or promise to repair or improve any of the
leasehold improvements, equipment, or other personal property being sold to
Buyer under this Agreement, and that Buyer takes all such property in the
condition existing on the date of this Agreement, "AS IS" and "WHERE IS".
/ / /
<PAGE>
SECTION 13. RISK OF LOSS
The risk of loss, damage, or destruction to any of the equipment,
inventory, or other personal property to be conveyed to Buyer under this
Agreement shall be borne by Seller until January 1, 1997 and thereafter the risk
of loss shall be born by the Buyer. In the event of such loss, damage, or
destruction, Seller, to the extent reasonable, shall replace the lost property
or repair or cause to repair the damaged property to its condition prior to the
damage. If replacement, repairs, or restorations are not completed prior to
January 1, 1997, then the purchase price shall be adjusted by an amount agreed
upon by Buyer and Seller that will be required to complete the replacement,
repair, or restoration following closing. If Buyer and Seller are unable to
agree, then Buyer, at its sole option and notwithstanding any other provision of
this Agreement, upon notice to Seller, may rescind this Agreement and declare
it to be of no further force and effect, in which event there shall be no
closing of this Agreement and all the terms and provisions of this Agreement
shall be deemed null and void.
SECTION 14. INDEMNIFICATION AND SURVIVAL
14.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made in this Agreement shall survive the closing of this Agreement,
except that any party to whom a representation or warranty has been made in this
Agreement shall be deemed to have waived any misrepresentation or breach of
representation or warranty of which such party had knowledge prior to closing.
Any party learning of a misrepresentation or breach of representation or
warranty under this Agreement shall immediately give written notice thereof to
all other parties to this Agreement. The representations and warranties in this
Agreement shall terminate one year from the closing date, and such
representations or warranties shall thereafter be without force or effect,
except any claim with respect to which notice has been given to the party to be
charged prior to such expiration date.
14.2 SELLER'S INDEMNIFICATION.
14.2.1 Seller agrees to indemnify and hold Buyer, its successors, and
assigns harmless from and against:
(1) Any and all claims, liabilities, and obligations of every kind and
description, contingent or otherwise, arising out of or related to the operation
of Seller's business assets prior to the close of business on the closing date,
except for claims, liabilities, and obligations of Seller expressly assumed by
Buyer under this Agreement or paid by insurance maintained by Seller or Buyer.
(2) Any and all damage or deficiency resulting from any material
misrepresentation, on the part of Seller or their authorized representatives
under this Agreement.
(3) Any and all claims by shareholders of Seller arising from this sale of
assets.
<PAGE>
(4) Any and all claims of creditors of Seller if said creditor liabilities
were not expressly assumed by Buyer under Section 2 of this agreement.
14.2.2 Seller's indemnity obligations under Section 15.2.1 shall be subject
to the following:
(1) If any claim is asserted against Buyer that would give rise to a claim
by Buyer against Seller for indemnification under the provisions of this
paragraph, then Buyer shall promptly give written notice to Seller concerning
such claim and Seller shall, at no expense to Buyer, defend the claim.
14.3 BUYER'S INDEMNIFICATION. Buyer agrees to defend, indemnify, and
hold harmless Seller from and against:
14.3.1 Any and all claims, liabilities, and obligations of every kind and
description arising out of or related to the operation of the business following
closing or arising out of Buyer's failure to perform obligations of Seller
assumed by Buyer pursuant to Section 2 of this Agreement.
14.3.2 Any and all damage or deficiency resulting from any material
misrepresentation, breach of warranty or covenant, or nonfulfillment of any
agreement on the part of Buyer under this Agreement.
14.3.3 Any and all claims arising from any occurrence subsequent to January
1, 1997 by owners under "Pay Telephone Agreements" and/or "Customer Service
Agreement & Letter of Agency" contracts, which agreements have been assigned to
Buyer.
SECTION 15. CLOSING
15.1 TIME AND PLACE. This Agreement shall be closed in Portland, Oregon
the 6th day of January, 1997, or at such other time as the parties may agree in
writing.
15.2 OBLIGATIONS OF SELLER AT THE CLOSING. At the closing and
coincidentally with the performance by Buyer of its obligations described
herein, Seller shall deliver to Buyer the following:
15.2.1 Bills of sale in the form of Exhibit #1 and #2 hereto,
assignments, properly endorsed certificates of title, and other instruments
of transfer, in form and substance reasonably satisfactory to Buyer,
necessary to transfer and convey all of the Assets to Buyer as well as
physical possession of the assets identified herein, free and clear of all
liens, security interests and encumbrances.
15.2.2 Transfer of all licenses and permits to transacts business of the
Seller and transfer of the assumed business name of Seller.
15.2.3 Such other certificates and documents as may be contemplated by the
provisions of this Agreement, including a board resolution of Seller's board of
directors authorizing this transaction.
15.3 OBLIGATIONS OF BUYER AT THE CLOSING. At the closing and
coincidentally with the performance by Seller of their obligations described in
Section 16.2, Buyer shall deliver to Seller the following:
15.3.1 A good and sufficient check or wire transfer in the amount specified
herein as partial consideration for this transfer.
<PAGE>
15.3.2 Original Promissory Notes as identified in Sections 3.1.1 and 3.1.2,
Security Agreements and Financing Statements.
15.3.3 Such other certificates and documents as may be contemplated by the
provisions of this Agreement.
SECTION 16. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING
16.1 BOOKS AND RECORDS. This sale does not include the books and records
of Seller's business, except those records relating to the sellers accounts with
customers identified in the contracts being sold.
16.2 SELLER'S RIGHT TO PAY. In the event Buyer fails to make any payment
of taxes, assessments, or other charges that Buyer is required to pay to third
parties under this Agreement, Seller shall have the right, but not the
obligation, to pay the same. Buyer will reimburse Seller for any such payment
immediately upon Seller's demand. Any such payment by Seller shall not
constitute a waiver by Seller of any remedy available by reason of Buyer's
default for failure to make the payments.
16.3 BUYERS'S RIGHT TO PAY. In the event Seller failed to make any
payment of taxes, assessments or other charges that Seller is required to pay to
third parties (including but not limited to payments that are due to creditors
of Seller which in any way affect the use or ownership of the property
transferred hereunder) under this Agreement, Buyer shall have the right, but not
the obligation, to pay the same. Seller and/or Selling Shareholder's will
reimburse Buyer for any such payment immediately upon Buyer's demand. Further,
Buyer may withhold payments due under the Installment Collateral Note in the
amount paid by Buyer to satisfy Seller's obligations. Any such payment by Buyer
shall not constitute a waiver by Buyer of any remedy available by reason of
Seller's default for failure to make the payments.
SECTION 17. BULK SALES LAW
Buyer waives compliance by Seller with the any Bulk Transfer Act. Except
for those liabilities assumed by Buyer, as provided herein, in the event any
creditor of Seller claims the benefit of the Bulk Transfer Laws as against Buyer
or any of the assets being conveyed to Buyer under this Agreement, Seller shall
immediately pay or otherwise satisfy such claim or undertake its defense.
Seller shall indemnify and hold Buyer harmless from and against any and all
loss, expense, or damage resulting from the failure to comply with any Bulk
Transfer Law. If Seller fails to comply with the provisions of this Section 15
and Buyer is required to pay any creditor of Seller in order to protect the
property purchased under this Agreement from claims or liens of Seller's
creditors, except those assumed by Buyer, then Buyer may offset the amount it
pays against any sum due Seller under this agreement by furnishing proof of such
payment in the form of a receipt from the creditor involved and/or demand
payment and file an action to enforce the terms of this agreement.
<PAGE>
SECTION 18. COVENANT NOT-TO-COMPETE.
In further consideration of the transactions contemplated by this
agreement, at closing Seller and Evert Brown shall enter into the form of
Non-Compete Agreement attached hereto as Exhibit #9 and made a part hereof by
reference. In consideration of the granting of this covenant not-to-compete,
the parties hereto agree to allocate $10,000.00 of the aggregate purchase price
to such covenant.
SECTION 19. MISCELLANEOUS PROVISIONS
19.1 PUBLIC DISCLOSURES. Neither Seller nor Buyer shall disclose the sale
of the assets in any press release or other public announcement without the
prior written consent of the other parties, which consent shall not be
unreasonably withheld.
19.2 EXPENSES. Whether or not the closing occurs, each party hereto shall
pay its own expenses in connection with his agreement.
19.3 NOTICES. Any notice, demand or communication required or permitted by
this agreement shall be in writing and shall be delivered by hand or by U.S.
mail, first class certified mail, postage prepaid, return-receipt requested and
addressed to the parties at their respective addresses set forth at page one of
this agreement. Either party may changes its address for notice purposes by
providing notice in accordance with his provision. Any notice, demand or other
communication shall be deemed given and effective as of the date of delivery by
hand, or upon the firth day following mailing.
19.4 HEADINGS. The headings and titles to the Sections and subparagraphs
of this agreement are inserted for convenience only, and shall not be deemed to
be a part of the Agreement nor affect the construction or interpretation of any
provision of the Agreement.
19.5 MODIFICATIONS AND WAIVERS. No modification or amendment of any
provision of this Agreement shall be effective for any purpose unless set forth
in a writing signed by the party of parties to be bound thereby. The waiver by
any party of any right or remedy under this Agreement on any one occasion shall
not be deemed a waiver of such right or remedy on any subsequent occasion.
19.6 SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this Agreement.
19.7 BINDING EFFECT. The provisions of this Agreement shall be binding
upon and inure to the benefit of the respective heirs, personal representatives,
successors and assigns of the parties.
19.8 ENTIRE AGREEMENT. This Agreement and the exhibits to this Agreement
set forth the entire understanding of the parties with respect to the subject
matter hereof and supersedes all existing
<PAGE>
agreements between the parties with respect to such subject matter including
without limiting the foregoing, the letter agreement between the parties hereto
concerning the subject matter hereof dated December 3, 1996.
19.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
19.10 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the state of Oregon.
19.11 VENUE. This Agreement has been made entirely within the state of
Oregon. This Agreement shall be governed by and construed in accordance with
the laws of the state of Oregon. If any suit or action is filed by any party to
enforce this Agreement or otherwise with respect to the subject matter of this
Agreement, venue shall be in the federal or state courts in Oregon, Multnomah
County, Oregon.
DATED this 2nd day of January, 1997.
SELLER: --------------------------------------------------------
Telco West, Inc., an Oregon corporation
By /s/ Evert S. Brown, Treasurer
------------------- --------------------------------
Evert Brown Treasurer
BUYER: --------------------------------------------------------
Intelliphone, Inc., a Minnesota corporation
By /s/ Jeffrey Paletz, President
------------------- --------------------------------
<PAGE>
INSTALLMENT COLLATERAL NOTE
$841,500 Portland, Oregon, January 2, 1997.
The undersigned promises to pay to the order of TELCO WEST, INC., an
Oregon corporation or their assigns at 15838 S.W. Upper Boones Ferry Rd.,
Lake Oswego, Oregon 97035 the sum of EIGHT HUNDRED FORTY ONE THOUSAND FIVE
HUNDRED AND NO/100 DOLLARS ($841,500.00), together with interest thereon at
the rate of 10.0% per annum accruing from the date hereof until paid.
Payments on this note shall commence on or before February 1, 1997 when the
sum of $7,012.50 shall be due and on the first day of each month thereafter
for five additional months the sum of $7,012.50 shall be due until beginning
August 1, 1997 the sum of $21,342.61 shall be due and on the first day of
each month thereafter for forty-seven (47) additional months the sum of
$21,342.61 shall be due on or before the first day of each month. The
balance, if any, shall be due and payable on or before August 1, 2001. All
payments must be postmarked on or before the first day of each month.
Attached hereto as exhibit "A" is an amortization table which the parties
hereto agree represents the principal and interest balances as of the dates
set forth therein if all payments are made upon the dates due as set forth by
this Installment Collateral Note. The undersigned represents that the funds
borrowed are for business purposes in the purchase pay telephone equipment
and not for any non-commercial purpose. If any of said installments is not
paid, all principal and interest shall become immediately due and collectible
at the option of the holder of this note.
The undersigned shall have the right to prepay all or any portion of the
principal balance. A payment of principal only is known as a "prepayment". If
the undersigned elects to make a "prepayment" it must be identified as such
by written statement of the undersigned on the check or otherwise. No
portion of any prepayment will be applied to the regular monthly payment.
"Prepayment shall not forgive the undersigned from making any regular monthly
payment.
If the holder of this Note has not received the full amount of any
monthly payment by the end of three calendar days after the date it is due,
the undersigned agrees to pay a late charge to the note holder equal to 5.0%
of the overdue amount. The undersigned agrees to pay the late charge
promptly, however, in no event later than thirty (30) days past the date said
late charge is assessed by reason of delinquency. The holder of this note
shall not be required to send notice of any late charge assessment. In
addition the holder may charge the undersigned any costs and expenses
associated with collection of the late payment or charge.
PAGE 1 - INSTALLMENT COLLATERAL NOTE
<PAGE>
To secure the payment of this note and any other liabilities of the
undersigned to said payee, hereafter arising, the undersigned has delivered
unto the payee a Security Agreement and Finance Statements. As additional
security for payment of the debts evidenced hereby shareholders of
Intelliphone, Inc. have personally guaranteed the debt.
The payee shall have no duty to collect or protect the collateral or any
proceeds, to preserve the rights of any of the undersigned against prior or
other parties, to realize on the collateral in any particular manner or to
seek reimbursement from any particular source and, at the payees option, may
proceed directly against the undersigned without exercising any further right
to satisfy the obligations of the undersigned by repossession or sale of the
collateral.
With reference to this note and also to that portion of the collateral,
which indebtedness owing to the undersigned, the payee, at his election, may
grant any extensions, postponement of time of payment, indulgence, or permit
any substitutions, exchange or release of collateral and may add to or
release any parties primarily or secondarily liable without notice to and
without releasing the undersigned.
The undersigned assumes full responsiblity for taking any necessary
steps to protect any of the collateral in payee's possession including
without limitation, the exercise of any rights respecting the collateral. The
payee shall have exercised reasonable care in the preservation and protection
of the collateral if he takes such action for that purpose as the
undersigned shall request in writing.
If this note is placed in the hands of an attorney for collection, each
of the undersigned promises to pay the reasonable collection costs of the
holder hereof; and if suit or action is filed hereon, also promises to pay(1)
holder's reasonable attorney's fees to be fixed by the trial court and (2) if
any appeal is taken from any decision of the trial court, such further sum as
may be fixed by the appellate court, as the holder's reasonable attorney's
fees in the appellate court.
If payment of this note is made by any co-maker or endorser the payee is
authorized, at his election, to surrender the collateral to the person making
such payment.
The rights and remedies of the payee (as the secured party herein) with
respect to all of the above described collateral as well as all other
collateral in which the payee has a security interest by this note or
otherwise shall be those provided by the laws of the State of Oregon.
PAGE 2 - INSTALLMENT COLLATERAL NOTE
<PAGE>
The undersigned shall be in default hereunder upon the occurrence of
the following events:
(a) Failure to pay when due the principal, interest or late charges on
this note or any of the said installments when due;
(b) Failure to pay when due the principal, interest or late charges on
the Installment Note dated January 2, 1997 in the face amount of $365,000.00.
(c) Commencement of any insolvency proceedings by or against any of the
undersigned or any endorser hereof;
(d) Failure of the undersigned to pay personal property taxes associated
with the property securing the obligations hereunder.
In the event of the occurrence of any of the foregoing events of
default, then at the option of the said payee this note as well as all other
obligations to the payee of any of the undersigned and of any endorser hereof
shall immediately become due and payable.
INTELLIPHONE, INC.
By: /s/ Jeffrey Paletz, President
----------------------------------
STATE OF MINNESOTA )
)ss
County of Hennepin )
This instrument was acknowledged before me on January 7, 1997 by Jeffrey
Paletz who attested that he is the President of Intelliphone, Inc., a
Minnesota corporation and that he has authority to sign this document on
behalf of said corporation and acknowledged the foregoing document as the
voluntary act and deed of Intelliphone, Inc.
Before me this 7 day of January, 1997.
/s/ Marilyn M. Susbauer
---------------------------------------
Notary Public for Oregon
my commission expires: 9-16-98
- ------------------------------------
OFFICIAL SEAL
MARILYN M. SUSBAUER
NOTARY PUBLIC-OREGON
COMMISSION NO. 037827
MY COMMISSION EXPIRES SEPT. 18, 1998
- -------------------------------------
PAGE 3 - INSTALLMENT COLLATERAL NOTE
<PAGE>
INSTALLMENT COLLATERAL NOTE
$365,000.00 Portland, Oregon, January 2, 1997.
The undersigned promises to pay to the order to TELCO WEST, INC., an
Oregon Corporation or their assigns at 15838 S.W. Upper Boones Ferry Rd., Lake
Oswego, Oregon 97035 the sum of THREE HUNDRED SIXTY FIVE THOUSAND AND NO/100
DOLLARS ($365,000), together with interest thereon at the rate of 10.0% per
annum accruing from the date hereof until paid. Payments on this note shall
commence on or before February 1, 1997 when the sum of $3,042.00 shall be due
and on the first day of each month thereafter the sum of $3,042 shall be due
until April 1, 1998 when the entire unpaid principal and interest us due and
payable. All payments must be postmarked on or before the first day of each
month. Attached hereto as exhibit "A" is an amortization table which the
parties hereto agree represents the principal and interest balances as of the
dates set forth therein if all payments are made upon the dates due as set
forth by this Installment Collateral Note. The undersigned represents that
the funds borrowed are for business purposes in the purchase pay telephone
equipment and not for any non-commercial purpose. If any of said installments
is not paid, all principal and interest shall become immediately due and
collectible at the option of the holder of this note.
The undersigned shall have the right to prepay all or any portion of the
principal balance. A payment of principal only is known as a "prepayment".
If the undersigned elects to make a "prepayment" it must be identified as
such by written statement of the undersigned on the check or otherwise. No
portion of any prepayment will be applied to the regular monthly payment.
"Prepayment shall not forgive the undersigned from making any regular monthly
payment.
If the holder of this note has not received the full amount of any
monthly payment by the end of three calendar days after the date it is due,
the undersigned agrees to pay a late charge to the note holder equal to 5.0%
of the overdue amount. The undersigned agrees to pay the late charge
promptly, however, in no event later than thirty (30) days past the date said
late charge is assessed by reason of delinquency. The holder of this note
shall not be required to send notice of any late charge assessment. In
addition the holder may charge the undersigned any costs and expenses
associated with collection of the late payment or charge.
PAGE 1 -- INSTALLMENT COLLATERAL NOTE
<PAGE>
To secure the payment of this note and any other liabilities of the
undersigned to said payee, hereafter arising, the undersigned has delivered
unto the payee a Security Agreement and Finance Statements. As additional
security for payment of the debts evidenced hereby shareholders of
Itelliphone, Inc. have personally guaranteed the debt.
The payee shall have no duty to collect or protect the collateral or any
proceeds, to preserve the rights of any of the undersigned against prior or
other parties, to realize on the collateral in any particular manner or to
seek reimbursement from any particular source and, at the payees option, may
proceed directly against the undersigned without exercising any further right
to satisfy the obligations of the undersigned by repossession or sale of the
collateral.
With reference to this note and also to that portion of the collateral,
which indebtedness owing to the undersigned, the payee, at his election, may
grant any extensions, postponement of time of payment, indulgence, or permit
any substitutions, exchange or release of collateral and may add to or
release any parties primarily or secondarily liable without notice to and
without releasing the undersigned.
The undersigned assumes full responsibility for taking any necessary
steps to protect any of the collateral in payee's possession including
without limitation, the exercise of any rights respecting the collateral. The
payee shall have exercised reasonable care in the preservation and protection
of the collateral if he takes such action for that purpose as the undersigned
shall request in writing.
If this note is placed in the hands of an attorney for collection, each
of the undersigned promises to pay the reasonable collection costs of the
holder hereof; and if suit or action is filed hereon, also promises to pay
(1) holder's reasonable attorney's fees to be fixed by the trial court and
(2) if any appeal is taken from any decision of the trial court, such further
sum as may be fixed by the appellate court, as the holder's reasonable
attorney's fees in the appellate court.
If payment of this note is made by any co-maker or endorser the payee is
authorized, at his election, to surrender the collateral to the person
making such payment.
The rights and remedies of the payee (as the secured party herein) with
respect to all of the above described collateral as well as all other
collateral in which the payee has a security interest by this note or
otherwise shall be those provided by the laws of the State of Oregon.
PAGE 2 -- INSTALLMENT COLLATERAL NOTE
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The undersigned shall be in default hereunder upon the occurrence of
the following events:
(a) Failure to pay when due the principal, interest or late charges on
this note or any of the said installments when due;
(b) Failure to pay when due the principal, interest or late charges on
the Installment Note dated January 2, 1997 in the face amount of $841,500;
(c) Commencement of any insolvency proceedings by or against any of
the undersigned or any endorser hereof;
(d) Failure of the undersigned to pay personal property taxes
associated with the property securing the obligations hereunder.
In the event of the occurrence of any of the foregoing events of
default, then at the option of the said payee this note as well as all other
obligations to the payee of any of the undersigned and of any endorser hereof
shall immediately become due and payable.
INTELLIPHONE, INC.
by /s/ Jeffrey Paletz, President
------------------------------
STATE OF MINNESOTA )
)ss
County of Hennepin )
This instrument was acknowledged before me on January 7, 1997 by
Jeffrey Paletz who attested that he is the President of Intelliphone,
Inc., a Minnesota corporation and that he has authority to sign this
document on behalf of said corporation and acknowledged the foregoing
document as the voluntary act and deed of Intelliphone, Inc.
Before me this 7 day of January, 1997.
OFFICIAL SEAL /s/ Marilyn M. Susbauer
MARILYN M. SUSBAUER ------------------------------
NOTARY PUBLIC - OREGON Notary Public for Oregon
COMMISSION NO. 037827 my commission expires: 9-16-98
MY COMMISSION EXPIRES SEPT. 16, 1998
PAGE 3 -- INSTALLMENT COLLATERAL NOTE
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AGREEMENT FOR SALE AND PURCHASE OF ASSETS
DATE: AS OF MARCH 14, 1997
PARTIES: COMPUTER ASSISTED TECHNOLOGIES, INC.
a Wisconsin corporation ("Seller")
10740 Lyndale Avenue South
Bloomington, MN 55420
INTELLIPHONE, INC.
a Minnesota corporation ("Buyer")
6801 Wayzata Blvd.
St. Louis Park, Minnesota 55426
RECITALS:
A. Seller operates a business primarily engaged in providing and
servicing public pay telephones in Minnesota and Wisconsin. Seller owns
equipment, site contract rights, leasehold interests, tools, inventories,
account receivables, operating accounts, prepaid insurance, advertising and
sales materials and miscellaneous assets used in connection with the operation
of its business.
B. Buyer desires to acquire site contract rights for not less than 586
pay telephones, including a minimum of 385 "Intellicall" brand pay telephones
("Intellicall Phones"), located in Minnesota and Wisconsin and all telephones
and related equipment located at the respective sites identified in Exhibit
1.1.1 hereto together with all computer boards, telephone enclosures, cash
contents of the pay telephones, line deposits, permits, contract rights and
intangibles related thereto including all good will and rights associated with
the potential continuation of the site contracts after the expiration of the
term of the site agreement contracts and Seller desires to sell all of such
assets to Buyer.
AGREEMENT:
SECTION 1. ASSETS PURCHASED.
1.1 ASSETS PURCHASED. Seller agrees to sell to Buyer, and Buyer agrees to
purchase from Seller, on the terms and conditions set forth in this Agreement,
the following assets ("Assets"):
1.1.1 All of the Seller's right, title and interest in the "Site
Agreements" and any modifications thereto described on Exhibit 1.1.1 attached
hereto and made a part hereof by reference,
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together with all equipment located at the sites identified in the contracts,
including telephones, computer boards used in relation to the telephones,
telephone enclosures, the cash contents of any pay telephones at 11:59 p.m. upon
the date of closing, line deposits, contract rights identified therein and any
intangibles related thereto. Seller represents that there are not less than 586
pay telephones, including a minimum of 385 Intellicall Phones, with "Site
Agreements" which are being purchased by Buyer. In the event that at the
closing the number of pay telephones is less than 586 and/or the number of
Intellicall Phones is less than 385, then the Purchase Price set forth at
Section 3 will be reduced accordingly at the rate of $3,916 per pay telephone
(other than an Intellicall Phone) and $4,166 per Intellicall Phone. Buyer shall
have no obligation to purchase more than 586 installed telephones at closing,
but should it elect to do so, the Purchase Price shall be increased accordingly
at the rate of $3,916 per pay telephone (other than an Intellicall Phone) and
$4,166 per Intellicall Phone, and the aggregate amount of such increase shall be
added to the principal amount of the Buyer's convertible replacement promissory
note ("Convertible Note") described at Section 3.1.4.
1.1.2 All manuals, warranties, sales materials and telephone books at
the identified sites.
1.1.3 All inventories of Seller's equipment, computer systems, spare
parts, materials and supplies used by Seller in the ordinary course of Seller's
business to maintain, service, repair and replace the equipment located at the
site locations identified in the above paragraphs.
1.1.4 Seller's goodwill for pay telephone operations within Minnesota
and Wisconsin, and all files or other business records to handle accounts
identified above.
1.1.5 All warranties, contract rights, claims, licenses, prepaid
insurance, and renewal rights, rights to receive income or to continue
contracts, options, grants and all assets of Seller associated with the
equipment listed on Exhibit 1.1.1 of whatever kind, whether known or unknown
(except as specifically excluded), are included as part of this sale.
1.1.6 The service vehicle described by year, make, model, V.I.N., and
location at the time of closing on Exhibit 1.1.6 attached hereto and as made a
part hereof by reference, which shall be sold in "AS-IS" and "WHERE-IS"
condition.
1.1.7 The trade names "Computer Assisted Technologies" and "Rolcom
USA," as well as any associated logos, or servicemarks.
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1.1.8 Executed agreements providing for the installation of at least
ninety-eight (98) pay telephones (the "Uninstalled Phones"), as set forth on
Exhibit 1.1.8.
1.2 EXCLUDED ASSETS. Excluded from this sale and purchase are Seller's
accounts receivable, collected cash on hand, notes receivable, prepaid accounts,
and the following:
1.2.1 All of Seller's cash on hand, bank accounts and operational
accounts of the date of closing, except for the cash contents of all pay
telephones being purchased at 11:59 on the date of closing,
1.2.2 Any prepaid taxes, tax deposits and prepaid rent,
1.2.3 No licenses or permits required to own and/or operate the
equipment are being purchased by the Buyer. Buyer shall be solely responsible
for obtaining all necessary permits and licenses as may be required to own and
operate the telephone equipment, however Seller agrees to cooperate and to
execute any documents which may be necessary to effect the transfer or
assignment of any permits and licenses required by regulatory or government
agencies.
SECTION 2. LIABILITIES ASSUMED AND NOT ASSUMED
2.1 LIABILITIES ASSUMED BY BUYER.
2.1.1 CONTRACT OBLIGATIONS. Buyer shall accept the assignment and
assume responsibility for the obligations of Seller under the Site Agreements
identified in Section 1.1.1, and Buyer will make its best efforts to install the
Uninstalled Phones set forth on Exhibit 1.1.8 and obtain Seller's consent with
respect to the Uninstalled Phones which it will not install, if any.
2.2 LIABILITIES NOT ASSUMED BY BUYER.
2.2.1 CORPORATE OBLIGATIONS. Notwithstanding that Buyer is acquiring
the trade name "Computer Assisted Technologies", it is not assuming any
liabilities of Seller or "Computer Assisted Technologies" except for those
described at Section 2.1.1 above.
2.2.2 EMPLOYEES. Except for the agreement described at Section 5.1
below, Buyer shall have no responsibility to hire or pay any employee or
independent contractor of Seller any compensation, sales commissions, sick pay,
retirement or other compensation.
2.2.3 TRANSFER TAXES. Seller shall pay one-half of any transfer
taxes, including, but not limited to, excise taxes and sales taxes arising from
this sale (with Buyer paying the balance, if any).
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2.2.4 GENERAL LIMITS. Except as set forth herein, Buyer shall not be
liable for any indebtedness of Seller. Buyer assumes no liabilities except as
stated herein.
2.3 SELLER'S OBLIGATIONS.
2.3.1 INCOME TAXES. Seller shall pay any state, federal or local
income taxes of Seller after application of all loss carry forwards, credits,
deductions or other tax offsets available to Seller and shall be responsible for
the cost of preparation of said tax returns and for all accounting fees
associated with the preparation of said tax returns for all time periods prior
to the date of closing.
2.3.2 COMMISSIONS AND CONTRACT OBLIGATIONS PAYABLE. Seller shall
remain liable for and shall pay when due any and all obligations arising from
payments and/or commissions due to site providers under the "Pay Telephone
Agreements", "Customer Service Agreements" and "Site Agreements" and shall
further pay all telephone bills and the cost of long distance or other telephone
service charges calculated through the date of closing. Buyer shall have the
right but not the obligation to cure any of Seller's defaults under such
agreements and to set off against its obligations under the Convertible Note
described at Section 3.1.4 any amounts paid to so cure Seller's defaults.
SECTION 3. PURCHASE PRICE FOR ASSETS
3.1 The purchase price for the assets is Two Million Two Hundred Seventy
Thousand Three Hundred Dollars ($2,270,300) (the "Purchase Price"). Seller
accepts the consideration as full and sufficient consideration for the assets
identified above. The parties acknowledge that the Fifty Thousand Dollars
($50,000) paid by Buyer to Seller at the signing of the Letter of Intent between
them dated January 31, 1997, shall be applied to the Purchase Price. The
remainder of the Purchase Price shall be paid by Buyer to Seller at the closing
in the following manner:
3.1.1 Fifty Thousand Dollars ($50,000) in cash or other immediately
available funds; and
3.1.2 The assumption by Buyer of up to One Million One Hundred Twenty-
One Thousand Nine Hundred Dollars ($1,121,900) of Seller's debt to two equipment
leasing companies, Berthel Fisher and TeleCapital; and
3.1.3 Six Hundred Ninety-Eight Thousand Four Hundred Dollars ($698,400)
to be paid by the delivery of 174,600 shares of Buyer's unregistered common
stock, based on a valuation of
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$4.00 per share. Seller shall be entitled to receive additional shares under
the following circumstances:
3.1.3(a) In the event Buyer completes an initial public offering at a
price per share of less than $8.00 (on a post-adjusted basis assuming a
two-for-one stock split prior to the anticipated initial public offering),
then, as soon as reasonably practical, Buyer shall deliver to Seller that
number of additional shares necessary to provide them with such total
number of shares resulting from the calculation in which 174,600 is divided
by the result of dividing the actual initial public offering price by
$8.00. For example, if the initial public offering price is $7.00, then
Buyer shall deliver to Seller an additional 24,943 shares (for a total of
199,543 shares) in accordance with the following calculations:
(i) $7.00 DIVIDED BY $8.00 = .875
(ii) 174,600 DIVIDED BY .875 = 199,543
(iii) 199,543 - 174,600 = 24,943
3.1.3(b) In the event Buyer does not complete an initial public
offering within one year of the date of this Agreement, then, as soon as
reasonably practical, Buyer shall deliver to Seller an additional 26,190
shares, representing an additional 15% of shares over the 174,600 delivered
under Section 3.1.3 above; PROVIDED, HOWEVER, that instead of delivering
such additional shares, Buyer may elect, in its sole discretion, to
purchase all of the shares then held by Seller at a price of $8.00 per
share for cash or other immediately available funds, and Seller hereby
agrees to sell all of its shares to Buyer upon such election. Buyer shall
make such election within 60 days after the first anniversary of this
Agreement; the closing of the purchase of shares by Buyer from Seller shall
take place no later than 60 days after such election.
3.1.4 Buyer will assume Seller's promissory note payable to Jack Elder
in the principal amount of Three Hundred Fifty Thousand Dollars ($350,000),
cancel it and then issue to him Buyer's Convertible Note in the principal amount
of Three Hundred Fifty Thousand Dollars ($350,000) in substantially the form of
Exhibit 3.1.3 hereto. The Convertible Note shall bear interest at the rate of
eight and one-half percent (8 1/2%) per annum. Interest only will be payable
for six (6) months
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following the date of execution of said note, with the entire principal balance
and accrued interest due at the end of such six (6) month period. Jack Elder
shall have the right to convert any or all of the principal or accrued interest
due under the Convertible Note on the basis of one (1) share of stock for each
$6.75 of principal and accrued interest due (on a post-adjusted basis assuming a
two-for-one stock split prior to the anticipated initial public offering),
subject to the same adjustments for an initial public offering price of less
than $8.00 as set forth in Section 3.1.3 above.
SECTION 4. ADJUSTMENTS
4.1 PERFORMANCE OF UNINSTALLED PHONES. The Purchase Price shall be
adjusted with respect to the performance of the Uninstalled Phones once they are
in operation in accordance with the formula set forth in Exhibit 4.1 hereto.
Such adjustment shall be applied to the principal amount of the Convertible Note
outstanding as of August 1, 1997; provided, however, if, as of such date, the
Convertible Note has been paid off or fully converted or is less than the amount
of the adjustment, then Seller shall receive or surrender, as the case may be,
one (1) share of stock for each $6.75 of the amount of the adjustment that is
not applied to the Convertible Note (on a post-adjusted basis assuming a two-
for-one stock split prior to the anticipated initial public offering), subject
to the same adjustments for an initial public offering price of less than $8.00
as set forth in Section 3.1.3 above. Buyer agrees to waive such an adjustment
to the Purchase Price if both of the following conditions are satisfied as of
August 1, 1997: (i) the site providers under this Agreement have in service at
least 685 payphones, and (ii) such payphones' average cash flow (as defined in
Exhibit 4.1 hereto) meets or exceeds the average cash flow of all Minnesota and
Wisconsin payphones.
4.2 OPERATION, INCOME AND EXPENSES REGARDING TELEPHONE EQUIPMENT. The
operation of telephone equipment identified on Exhibit 1.1.1 and related income
and expenses up to 11:59 p.m. on the closing date shall be for the account of
Seller, and thereafter for the account of Buyer. Seller shall pay all expenses
of the equipment through the date of closing, including but not limited to site
commissions, utilities, advertising, personal property taxes, rents and lease
payments, real property taxes, wages, and payroll taxes of Seller. Cash from
the telephones will be collected by Seller prior
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to 11:59 p.m. (local time in each location) on the date of closing and any cash
in the telephones thereafter shall belong to the Buyer.
4.3 OPERATION, INCOME AND EXPENSES REGARDING TELEPHONE EQUIPMENT. The
operation of telephone equipment identified on Exhibit 1.1.1 and related income
and expenses up to 11:59 p.m. on the closing date shall be for the account of
Seller, and thereafter for the account of Buyer. Seller
SECTION 5. OTHER AGREEMENTS
5.1 EMPLOYMENT AND NON-COMPETITION AGREEMENT (DUSTIN ELDER). Following
closing, Buyer shall engage Dustin Elder in the initial position of Vice
President at an annual salary of Sixty Five Thousand ($65,000) all as set forth
in the form of Employment and Non-Competition Agreement attached hereto as
Exhibit 5.1(a) (the "Employment Agreement"). In further consideration of his
execution of the Employment Agreement, Dustin Elder will be granted an option to
purchase twenty thousand (20,000) shares of Buyer's common stock at an exercise
price of $6.75 per share. In addition, subject to his continuing employment by
Buyer or his termination of employment without cause (as set forth in the
Employment Agreement) , Dustin Elder shall also be entitled to exercise
successive stock options for ten thousand (10,000) shares (with the exercise
price being the fair market value of Seller's common stock on the effective date
of each exercise) in each of the three (3) years following the completion of his
first full year of employment by Buyer. Such grants of options shall be subject
to the terms and conditions of an Incentive Stock Option Agreement substantially
in the form of Exhibit 5.1(b).
5.2 NON-COMPETITION AGREEMENT (SELLER AND JACK ELDER). In further
consideration of the transactions contemplated by this Agreement, at closing
Seller and Jack Elder shall enter into the form of Non-Competition Agreement
attached hereto as Exhibit 5.2. In consideration of the granting of the
covenant not-to-compete, the parties hereto agree to allocate $10,000 of the
aggregate Purchase Price to such covenant.
5.3 ASSIGNMENT OF CONTRACTS. Seller shall execute and deliver at closing
separate assignments of the Pay Telephone Agreements and Telephone Site
Agreements and after closing any additional documentation as may be requested by
Buyer it being the intention of the parties hereto that Seller shall cooperate
as is hereinafter necessary to perfect the Buyer's interest in all assets
purchased
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hereunder and that the obligations of Seller to execute assignments of
said contracts shall survive the closing.
SECTION 6. COLLECTION OF SELLER'S ACCOUNTS RECEIVABLE. Seller shall take
such action as is necessary to collect accounts receivable due to Seller on
account of telephone services provided prior to the date of closing. Buyer
shall cooperate with Seller as is necessary to provide Seller with information
from the files purchased by Buyer in order for Seller to collect the accounts
receivable. All commissions due to site owners prorated as 11:59 p.m. on the
date of closing shall be paid by Seller.
SECTION 7. SELLER'S REPRESENTATIONS AND WARRANTIES
Seller represents and warrants to Buyer as follows:
7.1 CORPORATE EXISTENCE. Seller represents that Computer Assisted
Technologies, Inc. is a Wisconsin corporation duly organized and validly
existing and in good standing and is authorized to transact business in the
states of Minnesota and Wisconsin. Seller has all requisite power and authority
to own, operate and/or lease the assets, as the case may be, and to carry on its
business as now being conducted.
7.2 AUTHORIZATION. The execution, delivery and performance of this
Agreement have been duly authorized and approved by the Board of Directors and
the requisite number of the shareholders of Seller, the lawful owner of all the
assets described herein, that no further approval for sale and transfer of the
assets to Buyer is required and this Agreement constitutes a valid and binding
Agreement of Seller in accordance with its terms.
7.3 FINANCIAL STATEMENTS. Seller has delivered to Buyer a list of site
revenues dated February 1, 1997. To the best of Seller's knowledge the site
revenues are in accordance with the books and records of Seller and are true,
correct, and complete.
7.4 TITLE TO ASSETS. Seller holds good and marketable title to the
Assets, free and clear of restrictions on or conditions to transfer or
assignment, and free and clear of liens, pledges, charges, security interests or
encumbrances of any kind or nature whatsoever except as described on Exhibit 7.4
attached hereto and made in part hereof by reference. Buyer is under no
obligations whatsoever to use OPTICOM operator service beyond August 31, 1997,
or any long distance provider previously
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used by Seller and Seller agrees to indemnify Buyer from any and all claims of
any person who may claim a right, title or interest in the assets transferred by
this Agreement. Seller specifically represents that it has made all payments
required prior to closing and taken such actions as may be necessary in order
for the transfer of all licenses for Intellicall I-STAR boards to be, and hereby
are transferred to Buyer.
7.5 BROKERS AND FINDERS. Seller has not employed a broker or finder in
connection with the transactions contemplated by this Agreement, or taken any
action that would give rise to a valid claim against Buyer or any party for a
brokerage commission, finder's fee, or other like payment.
7.6 TRANSFER NOT SUBJECT TO ENCUMBRANCES OR THIRD-PARTY APPROVAL. The
execution and delivery of this Agreement by Seller, and the consummation of the
contemplated transactions, will not result in the creation or imposition of any
valid lien, charge, or encumbrance on any of the Assets by any person, and will
not require the authorization, consent, or approval of any third party,
including any governmental subdivision, court or regulatory agency, except for
the consent required by the Minnesota and Wisconsin Public Utilities
Commissions.
7.7 LABOR AGREEMENTS AND DISPUTES. Seller is neither a party to, nor
otherwise subject to any collective bargaining or other agreement governing the
wages, hours, and terms of employment of Seller's employees. Seller is not
aware of any labor dispute or labor trouble involving employees of Seller, nor
has there been any such dispute or trouble during the three years preceding the
date of this Agreement
7.8 NONCANCELABLE CONTRACTS. At the time of closing, there will be no
material leases, employment contracts, contracts for services or maintenance, or
other similar contracts existing or relating to or connected with the operation
of Seller's business not cancelable within 30 days, except the telephone site
agreements.
7.9 LITIGATION. Seller has no knowledge of any claim, litigation,
proceeding, or investigation pending or threatened against Seller that might
result in any material adverse change in the business or condition of the Assets
being conveyed under this Agreement.
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7.10 NO MATERIAL ADVERSE CHANGE. Since January 1, 1997, there has not been
an adverse change in any of the assets or in the business in which the assets
are employed except as described on Exhibit 7.10 attached hereto and made a part
hereof by reference.
7.11 ACCURACY OF REPRESENTATIONS AND WARRANTIES. None of the
representations or warranties of Seller contain or will contain any untrue
statement of a material fact or omit or will omit or misstate a material fact
necessary in order to make statements in this Agreement not misleading. Seller
knows of no fact that has resulted, or that in the reasonable judgment of Seller
will result in a material change in the business, operations, or assets of
Seller that has not been set forth in this Agreement or otherwise disclosed to
Buyer.
7.12 SELLER'S OPERATION OF BUSINESS PRIOR TO CLOSING. Seller represents
that between January 1, 1997 and the closing date, Seller has: (a) operated the
business that in the usual and ordinary course and in substantial conformity
will all applicable laws, ordinances, regulation, rules, or orders, and has used
its best efforts to preserve its business organization and preserve the
continued operation of its business with its customers, suppliers, and others
having business relations with Seller and b) not assigned, sold, leased, or
otherwise transferred or disposed of any of the assets used in the performance
of its business, whether now owned or hereafter acquired, except in the normal
and ordinary course of business and in connection with its normal operation.
SECTION 8. COVENANTS OF SELLER
8.1 EMPLOYEE MATTERS
8.1.1 Seller has delivered to Buyer a list of the names and addresses
of all persons on the payroll of Seller dated February 1, 1997 having
information concerning the site agreements transferred to Buyer which list is
satisfactory to Buyer. Seller represents that Seller is unaware of any person
who has confidential information concerning the site agreements that would
assist that person in interfering with the contract rights being assigned.
8.2 CONDITIONS AND BEST EFFORTS. Seller will use its best efforts to
effectuate the transactions contemplated by this Agreement and to fulfill all
the conditions and obligations of Seller under this Agreement, and will do all
acts and things as may be required to carry out its obligations
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under this Agreement and to consummate and complete this Agreement. Seller
agrees to execute such additional documents as may be required to transfer all
assets identified by this Agreement.
SECTION 9. COVENANTS OF BUYER
9.1 CONDITIONS AND BEST EFFORTS. Buyer will use its best efforts to
effectuate the transactions contemplated by this Agreement and to fulfill all
the conditions of Buyer's obligations under this Agreement.
9.2 CONFIDENTIAL INFORMATION. If for any reason the sale of Assets is not
closed, Buyer will not disclose to third parties or use any confidential
information received from Seller in the course of investigating, negotiating,
and performing the transactions contemplated by this Agreement.
SECTION 10. CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS. The obligation of
Buyer to purchase the Assets is subject to the fulfillment, before or at the
closing date, of each of the following conditions.
10.1 REPRESENTATIONS, WARRANTIES, AND COVENANTS OF SELLER. All
representations and warranties made in this Agreement by Seller shall be true as
of the closing date as fully as though such representations and warranties had
been made on and as of the closing date, and, as of the closing date, Seller
shall not have violated or failed to perform in accordance with any covenant
contained in this Agreement.
10.2 LICENSES AND PERMITS. Buyer shall have obtained or applied for all
licenses and permits from public authorities necessary to authorize the
ownership and operation of the business of Seller and the transaction shall have
been approved to by the Minnesota and Wisconsin Public Utilities Commissions.
10.3 CONDITIONS OF THE BUSINESS. There shall have been no material adverse
change in the manner of operation of Seller's business before the closing date.
10.4 NO SUITS OR ACTIONS. At the closing date no suit, action, or other
proceeding shall have been threatened or instituted to restrain, enjoin, or
otherwise prevent the consummation of this Agreement or the contemplated
transactions.
10.5 SITE AGREEMENTS. Seller has provided Buyer with satisfactory evidence
of the extension or renewal of any Site Agreements which otherwise might have
expired prior to closing.
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In no event shall Buyer be obligated to close hereunder if there are more than
50 telephones without valid, enforceable Site Agreements.
10.6 ENFORCEABLE AND ASSIGNABLE SITE AGREEMENTS. At closing Buyer is
provided with evidence that Seller is able to assign valid, enforceable and
current Site Agreements for at least 586 pay telephones and that the average
daily coin revenue per phone is $6.50 per phone and that site rents average
approximately 15% of site revenues.
SECTION 11. CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS
11.1 Except for the assumption of liabilities by Buyer required at closing
pursuant to Section 2.1.1 above, there are no other conditions precedent to the
obligations of the Seller herein.
SECTION 12. BUYER'S ACCEPTANCE
Buyer represents and acknowledges that it has entered into this Agreement
on the basis of its own examination, and opinion of the value of the business.
Buyer has not relied on any representations made by Seller other than those
specified in this Agreement. Buyer further acknowledges that Seller has made no
agreement or promise to repair or improve any of the leasehold improvements,
equipment, or other personal property being sold to Buyer under this Agreement,
and that Buyer takes all such property in the condition existing on the date of
this Agreement, "AS IS" and "WHERE IS".
SECTION 13. RISK OF LOSS
The risk of loss, damage, or destruction to any of the equipment,
inventory, or other personal property to be conveyed to Buyer under this
Agreement shall be borne by Seller to the time of closing. In the event of such
loss, damage, or destruction, Seller, to the extent reasonable, shall replace
the lost property or repair or cause to repair the damaged property to its
condition prior to the damage. If replacement, repairs, or restorations are not
completed prior to closing, then the Purchase Price shall be adjusted by an
amount agreed upon by Buyer and Seller that will be required to complete the
replacement, repair, or restoration following closing. If Buyer and Seller
are unable to agree, then Buyer, at its sole option and notwithstanding any
other provision of this Agreement, upon notice to Seller, may rescind this
Agreement and declare it to be of no further force and effect, in which event
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there shall be no closing of this Agreement and all the terms and provisions of
this Agreement shall be deemed null and void.
SECTION 14. INDEMNIFICATION AND SURVIVAL
14.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made in this Agreement shall survive the closing of this Agreement,
except that any party to whom a representation or warranty has been made in this
Agreement shall be deemed to have waived any misrepresentation or breach of
representation or warranty of which such party had knowledge prior to closing.
Any party learning of a misrepresentation or breach of representation or
warranty under this Agreement shall immediately give written notice thereof to
all other parties to this Agreement. The representations and warranties in this
Agreement shall terminate two (2) years from the closing date, and such
representations or warranties shall thereafter be without force or effect,
except any claim with respect to which notice has been given to the party to be
charged prior to such expiration date.
14.2 SELLER'S INDEMNIFICATION.
14.2.1 Seller agrees to indemnify and hold Buyer, its successors, and
assigns harmless from and against:
(1) Any and all claims, liabilities, and obligations of every kind
and description, contingent or otherwise, arising out of or related to the
operation of Seller's business assets prior to the close of business on the
closing date, except for claims, liabilities, and obligations of Seller
expressly assumed by Buyer under this Agreement or paid by insurance
maintained by Seller or Buyer.
(2) Any and all damage or deficiency resulting from any material
misrepresentation, on the part of Seller or its authorized representatives
under this Agreement.
(3) Any and all claims by shareholders of Seller arising from this
sale of the Assets.
(4) Any and all claims of creditors of Seller if said creditor
liabilities were not expressly assumed by Buyer under Section 2 of this
Agreement.
14.2.2 Seller's indemnity obligations under Section 14.2.1 shall be
subject to the following:
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(1) If any claim is asserted against Buyer that would give rise to a
claim by Buyer against Seller for indemnification under the provisions of
this paragraph, then Buyer shall promptly give written notice to Seller
concerning such claim and Seller shall, at no expense to Buyer, defend the
claim.
14.3 BUYER'S INDEMNIFICATION. Buyer agrees to defend, indemnify, and hold
harmless Seller from and against:
14.3.1 Any and all claims, liabilities, and obligations of every kind
and description arising out of or related to the operation of the business
following closing or arising out of Buyer's failure to perform obligations of
Seller assumed by Buyer pursuant to Section 2 of this Agreement.
14.3.2 Any and all damage or deficiency resulting from any material
misrepresentation, breach of warranty or covenant, or nonfulfillment of any
agreement on the part of Buyer under this Agreement.
14.3.3 Any and all claims arising from any occurrence subsequent to the
date of closing by owners under "Pay Telephone Agreements" and/or "Customer
Service Agreement & Letter of Agency" contracts, which agreements have been
assigned to Buyer.
SECTION 15. CLOSING
15.1 TIME AND PLACE. This Agreement shall be closed in Minneapolis,
Minnesota on the first business day following the date on which the Minnesota
and Wisconsin Public Utilities Commissions approve the transaction contemplated
hereby, unless the parties mutually agree in writing to a different date for
closing.
15.2 OBLIGATIONS OF SELLER AT THE CLOSING. At the closing and
coincidentally with the performance by Buyer of its obligations described
herein, Seller shall deliver to Buyer the following:
15.2.1 Bill of Sale in the form of Exhibit 15.2.1 hereto, assignments,
properly endorsed certificates of title, and other instruments of transfer, in
form and substance reasonably satisfactory to Buyer, necessary to transfer and
convey all of the Assets to Buyer as well as physical possession of the assets
identified herein, free and clear of all liens, pledges, charges, security
interests and encumbrances of any kind or nature whatsoever.
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15.2.2 Transfer of all licenses and permits to transacts business of the
Seller and transfer of the assumed business name of Seller.
15.2.3 Such other certificates and documents as may be contemplated by
the provisions of this Agreement, including a resolution of Seller's board of
directors and a resolution adopted by the requisite number of Seller's
shareholders authorizing this transaction.
15.3 OBLIGATIONS OF BUYER AT THE CLOSING. At the closing and
coincidentally with the performance by Seller of its obligations hereunder,
Buyer shall deliver to Seller the following:
15.3.1 A good and sufficient check or wire transfer in the amount
specified herein as consideration for this transfer along with the shares of
Buyer's stock as required under Section 3.1.3 and the Convertible Note required
under Section 3.1.4.
15.3.2 Such other certificates and documents as may be contemplated by
the provisions of this Agreement.
SECTION 16. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING
16.1 BOOKS AND RECORDS. This sale does not include the books and records
of Seller's business, except those records relating to the sellers accounts with
customers identified in the contracts being sold.
16.2 SELLER'S RIGHT TO PAY. In the event Buyer failed to make any payment
of taxes, assessments, or other charges that Buyer is required to pay to third
parties under this Agreement, Seller shall have the right, but not the
obligation, to pay the same. Buyer will reimburse Seller for any such payment
immediately upon Seller's demand. Any such payment by Seller shall not
constitute a waiver by Seller of any remedy available by reason of Buyer's
default for failure to make the payments.
16.3 BUYERS'S RIGHT TO PAY. In the event Seller failed to make any payment
of taxes, assessments or other charges that Seller is required to pay to third
parties (including but not limited to payments that are due to creditors of
Seller which in any way affect the use or ownership of the property transferred
hereunder) under this Agreement, Buyer shall have the right, but not the
obligation, to pay the same. Seller and/or Selling Shareholder's will reimburse
Buyer for any such payment immediately upon Buyer's demand. Further, Buyer may
withhold payments due under the Collateral Note in the amount paid by Buyer to
satisfy Seller's obligations. Any such payment by
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<PAGE>
Buyer shall not constitute a waiver by Buyer of any remedy available by reason
of Seller's default for failure to make the payments.
SECTION 17. WISCONSIN BULK SALES LAW
Buyer waives compliance by Seller with the Wisconsin Bulk Transfer Act.
Except for those liabilities assumed by Buyer, as provided herein, in the event
any creditor of Seller claims the benefit of the Bulk Transfer Laws as against
Buyer or any of the assets being conveyed to Buyer under this Agreement, Seller
shall immediately pay or otherwise satisfy such claim or undertake its defense.
Seller shall indemnify and hold Buyer harmless from and against any and all
loss, expense, or damage resulting from the failure to comply with the Wisconsin
Bulk Transfer Law. If Seller fails to comply with the provisions of this
Section 17 and Buyer is required to pay any creditor of Seller in order to
protect the property purchased under this Agreement from claims or liens of
Seller's creditors, except those assumed by Buyer, then Buyer may withhold
payments due under the Convertible Note in the amount paid by Buyer to satisfy
Seller's obligations.
SECTION 18. SECURITIES LAWS.
This Agreement provides for the tender and delivery of Buyer's common stock
to Seller in partial consideration of the sale of the Assets and provides for
option(s) to purchase its common stock to be granted in connection with the
Employment Agreement between Buyer and Dustin Elder described at Section 5.1.
The securities referred to above have not been (nor prior to closing will they
be) registered with either the federal Securities and Exchange Commission or any
state securities agency and will be issued in reliance on the exemption from
registration contained in Section 4(2) of the Securities Act of 1933 (the
"Securities Act"). The shares, including shares underlying the common stock
purchase option(s) referred to above, may not be sold, pledged, hypothecated or
otherwise transferred unless they are registered under the Securities Act and
applicable state securities law or an exemption therefrom. Seller, Dustin Elder
and Jack Elder, hereby acknowledge that the shares when issued will bear a
restrictive legend to the following effect:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED
WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, (THE "ACT") AND UPON REPRESENTATION OF THE HOLDER
HEREOF THAT
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<PAGE>
SAID SHARES ARE BEING HELD FOR INVESTMENT AND
NOT WITH A VIEW TO THE SALE OR DISTRIBUTION THEREOF, AND NO
SALE, TRANSFER OR OTHER DISPOSITION MAY BE MADE EXCEPT IN
COMPLIANCE WITH THE PROVISIONS OF THE ACT.
Further, Seller, Dustin Elder and Jack Elder acknowledge that Buyer can
give no assurance whatsoever that it will be able to complete an initial public
offering of its common stock at $8.00 per share or at any price, notwithstanding
references thereto at Section 3.1.3 above. Seller and Messrs. Elder represent
they may be required to hold any common stock received pursuant to the
transaction for an indefinite period of time and can resell or otherwise dispose
of such stock only in accordance with applicable federal and state securities
laws.
SECTION 19. MISCELLANEOUS PROVISIONS
19.1 PUBLIC DISCLOSURES. Neither Seller nor Buyer shall disclose the sale
of the assets in any press release or other public announcement without the
prior written consent of the other parties, which consent shall not be
unreasonably withheld.
19.2 EXPENSES. Whether or not the closing occurs, each party hereto shall
pay its own expenses in connection with his agreement.
19.3 NOTICES. Any notice, demand or communication required or permitted by
this Agreement shall be in writing and shall be delivered by hand or by U.S.
mail, first class certified mail, postage prepaid, return-receipt requested and
addressed to the parties at their respective addresses set forth at page one of
this Agreement. Either party may changes its address for notice purposes by
providing notice in accordance with his provision. Any notice, demand or other
communication shall be deemed given and effective as of the date of delivery by
hand, or upon the firth day following mailing.
19.4 HEADINGS. The headings and titles to the Sections and subparagraphs
of this Agreement are inserted for convenience only, and shall not be deemed to
be a part of the Agreement nor affect the construction or interpretation of any
provision of the Agreement.
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<PAGE>
19.5 MODIFICATIONS AND WAIVERS. No modification or amendment of any
provision of this Agreement shall be effective for any purpose unless set forth
in a writing signed by the party of parties to be bound thereby. The waiver by
any party of any right or remedy under this Agreement on any one occasion shall
not be deemed a waiver of such right or remedy on any subsequent occasion.
19.6 SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this Agreement.
19.7 BINDING EFFECT. The provisions of this Agreement shall be binding
upon and inure to the benefit of the respective heirs, personal representatives,
successors and assigns of the parties.
19.8 ENTIRE AGREEMENT. This Agreement and the exhibits to this Agreement
set forth the entire understanding of the parties with respect to the subject
matter hereof and supersedes all existing agreements between the parties with
respect to such subject matter, including, without limiting the foregoing, the
Letter of Intent between the parties hereto concerning the subject matter hereof
dated January 31, 1997.
19.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
19.10 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the state of Minnesota.
19.11 VENUE. This Agreement has been made entirely within the state of
Minnesota. This Agreement shall be governed by and construed in accordance with
the laws of the state of Minnesota. If any suit or action is filed by any party
to enforce this Agreement or otherwise with respect to the subject matter of
this Agreement, venue shall be in state courts in Minneapolis, Hennepin County,
Minnesota.
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<PAGE>
DATED this 14 day of March, 1997.
SELLER:
------------------------------------------------------
Computer Assisted Technologies, Inc., a Wisconsin corporation
By /s/ Dustin Elder
------------------------------
Dustin Elder, President
BUYER:
------------------------------------------------------
Intelliphone, Inc., a Minnesota corporation
By /s/ Jack Kohler
------------------------------
Jack Kohler, Vice President and
Chief Financial Officer
AS TO SECTIONS 18 AND 19, THE UNDERSIGNED INDIVIDUALLY ACKNOWLEDGE THE
DISCLOSURES MADE THEREIN.
/s/ Dustin Elder /s/ Jack Elder
- ------------------------------------ ------------------------------------
Dustin Elder Jack Elder
<PAGE>
ROUTE SERVICE AGREEMENT
THIS AGREEMENT is made and entered into as of this 1st day of February,
1997, by and between INTELLIPHONE, INC., a Minnesota corporation, with offices
at 6801 Wayzata Boulevard, St. Louis Park, MN 55426 (the "Company"), and
COMPUTER ASSISTED TECHNOLOGIES, INC., a Wisconsin corporation, with offices at
10740 Lyndale Avenue South, Bloomington, MN 55420 ("CAT").
WHEREAS, the Company and CAT separately engage in providing private
payphone services in various locations in Minnesota and Wisconsin;
WHEREAS, CAT seeks to engage the Company to provide various services in
connection with the operation of its business while it seeks the approval of the
Minnesota and Wisconsin Public Utilities Commissions to transfer its assets to
the Company; and
WHEREAS, the Company is willing to provide such services in accordance with
the terms and conditions hereof.
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby,
do covenant and agree as follows:
1) DUTIES. Commencing on or about February 3, 1997, the Company shall
provide to CAT all services which are reasonably necessary to ensure
the proper functioning of CAT's payphones located at various sites in
Minnesota and Wisconsin including, without limiting the foregoing,
daily monitoring, coin collection, maintenance and service, long
distance processing, and the payment of all bills, including payphone
line charges, long distance charges and site provider rents. The
Company will deposit all coins collected into its own account and
receive all commission checks for operator service, long distance and
dial-around compensation (less the January 1997 portion thereof). The
Company shall further install all telephones to be installed pursuant
to agreements executed by CAT. During the term of this Agreement, CAT
shall pay all of its state, federal and local income taxes after
application of any tax offsets available to it, and it shall be
responsible for the cost of preparing said tax returns, including all
accounting fees. CAT shall also remain liable for and shall pay when
due all obligations arising during the term of this Agreement from
payments and/or commissions due to site providers under any "Pay
Telephone Agreements," "Customer Service Agreements" and "Site
Agreements" to which it is a party, and shall further pay all
telephone bills and the cost of long distance or other telephone
service charges calculated through January 1, 1997.
2) COMPENSATION. The Company will pay CAT (a) $30,900 on the last day of
February and March 1997, and (b) $35,300 on the last day of April 1997
and of each month thereafter during the term of this Agreement;
provided, however, that such payment
<PAGE>
shall be reduced by any amount the equipment leasing companies of
Berthel Fisher and TeleCapital receive directly from the commissions
that would otherwise be remitted by long distance providers,
including, but not limited to, Intellicall and Opticom. Any income
generated from CAT's pay telephones each month which remains after
such fees have been paid to CAT shall belong to the Company.
3) TERM OF AGREEMENT. This Agreement will commence on or about February
1, 1997, and continue thereafter unless earlier terminated by mutual
consent of the parties or the closing of an agreement by which CAT
shall transfer its assets to the Company.
4) FURTHER ASSURANCES. The parties hereto agree to take such further
actions, including the execution and delivery of documents and
certificates, as may be necessary, in order to more fully accomplish
the purposes and intent of this Agreement.
5) PUBLIC DISCLOSURE. Unless otherwise compelled by legal process,
neither CAT nor the Company shall disclose the existence of this
Agreement or its terms without the prior written consent of the party,
which consent shall not be unreasonably withheld.
6) NOTICES. Any notice required or permitted under this Agreement shall
be in writing and delivered by hand or U.S. mail and addressed to the
party at their respective address as set forth above.
7) BINDING EFFECT. The provisions of this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their
respective successors or assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
INTELLIPHONE, INC.
By: /s/ Jack Kohler
------------------------------------
Jack Kohler, Vice President and Chief
Financial Officer
COMPUTER ASSISTED TECHNOLOGIES, INC.
By: /s/ Jack Elder
-----------------------------------
Jack Elder, President
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective as of the
15th day of April, 1997, by and between INTELLIPHONE, INC., a Minnesota
corporation (the "Company"), and JEFFREY R. PALETZ, a resident of Minnesota
("Employee").
RECITALS:
WHEREAS, Employee is currently employed by the Company;
WHEREAS, Employee desires to continue his employment with the Company, and
the Company desires to continue employing 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 as 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 April 15, 1997, and shall continue for a period of
two (2) years, 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.
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.
<PAGE>
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 Six Thousand Four Hundred Forty-Eight Dollars and 33/100
($6,448.33) per month.
(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.
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 determine in its sole discretion. Employee may carry
over into the next calendar year not more than one (1) week of vacation. Any
vacation time in excess of that which may be carried forward which is 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. NONCOMPETITION. 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 at any time
during the term of this Agreement, nor for a period of one (1) year after
Employee ceases to be employed by the Company do the following:
(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
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<PAGE>
(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 whom the Company has a Site Contract in
place until six (6) months following the expiration of any such Contract.
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 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
-3-
<PAGE>
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.
(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. If there is any dispute
as to whether the termination of Employee's employment was due to Employee's
physical or mental illness or incapacity, such question shall be submitted to a
licensed physician for the purpose of making such determination. An examination
of Employee shall be made within thirty (30) days after written notice by the
Company or Employee to the other by a licensed physician agreeable to Employee
and the Company. Employee shall submit to such examination and provide such
information that such physician may request and the determination of such
physician as to the question of Employee's physical or mental condition shall be
binding and conclusive on all parties concerned for purposes of this Agreement.
(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;
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<PAGE>
(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 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.
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<PAGE>
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:
INTELLIPHONE, INC.,
/s/ Jeffrey R. Paletz a Minnesota corporation
- ---------------------
Jeffrey R. Paletz
By: /s/ Jack Kohler
----------------------------------
Name: Jack Kohler
----------------------------
Title: Chief Financial Officer
---------------------------
-6-
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective as of the
15th day of April, 1997, by and between INTELLIPHONE, INC., a Minnesota
corporation (the "Company"), and MELVIN GRAF, a resident of Minnesota
("Employee").
RECITALS:
WHEREAS, Employee is currently employed by the Company;
WHEREAS, Employee desires to continue his employment with the Company, and
the Company desires to continue employing 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 as Executive 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 April 15, 1997, and shall continue for a period of
two (2) years, 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.
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.
<PAGE>
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 Five Thousand Eight Hundred Thirty Dollars ($5,830.00) per
month.
(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.
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 determine in its sole discretion. Employee may carry
over into the next calendar year not more than one (1) week of vacation. Any
vacation time in excess of that which may be carried forward which is 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. NONCOMPETITION. 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 at any time
during the term of this Agreement, nor for a period of one (1) year after
Employee ceases to be employed by the Company do the following:
(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
-2-
<PAGE>
(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 whom the Company has a Site Contract in
place until six (6) months following the expiration of any such Contract.
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 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
-3-
<PAGE>
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.
(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. If there is any dispute
as to whether the termination of Employee's employment was due to Employee's
physical or mental illness or incapacity, such question shall be submitted to a
licensed physician for the purpose of making such determination. An examination
of Employee shall be made within thirty (30) days after written notice by the
Company or Employee to the other by a licensed physician agreeable to Employee
and the Company. Employee shall submit to such examination and provide such
information that such physician may request and the determination of such
physician as to the question of Employee's physical or mental condition shall be
binding and conclusive on all parties concerned for purposes of this Agreement.
(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;
-4-
<PAGE>
(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 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.
-5-
<PAGE>
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:
INTELLIPHONE, INC.,
/s/ Melvin Graf Minnesota corporation
- ------------------------------
Melvin Graf
By: /s/ Jeff Paletz
----------------------------------
Name: Jeff Paletz
---------------------------
Title: President
--------------------------
-6-
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective as of the
15th day of April, 1997, by and between INTELLIPHONE, INC., a Minnesota
corporation (the "Company"), and JACK KOHLER, a resident of Minnesota
("Employee").
RECITALS:
WHEREAS, Employee is currently employed by the Company;
WHEREAS, Employee desires to continue his employment with the Company, and
the Company desires to continue employing 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 as its Vice President
and Chief Financial Officer, 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 April 15, 1997, and shall continue for a period of
two (2) years, 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.
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.
<PAGE>
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 Five Thousand Three Hundred Dollars ($5,300.00) per month.
(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.
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 determine in its sole discretion. Employee may carry
over into the next calendar year not more than one (1) week of vacation. Any
vacation time in excess of that which may be carried forward which is 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. NONCOMPETITION. 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 at any time
during the term of this Agreement, nor for a period of one (1) year after
Employee ceases to be employed by the Company do the following:
(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
-2-
<PAGE>
(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 whom the Company has a Site Contract in
place until six (6) months following the expiration of any such Contract.
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 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
-3-
<PAGE>
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.
(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. If there is any dispute
as to whether the termination of Employee's employment was due to Employee's
physical or mental illness or incapacity, such question shall be submitted to a
licensed physician for the purpose of making such determination. An examination
of Employee shall be made within thirty (30) days after written notice by the
Company or Employee to the other by a licensed physician agreeable to Employee
and the Company. Employee shall submit to such examination and provide such
information that such physician may request and the determination of such
physician as to the question of Employee's physical or mental condition shall be
binding and conclusive on all parties concerned for purposes of this Agreement.
(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;
-4-
<PAGE>
(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 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.
-5-
<PAGE>
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:
INTELLIPHONE, INC.,
/s/ Jack Kohler a Minnesota corporation
- ------------------------------
Jack Kohler
By: /s/ Jeff Paletz
----------------------------------
Name: Jeff Paletz
-----------------------------
Title: President
-----------------------------
-6-
<PAGE>
AGREEMENT
FOR SERVICE RESALE
BETWEEN
CHOICETEL, INC.
AND
U S WEST COMMUNICATIONS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C>
I. RECITALS & PRINCIPALS.............................................................................. 3
II. SCOPE OF AGREEMENT................................................................................. 4
III. DEFINITIONS........................................................................................ 4
IV. RESALE SERVICES.................................................................................... 5
A. Description.................................................................................... 5
B. Scope.......................................................................................... 5
C. Ordering and Maintenance....................................................................... 6
D. Reseller Responsibilities...................................................................... 7
E. Rates and Charges.............................................................................. 8
F. Collateral and Training........................................................................ 9
G. Cooperation.................................................................................... 10
V. ACCESS TO OPERATIONAL SUPPORT (OSS)................................................................ 10
VI. DIRECTORY LISTINGS................................................................................. 10
VII. GENERAL PROVISIONS................................................................................. 11
A. Term........................................................................................... 11
B. Billing........................................................................................ 11
C. Payment........................................................................................ 11
D. Deposit........................................................................................ 12
E. Taxes.......................................................................................... 13
F. Force Majeure.................................................................................. 13
G. Responsibility of Each Party................................................................... 13
H. Limitation of Liability........................................................................ 13
I. Indemnification................................................................................ 14
J. Patents, Trademarks and Branding............................................................... 14
K. Warranties..................................................................................... 16
L. Assignment..................................................................................... 16
M. Default........................................................................................ 16
N. Severability................................................................................... 16
O. Nondisclosure.................................................................................. 16
P. Survival....................................................................................... 18
Q. Dispute Resolution............................................................................. 18
R. State Commission Arbitration Issues............................................................ 18
</TABLE>
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<TABLE>
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<C> <S> <C>
S. Governing Law.................................................................................. 18
T. Limitation of Action........................................................................... 18
U. Joint Work Project............................................................................. 19
V. Notices........................................................................................ 19
W. No Third Party Beneficiaries................................................................... 19
X. Publicity and Advertising...................................................................... 19
Y. Amendments or Waivers.......................................................................... 19
Z. Most Favored Nation............................................................................ 20
AA. Executed In Counterparts...................................................................... 20
BB. Headings of No force or Effect................................................................ 20
CC. Entire Agreement.............................................................................. 20
</TABLE>
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AGREEMENT
FOR SERVICE RESALE
This is an Agreement for Service Resale ("Agreement"), between ChoiceTel,
Inc., ("Reseller"), a Certified Reseller and US WEST Communications, Inc.
("USWC") (collectively, "the Parties") in which USWC will provide certain
services to Reseller within the state of Minnesota. Where required, this
Agreement or the portions of this Agreement relative to a particular state, will
be submitted to the appropriate Public Utilities Commission ("Commission") and
the Parties will specifically request that the Commission promptly approve this
Agreement and refrain from taking any action to change, suspend or otherwise
delay implementation of this Agreement. The Parties enter into this Agreement
without prejudice to any positions they have taken previously, or may take in
the future in any legislative, regulatory, or other public forum addressing any
matters, including matters related to the types of arrangements prescribed by
this Agreement.
The Parties agree and understand that USWC is proposing certain provisions
in this contract based, in large part, on the FCC's First Report and Order, IN
THE MATTER OF IMPLEMENTING OF THE LOCAL COMPETITION PROVISIONS IN THE
TELECOMMUNICATIONS ACT OF 1996, CC Docket No. 96-98, rel. Aug. 8, 1996 ("FCC lst
Order") and the Second Report and Order and Memorandum Opinion and Order, IN THE
MATTER OF IMPLEMENTATION OF THE LOCAL COMPETITION PROVISIONS OF THE
TELECOMMUNICATIONS ACT OF 1996, CC Docket No. 96-98, rel. Aug. 8, 1996 ("FCC 2d
Order"). To the extent that certain of the rules contained in the FCC lst Order
and the FCC 2d Order are deemed by the courts to be not effective, this contract
shall be modified to comport with the final court decisions and subsequent FCC
or state Commission decisions or rules issued to comply with the courts'
decisions.
I. RECITALS & PRINCIPLES.
WHEREAS, the Telecommunications Act of 1996 (the "Act") was signed into law
on February 8, 1996; and
WHEREAS, the Act places certain duties and obligations upon, and grants
certain rights to, Telecommunications Carriers; and
WHEREAS, USWC is an Incumbent Local Exchange Carrier or has a majority
ownership interest in local exchange companies ("USWCs") which are Incumbent
Local Exchange Carriers; and
WHEREAS, the Telecommunications Act of 1996 has specific requirements for
service resale, commonly referred to as. a part of the "checklist" and USWC
desires that this Agreement meet those checklist requirements; and
WHEREAS, USWC, for itself and its Affiliates, is willing to sell services
for resale, on the terms and subject to the conditions of this Agreement; and,
WHEREAS, Reseller is a Telecommunications Carrier and has requested that
USWC negotiate an Agreement with Reseller for the provision of USWC services for
resale pursuant to the Act and in conformance with USWC's duties under the Act;
and
WHEREAS, the parties have arrived at this Agreement through voluntary
negotiations undertaken pursuant to the Act,
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NOW, THEREFORE, in consideration of the mutual provisions contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Reseller and USWC hereby covenant and agree as follows:
II. SCOPE OF AGREEMENT.
A. This Agreement sets forth the terms, conditions and prices under which
USWC agrees to provide services for resale. Unless otherwise provided in
this Agreement, USWC will perform all of its obligations hereunder
throughout, to the extent provided in the Appendices attached hereto. The
Agreement includes all accompanying appendices.
B. In the performance of their obligations under this Agreement, the
Parties shall act in good faith and consistently with the intent of the
Act. Where notice, approval or similar action by a Party is permitted or
required by any provision of this Agreement, the Act, FCC 1st and 2nd
Orders, or a state Commission, (including, without limitation, the
obligation of the parties to further negotiate the resolution of new or
open issues under this Agreement) such action shall not be unreasonably
delayed, withheld or conditioned.
C. The Parties acknowledge that the terms and conditions herein represent a
balancing of interests important to the parties, and for that reason
will, unless otherwise agreed, implement this Agreement as an integrated
package without alteration of any material term or condition, or the
inclusion or deletion of terms and conditions that would serve to after a
material term or condition herein unless such term or condition is
altered pursuant to Section IV, E. 1 herein or to comply with a court
order or an FCC or state Commission order.
D. This Agreement is entered into as a result of both private negotiations
between the Parties and the incorporation of some of the results of
arbitrated decisions by the Minnesota Commission acting pursuant to
Section 252 (b) of the Act involving interconnection/resale agreements of
other parties. The Parties have included for convenience certain rates
and services in this Agreement which reflect rates and services
established in some of those other arbitrations. Reseller acknowledges
(1) that those rates and services are extended only because of the
arbitrated results in other dockets, (2) that USWC intends to appeal
certain of those decisions and (3) that any negotiations, appeal, stay,
injunction, settlement or similar proceedings impacting the applicability
of those rates and services to the local services providers who were
parties to those arbitrations will similarly impact the applicability of
those rates and services to Reseller.
III. DEFINITIONS.
A. "Basic Exchange Telecommunications Service" means a service offered to
end users which provides the end user with a telephonic connection to,
and a unique local telephone number address on, the public switched
telecommunications network, and which enables such end user to generally
place calls to, or receive calls from, other stations on the public
switched telecommunications network. Basic residence and business line
services are Basic Exchange Telecommunication Services. As used solely in
the context of this Agreement and unless otherwise agreed, Basic Exchange
Telecommunication Services includes access to ancillary services such as
911, directory assistance and operator services.
B. "Basic Exchange Switched features" are optional CLASS, Custom Calling,
and AIN end user switched service features which include, but are not
necessarily limited to: Automatic Call Back; Call Trace; Caller ID and
Related Blocking Features; Distinctive Ringing/Call Waiting; Selective
Call Forward; Selective Call Rejection. (See Bellcore documentation for
definition.)
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C. "Commission" means the Public Utilities Commission(s) in the state of
Minnesota.
D. Directory Listings are any information: (1) identifying the listed names
of subscribers of a telecommunications carrier and such subscribers'
telephone numbers and addresses and (2) that the telecommunications
carrier or an affiliate has published, caused to be published, or
accepted for publication in any directory format.
E. "Enhanced Services" means any service offered over common carrier
transmission facilities that employ computer processing applications that
act on format, content, code, protocol or similar aspects of the
subscriber's transmitted information; that provide the subscriber with
additional, different or restructured information; or involve customer
interaction with stored information.
F. "Pre-ordering and Ordering" includes the exchange of information between
telecommunications carriers about current or proposed customer products
and services.
G. "Reseller" is a category of Local Exchange service providers that are
certified to obtain dial tone and associated telecommunications services
from another provider through the purchase of bundled finished services
for resale to its end user customers.
H. "Tariff Services" as used throughout this Agreement refers to USWC state
tariffs, price lists, price schedules and catalogs.
I. "Technically feasible." Branding of Operator Services and Directory
Assistance shall be deemed technically feasible absent technical or
operational concerns that prevent the fulfillment of a request by a
telecommunications carrier for such branding. A determination of
technical feasibility does not include consideration of economic,
accounting, billing, space, or site concerns, except that space and site
concerns may be considered in circumstances where there is no possibility
of expanding the space available. The fact that an incumbent LEC must
modify its facilities or equipment to respond to such request does not
determine whether satisfying such request is technically feasible. An
incumbent LEC that claims that it cannot satisfy such request because of
adverse network reliability impacts must prove to the state Commission by
clear and convincing evidence that such interconnection, access, or
methods would result in specific and significant adverse network
reliability impacts.
J. "Telecommunications Service(s)" means the offering of telecommunications
for a fee directly to the public, or to such class of users as to be
effectively available directly to the public, regardless of the
facilities used. As used in this definition, "telecommunications" means
the transmission, between or among points specified by the user, of
information of the user's choosing, without change in the form or content
of the information sent and received.
IV. RESALE SERVICES.
A. Description.
USWC services (as defined in Section III.A. and B.) and intraLATA toll
originating from USWC exchanges (hereinafter "intraLATA toll") will be
available for resale by USWC pursuant to the Act and will reference terms
and conditions (except prices) in USWC tariffs, where applicable.
Appendix A lists services which are available for resale under this
Agreement and the applicable discounts, and is attached and incorporated
herein by this reference.
B. Scope.
1. Basic Exchange Telecommunications Service, Basic Exchange Switched
Features and IntraLATA toll may be resold without restriction on
their use except that residential service, lifeline service or other
means tested services may be resold only to the same class of
customers to whom USWC sells such services and Centrex services may
not be resold to
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residence customers. Notwithstanding the above, nothing herein shall
be construed to prohibit USWC from seeking restrictions on resale in
tariffs approved by a state Commission.
2. USWC shall provide to Reseller services for resale that are equal in
quality, subject to the same conditions (including the conditions in
USWC's effective tariffs), within the same provisioning time
intervals that the LEC provides these services to others, including
end users, and in accordance with any applicable state Commission
service quality standards, including standards a state Commission may
impose pursuant to Section 252 (e)(3) of the Act.
C. Ordering and Maintenance.
1. Reseller or Reseller's agent shall act as the single point of contact
for its end users' service needs, including without limitation,
sales, service design, order taking, provisioning, change orders,
training, maintenance, trouble reports, repair, post-sale servicing,
billing, collection and inquiry, Reseller shall make it clear to its
end users that they are customers of the Reseller for resold
services. Reseller's end users contacting USWC will be instructed to
contact the Reseller; however, nothing in this Agreement, except as
provided in Section IV.C.7(e), shall be deemed to prohibit USWC from
discussing its products and services with Reseller's customers who
call USWC for any reason.
2. Reseller shall transmit to USWC all information necessary for the
installation (billing, listing and other information), repair,
maintenance and post-installation servicing according to USWC's
standard procedures, as described in the USWC resale operations guide
that will be provided to Reseller.
When USWC's end user or the end user's new service provider
discontinues the end user's service in anticipation of moving to
another service provider, USWC will render its closing bill to end
user customer effective with the disconnection. If USWC is not the
local service provider, USWC will issue a bill to Reseller for that
portion of the service provided to the Reseller should Reseller's end
user customer, a new service provider, or Reseller request service be
discontinued to the end user. USWC will notify Reseller by FAX, OSS,
or other processes when end user moves to another service provider.
USWC will not provide Reseller with the name of the other reseller or
service provider selected by the end user.
3. Reseller shall provide USWC and USWC shall provide Reseller with
points of contact for order entry, problem resolution and repair of
the resold services.
4. Prior to placing orders on behalf of the end user, Reseller shall be
responsible for obtaining and have in its possession Proof of
Authorization ("POA"). POA shall consistent of documentation
acceptable to USWC of the end user's selection of Reseller. Such
selection may be obtained in any manner consistent with Minnesota and
federal law.
Reseller shall make POAs available to USWC upon request. Prior to
placing orders that will disconnect a line from another reseller's
account the Reseller is responsible for obtaining all information
needed to process the disconnect order and re-establish the service
on behalf of the end user. If a Reseller is displaced by another
reseller or service provider, the Reseller is responsible for
coordination with the other reseller or service provider. Should an
end user dispute or a discrepancy arise regarding the authority of
Reseller to act on behalf of the end user, the Reseller is
responsible for providing written evidence of its authority to USWC
within three (3) business days. If there is a conflict between the
end user designation and Reseller's written evidence of its
authority, USWC shall honor the designation of the end user and
change the end user back to the previous service provider. If the
Reseller does not
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provide the POA within three (3) business days, or if the end user
disputes the authority of the POA, then the Reseller must, by the end
of the third business day:
- notify USWC to change the end user back to the previous reseller or
service provider, and
- provide any end user information and billing records the Reseller
has obtained relating to the end user to the previous reseller, and
- notify the end user and USWC that the change has been made,
- remit to USWC a charge of $100.00 ("slamming charge") as
compensation for the change back to the previous reseller or
service provider.
If an end user customer is switched from Reseller back to USWC and
there is a dispute or discrepancy with respect to such change in
service provider, Reseller may request to see a copy of the POA which
USWC has obtained from the end user to effectuate a return to USWC as
the end user's service provider. If USWC is unable to produce a POA
within three (3) business days, USWC shall change the end user back
to Reseller (or other previous reseller) without imposition of any
Customer Transfer Charge.
5. Reseller shall designate Primary lnterexchange Carrier (PIC)
assignments on behalf of its end-users for interLATA services and
intraLATA services where intraLATA presubscription is implemented.
6. When end user customers switch from USWC to Reseller, or to Reseller
from any other reseller, such customers shall be permitted to retain
their current telephone numbers if they so desire and do not change
their service address to an address served by a different central
office. USWC shall take no action to prevent Reseller customers from
retaining their current telephone numbers.
7. Reseller and USWC will employ the following procedures for handling
misdirected repair calls:
a. Reseller and USWC will provide their respective customers with
the correct telephone numbers to call for access to their
respective repair bureaus.
b. Customers of Reseller shall be instructed to report all cases of
trouble to Reseller. Customers of USWC shall be instructed to
report all cases of trouble to USWC.
c. To the extent the correct provider can be determined, misdirected
repair calls will be referred to the proper provider of Basic
Exchange Telecommunications Service.
d. Reseller and USWC will provide their respective repair contact
numbers to one another on a reciprocal basis.
e. Notwithstanding the provisions of Section IV. C. I., USWC will
not discuss its products and services with Reseller's customers
during the course of repair calls or visits.
D. Reseller Responsibilities.
1. Reseller must send USWC complete and accurate end-user listing
information for Directory Assistance, Directory, and 911 Emergency
Services using USWC's resale order form and process. Reseller must
provide to USWC accurate end-user information to ensure appropriate
listings in any databases in which USWC is required to retain and/or
maintain end-user information. USWC assumes no liability for the
accuracy of information provided by Reseller.
2. Reseller may not reserve blocks of USWC telephone numbers, except as
allowed by tariffs.
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3. Reseller is liable for all fraud associated with Service to its
end-users and accounts. USWC takes no responsibility, will not
investigate, and will make no adjustments to Reseller's account in
cases of fraud unless such fraud is the result of any intentional act
or gross negligence of USWC. Notwithstanding the above, if USWC
becomes aware of potential fraud with respect to Reseller's accounts,
USWC will promptly inform Reseller and, at the direction of Reseller,
take reasonable action to mitigate the fraud where such action is
possible.
4. In accordance with the Act, Reseller will indicate the date it will
offer to residential and business subscribers telephone exchange
services. The Reseller will provide a two year forecast within ninety
(90) days of signing this Agreement. During the first year of the
term of this Agreement, the forecast shall be updated and provided to
USWC on a quarterly basis. Thereafter, during the term of this
Agreement, Reseller will provide updated forecasts from time to time,
as requested by USWC. The initial forecast will provide:
- The date service will be offered (by city and/or state)
- The type and quantity of service(s) which will be offered
- Reseller's anticipated order volume
- Reseller's key contact personnel
The information provided pursuant to this paragraph shall be
considered Proprietary Information under Section VII. 0. of this
Agreement.
5. In the event USWC terminates the provisioning of any resold services
to Reseller for any reason, Reseller shall be responsible for
providing any and all necessary notice to its end users of the
termination. In no case shall USWC be responsible for providing
notice to Reseller's end user customers. USWC will provide notice to
Reseller of its termination of a resold service on a timely basis
consistent with Commission rules and notice requirements.
E. Rates and Charges.
1. Resold services as listed in Appendix A are available for resale at
the applicable discount percentage or rate per minute set forth in
Appendix A or at the retail tariff rates for services available for
resale but excluded from the wholesale pricing arrangement in this
Agreement.
The wholesale discounts rates in Appendix A were established as
interim rates in Minnesota Docket Nos. P-442,421/M-96-855,
P-5321,421/M-96-909 and P-3167,421/M-96-729, Order Resolving Issues
after Reconsideration and Approving Contract, In the Matter of AT&T
Communications of the Midwest, Inc., MCImetro Access Transmission
Services, Inc., and MFS Communications Company (the "AT&T Rate").
If the AT&T Rate or applicability of the wholesale discounts rates
and/or services set forth in Appendix A are changed by any
negotiations, appeal, stay, injunction, settlement or similar
proceeding with respect to AT&T/MCI or MFS, who were parties to the
above-referenced arbitrations dockets which established the AT&T
Rates and services, the Parties agree that the telecommunications
services still available for resale following the proceeding will be
available to Reseller, effective as of the date of the order in the
proceeding or settlement at a wholesale discount rate of 12% (the
"Standard Rate") until such time as a final order establishes
wholesale discount rates or until the proceeding impacting the rates
and/or services reaches final resolution, which ever comes first. If
the Standard Rate becomes effective pursuant to this paragraph, the
Standard Rate will also be subject to true-up to the rates
established in the final order for the period of that the Standard
Rate was in effect.
USWC shall have a reasonable time to implement system or other
changes necessary to bill the Commission ordered rates or services.
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2. If the resold services are purchased pursuant to Tariffs and the
Tariff rates change, charges billed to Reseller for such services
will be based upon the new Tariff rates less the applicable wholesale
discount as agreed to herein or established by resale Tariff. The new
rate will be effective upon Tariff effective date.
3. A Customer Transfer Charge (CTC) as specified in Appendix A applies
when transferring any existing lines from USWC or another service
provider to Reseller. Tariffed non-recurring charges will apply to
new installations.
4. A Subscriber Line Charge (SLC) will continue to be paid by the
Reseller without discount to USWC for each local exchange line resold
under this Agreement. All federal and state rules and regulations
associated with SLC as found in the applicable tariffs also apply.
5. Reseller will pay to USWC the PIC change charge without discount
associated with Reseller end user changes of inter-exchange or
intraLATA carriers.
6. Reseller agrees to pay USWC when its end user activates any services
or features that are billed on a per use or per activation basis
subject to the applicable discount in Appendix A as such may be
amended pursuant to Section IV.E.1 (e.g., continuous redial, last
call return, call back calling, call trace, etc.).
7. Resold services are available only where facilities currently exist
and are capable of providing such services without construction of
additional facilities or enhancement of existing facilities. However,
if Reseller requests that facilities be constructed or enhanced to
provide resold services, USWC will review such requests on a
case-by-case basis and determine, in its sole discretion, if it is
economically feasible for USWC to build or enhance facilities. If
USWC decides to build or enhance the requested facilities, USWC will
develop and provide to Reseller a price quote for the construction.
If the quote is accepted, Reseller will be billed the quoted price
and construction will commence after receipt of payment.
8. Nonrecurring charges will not be discounted and will be billed at the
applicable Tariff rates.
9. As part of the resold line, USWC provides and Reseller accepts, at
this time, operator services, directory assistance, and IntraLATA
long distance with standard USWC branding. Reseller is not permitted
to alter the branding of these services in any manner when the
services are a part of the resold line without the prior written
approval of USWC. However, at the request of Reseller and where
technically feasible, USWC will rebrand operator services and
directory assistance in the Reseller's name, provided the costs
associated with such rebranding are paid by Reseller.
F. Collateral and Training.
The Parties will jointly develop procedures regarding Reseller's use of
USWC's retail product training materials. Except for any rights granted
by USWC to Reseller for the use or copying of product training material,
product training provided under this Agreement shall be considered
"Proprietary Information" as described in Section VII.O., and shall be
subject to the terms and conditions specified therein.
G. Cooperation.
The Parties agree that this Agreement involves the provision of USWC
services in ways such services were not previously available and the
introduction of new processes and procedures to provide and bill such
services. Accordingly, the Parties agree to work jointly and
cooperatively in testing and implementing processes for pre-ordering,
ordering, maintenance, provisioning and billing and in reasonably
resolving issues which result from such implementation on a timely basis.
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V. ACCESS TO OPERATIONAL SUPPORT SYSTEMS (OSS).
A. The Parties acknowledge that USWC is developing a proposal for access to
its Operational Support Systems (OSS) to meet the requirements of the
FCC's lst and 2nd Orders and to provide Reseller and other
telecommunications carriers with electronic interfaces for pre-ordering,
ordering, repair and billing functions by January 1, 1997 for Plain Old
Telephone services (POTs). Subsequent phases of the plan will incorporate
the capabilities to support designed services for preordering, ordering
and repair, which are estimated to be available between the second and
third quarters of 1997. Reseller understands that USWC is proposing that
these interfaces will have the necessary mediation to protect the
integrity of the network and protect the privacy of customer information.
B. The Parties further acknowledge that USWC is, or soon will be,
presenting its OSS proposal to state Commissions for approval, including
approval of fees or cost recovery methods that USWC may charge or use to
charge Reseller in connection with the design, implementation and
on-going maintenance and support of the OSS ("OSS fees"). The Parties
further acknowledge that, because the OSS is still in the conceptual
stage of development at the time of execution of this Agreement, USWC is
unable to specify or estimate the amount of OSS fees to be charged
Reseller at this time.
C. The Parties agree that, at such time as the interfaces to USWC's OSS
become operational and a state Commission approves USWC's OSS plan and
establishes OSS fees or cost recovery methods, the Parties will amend
this Agreement to incorporate terms and conditions regarding Reseller's
access to USWC's OSS, including OSS fees, on a state-by-state basis. The
Parties further agree that Reseller may terminate this Agreement if the
amount of OSS fees turns out to be so excessive as to make the overall
terms and conditions of this Agreement uneconomic for Reseller. In the
event of such termination, Reseller shall give USWC (sixty) 60 days
written notice.
D. Prior to approval and deployment of USWC's OSS interfaces, USWC shall
continue to provide all pre-ordering, ordering, repair and billing
functions and services through manual procedures outlined in a separately
provided Resale Resource Guide. Such manual procedures shall be available
where USWC's OSS interfaces are unable to handle pre-ordering, ordering,
repair and billing functions for the services available to Reseller under
this Agreement.
E. Notwithstanding Section II.B., Reseller reserves the right to intervene
and participate in any manner in any state Commission proceeding that
addresses USWC's OSS interface proposal, including the establishment of
OSS fees to the extent such participation is permitted by a Commission.
VI. DIRECTORY LISTING.
USWC will accept at no charge one primary listing for each main telephone
number belonging to Reseller's end user customer based on end user information
provided to USWC by Reseller. USWC will place Reseller's listings in USWC's
directory listing database for directory assistance purposes and will make
listings available to directory publishers and other third parties. Additional
terms and conditions with respect to directory listings are described in
Appendix B which by this reference is incorporated and made a part of this
Agreement.
VII. GENERAL PROVISIONS.
A. Term.
This Agreement shall be deemed effective upon approval by a Commission(s)
or pursuant to a Commission's rules or the Act. Except as provided
herein, USWC agrees to provide service on
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the terms defined in this Agreement for a term of two (2) years, and
thereafter the Agreement shall continue in force and effect unless and
until terminated as provided herein. Either party may terminate this
Agreement by providing written notice of termination to the other party,
such written notice to be provided at least sixty (60) days in advance of
the date of termination; provided no such termination shall be effective
prior to January 1, 1998. In the event of such termination as described
herein, for service arrangements made available under this Agreement and
existing at the time of termination, those arrangements shall continue
without interruption under either a) a new agreement executed by the
Parties, b) standard resale terms and conditions approved and made
generally effective by the Commission, or c) tariff terms and conditions
generally available to reseller's. By mutual agreement USWC and Reseller
may jointly petition the appropriate regulatory bodies for permission to
have this Agreement supersede any future standardized agreements or rules
such as regulators might adopt or approve.
B. Billing.
1. USWC shall bill Reseller and Reseller is responsible for all
applicable charges for the resold services as provided herein. The
Reseller shall also be responsible for all tariffed charges and
charges separately identified in this Agreement associated with
services that the Reseller resells to an end user under this
Agreement.
2. USWC shall provide Reseller, on a monthly basis, within 7-10 days of
the last day of the most recent billing period, in an agreed upon
standard electronic billing format, billing information including (1)
a summary bill, and (2) individual end user customer sub-account
information consistent with the samples provided to Reseller for
Reseller to render end user customer bills indicating all recurring
and nonrecurring charges associated with each individual customer's
account for the most recent billing period.
C. Payment.
1. Amounts payable under this Agreement are due and payable within
thirty (30) days after the bill date of USWC's invoice. During the
initial three billing cycles of this Agreement, Reseller and USWC
agree that undisputed amounts shall be paid as provided herein.
Reseller and USWC further agree that, during said three billing cycle
period, they will cooperate to resolve amounts in dispute or billing
process issues in a timely manner but no later than sixty (60) days
after the bill date of USWC's invoice or identification and notice of
the billing process issue. Disputed amounts will be paid within
thirty (30) days following resolution of the dispute.
2. After the three (3) month period outlined in Section C.1. above, the
Reseller will pay the bill in full within 30 days after the bill date
of the invoice. Billing disputes will be processed and jointly
resolved. Any disputed amounts that USWC remits to the Reseller will
be credited on the next billing cycle including an interest credit of
1.5% per month compounded.
3. A late payment charge of 1.5% applies to all billed balances which
are not paid by 30 days after the bill date shown on the invoice.
USWC agrees, however, that the application of this provision will be
suspended for the initial three billing cycles of this Agreement and
will not apply to amounts billed during those three cycles.
4. USWC may discontinue processing orders for the failure by Reseller to
make full payment for the resold services provided under this
Agreement within thirty (30) days of the due date on Reseller's bill.
USWC agrees, however, that the application of this provision will be
suspended for the initial three billing cycles of this Agreement and
will not apply to amounts billed during those three cycles.
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5. USWC may disconnect for the failure by Reseller to make full payment
for the resold services provided under this Agreement within sixty
(60) days of the due date on Reseller's bill. USWC agrees, however,
that the application of this provision will be suspended for the
first three billing cycles under this Agreement and will not apply to
amounts billed during those three cycles.
USWC will not disconnect an end user customer without first obtaining
the approval of the Commission. USWC will notify Reseller of the date
of Reseller's disconnection thirty (30) days prior to the effective
date of the disconnection. Reseller shall notify its end user
customers that service will be disconnected on the date specified in
USWC's notice to Reseller for Reseller's failure to make payment due
hereunder ten (10) days prior to the effective date of Reseller's
disconnection. If Reseller is granted a stay of the disconnection,
then Reseller shall notify its end users that service will be
disconnected ten (10) days prior to the subsequent disconnection
date, if any, established by the Commission or by USWC pursuant to
Commission order.
6. Collection procedures and the requirements for deposit are unaffected
by the application of a late payment charge.
7. The Parties agree that this payment and dispute resolution process is
a new procedure and they further agree that this Section VII. C. can
be reopened for negotiation at any time within the first twelve (12)
months of this Agreement.
8. USWC shall credit Reseller's account the amount due for any trouble
or out-of-service conditions in the same manner that USWC credits the
accounts of its own end-user customers and pursuant to any applicable
provisions in USWC's tariffs. USWC shall reflect the amount of such
credits on an individual customer telephone number basis in the
billing information USWC provides Reseller.
9. In the event billing disputes relate to service quality issues, the
dispute shall be referred to the USWC account executive assigned to
Reseller who will evaluate the facts and circumstances of the service
quality issues and will work with Reseller to resolve the dispute.
D. Deposit.
1. USWC may require Reseller to make a suitable deposit to be held by
USWC as a guarantee of the payment of charges. Any deposit required
of an existing reseller is due and payable within ten days after the
requirement is imposed. The amount of the deposit shall be the
estimated charges for the resold Service which will accrue for a
two-month period. Reseller is acknowledged to have credit
satisfactory to USWC for purposes of initiating operations under this
Agreement and no deposit will be required unless Reseller's
circumstances change.
2. When the service is terminated, or when Reseller has established
satisfactory credit, the amount of the initial or additional deposit,
with any interest due as set forth in applicable tariffs, will, at
Reseller's option, either be credited to Reseller's account or
refunded. Satisfactory credit for a reseller is defined as twelve
consecutive months service as a reseller without a termination for
nonpayment and with no more than one notification of intent to
terminate Service for nonpayment. Interest on the deposit will be
accumulated by USWC at a rate equal to the federal discount rate, as
published in the Wall Street Journal from time-to-time.
E. Taxes.
Reseller shall be responsible for the collection, payment and remittance
of all federal, state or local sales, use, excise or gross receipts
taxes, fees or surcharges (collectively "Taxes") imposed on
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<PAGE>
or with respect to its sale of services or equipment provided under this
Agreement, except those Taxes which are explicitly required by a
governmental authority to be collected by USWC. Reseller shall seek sale
for resale exemptions from any applicable governmental or taxing body for
payment of any and all Taxes related to Reseller's purchase of services
or equipment from USWC under this Agreement. Until such time as
exemptions are obtained or applicable, Reseller shall pay USWC for the
amount of any such Taxes that USWC is required to pay or collect.
Reseller shall in no event be liable for payment of any income taxes
payable by USWC.
F. Force Majeure.
Neither Party shall be responsible for delays or failures in performance
resulting from acts or occurrences beyond the reasonable control of such
Party, regardless of whether such delays or failures in performance were
foreseen or foreseeable as of the date of this Agreement, including,
without limitation: fire, explosion, power failure, acts of God, war,
revolution, civil commotion, or acts of public enemies; any law, order,
regulation, ordinance or requirement of any government or legal body; or
labor unrest, including, without limitation, strikes, slowdowns,
picketing or boycotts; or delays caused by the other Party or by other
service or equipment vendors; or any other circumstances beyond the
Party's reasonable control. In such event, the Party affected shall, upon
giving prompt notice to the other Party, be excused from such performance
on a day-to-day basis to the extent of such interference (and the other
Party shall likewise be excused from performance of its obligations on a
day-for-day basis to the extent such Party's obligations relate to the
performance so interfered with). The affected Party shall use its best
efforts to avoid or remove the cause of non-performance and both parties
shall proceed to perform with dispatch once the causes are removed or
cease.
G. Responsibility of Each Party.
Each Party is an independent contractor, and has and hereby retains the
right to exercise full control of and supervision over its own
performance of its obligations under this Agreement and retains full
control over the employment, direction, compensation and discharge of all
employees assisting in the performance of such obligations. Each Party
will be solely responsible for all matters relating to payment of such
employees, including compliance with social security taxes, withholding
taxes and all other regulations governing such matters. Each Party will
be solely responsible for proper handling, storage, transport and
disposal at its own expense of all (i) substances or materials that it or
its contractors or agents bring to, create or assume control over at Work
Locations or, (ii) Waste resulting therefrom or otherwise generated in
connection with its or its contractors' or agents' activities at the Work
Locations. Subject to the limitations on liability and except as
otherwise provided in this Agreement, each Party shall be responsible for
(i) its own acts and performance of all obligations imposed by Applicable
Law in connection with its activities, legal status and property, real or
personal and, (ii) the acts of its own affiliates, employees, agents and
contractors during the performance of that Party's obligations hereunder.
H. Limitation of Liability.
Except for indemnity obligations, each Party's liability to the other for
any loss related to or arising out of any negligent act or omission in
its performance of this Agreement, whether in contract or in tort, shall
be limited to the total amount that is or would have been charged to the
other Party by such negligent or breaching Party for the service(s) or
function(s) not performed or improperly performed.
In no event shall either Party be liable to the other in connection with
the provision or use of services offered under this Agreement for
indirect, incidental, consequential, reliance or special damages,
including (without limitation) damages for lost profits, lost revenues,
lost savings suffered by such other Parties regardless of the form of
action, whether in contract, warranty,
13
<PAGE>
strict liability, or tort, including (without limitation) negligence of
any kind and regardless of whether the Parties know the possibility that
such damages could result. Nothing contained in this Section H shall
limit USWC's or Reseller's liability to the other for (i) willful or
intentional misconduct (including gross negligence); (ii) bodily injury,
death or damage to tangible real or tangible personal property
proximately caused by USWC's or Reseller's negligent act or omission or
that of their respective agents, subcontractors or employees, nor shall
anything contained in this section limit the parties indemnification
obligations, as specified below.
I. Indemnification.
1. Each of the Parties agrees to release, indemnify, defend and hold
harmless the other Party and each of its officers, directors,
employees and agents (each an "Indemnitee") from and against and in
respect of any loss, debt, liability, damage, obligation, claim,
demand, judgment or settlement of any nature or kind, known or
unknown, liquidated or unliquidated including, but not limited to,
costs and attorneys' fees, whether suffered, made, instituted, or
asserted by any other party or person, for invasion of privacy,
personal injury to or death of any person or persons, or for loss,
damage to, or destruction of property, whether or not owned by
others, resulting , from the indemnifying Party's performance, breach
of Applicable Law, or status of its employees, agents and
subcontractors; or for failure to perform under this Agreement,
regardless of the form of action.
2. The indemnification provided herein shall be conditioned upon:
a. The indemnified Party shall promptly notify the indemnifying
Party of any action taken against the indemnified Party relating
to the indemnification. Failure to so notify the Indemnifying
Party shall not relieve the Indemnifying Party of any liability
that the Indemnifying Party might have, except to the extent that
such failure prejudices the Indemnifying Party's ability to
defend such Claim.
b. The indemnifying Party shall have sole authority to defend any
such action, including the selection of legal counsel, and the
indemnified Party may engage separate legal counsel only at its
sole cost and expense.
c. In no event shall the indemnifying Party settle or consent to any
judgment pertaining to any such action without the prior written
consent of the indemnified Party.
J. Patents and Trademarks.
1. Neither Party shall have any obligation to defend, indemnify or hold
harmless, or acquire any license or right for the benefit of, or owe
any other obligation or have any liability to, the other based on or
arising from any claim, demand, or proceeding (hereinafter "claim")
by any third party alleging or asserting that the use of any circuit,
apparatus, or system, or the use of any software, or the performance
of any service or method, or the provision of any facilities by
either Party under this Agreement constitutes direct or contributory
infringement, or misuse or misappropriation of any patent, copyright,
trademark, trade secret, or any other proprietary or intellectual
property right of any third party.
2. No license or affiliation.
a. Nothing in this Agreement shall be construed as the grant of a
license, either express or implied, with respect to any patent,
copyright, logo, trademark, tradename, trade secret or any other
intellectual property right now or hereafter owned, controlled or
licensable by either Party. Reseller may not use any patent,
copyright, logo, trademark, tradename, trade secret or other
intellectual property right of USWC or its affiliates without
execution of a separate agreement between the Parties.
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<PAGE>
b. Reseller shall not, without the express written permission of
USWC, state or imply that; 1) Reseller is connected, or in any
way affiliated with USWC or its affiliates or, 2) Reseller is
part of a joint business association or any similar arrangement
with USWC or its affiliates or, 3) USWC and its affiliates are in
any way sponsoring endorsing or certifying Reseller and its goods
and services or, 4) the resold goods and services are in any way
associated with or originated from USWC or any of its affiliates.
Notwithstanding the above, Reseller may state in response to a
specific customer inquiry concerning the origin of the resold
services that "Reseller is reselling USWC services." No other
statements may be made.
3. Notwithstanding the above, unless otherwise prohibited by USWC
pursuant to an applicable provision herein, Reseller may use the
phrase "(Name of Reseller) is a reseller of US WEST Communications
services" (the "Authorized Phrase") in Reseller's printed materials
provided:
a. The Authorized Phrase is not used in connection with any goods or
services other than USWC services resold by Reseller.
b. Reseller's use of the Authorized Phrase does not, in USWC's sole
discretion, cause customers to believe that Reseller is USWC.
c. The Authorized Phrase, when displayed, appears only in text form
(Reseller may not use the US WEST logo) with all letters being
the same font and point size. The point size of the Authorized
Phrase shall be no greater than one fourth the point size of the
smallest use of Reseller's name and in no even shall exceed 8
point size.
d. Reseller shall provide all printed materials to USWC for its
prior written approval.
e. If USWC determines that Reseller's use of the Authorized Phrase
causes customer confusion, USWC may in it's sole discretion,
immediately terminate Reseller's right to use the Authorized
Phrase.
f. Upon termination of the Reseller's right to use the Authorized
Phrase or termination of this Agreement, all permission or right
to use the Authorized Phrase shall immediately cease to exist
and Reseller shall immediately cease any and all such use of the
Authorized Phrase. Reseller shall either promptly return to USWC
or destroy all materials in its possession or control displaying
the Authorized Phrase.
4. Reseller acknowledges the value of the marks "US WEST" and "US WEST
Communications" (the "Marks") and the goodwill associated therewith
and acknowledges that such goodwill is a property right belonging
to, US WEST Inc. and USWC respectively (the "Owners"). Reseller
recognizes that nothing contained in this Agreement is intended as
an assignment or grant to Reseller of any right, title or interest
in or to the Marks and that this Agreement does not confer any right
or license to grant sublicenses or permission to third parties to
Use the Marks and is not assignable. Reseller will do nothing
inconsistent with the Owner's ownership of the Marks, and all
rights, if any , that may be acquired by use of the Marks shall
inure to the benefit of the Owners. Reseller will not adopt, use
(other than as authorized in Section 3 herein,) register or seek to
register any mark anywhere in the world which is identical or
confusingly similar to the Marks or which is so similar thereto as
to constitute a deceptive colorable imitation thereof or to suggest
or imply some association, sponsorship, or endorsement by the
Owners; The Owners make no warranties regarding its ownership of any
rights in or the validity of the Marks.
K. Warranties.
NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, THE PARTIES AGREE
THAT NEITHER PARTY HAS MADE, AND THAT THERE DOES NOT EXIST, ANY WARRANTY,
EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
15
<PAGE>
L. Assignment.
This Agreement is unique in nature and the result of negotiations between
the Parties. As such, this Agreement can be assigned only with the prior
written consent of the non-assigning Party, which consent shall not be
unreasonably withheld.
M. Default.
If either Party defaults in the payment of any amount due hereunder, or if
either Party violates any other provision of this Agreement, and such
default or violation shall continue for thirty (30) days after written
notice thereof, the other Party may terminate this Agreement forthwith by
written instrument. The failure of either Party to enforce any of the
provisions of this Agreement or the waiver thereof in any instance shall not
be construed as a general waiver or relinquishment on its part of any such
provision, but the same shall, nevertheless, be and remain in full force and
effect.
N. Severability.
The Parties recognize that the FCC has promulgated rules addressing issues
contained in this Agreement. To the extent that certain of the rules
contained in the FCC lst Order and the FCC 2d Order are deemed by the courts
to be not effective, this contract shall be modified to comport with the
final court decisions and subsequent FCC or state Commission decisions or
rules issued to comply with the courts' decisions. If any other term,
condition or provision of this Agreement is held to be invalid or
unenforceable for any reason, such invalidity or unenforceability shall not
invalidate the entire Agreement. The Agreement shall be construed as if it
did not contain the invalid or unenforceable provision or provisions, and
the rights and obligations of each Party shall be construed and enforced
accordingly; provided, however, that in the event that such invalid or
unenforceable provision or provisions are essential elements of this
Agreement and, in the opinion of either party, substantially impair the
rights or obligations of either party, Reseller and USWC shall promptly
negotiate a replacement provision or provisions. If the Parties cannot
negotiate such a replacement provision or provisions, the Parties may agree
to terminate the Agreement, In the event of termination as described herein,
for service arrangements made available under this Agreement and existing at
the time of termination, those arrangements shall continue without
interruption under either a) a new agreement executed by the Parties, b)
standard resale terms and conditions approved and made generally effective
by the Commission, or c) tariff terms and conditions generally available to
reseller's. If a) does not come about, or b) or c) are not available, the
Agreement shall remain in effect until a replacement provision is determined
through arbitration.
O. Nondisclosure.
1. All information including, but not limited to, specifications, drawings,
sketches, models, tools, technical information, employee records, maps,
financial reports, and market data, (i) furnished by one Party to the
other Party or to which one Party provides to the other Party access
(such as to a database) dealing with customer specific, facility
specific, or usage specific information, or (ii) in written, graphic,
electromagnetic, or other tangible form and marked at the time of
delivery as "Confidential", "Proprietary", or other similar legend, or
(iii) communicated orally or by visual presentation and declared to the
receiving Party at the time of delivery, or by written notice given to
the receiving Party within ten (10) days after delivery, to be
"Confidential" or "Proprietary" (collectively referred to as "Proprietary
Information"), shall remain the property of the disclosing Party.
2. Upon request by the disclosing Party, the receiving Party shall return
all tangible copies of Proprietary Information, whether written, graphic
or otherwise, except that the receiving Party may retain one copy for
archival purposes.
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<PAGE>
3. The receiving Party acknowledges and agrees that Proprietary Information
constitutes trade secrets of the disclosing Party. The receiving Party
shall maintain in confidence all of the disclosing Party's Proprietary
Information and shall use the disclosing Party's Proprietary Information
only for performing the covenants contained, or exercising any rights
granted, in this Agreement. Only the employees and agents with a need to
know shall have access to the Proprietary Information and each such
employee and agent shall be advised of his or her obligations under this
Section O. Neither Party shall use the other Party's Proprietary
Information for any other purpose except upon such-terms and conditions
as may be agreed upon between the parties in writing.
4. Unless otherwise agreed, the obligations of confidentiality and non-use
set forth in this Agreement do not apply to the extent that such
Proprietary Information:
a. was at the time of receipt already known to the receiving Party free
of any obligation to keep it confidential (evidenced by written
records prepared prior to delivery by the disclosing Party);
b. is or becomes publicly known through no wrongful act of the receiving
Party;
c. is rightfully received from a third person having no direct or
indirect secrecy or confidentiality obligation to the disclosing
Party with respect to such information; or
d. is independently developed by receiving Party individuals who do not
have access to the Proprietary Information;
e. is disclosed to a third person by the disclosing Party without
restrictions on disclosure;
f. is approved for release by written authorization of the disclosing
Party; or
g. is required to be made public by the receiving Party pursuant to
applicable law, regulation, or governmental order, provided that the
receiving Party shall give sufficient notice of the requirement to
the disclosing Party to enable the disclosing Party to seek
protective orders where possible.
5. USWC grants Reseller the limited, personal, nonexclusive right and
license to access and use information contained in certain of USWC's
databases (Directory Assistance and Operator Services databases, certain
Advanced Intelligent Network databases and Operation Support System
databases) but only to the extent as specifically required by the then
applicable federal and state rules and regulations relating to access to
and use of such databases, as they may be amended from time to time, and
for no other purpose. Without limiting the generality of the foregoing,
this right and license to Reseller does not include the license and right
to extract or copy (including by any manual, mechanical or electronic
means) or use any such database information, in whole or in part, to
enhance the quality of any of Reseller's own database services or
offerings, as inputs to Reseller's or other's directory assistance or
directory publishing operations or for the creation of marketing
databases, in the absence of USWC's prior written consent. Reseller
agrees that any and all information contained in any of such USWC's
databases shall be Proprietary Information subject to the terms and
conditions of this section O; provided, however, that Sections 4 a, b,
and c shall not apply even though the individual parts or components of
the information contained in any such databases may otherwise fall within
such Sections.
6. Notwithstanding any other provision of this Agreement, the Proprietary
Information provisions of this Agreement shall apply to all information
furnished by either Party to the other in furtherance of the purpose of
this Agreement, even if furnished before the date of this Agreement.
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<PAGE>
7. The Parties acknowledge that this Agreement contains commercially
confidential information that may be considered Proprietary Information
by either or both Parties, and agree to limit distribution of this
Agreement to those individuals in their respective companies with a need
to know the contents of this Agreement.
P. Survival.
Any liabilities or obligations of a Party for acts or omissions prior to the
cancellation or termination of this Agreement; any obligation of a Party
under the provisions regarding indemnification, Confidential Information,
limitations on liability, and any other provisions of this Agreement which,
by their terms, are contemplated to survive (or to be performed after)
termination of this Agreement, shall survive cancellation or termination
thereof.
Q. Dispute Resolution.
Except as provided by the Act, if any claim, controversy or dispute between
the Parties, their agents, employees, officers, directors or affiliated
agents ("Dispute") cannot be settled through negotiation, it shall be
resolved by arbitration conducted by a single arbitrator engaged in the
practice of law, under the then current rules of the American Arbitration
Association ("AAA"). The Federal Arbitration Act, 9 U.S.C. Secs. 1-16, not
state law, shall govern the arbitrability of all Disputes. The arbitrator
shall not have authority to award punitive damages. All expedited procedures
prescribed by the AAA rules shall apply. The arbitrator's award shall be
final and binding and may be entered in any court having jurisdiction
thereof. Each Party shall bear its own costs and attorneys' fees, and shall
share equally in the fees and expenses of the arbitrator. The laws of the
state where the services subject to this Agreement are provided shall govern
the construction and interpretation of this Agreement.
R. State Commission Arbitration Issues.
In the event Reseller and USWC are unable to agree on certain issues during
negotiation, the Parties will identify such issues for arbitration before an
appropriate state regulatory agency. Only those points identified by the
Parties for arbitration will be submitted. All other terms on which the
Parties reach agreement will be submitted for approval in their final form.
S. Governing Law.
This Agreement shall be deemed to be a contract made under and shall be
construed, interpreted and enforced in accordance with the Act, where
applicable, and the laws of the state where the services subject to this
Agreement are provided and shall be subject to the exclusive jurisdiction of
the courts in that state, unless otherwise provided by the Act.
USWC shall be responsible for obtaining and keeping in effect all Federal
Communications Commission, state regulatory Commission, franchise authority
and other regulatory approvals that may be required in connection with the
performance of its obligations under this Agreement. Reseller shall be
responsible for obtaining and keeping in effect all Federal Communications
Commission, state regulatory Commission, franchise authority and other
regulatory approvals that may be required in connection with its offering of
services to Reseller Customers contemplated by this Agreement.
T. Limitation of Action.
No arbitration demand or judicial action, regardless of form, arising out of
the transaction(s) under this Agreement, whether in contract, tort, or other
theory, may be brought by either party more than two (2) years after the
cause of action accrues.
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U. Joint Work Product.
This Agreement is the joint work product of representatives of the Parties.
For convenience, it has been drafted in final form by one of the Parties.
Accordingly, in the event of ambiguities, no inferences will be drawn
against either Party solely on the basis of authorship of this Agreement.
V. Notices.
Any notices or other communications required or permitted to be given or
delivered under this Agreement shall be in hard-copy writing (unless
otherwise specifically provided herein) and shall be sufficiently given if
delivered personally or delivered by prepaid overnight express service to
the following (unless otherwise specifically required by this Agreement to
be delivered to another representative or point of contact).
Any notices required by or concerning this Agreement shall be sent to the
Parties and to the Commission at the addresses shown below:
<TABLE>
<S> <C>
USWC Reseller
Kathy Fleming Jack Kohler
US WEST Communications Choicetel, Inc.
Interconnection Services 6801 Wayzata Blvd.
1801 California, Room 2340 Louis Park, MN 55426
Denver, CO 80202
303-896-6100 (phone) 612-544-1260 (phone)
303-893-9028 (fax) 612-544-1281 (fax)
Commission
Executive Secretary
Minnesota Public Utilities Commission
Metro Square Building, Suite 350
121 Seventh Place E
St. Paul, MN 55101-2147
</TABLE>
Each Party and the Commission shall inform the other of any changes in the
above addresses.
W. No Third-Party Beneficiaries.
Except as may be specifically set forth in this Agreement, this Agreement
does not provide and shall not be construed to provide third parties with
any remedy, claim, liability, reimbursement, cause of action, or other
privilege. The Commission is a third party beneficiary of this contract on
behalf of the public. Accordingly, the Commission is entitled to notice and
may intervene to protect the public interest in any lawsuit involving this
Agreement.
X. Publicity and Advertising.
Neither party shall publish or use any advertising, sales promotions or
other publicity materials that use the other party's name, logo, trademarks
or service marks without the prior written approval of the other party.
Y. Amendments or Waivers.
Except as otherwise provided in this Agreement, no amendment or waiver of
any provision of this Agreement, and no consent to any default under this
Agreement, shall be effective unless the same is in writing and signed by an
officer of the Party against whom such amendment, waiver or consent is
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claimed. The Parties acknowledge that they may not consent to the default of
any requirement of federal or state law which affects the rights of end use
customers.
Z. Most Favored Nation.
The Parties agree that the provisions of Section 252(i) of the Act shall
apply, including final state and federal interpretive regulations in effect
from time to time and USWC shall make available to Reseller the terms and
conditions-of any other agreement for interconnection and/or resale services
whether arrived at through negotiations, mediation or arbitration, approved
by a state Commission under Section 252 of the Act, in that agreement's
entirety.
AA. Executed in Counterparts.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original; but such counterparts shall together constitute
one and the same instrument.
BB. Headings of No Force or Effect.
The headings of Articles and Sections of this Agreement are for convenience
of reference only, and shall in no way define, modify or restrict the
meaning or interpretation of the terms or provisions of this Agreement.
CC. Entire Agreement.
This Agreement constitutes the entire agreement between the Parties and
supersedes all prior oral or written agreements, representations,
statements, negotiations, understandings, proposals and undertakings with
respect to the subject matter hereof. This Agreement shall prevail in the
event of any conflict between the "Resale Resource Guide" and the terms and
conditions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized representatives.
<TABLE>
<S> <C>
CHOICETEL, INC. US WEST COMMUNICATIONS, INC.
/s/ JACK KOHLER /s/ KATHERINE L. FLEMING
- -------------------------------------- --------------------------------------
Signature Signature
Jack Kohler Katherine L. Fleming
- -------------------------------------- --------------------------------------
Name Printed/Typed Name Printed/Typed
PRESIDENT EXEC DIRECTOR--INTERCONNECT
- -------------------------------------- --------------------------------------
Title Title
- -------------------------------------- --------------------------------------
Date Date
</TABLE>
SIGNATURE DOES NOT WAIVE ANY RIGHTS OF EITHER PARTY TO SEEK
ADMINISTRATIVE/JUDICIAL REVIEW OF ALL OR PART OF THIS AGREEMENT OR TO REFORM
THIS AGREEMENT AS A RESULT OF SUCCESSFUL ADMINISTRATIVE/JUDICIAL REVIEW AND/OR
FUTURE SETTLEMENT AGREEMENTS BETWEEN THE PARTIES OF THIS AGREEMENT.
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<PAGE>
APPENDIX A
LOCAL EXCHANGE SERVICES
RESALE OF SERVICES
The Parties agree the following charges apply to the Resale of Local Services:
1. Nonrecurring Charges.
a. Customer Transfer Charge (CTC): The following nonrecurring charges
apply when converting a USWC account to a Reseller account or when changing
an end user from one reseller to another.
<TABLE>
<CAPTION>
USOC NONRECURRING CHARGE
--------- -------------------
<S> <C> <C>
MEDIATED ACCESS
- Residence
First Line................................................. $12.64
Each Additional Line....................................... $11.16
- Business
First Line................................................. $16.80
Each Additional Line....................................... $13.93
NON-MEDIATED ACCESS (MANUAL)
- Residence and Business
First Line................................................. $22.20
Each Additional Line....................................... $16.38
</TABLE>
b. Product Specific Nonrecurring Charge: As set forth in USWC tariffs,
the product specific nonrecurring charges, without discount, will apply when
additional lines or trunks are added or when the end user adds features or
services to existing lines or trunks.
c. IntraLATA Toll Charges: lntraLATA toll resale at the below uniform
rate.
<TABLE>
<CAPTION>
STATE: RATE PER MINUTE OF USE
------ ------------------------
<S> <C>
Minnesota.............................................................. .135
</TABLE>
2. The Parties agree the following charges apply to the Resale of Local
Services in Minnesota:
a. Except as expressly listed in Paragraphs 2b. and 2c. of this
Appendix, all USWC telecommunications tariffed services and rate elements
offered now or in the future to retail customers shall be available for
resale at a 21.5% discount.
b. Promotions of less than 90 days and enhanced services are not
available for resale. Grandparented services are only available for resale
to customers currently receiving such services.
c. The following services are available at the 21.5% discount only to
the same class of customers eligible to purchase that service from USWC:
- Residential Service
- Contract Services
- Special Arrangements
- Packaged and Discount Services
- Promotional offerings of greater than 90 days
- Grandfathered services
d. USWC provides Lifeline-type services to reseller's as residential
basic exchange lines. Reseller is responsible for obtaining certification
for Reseller's end users from the qualifying and funding organizations for
these programs.
<PAGE>
APPENDIX B
DIRECTORY LISTINGS
Directory Listings
1. Scope.
a. Reseller Listings Service ("Listings") consists of USWC placing the
names, addresses and telephone numbers of Reseller's end users in USWC's
listing database, based on end user information provided to USWC by
Reseller. USWC is authorized to use Listings in Directory Assistance (DA)
and as noted in 1.D.i or 1.D.ii.
b. Reseller will provide in standard, format, and USWC will accept at
no charge, one primary listing for each main telephone number belonging to
Reseller's end user customers. Primary listings are as defined for USWC end
users in USWC's general exchange tariffs. Reseller will be charged for
privacy listings and premium listings, e.g., additional, foreign, cross
reference, informational, etc., at USWC's general exchange listing tariff
rates minus the applicable standard resale discount in each state.
c. USWC will furnish Reseller the Listings format specifications. USWC
cannot accept Listings with advance completion dates.
d. Reseller grants USWC a non-exclusive license to incorporate Listings
information into its directory assistance database. Reseller hereby selects
one of two options for USWC's use of Listings and dissemination of Listings
to third parties.
EITHER:
i. TREAT THE SAME AS USWC'S END USER LISTINGS--NO PRIOR
AUTHORIZATION is needed for USWC to release Listings to directory
publishers or other third parties. USWC will incorporate Listings
information in all existing and future directory assistance
applications developed by USWC. Reseller will authorize USWC to sell
and otherwise make Listings available to directory publishers
including USWC's publisher affiliate for inclusion in white pages
published on USWC's behalf. USWC shall be entitled to retain all
revenue associated with any such sales. Listings shall not be
provided or sold in such a manner as to segregate end users by
carrier.
OR:
ii. RESTRICT TO USWC'S DIRECTORY ASSISTANCE--PRIOR
AUTHORIZATION REQUIRED BY RESELLER FOR ALL OTHER USES. Reseller makes
its own, separate agreements with USWC, third parties and directory
publishers for all uses of its listings beyond DA. USWC will sell
Listings to directory publishers (including USWC'S publisher
affiliate for inclusion in white pages published on USWC's behalf,
other third parties and USWC products only after third party presents
proof of Reseller's authorization. USWC shall be entitled to retain
all revenue associated with any such sales. Listings shall not be
provided or sold in such a manner as to segregate end users by
carrier.
e. To the extent that state tariffs limit USWC's liability with regard
to Listings, the applicable state tariff(s) is incorporated herein and
supersedes Section VII.G., "Limitation of Liability", of this Agreement with
respect to Listings only.
2. USWC Responsibilities.
USWC is responsible for maintaining Listings including entering, changing,
correcting, rearranging and removing Listings in accordance with Reseller
orders. USWC will take reasonable steps in accordance with industry practices to
accommodate non-published and non-listed listings provided that Reseller has
supplied USWC the necessary privacy indicators on such Listings.
<PAGE>
USWC will include Reseller's Listings in USWC's Directory Assistance service
to ensure that callers to USWC's Directory Assistance service have
non-discriminatory access to Reseller's Listings.
USWC will incorporate Reseller's Listings provided to USWC in the white
pages directory published on USWC's behalf.
3. Reseller Responsibilities.
a. Reseller agrees to provide to USWC its end user names, addresses and
telephone numbers in a standard format, as specified by USWC.
b. Reseller will supply its ACNA/CIC or CLCC/OCN, as appropriate, with
each order to provide USWC the means of identifying Listings ownership.
c. Reseller represents and warrants the end user information provided
to USWC is accurate and correct. Reseller further represents and warrants
that it has reviewed all Listings provided to USWC, including end user
requested restrictions on use such as non-published and non-listed. Reseller
shall be solely responsible for knowing and adhering to state laws or
rulings regarding Listings (e.g., no solicitation requirements in the states
of Arizona and Oregon, privacy requirements in Colorado), and for supplying
USWC the applicable Listing information.
d. Reseller is responsible for all dealings with and on behalf of
Reseller's end users, including:
i. All end user account activity, e.g., end user queries and
complaints.
ii. All account maintenance activity, e.g., additions, changes,
issuance of orders for Listings to USWC.
iii. Determining privacy requirements and accurately coding the
privacy indicators for Reseller's end user information. If end user
information provided by Reseller to USWC does not contain a privacy
indicator, no privacy restrictions will apply.
iv. Any additional services requested by Reseller's end users.
<PAGE>
Exhibit 21
Registrant: ChoiceTel Communications, Inc.
Subsidiaries of the Registrant: Choicetel, Inc.
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement on Form SB-2 of (i)
our report dated March 20, 1997 except for Note 7 for which the date is May 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 revenues and direct expenses for the Telco West, Inc. pay telephone division,
(iii) our report dated May 16, 1997 relating to the statements of operations for
Computer Assisted Technologies, Inc. and (iv) the reference to our Firm under
the caption "Experts" in the Prospectus included therein.
/s/ Schechter Dokken Kanter
Andrews & Selcer, Ltd.
--------------------------------------
SCHECHTER DOKKEN KANTER
ANDREWS & SELCER, LTD.
Minneapolis, Minnesota
June 24, 1997
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