<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 3, 1998
REGISTRATION NO. 333-42971
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
GLOBALTEL RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
WASHINGTON 4813 91-1663099
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
1520 EASTLAKE AVENUE EAST
SEATTLE, WASHINGTON 98102
(206) 720-7250, FAX (206) 720-7251
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
RONALD P. ERICKSON, CHIEF EXECUTIVE OFFICER
1520 EASTLAKE AVENUE EAST
SEATTLE, WASHINGTON 98102
(206) 720-7250, FAX (206) 720-7251
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
--------------
COPIES TO:
<TABLE>
<S> <C>
THOMAS S. HODGE RONALD J. LONE
AUDREY HWANG CHRISTOPHER J. VOSS
HELLER EHRMAN WHITE & MCAULIFFE LEE J. BRUNZ
6100 COLUMBIA CENTER STOEL RIVES LLP
701 FIFTH AVENUE ONE UNION SQUARE
SEATTLE, WASHINGTON 98104 600 UNIVERSITY STREET, 36TH FLOOR
TELEPHONE: (206) 447-0900 SEATTLE, WASHINGTON 98101
FACSIMILE: (206) 447-0849 TELEPHONE: (206) 624-0900
FACSIMILE: (206) 386-7500
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effectiveness 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 of 1933, 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 of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, 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: [_]
--------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE(1)
------------------- ------------ ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
Common Stock, $0.05 par
value.................. 2,300,000 $10.00 $23,000,000 $6,785
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) Calculated pursuant to Rule 457(o) under the Securities Act of 1933, as
amended. Includes shares of Common Stock subject to the underwriters'
over-allotment option. $6,107 of the registration fee was previously paid
by the Registrant in connection with its original filing of this
Registration Statement and the remaining $678 is paid herewith.
--------------
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 SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 3, 1998
PROSPECTUS
2,000,000 SHARES
[LOGO OF GLOBALTEL]
COMMON STOCK
All of the 2,000,000 shares of Common Stock offered hereby are being sold by
GlobalTel Resources, Inc. ("GlobalTel" or the "Company"). Prior to this
offering (the "Offering"), there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $8.00 and $10.00 per share. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price. The Company has applied to have the Common Stock approved for listing on
the American Stock Exchange under the symbol " ."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON
STOCK OFFERED HEREBY.
-----------
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
DISCOUNTS
PRICE TO AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................... $ $ $
- -------------------------------------------------------------------------------------------
Total (3)....................... $ $ $
============================================================================================
</TABLE>
(1) Excludes the value of warrants (the "Representatives' Warrants") to
purchase up to 200,000 shares of Common Stock to be granted to Cruttenden
Roth Incorporated and Ferris, Baker Watts Incorporated, the representatives
(the "Representatives") of the several underwriters (the "Underwriters").
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the Offering, payable by the Company,
estimated at approximately $1,200,000, including a non-accountable expense
allowance payable to Cruttenden Roth Incorporated. See "Underwriting."
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 300,000 additional shares of Common Stock on the same terms and
conditions set forth above, solely to cover over-allotments, if any. If all
such shares are purchased the total Price to Public, Underwriting Discounts
and Commissions and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered severally by the Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by
them, and subject to the right of the Underwriters to reject any order in whole
or in part and to certain other conditions. It is expected that the delivery of
certificates for the Common Stock will be made against payment therefor at the
offices of Cruttenden Roth Incorporated, Irvine, California, on or about
, 1998.
-----------
Cruttenden Roth Ferris, Baker Watts
I N C O R P O R A T E D I N C O R P O R A T E D
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
[ARTWORK: MULTICOLOR MAP OF CONTINENTS OF THE WORLD SHOWING THE COMPANY'S
NETWORK]
Primecall(R) is a service mark of the Company. Trade names, trademarks and
service marks of other companies appearing in this Prospectus are the property
of their respective holders.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING BY
ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR
IMPOSING PENALTY BIDS, AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK
EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
all information contained in this Prospectus (i) assumes no exercise of the
Underwriters' over-allotment option and the Representatives' Warrants and (ii)
gives effect to a five-for-one reverse split of the capital stock of the
Company (the "Reverse Stock Split") and the conversion of all outstanding
shares of the Company's Series A Convertible Preferred Stock, $0.01 par value
(the "Preferred Stock") and all accrued dividends thereon, into an aggregate of
209,045 shares of Common Stock upon the closing of this Offering (the
"Preferred Stock Conversion"). See "Description of Securities--Preferred Stock"
and "Underwriting." References in this Prospectus to the "Company" and
"GlobalTel" refer to GlobalTel Resources, Inc. and its two wholly owned
subsidiaries, PrimeCall, Inc. and GFP Group, Inc., except where the context
otherwise requires. See "Glossary of Terms" for definitions of certain
technical and other terms used in this Prospectus. Investors should carefully
consider the information set forth under the heading "Risk Factors."
THE COMPANY
GlobalTel provides international telecommunications services principally to
small- and medium-sized business customers in developing ("second-tier")
telecommunications markets. Currently, the Company offers international long-
distance services, calling cards and enhanced voice services consisting of
voice-mail and conference calling to more than 8,500 business customers in over
120 countries. The Company began operations in 1995 with its entry into the
international call-reorigination business, capitalizing on the arbitrage
opportunity created by differences between U.S. and foreign originated
international long-distance rates. The Company is leveraging the expertise
derived from, and the established customer base generated by, its call-
reorigination business to provide higher margin enhanced telecommunications
services.
According to the International Telecommunications Union ("ITU"), the
international telecommunications industry accounted for $52.8 billion in
revenues for 1995. Based upon trends in revenue growth from 1991 through 1995
measured by the ITU, the Company believes that international long distance
telecommunications revenues will surpass $76.0 billion by 2000 if such trends
continue. Deregulation, together with decreases in the cost of providing
services and the introduction of sophisticated value-added features, have made
it possible for new entrants to compete with large global telecommunications
providers and national incumbent telephone operators ("ITOs") in providing
international voice telecommunications services. In addition, the convergence
of conventional telephony and computing technologies with the advent of the
Internet has created the opportunity for data networks, and computers in
general, to become primary telecommunications tools. Industry analysts expect
the market size for both value-added Internet Protocol ("IP") data networking
services and Internet access to continue to grow rapidly as businesses and
consumers increase their use of the Internet, intranets and privately managed
IP networks for both electronic commerce as well as conventional telephony. IDC
projects total value-added services revenues generated by Internet service
providers alone to grow from $197.8 million in 1996 to approximately $11.4
billion in 2000, reaching average annual growth of approximately 175.6% during
that period.
GlobalTel's objective is to become a leading provider of value-added
telecommunications services in markets that historically have been underserved
by large global telecommunications providers and ITOs. The Company has entered
second-tier markets by providing non-regulated or less regulated
telecommunications services, such as international call-reorigination. The
Company plans to continue to serve existing customers and to enter additional
markets by providing less regulated enhanced telecommunications services. The
Company has designed and plans to implement a range of business-grade Internet
services with business partners such as Novell, Inc. ("Novell"). The Company
expects these services to include business quality messaging, global enhanced
Virtual Private Networks ("VPN") and other value-added services. Most of the
planned services can be provided under existing regulatory frameworks.
3
<PAGE>
GlobalTel primarily markets its telecommunications services through a
network of over 75 independent sales agents, supplemented by direct marketing
efforts. The Company also has an exclusive agreement with the International
Business Network for World Commerce and Industry, Ltd. ("IBNET"), the managing
member of the Consortium of Global Commerce, whereby IBNET has agreed to
market the Company's services through several thousand individual chambers of
commerce located in over 200 countries. In addition, the Company's
relationship with Novell provides a distribution channel for the Company's
services through Novell's network of over 25,000 value-added resellers
("VARs").
GlobalTel's current network architecture consists of: (i) voice switching
and global fax messaging infrastructure in Los Angeles, California; (ii)
access to third party infrastructure through Equant Network Services
International Corporation ("Equant"), a global data network services provider,
and other suppliers; (iii) enhanced fax nodes in Hong Kong and Mexico City;
and (iv) a Network Control and Operations Center in Seattle, Washington. The
Company's agreement with Equant allows the Company to utilize the global reach
of the Equant network and to co-locate its servers and switches in many large
cities around the world. In addition, GlobalTel's agreement with Novell
provides the Company with access to key network technologies.
Key elements of the Company's strategy include: (i) capitalizing on its
existing customer base by offering additional and enhanced telecommunications
services; (ii) leveraging its global sales channels and relationships with
Novell and IBNET; (iii) minimizing capital requirements by utilizing existing
third party networks such as the Equant network; and (iv) employing flexible,
open architecture technology for the easy integration of technologies.
The Company was incorporated in Washington in November 1994 and commenced
operations in March 1995. GlobalTel's executive offices are located at 1520
Eastlake Avenue East, 2nd Floor, Seattle, Washington 98102, and its telephone
number is (206) 720-7250.
THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered.......... 2,000,000 shares
Common Stock Outstanding after
the Offering................. 4,799,356 shares(1)
Use of Proceeds............... To repay certain indebtedness and for capital
expenditures, working capital and general
corporate purposes. In addition, a portion of
the proceeds will be used to fund the
repurchase of any securities tendered in
connection with the rescission offer that the
Company intends to commence immediately after
this Offering. See "Use of Proceeds" and
"Rescission Offer."
Proposed American Stock
Exchange Symbol..............
</TABLE>
- -------
(1) Includes (i) the issuance of 331,251 and 18,054 shares of Common Stock to
certain holders of notes of the Company (the "Full Coverage Bridge Notes")
to be repaid at the closing of this Offering and past noteholders of the
Company, respectively, assuming an initial public offering price of $9.00
per share, (ii) the issuance of 161,783 shares of Common Stock upon the
cashless conversion of certain warrants (the "Cashless Warrants") at the
closing of this Offering, assuming an initial public offering price of
$9.00 per share, (iii) the issuance of 30,000 shares of Common Stock to an
officer of the Company in connection with the acquisition of GFP Group,
Inc. upon the closing of this Offering, (iv) the issuance of 22,222 shares
of Common Stock to an affiliate of the Company in connection with services
to be rendered by such affiliate, assuming an initial public offering
price of $9.00 per share, (v) the conversion of certain long-term debt
into 281,817 shares of Common Stock upon the closing of the Offering at a
price of $3.85 per share and (vii) the Preferred Stock Conversion
(collectively, the "Offering Issuances"). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources," "Certain Transactions" and "Description of
Securities." Excludes (i) 700,000 shares of Common Stock reserved for
issuance under the Company's 1996 Stock Option Plan (the "1996 Plan"),
4
<PAGE>
of which 528,426 shares are subject to options granted as of the date of the
Offering at a weighted average exercise price of $7.35 per share, assuming
an initial public offering price of $9.00 per share, (ii) 300,000 shares of
Common Stock reserved for issuance under the Company's Employee Stock
Purchase Plan and (iii) 200,000 shares of Common Stock issuable upon
exercise of the Representatives' Warrants. See "Management--Benefit Plans"
and "Underwriting."
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- ------------------
1995 1996 1996 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................... $ 2,113 $ 9,136 $ 5,830 $ 10,639
Operating expenses:
Cost of sales........................ 1,929 8,230 5,155 9,007
Sales and marketing.................. 238 682 494 664
General and administrative........... 1,536 5,773 4,095 4,658
Depreciation and amortization........ 111 98 86 141
------- ------- -------- --------
Total operating expenses............... 3,814 14,783 9,830 14,470
------- ------- -------- --------
Operating loss......................... (1,701) (5,647) (4,000) (3,831)
Interest expense....................... (34) (225) (103) (588)
------- ------- -------- --------
Net loss............................... $(1,735) $(5,872) $ (4,103) $(4,419)
======= ======= ======== ========
Series A convertible preferred stock
dividends............................. -- -- -- (21)
------- ------- -------- --------
Net loss applicable to common
shareholders.......................... $(1,735) $(5,872) $(4,103) $(4,440)
======= ======= ======== ========
Pro forma(1):
Net loss per share................... $ (3.17) $ (2.39)
======= ========
Weighted average number of shares
outstanding......................... 1,855 1,859
======= ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash.................................................. $ 237 $14,160
Working capital....................................... (5,823) 9,275
Total assets.......................................... 4,002 18,124
Long-term debt, excluding current maturities.......... 2,120 200
Common stock subject to rescission.................... 1,850 1,850
Total shareholders' (deficit) equity.................. (7,413) 10,470
</TABLE>
- --------
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used in computing pro
forma net loss per share.
(2) Adjusted to give effect to (A) the Offering Issuances and (B) the sale of
the 2,000,000 shares offered hereby at an assumed initial public offering
price of $9.00 per share and the receipt and application of the net
proceeds therefrom. See footnote (1) to "The Offering," "Use of Proceeds,"
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, in addition to the other information set forth in this
Prospectus, in connection with an investment in the Common Stock offered
hereby. This Prospectus contains forward-looking statements. Those statements
appear in a number of places in this Prospectus and include statements
regarding the intent, belief or current expectation of the Company with
respect to, among other things, (i) trends affecting the Company's financial
condition or results of operations and (ii) the Company's business and growth
strategies. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected, expressed or implied in the forward-looking statements as a result
of various factors. The information contained in this Prospectus, including
without limitation the information set forth under the headings "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" identifies important factors that could
cause such differences. Such forward-looking statements speak only as of the
date of this Prospectus, and the Company cautions potential investors not to
place undue reliance on such statements.
LIMITED OPERATING HISTORY; SUBSTANTIAL OPERATING LOSSES
The Company commenced operations in March 1995 and has only a limited
operating history upon which an evaluation of its performance can be based.
The Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
operations. The Company has incurred substantial net losses of approximately
$1.7 million, $5.9 million and $4.4 million in 1995, 1996 and the nine months
ended September 30, 1997, respectively. As of September 30, 1997, the Company
had a working capital deficit of $5.8 million, an accumulated deficit of
approximately $12.1 million and shareholders' deficit of $7.4 million. The
Company's current focus is on introducing several enhanced telecommunications
services, and the Company plans to hire additional personnel and to increase
its expenses related to sales and marketing, network infrastructure, technical
resources and customer support. As a result, the Company expects that it will
continue to incur net losses at least through 1998. There can be no assurance
that revenue will grow or that the Company will achieve or sustain
profitability on either a quarterly or annual basis. The Company's results of
operations may be below the expectations of public market analysts and
investors in future quarters, which would likely result in a decline in the
trading price of the Common Stock. The Company believes that period-to-period
comparisons of its results of operations should not be relied upon as
indicators of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RECENT INTRODUCTION AND ONGOING DEVELOPMENT OF VALUE-ADDED SERVICES
Substantially all of the Company's revenues to date have been derived from
providing international call-reorigination services to small- and medium-sized
businesses and reselling international long-distance minutes to other
telecommunications service providers. The Company believes that as
deregulation occurs and competition increases in markets around the world, the
pricing advantage of traditional call-reorigination to most destinations
relative to conventional call-through international long-distance service will
diminish. In order to maintain its existing customer base, attract new
customers and increase its revenues the Company must offer a variety of value-
added telecommunications services, as well as its own call-through service, at
competitive prices. Accordingly, the Company is in the process of developing a
number of value-added telecommunications services such as enhanced voice
services, enhanced fax and business-grade Internet services. The first of
these enhanced services were offered to the Company's customers in November
1997, and to date the Company has not generated significant revenue from these
services. Several other new services described in this Prospectus are still
under development and are not scheduled for implementation until various times
in 1998. It is not uncommon for the introduction of new telecommunications
services to be delayed or occasioned by technical problems. There can be no
assurance that the Company will not encounter
6
<PAGE>
delays or technical problems in the introduction of new services which will
inhibit the Company's ability to compete. Also, there can be no assurance that
the Company will have sufficient capital to complete development and
introduction of all of the enhanced services that it currently plans to offer
to its customers or that the introduction of such services will result in
increased sales. The failure to introduce enhanced telecommunications and
Internet-related services, failures in the systems that would deliver those
services or the absence of demand for such services when introduced would have
a material adverse affect on the Company's ability to achieve or sustain
profitability in the future. See "Business--Services."
NEED FOR ADDITIONAL CAPITAL AND CAPITAL REQUIREMENTS
The Company's efforts to develop and introduce an array of value-added
telecommunications services have required, and will continue to require, the
Company to invest in network infrastructure and systems development. Also, the
Company has incurred substantial losses since inception and expects to
continue to incur losses through at least 1998. The Company believes that,
based upon its present business plan, the net proceeds of this Offering,
together with revenues from operations, will be sufficient to finance
operating losses and the development and introduction of new services and to
meet its other currently planned working capital and capital expenditure
requirements through the end of 1998. However, due to the need to continue to
expand its network operations and service offerings and other factors, the
Company expects that it will need to raise additional capital in future
periods. The Company also intends to seek lease financing for a portion of the
equipment and systems that it acquires in 1998 and beyond, although there can
be no assurance that this financing will be available to the Company when
needed or on acceptable terms. If the Company experiences greater than
anticipated capital requirements, if the implementation of the Company's
operating strategy fails to produce anticipated revenue growth and cash flows,
if lease financing is not available or if additional working capital is
required for any other reason, the Company will be required to obtain
additional capital earlier than currently anticipated. The timing of the need
for additional capital also will be affected by the extent to which the
Company's rescission offer is accepted. See "Rescission Offer." There can be
no assurance that the Company will be able to obtain equity, debt or lease
financing when needed or on terms that the Company finds acceptable. Any
additional equity or debt financing may cause substantial dilution to the
Company's shareholders. If the Company is unable to obtain sufficient funds to
satisfy its capital requirements, it will be forced to reduce the scope of its
expansion plans, curtail operations, dispose of assets or seek extended
payment terms from its vendors, any of which could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
DEPENDENCE ON NEW NETWORK SYSTEMS
The Company's success is dependent upon its ability to deliver high quality,
uninterrupted telecommunications services. During 1997, the Company installed
new switching software and hardware in its Los Angeles switching center. These
facilities did not commence carrying customer traffic until the fourth quarter
of 1997. Prior to implementing these new systems, virtually all of the
Company's revenue was attributable to international call-reorigination
services. Accordingly, successful implementation and reliable operation of
these new systems is essential to the Company's operations. Implementation of
new switching and software systems often is accompanied by a variety of
problems. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Quarterly Results of Operations." There can be no
assurance that these recently installed systems will be adequate to perform
their intended functions or that the Company will not suffer adverse
consequences in connection with their implementation. For example, there can
be no assurance that the Company will not encounter material delays in the
introduction of new services or the provisioning of new customers or new
services to existing customers. There also can be no assurance that the
Company will not encounter difficulties in enhancing, or integrating new
technology into, its systems. The inability of the Company to implement any
required system enhancement, to acquire new systems or to integrate new
technology in a timely and cost effective manner could have a material adverse
7
<PAGE>
effect on the Company's business, financial condition and results of
operations. See "Business--Services" and "--Network and Operations."
DEPENDENCE ON SUPPLIERS
The Company has supply contracts with a number of interexchange carriers for
long-distance telecommunications services. Under these arrangements, and
consistent with industry practice, the Company is subject to the risk of price
changes and service restrictions or cancellations upon short notice. Certain
of these suppliers are or may become competitors of the Company, and such
suppliers are not restricted from competing with the Company. To the extent
that any of these suppliers change their pricing structures, the Company may
be adversely affected. To obtain favorable forward pricing from certain of its
suppliers, the Company has committed to purchase minimum volumes of a variety
of long-distance services during stated periods, whether or not such volumes
are used and, in one case, has agreed to pay a surcharge equal to a percentage
of the Company's shortfall from a specified monthly minimum volume. During
January 1998 the Company's monthly minimum volume commitments and maximum
surcharge totaled approximately $240,000. The failure by the Company to meet
its minimum usage commitments could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company's ability to maintain and expand its business depends, in part, on its
ability to continue to obtain telecommunications services on satisfactory
terms from facilities-based long-distance carriers and the cooperation of
interexchange carriers in initiating and terminating service in a timely
manner. See "Business--Network and Operations" and "--Suppliers."
In the past the Company has from time to time been in arrears on its payment
obligations to its carriers. In October 1997, the Company failed to pay
amounts due to one of its principal long-distance suppliers within the time
period that this carrier customarily had required payment. As a result, this
supplier ceased providing services to the Company and, under the terms of its
agreement with the Company, could demand a termination payment of up to $1.2
million. The Company was able to re-route traffic that previously had been
carried by this supplier without any interruption in service to the Company's
customers. In December 1997, after the Company paid this supplier a
substantial portion of the amounts past due, services were restored. The
Company has negotiated the payment terms of the remaining balance owed and
does not believe that it will be required to pay an amount in excess of that
owed for carrier services provided. As of January 31, 1998, the Company was in
arrears on approximately $558,000 due to this supplier. There can be no
assurance that the Company will not be required to pay a penalty to this or
any other supplier or that the Company will not be in default of its
obligations to its suppliers in the future. If suppliers to the Company were
to decline to continue to carry the Company's traffic, due to non-payment or
otherwise, the Company could experience an interruption in service to its
customers which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
A failure by a supplier to deliver quality services or products on a timely
basis, or the inability of the Company to develop alternative sources if and
as required, could result in delays in the provision of service to the
Company's customers which could have a material adverse effect on the Company.
The Company's remedies against suppliers that fail to deliver services or
products on a timely basis are limited, in many cases, by the Company's desire
to maintain relationships with its suppliers. In addition, as the Company's
suppliers upgrade the technology of their equipment, the Company may encounter
difficulties in integrating the new technology into the Company's network.
The Company will depend in part on the Equant network to provide certain
enhanced telecommunications and business-grade Internet services. If the
Equant network were to suffer operational problems or failure, or is not
expanded to accommodate increased demand for access to the Equant network,
there could be a material adverse effect on the Company. Also, there can be no
assurance that the Company will continue to have access to the Equant network
or that such access will be available to the Company on terms that afford a
favorable gross margin to the Company. If the Company's agreement with Equant
is
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terminated, if such agreement is renegotiated to GlobalTel's disadvantage, or
if Equant is unable to provide the Company with services in accordance with
its agreement with the Company, there could be a material adverse effect on
the Company's business, financial condition and results of operations.
Although certain leased data communications services are currently available
from several alternative suppliers, there can be no assurance that the Company
could obtain substitute services from other suppliers when needed or on terms
the Company finds acceptable. See "Business--Suppliers."
RESCISSION OFFER
Immediately after the closing of this Offering, the Company intends to
commence a rescission offer (the "Rescission Offer") in accordance with the
federal securities laws and the securities laws of the State of Washington
(the "Washington Securities Act") with respect to an aggregate of 527,121
shares of Common Stock (the "Rescission Stock"), $350,000 in aggregate
principal amount of promissory notes (the "Rescission Notes") and warrants to
purchase an aggregate of approximately 29,600 shares of Common Stock issued in
conjunction with the Rescission Stock and Rescission Notes. The Rescission
Notes, the Rescission Stock and the Rescission Warrants are hereinafter
collectively referred to as the "Rescission Securities." The Rescission
Securities were issued or sold by the Company from 1995 through 1997 to
approximately 40 individuals and entities who the Company believes at the time
of purchase were residents of the State of Washington. The Company has filed a
registration statement relating to the Rescission Offer (the "Rescission Offer
Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act").
The Company believes that the Rescission Securities may have been issued or
sold in violation of the registration requirements of the Washington
Securities Act. As a precaution against potential claims by holders of
Rescission Securities, and without admitting non-compliance with the
Washington Securities Act, the Company plans to offer to rescind such prior
issuances and sales by offering to repurchase the Rescission Securities at the
price paid therefor plus interest at the statutory rate of eight percent per
annum from the date of purchase to the expiration of the Rescission Offer. The
price paid will be based upon the price paid for the original security
purchased by the purchaser from the Company, regardless of the type of
Rescission Security currently held by the purchaser. The weighted average
price paid for the Rescission Stock is $4.66 per share. The aggregate price
paid for the Rescission Notes is $350,000. Each of the Rescission Warrants was
issued in conjunction with Rescission Stock or Rescission Notes and for no
separate consideration. Accordingly, the Rescission Warrants must be
surrendered for no separate consideration if the holder of the related
Rescission Securities elects to accept the Rescission Offer with respect to
its Rescission Securities. The aggregate accrued interest with respect to all
of the Rescission Securities as of February 28, 1998 will be approximately
$322,000. If all holders of Rescission Securities were to accept the
Rescission Offer, the Company would be required to make payments aggregating
approximately $3.1 million, plus the aggregate amount of any additional
interest thereon that accrues after February 28, 1998. The Rescission Offer
will expire 15 days after the offer is transmitted. The Company currently
expects to use a portion of the proceeds from this Offering to make payments
under the Rescission Offer, if any are required. Offerees who do not accept
the Rescission Offer will thereafter hold registered Rescission Securities
under the Securities Act which, in the case of the Rescission Stock, will be
freely tradeable by non-affiliates in the public market as of the effective
date of the Rescission Offer Registration Statement.
As of the date hereof, management is not aware of any claims for rescission
against the Company. Also, current and former officers and directors of the
Company holding an aggregate of $1.4 million (including statutory interest
accrued thereon as of February 28, 1998) of the Rescission Securities have
indicated their intent not to accept the Rescission Offer, although no formal
Rescission Offer has been made to them and they have not and may not agree to
reject the Rescission Offer until the Rescission Offer Registration Statement
has been declared effective by the Securities and Exchange Commission and the
Rescission Offer has commenced. There can be no assurance that all or a
substantial portion of the Rescission Securities will not be tendered in
response to the Rescission Offer. Use of a portion of the proceeds of this
Offering in connection with the Rescission Offer will reduce the amount of
working capital available to the Company and require it to seek additional
capital sooner than otherwise might be required. The Rescission Offer is being
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made in order to limit, so far as may be permitted under applicable federal
and state securities laws, the potential liability of the Company with respect
to the offer and sale of the Rescission Securities. Although the Company
believes that the offer and sale of the Rescission Securities were made in
compliance with the registration requirements of federal securities laws, if a
holder of the Rescission Securities were to assert a claim that the Rescission
Securities were sold in violation thereof, the position of the Securities and
Exchange Commission is that liabilities under the federal securities laws are
not terminated by making a rescission offer. Furthermore, notwithstanding the
Rescission Offer, there can be no assurance that the Company will not be
subject to penalties or fines relating to past securities issuances or that
other holders of the Company's securities will not assert or prevail in claims
against the Company for rescission or damages under state or federal
securities laws. See "--Need for Additional Capital and Capital Requirements,"
"Use of Proceeds," "Rescission Offer," "Shares Eligible for Future Sale" and
Note 6 of Notes to the Consolidated Financial Statements.
RISK OF MANAGING GROWTH; RECENT MANAGEMENT CHANGES AND NEW INFORMATION SYSTEMS
The Company's growth has placed, and is expected to continue to place, a
significant strain on the Company's management, administrative, operational,
financial and technical resources and on its systems and controls. The Company
has made recent changes in executive-level management positions. Due in part
to the need to reduce expenses, since August 1997 four executive officers of
the Company discontinued full-time employment. Certain of the Company's senior
management personnel have worked together only a short time. The Company
believes that it will need, both in the short term and the long term, to hire
additional qualified administrative and management personnel in all functional
areas. Failure to locate, hire and retain such qualified personnel or failure
to manage the Company's growth properly could have a material adverse effect
on the Company's business, financial condition or results of operations. See
"--Dependence on Key Personnel; Need to Hire Additional Qualified Personnel"
and "Business--Management."
The Company recently has implemented new financial reporting, management
information and billing systems. As a telecommunications service provider, the
Company must record and process millions of call detail records quickly and
accurately to produce customer bills and financial reports in a timely manner.
Demands on the Company's information systems will increase significantly if
the Company realizes anticipated growth and expands its customer base. There
can be no assurance that the Company's information systems will be adequate as
the volume of customer traffic increases or that the Company will not suffer
adverse consequences should such systems fail to operate effectively. In
addition, the Company has not previously reported financial results on a
quarterly basis and there can be no assurance that the Company will not
encounter material delays or errors in billing of customers or in financial
reporting. While the Company believes that its information systems are
sufficient for its current operations, it will be necessary to expand the
capacities and capabilities of its systems as the Company grows. There can be
no assurance that the Company will be able to do so, and the failure to
implement enhancements or to make the necessary investments in the Company's
information systems in a timely fashion could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Management Information Systems."
COMPETITION
The global telecommunications industry is extremely competitive and is
characterized by rapid regulatory and technological change. The Company's
success depends upon its ability to compete with a variety of
telecommunications providers in each of its markets, including with global
alliances between and among some of the world's largest telecommunications
carriers. Other potential competitors include cable television companies,
wireless communications providers, Internet service providers ("ISPs"),
electric and other utilities with rights of way, large end users that have
private networks and new entrants focused upon niche market opportunities. The
Company believes that such competition will intensify. Many of the Company's
current or potential competitors have substantially greater financial,
marketing and other resources than the Company. If the Company's competitors
or potential competitors devote significant additional resources to offering
telecommunications services to the Company's target customer base, such action
could have a material
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adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be able to compete
successfully against its current or future competitors.
Currently, the Company competes with providers and other marketers of
international call-reorigination services, ITOs and other marketers of long-
distance telephone service. Because of their close ties to ITOs, regulatory
authorities often can be pressured to refrain from adopting policies and
granting regulatory approvals that would result in increased competition for a
local ITO. If an ITO were to successfully pressure its local regulator, the
Company could be denied regulatory approval in a jurisdiction in which it
otherwise would be permitted to offer certain services. Any delay in
obtaining, or failure to obtain, approval in such jurisdictions could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's competitors for basic and enhanced telecommunications services
include some of the world's largest telecommunications providers, such as AT&T
Corp. ("AT&T"), MCI Communications Corporation ("MCI"), Sprint Corporation
("Sprint"), Worldcom Inc. ("Worldcom"), Cable & Wireless p.l.c. and British
Telecommunications P.L.C. and other global telecommunications providers
including USA Global Link, Inc., Telegroup, Inc. and IDT Corporation. In
addition, numerous smaller carriers have emerged, both in the United States
and in newly deregulated markets around the world, many of which specialize in
offering international telephone services similar to the Company's call-
reorigination services.
Competition for customers in the telecommunications markets in which the
Company operates is primarily based on price, and to a lesser extent on the
type and quality of services offered. The Company anticipates that
deregulation and increased competition will result in decreased prices for
telecommunications services. The Company believes that the effects of such
decreases will be at least partially offset by increased telecommunications
usage and decreased costs. However, to the extent that this does not occur,
the Company's business, financial condition and results of operations could be
materially and adversely affected.
The market for value-added data services, such as the business-grade
Internet services under development by the Company, is extremely competitive,
and the Company expects that competition will intensify in the future. The
Company's current and prospective competitors in the value-added services
business include many large companies that have substantially greater market
presence and financial, technical, marketing and other resources than the
Company. In addition to the Company's traditional telecommunications
competitors, the Company's value-added services business competes or will
compete with two additional categories of competitors: (i) ISPs, including on-
line service providers such as America Online, Inc., UUNET Technologies, Inc.,
Netcom On-line Communication Services, Inc., Bolt Beranek & Newman, Inc.,
Microsoft Corporation, and other national and regional Internet providers,
that provide public access to the Internet and limited business-grade access
and services; and (ii) enhanced messaging providers, including a number of
newer companies, such as Xpedite System, Inc., FaxSav Incorporated and Premier
Technologies, Inc., that were recently established to provide niche services
and have grown by expanding their service offerings. There can be no assurance
that the Company will have the financial resources, technical expertise or
marketing and support capabilities to compete successfully in the market for
value-added data services.
The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications
companies, will enter the value-added services market, resulting in even
greater competition. In addition, the ability of some of the Company's
competitors to bundle other services and products with VPN, global roaming
services or both could place the Company at a significant competitive
disadvantage. Increased competition in the value-added services market could
result in significant price competition, which in turn could result in
significant reductions in the average selling price of the Company's value-
added services. In addition, competition could cause the Company to incur
increased selling and marketing expenses, which could adversely affect the
Company's profitability. There can be no assurance that the Company will be
able to offset the effects of any such price reductions through an increase in
the number of its customers, higher revenues from enhanced services, cost
reductions or otherwise. Increased competition, price or otherwise, could
result in erosion of the Company's customer base and adversely affect the
Company's business, financial condition and results of operations. See
"Business--Competition."
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FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have fluctuated in the past,
primarily as a result of the evolution of the Company's business, and may
fluctuate significantly in the future as a result of a variety of factors,
some of which are outside of the Company's control. These factors include:
pricing changes; changes in the mix of services sold or channels through which
those services are distributed; seasonality; changes in user demand; customer
terminations of service; capital expenditures and other costs relating to the
expansion of the Company's network; the timing and costs of any acquisitions
of customer bases, businesses, services or technologies; the timing and costs
of selling and marketing efforts; the effects of government regulation and
regulatory changes; and specific economic conditions in the telecommunications
industry. These factors also could have a material adverse effect on the
Company's business, results of operations and financial condition. See "--
Limited Operating History; Substantial Operating Losses" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RAPID CHANGES IN TECHNOLOGY
The telecommunications industry is characterized by rapidly changing
technology, evolving industry standards, emerging competition and frequent new
service and other product introductions. Examples of some newly developed
technologies include satellite-based systems, such as those proposed by
Iridium World Communications Ltd., GlobalStar Telecommunications Limited and
Teledesic Corp., utilization of the Internet for voice and data transmission
and digital wireless communications systems. There can be no assurance that
the Company can successfully identify new service opportunities and develop
and bring new products and services to market in a timely and cost-effective
manner, or that products, services or technologies developed by others will
not render the Company's products, services or technologies noncompetitive or
obsolete. In addition, there can be no assurance that product or service
developments or enhancements introduced by the Company will achieve or sustain
market acceptance or that the Company will be able to address the
compatibility and interoperability issues raised by technological changes or
new industry standards. See "Business--Competition."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company's strategy is to focus on international markets. In many second-
tier markets in which the Company seeks to market its services, the national
ITO controls access to the local networks, enjoys better brand recognition and
customer loyalty, and possesses significant operational economies, including
operating agreements with other ITOs. Moreover, an ITO may take many months
before allowing competitors, such as the Company, to interconnect to its
switches within the target market. There can be no assurance that the Company
will be able to obtain the permits and operating licenses required to operate,
obtain access to local transmission facilities or market, sell and deliver
competitive services in these markets. In addition, pursuit of international
growth opportunities may require significant investments for extended periods
before returns, if any, on such investments are realized.
The Company's operations also will be subject to the wide range of general
business risks associated with international operations, including unexpected
changes in legal and regulatory requirements; changes in tariffs, exchange
rates and other barriers; political and economic instability; restrictions on
repatriation of funds or profits from foreign markets; long accounts
receivable payment cycles in certain countries; difficulty in protecting the
Company's intellectual property; potentially adverse tax consequences and the
regulation of ISPs by foreign regulatory authorities.
Although the Company's sales to date have been denominated in U.S. dollars,
the value of the U.S. dollar in relation to foreign currencies also may
adversely affect the Company's sales to international customers. To the extent
the Company changes its pricing practices to denominate prices in foreign
currencies, the Company will be exposed to increased risks of currency
fluctuation. Any such fluctuation could have a material adverse effect on the
Company's earnings or assets when translated into U.S. dollars. Although the
Company has not
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entered into foreign exchange contracts to hedge intercompany exchange
transactions, it may do so in the future. Additionally, the Company generally
will be subject to taxes in foreign countries where the Company operates. The
Company's ability to claim a foreign tax credit against its U.S. federal
income taxes is subject to various limitations that could result in a high
effective tax rate on the Company's earnings. There can be no assurance that
laws or administrative practice relating to taxation, foreign exchange or
other matters in countries in which the Company operates or will operate will
not change in a manner adverse to the Company. There can be no assurance that
such factors will not have a material adverse effect on the Company's future
operations and, consequently, on the Company's business, financial condition
and results of operations.
The Company is subject to the Foreign Corrupt Practices Act ("FCPA"), which
generally prohibits U.S. companies and their intermediaries from bribing
foreign officials for the purpose of obtaining or keeping business. The
Company may be exposed to liability under the FCPA as a result of past or
future actions taken without the Company's knowledge by agents, strategic
partners and other intermediaries. Such liability could have a material
adverse effect on the Company's business, financial condition and results of
operations.
REGULATORY RISKS
The Company's call-reorigination operations are subject to the domestic laws
and regulations in the foreign countries in which the Company provides
services. Countries that have declared call-reorigination services illegal
have, at times, enforced their laws against operators with offices or
representatives in their respective territories. These enforcement actions
have ranged from disconnection of the operators' lines to imprisonment of the
operators' local marketing representatives. The Company is not able to predict
whether countries in which it provides services will consider its call-
reorigination services illegal under their respective laws or will change
their laws to outlaw these services, nor can the Company predict what actions
foreign governments might take in the enforcement of these laws. There can be
no assurance that the Company's call-reorigination services will not be found
illegal by a foreign jurisdiction, and any determination of illegality could
have a material adverse effect on the Company's business, financial condition
and results of operations.
There is also a risk that adverse legal developments overseas relating to
traditional call back services could have consequences for the Company in the
United States. The Company provides its call-reorigination services to
customers in foreign countries using a number of methods. Some methods involve
completed calls and other communications to the United States from foreign
countries, and other methods, such as traditional call back service, involve
incomplete calls that avoid the high international rates offered by a national
ITO by providing a dial tone from a deregulated country, typically the United
States. A substantial number of countries consider call-reorigination adverse
to the interests of their national telecommunications sectors and in some
cases, these countries have passed laws to make traditional call back services
illegal.
In June 1995, the Federal Communications Commission ("FCC") issued an order
stating that it would consider enforcement action against operators based in
the United States engaged in call-reorigination by means of the traditional
call back method in countries where this activity is expressly prohibited. The
FCC confirmed in the order that call-reorigination by means of traditional
call back service does not violate either United States domestic law or
international law. Under the FCC order, a party requesting enforcement
assistance from the FCC must provide sufficient documentation of the
illegality of traditional call back service and detailed evidence of the
operator's violation of the law by virtue of its provision of traditional call
back services in the country. The FCC also requires the party to provide
documentation of the declaratory or enforcement action taken by its national
authorities against the operator before requesting the FCC's assistance in
enforcing the country's laws against the operator. At November 30, 1997,
31 countries had filed documents with the FCC alleging that certain forms of
call-reorigination services violate their respective domestic laws. Of those
31 countries, only the Philippines and Saudi Arabia had fully complied with
the FCC's documentation requirements. Sales by agents located in the
Philippines and Saudi Arabia represented approximately 2.2% and 1.4% of the
Company's call-reorigination revenues and total revenues during the first nine
months of 1997, respectively, and revenues from agents located in those 31
countries represented
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approximately 11.7% and 7.5% of the Company's call-reorigination revenues and
total revenues during the first nine months of 1997, respectively. To date, the
FCC has not specified the types of actions it might take against an operator,
but possible enforcement remedies include the issuance of a cease-and-desist
order, imposition of a monetary sanction or, in an extreme case, revocation of
the operator's Section 214 license. The FCC recently took enforcement action by
revoking an operator's Section 214 license in a case involving the Philippines.
The Company provides call-reorigination services in certain of these countries.
Any enforcement action taken by the FCC, in addition to any actions taken by
the foreign country's authorities, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Within the United States, the interstate and international telecommunications
services currently provided by GlobalTel are subject to the exclusive
jurisdiction of the FCC. In the event that the Company decides to offer
intrastate telecommunications services, such activity will be subject to the
jurisdiction of the individual states in which the Company provides such
services. In the majority of states it is necessary to obtain a certificate of
public convenience and necessity from the appropriate state agency prior to
offering intrastate telecommunications services. Should the Company decide to
provide such services, it would apply for and obtain the required certificates
and any other approvals prior to the time it offers any intrastate
telecommunications services. There can be no assurance that the Company will be
successful in obtaining such certificates and approvals. See "Business--
Regulation--Telecommunications."
Adverse regulatory developments associated with the value-added services the
Company expects to provide to its customers could also pose a risk to the
Company's operations. In the United States and abroad, enhanced and value-added
services are essentially unregulated. The FCC's Computer II decision in 1980
and the Telecommunications Act of 1996 (the "1996 Telecommunications Act")
establish that enhanced services of the type provided by the Company are
outside the definition of regulated telecommunications or common carrier
services. The Company's enhanced services also are exempt from local access
charges pursuant to FCC rules. This exemption, however, has been threatened
from time to time both by Congress and the FCC. In addition, as part of the
1996 Telecommunications Act, all telecommunications operators providing certain
domestic telecommunications services are required to make contributions to the
Universal Service Fund established thereunder, which provides a subsidy to
facilitate the provision of telecommunications services to high-cost areas.
While the Company's current operations do not subject it to such requirement,
it is possible that legislation could be introduced that could similarly
require providers of Internet, intranet or other value-added services that are
not considered telecommunications operators under the 1996 Telecommunications
Act to contribute to the Universal Service Fund. Although to date no such
legislation has been introduced, a law requiring the Company to contribute to
the Universal Service Fund would result in higher costs for the Company, and
there could be a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, if the FCC were to eliminate the
local access charge exemption, the Company's business, financial condition and
results of operations could be materially adversely affected. While the Company
believes that the possibility appears at the present to be remote, Congress or
the FCC may in the future change the regulatory status of enhanced data and
value-added services. The Company cannot predict the impact, if any, if any
that future regulation or regulatory changes may have on the Company's enhanced
services business. See "Business--Regulation--Value-Added Services."
Local laws and regulations differ significantly among the jurisdictions in
which the Company operates, and the interpretation and enforcement of such laws
and regulations vary or are often based on the informal views of the local
ministries which in some cases are subject to influence by the national ITO.
There can be no assurance that the Company has accurately predicted the
enforcement of applicable laws and regulations or regulatory and enforcement
trends in a given jurisdiction or will be found in compliance with all such
laws and regulations. Failure to predict the enforcement of applicable laws
accurately, or incorrect interpretations of applicable laws and regulations,
could cause the Company to lose or to be unable to obtain regulatory approvals
necessary for it to be able to provide certain of the services the Company
markets. Such failure could result in material adverse effects on the Company's
business, financial condition and results of operations.
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DEPENDENCE ON INDEPENDENT SALES AGENTS
The Company's success depends in significant part on its ability to recruit,
retain and motivate a network of independent sales agent. For the nine months
ended September 30, 1997, 75 independent agents were responsible for
generating approximately 59% of the Company's call-reorigination revenues.
Most of the Company's agents are not subject to minimum sales quotas, are free
to market services offered by competitors of the Company and can terminate
their relationship with the Company at any time. The Company competes with
other organizations, including other telecommunications services providers, in
recruiting independent agents. Moreover, the Company's ability to retain and
motivate its current agents, which can be affected by commission rates payable
by the Company, telecommunications services and technical and marketing
support available from the Company, general economic conditions and other
intangible factors, is uncertain. If an independent agent decided to
discontinue its relationship with the Company, it is likely that such agent
would attempt to move its clients to an alternate telecommunications services
supplier. There can be no assurance that the Company's current independent
sales agents will continue to distribute the Company's services or do so
successfully. Failure of the Company to effectively develop and manage its
agent network and any loss of the Company's more productive agents could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Sales, Marketing and Customer Service."
RISK OF NETWORK FAILURE
The success of the Company is largely dependent upon the efficient and
uninterrupted operation of its network infrastructure. While the Company has
established a disaster recovery plan and has a fully redundant network
switching center, the Company's systems and operations remain vulnerable to
damage or interruption from fire, earthquake or other natural disaster and
from power loss, telecommunications failure, break-ins and similar events. The
Company's switching center is located in Los Angeles, California, and the
Company has additional equipment located in Hong Kong, Mexico City and
Seattle, Washington. Although the Company carries business interruption
insurance, there can be no assurance that such insurance will be sufficient to
cover any losses suffered by the Company. In addition, despite the
implementation of network security measures by the Company, its servers are
vulnerable to computer viruses, electronic break-ins and similar disruptions,
any of which could lead to interruptions, delays or loss of customer data. See
"--Security Risks." The occurrence of any of the foregoing risks could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In the first two quarters of 1997 the Company experienced temporary
technical and operational difficulties associated with the relocation of its
primary switching platform from Las Vegas to Los Angeles. As the Company
attempts to expand its network and data as traffic grows, there will be
increased stress on its network equipment and traffic management systems.
There can be no assurance that the Company will not experience failure of all
or part of its network. The Company's operations also are dependent on its
ability to successfully expand its network and integrate new and emerging
technologies and equipment into its network, which are likely to increase the
risk of system failure and cause unforeseen strains upon the network.
Significant or prolonged system failures could damage the reputation of the
Company and result in the loss of customers. Such damage or losses could have
a material adverse effect on the Company's ability to obtain new customers and
on the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Network Infrastructure."
DEPENDENCE ON KEY PERSONNEL; NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company is highly dependent on the technical and management skills of
its key employees, including technical, sales, marketing, financial and
executive personnel, and on its ability to identify, hire and retain
additional qualified personnel. Competition for such personnel is intense and
there can be no assurance that the Company will be able to retain existing
personnel or hire additional qualified personnel. The failure to retain and
attract the necessary technical, managerial, financial, marketing and customer
service personnel
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could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's performance also depends on
the Company's ability to retain and motivate its executive officers and key
employees, several of whom have worked together for only a short time. The
Company has entered into employment agreements with five of its senior
officers. The loss of key personnel could have a material adverse effect on
the Company's business, financial condition and results of operations. See "--
Risk of Managing Growth; Recent Management Changes and New Information
Systems" and "Management--Officers and Directors" and "--Employment
Agreements."
RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
The Company may, in the future, acquire or seek to acquire customer bases
and businesses from, make investments in, or enter into strategic alliances
with, companies that have customer bases, switching capabilities or existing
networks in the Company's current or target markets. In June 1997, the Company
entered into a letter of intent with two Chinese companies to explore the
potential of jointly providing telecommunications services in the People's
Republic of China through an entity in which the Company would potentially
have an equity interest. See "Certain Transactions." However, there can be no
assurance that such venture will be consummated or be successful. Any future
acquisitions, investments, strategic alliances or related efforts will be
accompanied by the risks commonly encountered in such transactions or efforts.
Such risks include, among others, the difficulty of identifying appropriate
acquisition candidates; the difficulty of assimilating the operations and
personnel of the respective entities; the potential disruption of the
Company's ongoing business; the inability of management to capitalize on the
opportunities presented by acquisitions, investments, strategic alliances or
related efforts; the failure to successfully incorporate licensed or acquired
technology and rights into the Company's services; the inability to maintain
uniform standards, controls, procedures and policies; and the impairment of
relationships with employees and customers as a result of changes in
management. Acquired operations typically operate independent marketing,
customer support, billing systems and other functions. Any acquisition by the
Company could result in difficulties in the integration and consolidation of
customer bases or operations. Pending such integration and consolidation, it
would be necessary for the Company to maintain separate billing systems and
other functions of the acquired operation, which could cause inefficiencies
and significant operational complexity and expense, increase the risk of
billing delays and financial reporting difficulties, and impair the Company's
efforts to cross-sell the products and services of the acquired operation.
Additionally, in connection with an acquisition, the Company could experience
rates of customer attrition that would be significantly higher than the rate
of customer attrition that it ordinarily experiences. Further, to the extent
that any such transaction involves customer bases or businesses located
outside the United States, the transaction would involve the risks associated
with international operations. There can be no assurance that the Company
would be successful in overcoming these risks or any other problems
encountered with such acquisitions, investments, strategic alliances or
related efforts. See "--Risks Associated with International Operations."
VALUE-ADDED AND SALES TAX COLLECTION
The Company does not currently collect value-added tax ("VAT"), sales tax or
other similar taxes (other than federal excise tax) in respect of any of its
services. In addition, the rules for imposition of VAT vary from country to
country. For example, some EU member states deem telecommunications services
provided by U.S.-based companies to be performed outside the EU and,
therefore, exempt from VAT. Other EU member states, however, impose VAT on
telecommunications services provided by non-EU based companies. To the extent
that the Company's services are, and in the future become, subject to VAT, the
Company's competitive price advantage with respect to those businesses and
other customers required to pay VAT on services provided by the Company will
be reduced. Such reduction could have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover,
one or more states may seek to impose sales tax collection obligations on out-
of-state companies such as the Company which engage in telecommunications
services. A successful assertion by one or more states or any foreign country
that the Company should collect VAT, sales or other similar taxes on the sale
of its services could have a material adverse effect on the Company's
business, financial condition and results of operations.
16
<PAGE>
SECURITY RISKS
Despite the implementation of network security measures, such as limiting
physical and network access to its routers, the Company's network
infrastructure is vulnerable to computer viruses, break-ins and similar
disruptions. Such security breaches could lead to interruptions or delays in
or cessation of service to the Company's value-added services customers.
Furthermore, such events could jeopardize the security of confidential
information stored in the computer systems of the Company's customers and
other parties connected to the Internet, which may deter potential subscribers
and subject the Company to possible liability. Alleviating problems caused by
computer viruses, break-ins or other security breaches may require significant
expenditures of capital and resources by the Company, which could have a
material adverse effect on the Company. Moreover, until more comprehensive
security technologies are developed, the security and privacy concerns of
existing and potential customers may inhibit the growth of the Internet
service industry in general and the Company's customer base and revenues in
particular.
CONTROL BY EXISTING SHAREHOLDERS
Immediately upon completion of this Offering, assuming an initial public
offering price of $9.00 per share, an aggregate of approximately 22.6% of the
outstanding Common Stock (approximately 21.4% if the Underwriters' over-
allotment option is exercised in full) will be beneficially owned by the
Company's officers and directors. Although such shareholders will not have the
ability to control matters requiring shareholder approval, they may have the
ability to influence the affairs and management of the Company and the
elections of directors. This may have the effect of delaying, deferring or
preventing a change in control of the Company and could limit the price that
certain investors might be willing to pay for the Common Stock. See
"Management" and "Principal Shareholders."
SERVICE OF LEGAL PROCESS AND ENFORCEMENT OF JUDGMENTS ON FOREIGN PERSONS
Immediately upon completion of this Offering, approximately 17% of the
Company's Common Stock will be owned by individuals and entities residing or
domiciled outside of the United States. Steven S.V. Wong and Paul van de Plas,
both directors of the Company, will beneficially own approximately 12% and
less than 1%, respectively, of the Company's outstanding Common Stock. In
addition, Hare & Co. will hold approximately 4% of the Company's outstanding
Common Stock as a nominee for Security Kapitalage AG, an Austrian entity.
Service of process upon directors and shareholders of the Company who reside
outside the United States may be difficult to obtain. Furthermore, judgments
obtained in the United States against directors or shareholders of the Company
who reside outside the United States may not be enforceable or collectible
within the United States or in the country in which they reside.
NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE; POSSIBLE
ILLIQUIDITY OF TRADING MARKET
There has been no public market for the Company's Common Stock prior to the
Offering. The Company has applied for listing of the Common Stock on the
American Stock Exchange ("Amex"). The initial public offering price has been
determined through negotiations between the Company and the Representatives
and may not be indicative of the market price for the Common Stock following
the Offering. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. There can be no assurance that
an active trading market will develop or be sustained or that the market price
of the Common Stock will not decline below the initial public offering price.
Even if an active trading market does develop, the market price of the Common
Stock following the Offering may be highly volatile. Factors such as
variations in the Company's revenue, earnings and cash flow and announcements
of new service offerings, technological innovations or price reductions by the
Company, its competitors or providers of alternative services could cause the
market price of the Common Stock to fluctuate substantially. In addition, the
stock market in general, and the Amex and the market for telecommunications
companies in particular, has experienced extreme price and volume fluctuations
that often have been unrelated or disproportionate to the operating
performance of such companies. These broad market and industry factors may
materially and
17
<PAGE>
adversely affect the market price of the Common Stock, regardless of the
Company's operating performance. In the past, following periods of volatility
in the market price of a company's securities, securities class-action
litigation often has been instituted against such company. Such litigation, if
commenced, could result in substantial costs and a diversion of management's
attention and resources, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
The number of shares of Common Stock available for resale in the trading
market is limited because of trading restrictions on shares of Common Stock
owned by affiliates and "lock-up" agreements between certain of the Company's
officers, directors and securityholders and Cruttenden Roth Incorporated
("Cruttenden Roth"). Moreover, if the Company should continue to experience
losses from operations, it may be unable to maintain the standards for
continued quotation on the Amex, and the Common Stock could be subject to
removal therefrom. If such removal were to occur, trading, if any, in the
Common Stock henceforth would be conducted in the over-the-counter market on
an electronic bulletin board established for securities that do not meet the
listing requirements for the Amex, or in what are commonly referred to as the
"pink sheets." As a result, an investor would find it more difficult to
dispose of, or to obtain accurate quotations for the price of, the Company's
securities. In addition, such removal would subject the Company's securities
to so-called "penny stock" rules that impose additional sales practice and
market making requirements on broker-dealers who sell and/or make a market in
such securities. Consequently, removal from the Amex could affect the ability
or willingness of broker-dealers to sell and/or make a market in the Company's
securities and the ability of purchasers of the Company's securities to sell
their securities in the secondary market. In addition, if the market price of
the Company's Common Stock falls to below $5.00 per share, the Company may
become subject to certain penny stock rules even if still quoted on the Amex.
While such penny stock rules should not affect the quotation of the Company's
Common Stock on the Amex, such rules may further limit the market liquidity of
the Common Stock and the ability of investors to sell securities in the
secondary market.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
by existing shareholders following the Offering could adversely affect the
market price for the Company's Common Stock. The number of shares of Common
Stock available for sale in the public market is limited by restrictions under
the Securities Act and lock-up agreements under which the Company's officers,
directors and certain security holders have agreed not to sell or otherwise
dispose of any of their shares for a period of 270 days after the date of this
Prospectus without the prior written consent of Cruttenden Roth. The 2,000,000
shares offered hereby and, upon the effectiveness of the Rescission Offer
Registration Statement, any shares of Common Stock subject to the Rescission
Offer will be freely tradable, except to the extent acquired by affiliates of
the Company or subject to lock-up agreements with Cruttenden Roth. The
approximately 2,478,103 remaining shares of Common Stock outstanding upon
completion of this Offering (or any securities exercisable for or convertible
into the Company's Common Stock) are "restricted securities" ("Restricted
Shares") within the meaning of Rule 144 under the Securities Act. Restricted
Shares may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rules 144 or 701 under the Securities
Act. Sales of Restricted Shares in the public market, or the availability of
such shares for sale, could adversely affect the market price of the Common
Stock. The number of shares that will be available for sale in the public
market will be as follows: (i) approximately 337,512 Restricted Shares will be
freely tradeable upon completion of this Offering; (ii) beginning 270 days
after the effective date of the Registration Statement of which this
Prospectus is a part (the "Effective Date"), approximately 2,068,490
Restricted Shares will become eligible for sale in the public market, subject
in certain cases to volume limitations and other resale restrictions pursuant
to Rule 701 and Rule 144; and (iii) one year after the closing of this
Offering, the approximately 72,101 remaining Restricted Shares will be
eligible for sale in the public market. See "Shares Eligible for Future Sale"
and "Underwriting."
ANTITAKEOVER PROVISIONS
Following the Offering, the Company's Board of Directors will have the
authority, without shareholder approval, to issue up to 5,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and
18
<PAGE>
restrictions of such shares without any further vote or action by the
Company's shareholders. This authority, together with certain other provisions
of the Company's amended and restated articles of incorporation, may have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company,
even if shareholders purchasing shares in the Offering may consider such
change in control to be in their best interests. See "Description of
Securities."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will suffer an immediate and
substantial dilution of $6.93 per share in the net tangible book value per
share of the Common Stock from the assumed initial public offering price of
$9.00 per share. See "Dilution."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$15.4 million ($17.8 million if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $9.00 per
share and after deducting the estimated underwriting discounts and commissions
and other estimated offering expenses payable by the Company. The Company
plans to use (i) approximately $5.6 million to repay outstanding notes which
bear interest at either ten or 12 percent, of which $4.5 million is due upon
the closing of this Offering; (ii) approximately $6.5 million for capital
expenditures and (iii) the remaining net proceeds for working capital and
general corporate purposes. Additionally, a portion of the proceeds will be
used to fund the repurchase of any securities of the Company tendered in
connection with the Rescission Offer in an approximate amount of up to $2.8
million, plus approximately $322,000 of statutory interest (as of February 28,
1998), of which up to approximately $1.3 million may be paid to officers and
directors of the Company and their affiliates if they accept the Rescission
Offer. See "Rescission Offer." Approximately $2.4 million of the $5.6 million
of notes to be repaid by the Company using the proceeds of the Offering will
be paid to Directors of the Company and their affiliates. The proceeds from
the sale of the $5.6 million of notes to be repaid by the Company were
originally used by the Company for working capital or to repay debt incurred
for working capital. The Company also may, if the opportunity arises, use an
unspecified portion of the net proceeds to acquire or invest in complementary
companies, technologies or products. Except for the Company's letter of intent
with two Chinese companies to explore the potential of jointly providing
telecommunications services in the People's Republic of China through an
entity in which the Company would potentially have an equity interest, the
Company has no other present understandings, commitments or agreements with
respect to any potential acquisitions or investments. Pending use of the net
proceeds, the Company intends to invest such funds in short-term, interest
bearing, investment grade securities. See "Risk Factors--Need for Additional
Capital and Capital Requirements," "--Risks Associated with Acquisitions,
Investments and Strategic Alliances," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Certain Transactions."
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock and
does not expect to pay dividends in the foreseeable future. The Company
currently anticipates that it will retain all available earnings for the
operation and expansion of its business. Any future declaration of dividends
will be subject to the discretion of the Board of Directors of the Company and
will depend upon the Company's operating results, financial condition, capital
requirements, general business conditions, and such other factors as the Board
of Directors deems relevant.
20
<PAGE>
DILUTION
The net tangible book value of the Company as of September 30, 1997 was
approximately $(7.9 million), or $(2.82) per share of Common Stock. The net
tangible book value per share represents the amount of the Company's total
tangible assets less the amount of its total liabilities, divided by the
number of shares of Common Stock issued and outstanding (after giving effect
to (i) the Offering Issuances (see footnote (1) to "The Offering"), (ii) the
issuance of 191,112 shares of Common Stock upon the conversion of certain
promissory notes and payables and the conversion and exercise of certain
warrants into Common Stock and (iii) the issuance of 14,000 shares of Common
Stock to certain directors of the Company). Without taking into account any
changes in net tangible book value after September 30, 1997, other than to
give effect to the sale of the shares of Common Stock offered hereby and the
receipt and application of the proceeds therefrom at an assumed initial public
offering price of $9.00 per share, and after deducting the underwriting
discounts and commissions and other estimated offering expenses payable by the
Company, the net tangible book value of the Company as adjusted to give effect
to the Offering as of September 30, 1997 would have been $9.9 million, or
approximately $2.07 per share of Common Stock. This represents an immediate
increase in net tangible book value of $4.89 per share to existing
shareholders and an immediate dilution in net tangible book value of $6.93 per
share to new investors purchasing Common Stock in the Offering. The following
table illustrates this per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed public offering price per share....................... $9.00
Net tangible book value per share before the Offering......... $(2.82)
Increase per share attributable to new investors.............. 4.89
------
As adjusted net tangible book value per share after the
Offering..................................................... 2.07
-----
Dilution per share to new investors........................... $6.93
=====
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1997, the number of shares of Common Stock purchased from the Company, the
total consideration paid therefor and the average price per share paid by
existing shareholders and by new investors (assuming the sale of the 2,000,000
shares of Common Stock offered hereby at an initial public offering price of
$9.00 per share before deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company):
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
----------------- ------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... 2,799,356 58% $12,342,990 41% $3.77
New investors.................. 2,000,000 42 18,000,000 59 9.00
--------- --- ----------- ---
Total........................ 4,799,356 100% $30,342,990 100%
========= === =========== ===
</TABLE>
The above computations exclude (i) 700,000 shares of Common Stock reserved
for issuance under the 1996 Plan, of which 528,426 shares are subject to
options granted as of the date of the Offering at a weighted average exercise
price of $7.35 per share, assuming an initial public offering price of $9.00
per share, (ii) 300,000 shares of Common Stock reserved for issuance under the
Company's Employee Stock Purchase Plan and (iii) 200,000 shares of Common
Stock issuable upon exercise of the Representatives' Warrants. See
"Management--Benefit Plans" and "Underwriting." To the extent that any options
or warrants are exercised, there will be further dilution to new investors.
See "Management--Benefit Plans" and "Underwriting."
21
<PAGE>
CAPITALIZATION
The following table sets forth the (i) actual capitalization of the Company
as of September 30, 1997; (ii) pro forma capitalization of the Company after
giving effect to (A) the issuance of 191,112 shares of Common Stock upon the
conversion of certain promissory notes and trade payables and the conversion
and exercise of certain warrants into shares of Common Stock, (B) the issuance
of warrants to certain consultants, advisors and noteholders of the Company,
(C) the issuance of 14,000 shares of Common Stock to certain directors of the
Company, (D) the issuance of certain promissory notes, (E) accrued dividends
on the Preferred Stock, (F) accrued interest on certain promissory notes and
(G) the adjustment to fair market value of the Cashless Warrants, assuming an
initial public offering price of $9.00 per share and (iii) pro forma
capitalization of the Company as adjusted to give effect to (A) the Offering
Issuances and (B) the sale by the Company of the 2,000,000 shares offered
hereby at an assumed initial public offering price of $9.00 per share and the
receipt and application of the net proceeds therefrom. See footnote (1) to
"The Offering." This table should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash........................................... $ 237 $ 3,475 $ 14,160
======== ======== ========
Working capital(1)............................. $ (3,788) $ (452) $ 10,745
======== ======== ========
Long-term debt, including current maturities... $ 4,155 $ 7,152 $ 1,670
-------- -------- --------
Common stock subject to recission; par value
$0.05, 386,497 issued and outstanding......... 1,850 1,850 1,850
-------- -------- --------
Shareholders' (deficit) equity:
Series A convertible preferred stock; par
value $0.01, 5,000,000 shares authorized;
275,000 shares issued and outstanding; pro
forma and pro forma as adjusted,
5,000,000 shares authorized, no shares
issued and outstanding...................... 987 1,015 --
Common stock; par value $0.05, 50,000,000
shares authorized; 1,133,110, 1,338,222 and
4,412,859 shares issued and outstanding;
respectively(2)............................. 2,389 3,277 25,914
Common stock warrants........................ 1,334 2,981 1,392
Accumulated deficit(3)....................... (12,123) (13,308) (16,836)
-------- -------- --------
Total shareholders' (deficit) equity......... (7,413) (6,035) 10,470
-------- -------- --------
Total capitalization....................... $ (1,408) $ 2,967 $ 13,990
======== ======== ========
</TABLE>
- --------
(1) Excludes current maturities of long-term debt.
(2) Excludes (i) 700,000 shares of Common Stock reserved for issuance under
the 1996 Plan, of which 528,426 shares are subject to options outstanding
as of the date of the Offering, at a weighted average exercise price of
$7.35 per share, assuming an initial public offering price of $9.00 per
share, (ii) 300,000 shares of Common Stock reserved for issuance under the
Company's Employee Stock Purchase Plan and (iii) 200,000 shares of Common
Stock issuable upon exercise of the Representatives' Warrants. See
"Management--Benefit Plans" and "Underwriting."
(3) Accumulated deficit has been adjusted to give effect to the following
transactions as if they had occurred on September 30, 1997 (dollars in
thousands, except per share amounts): (i) approximately $247 of
compensation expense recognized from the issuance of 14,000 shares of
Common Stock and the granting of warrants to purchase 30,829 shares of
Common Stock at an exercise price of $0.05 per share; (ii) approximately
$728 of interest expense recognized from adjusting the value of the
Cashless Warrants based on the market value of Common Stock as of the
closing of this Offering (assumed to be $9.00 per share); (iii)
approximately $182 of accrued interest recognized on the Full Coverage
Bridge Notes which are paid in full from the proceeds of the Offering;
(iv) approximately $28 of additional Preferred Stock dividends accumulated
from October 1, 1997 through the closing of this Offering; (v)
approximately $3,528 of interest expense recognized from the issuance of
391,992 shares of Common Stock to certain Full Coverage Bridge Note
holders upon the closing of this Offering (assuming an initial public
offering price of $9.00 per share).
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The Selected Consolidated Financial Data set forth below with respect to the
Company's statements of operations data for each of the two fiscal years ended
December 31, 1996 are derived from the Company's Consolidated Financial
Statements included elsewhere in this Prospectus, which have been audited by
Arthur Andersen LLP, independent public accountants. The Selected Consolidated
Financial Data for the nine months ended September 30, 1996 and 1997, and the
balance sheet data as of September 30, 1997, are derived from the unaudited
Consolidated Financial Statements for the Company included elsewhere in this
Prospectus which, in the opinion of management, contain all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial condition and results of operations of the
Company for such periods. The results of operations for the nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the full 1997 fiscal year. The information set forth below is
qualified in its entirety by, and should be read in conjunction with, the
Consolidated Financial Statements and the Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. Historical operating results are not
necessarily indicative of the results that may be expected in any future
period.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- ----------------
1995 1996 1996 1997
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues................................... $ 2,113 $ 9,136 $ 5,830 $10,639
Operating expenses:
Cost of sales............................ 1,929 8,230 5,155 9,007
Sales and marketing...................... 238 682 494 664
General and administrative............... 1,536 5,773 4,095 4,658
Depreciation and amortization............ 111 98 86 141
------- ------- ------- -------
Total operating expenses................... 3,814 14,783 9,830 14,470
------- ------- ------- -------
Operating loss............................. (1,701) (5,647) (4,000) (3,831)
Interest expense, net...................... (34) (225) (103) (588)
------- ------- ------- -------
Net loss................................... $(1,735) $(5,872) $(4,103) $(4,419)
======= ======= ======= =======
Series A convertible preferred stock
dividends................................. -- -- -- (21)
------- ------- ------- -------
Net loss applicable to common shareholders. $(1,735) $(5,872) $(4,103) $(4,440)
======= ======= ======= =======
Pro forma(1):
Net loss per share........................ $ (3.17) $ (2.39)
======= =======
Weighted average number of shares
outstanding.............................. 1,855 1,859
======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
ACTUAL AS ADJUSTED(2)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash.................................................... $ 237 $14,160
Working capital......................................... (5,823) 9,275
Total assets............................................ 4,002 18,124
Long-term debt, excluding current maturities............ 2,120 200
Common stock subject to rescission...................... 1,850 1,850
Total shareholders' (deficit) equity.................... (7,413) 10,470
</TABLE>
- -------
(1) See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used in
computing pro forma net loss per share.
(2) Adjusted to give effect to (A) the Offering Issuances and (B) the sale of
the 2,000,000 shares offered hereby by the Company at an assumed initial
public offering price of $9.00 per share and the receipt and application
of the net proceeds therefrom. "See footnote (1) to "The Offering," "Use
of Proceeds," "Capitalization" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and performance of the
Company should be read in conjunction with the Consolidated Financial
Statements and related Notes and other information regarding the Company
included elsewhere in this Prospectus. Certain information contained below and
elsewhere in this Prospectus, including information with respect to the
Company's plans and strategy for its business, are forward-looking statements.
See "Risk Factors" for a discussion of important factors that could cause
actual results to differ from the forward-looking statements contained herein.
OVERVIEW
GlobalTel provides international telecommunications services principally to
small- and medium-sized business customers in developing ("second-tier")
telecommunications markets. Currently, the Company offers international long-
distance services, calling cards and enhanced voice services consisting of
voice-mail and conference calling to more than 8,500 business customers in
over 120 countries. The Company also resells switched minutes on a wholesale
basis to other telecommunications providers and carriers. GlobalTel's current
network architecture consists of: (i) voice switching and global fax messaging
infrastructure in Los Angeles, California; (ii) access to third party
infrastructure through Equant and other suppliers; (iii) enhanced fax nodes in
Hong Kong and Mexico City; and (iv) a Network Control and Operations Center in
Seattle, Washington.
The Company was established in November 1994 to enter second-tier markets by
providing what is commonly called call-reorigination, or "call back" services,
with value-added services to be developed and introduced as markets matured
and as changes in technology and regulatory climates permitted. The Company
commenced operations in March 1995. Substantially all of the Company's
revenues have been generated by providing international call-reorigination
services primarily to small- and medium-sized businesses through a network of
agents and resellers, supplemented by direct marketing efforts, and by selling
switched minutes on a wholesale basis to other telecommunications providers
and carriers. The Company believes that as deregulation occurs and competition
increases in markets around the world, the pricing advantage of traditional
call-reorigination to most destinations relative to conventional call-through
international long distance service will diminish in those markets. In order
to maintain its existing customer base, attract new customers and increase its
revenues the Company intends to offer a variety of value-added
telecommunications services, as well as its own call-through service. See
"Risk Factors--Recent Introduction and Ongoing Development of Value-Added
Services" and "Business--Services."
In furtherance of this strategy, during 1996 the Company commenced a three-
phase network upgrade to (i) relocate its voice switching platform from Las
Vegas to Los Angeles for the primary purpose of facilitating access to least-
cost call routing alternatives for its call-reorigination business; (ii)
improve the Company's network facilities by implementing a more flexible
switching platform with enhanced features, installing an improved and
scaleable customer interface and transitioning to a more flexible customer
billing system; and (iii) implement an enhanced fax messaging infrastructure.
The first phase of this plan was completed in late 1996. In 1997, the Company
completed phases two and three, with installation and testing of a more
capable switching platform as well as the enhanced customer interface and
billing systems. Cutover of all customers to these new systems was completed
in November 1997. See "Business--Network and Operations."
Throughout 1996 and 1997, the Company invested significant resources in
refining and developing new business partner relationships and systems
necessary for introduction of value-added services, with the intention of
introducing these services commercially in 1998. The costs associated with the
development and testing of new service offerings, including those which have
yet to be commercially introduced, have been charged against the Company's
current operations. See "Business--Services."
24
<PAGE>
The Company has incurred substantial net losses in connection with the
initiation and growth of its call-reorigination business and the development
of value-added services, and expects to continue to incur net losses at least
through 1998. The Company expects to achieve positive operating income over
time by increasing its customer base, introducing new value-added services,
and achieving enhanced efficiency through greater economies of scale. The
Company expects its operating revenues to increase in 1998; however, the
Company also expects its net loss to increase in 1998 as the Company
implements its growth strategy. See "Risk Factors--Limited Operating History;
Substantial Operating Losses," "--Recent Introduction and Ongoing Development
of Value-Added Services" and "--Need for Additional Capital and Capital
Requirements."
The Company's call-reorigination revenue represents the majority of the
Company's revenues and has increased as the Company has added sales agents and
introduced its services into new countries. Following the relocation of the
Company's primary switching platform to Los Angeles in late 1996, the Company
also commenced selling international long distance minutes on a wholesale
basis to a limited number of interexchange carriers. Sales to carriers,
although profitable, typically generate lower margins than sales to small- and
medium-sized business customers. In addition, the Company benefits from
wholesale sales by reducing its cost per minute of use as a result of improved
bargaining power with vendors resulting from higher levels of network traffic.
The Company's carrier wholesale revenues vary significantly from period to
period.
The Company's call-reorigination customer base is diversified both
geographically and by customer type. As of the September 1997 billing cycle,
the Company served over 8,500 customers and four wholesale carriers, and
provided services in more than 120 countries. For information concerning the
Company's revenues by geographic areas, see Note 2 of Notes to the
Consolidated Financial Statements.
Based on transactions in the third quarter of 1997 the Company estimates
that approximately 60% of its call-reorigination revenues are charged directly
to its customers' credit cards and cleared electronically twice a month. Most
of the funds charged are credited to the Company's own account the following
day, shortening the Company's collection cycle in comparison with traditional
postal-based billing and collection systems. The remainder of the Company's
retail and wholesale customers typically are billed by the Company on a
monthly basis. The proportion of the Company's revenues collected on this
basis may vary in the future. As of September 30, 1997, approximately 39% of
the Company's accounts receivable and other receivables were due from foreign
customers. The Company estimates that approximately 60% of its accounts
receivable and other receivables from foreign customers are charged to such
customers' credit cards.
Cost of sales consists of costs associated with the origination,
transmission and termination of voice and data telecommunications services
provided to the Company by other carriers, the majority of which is
represented by fees paid to long-distance telecommunications carriers.
Substantially all of the Company's cost of sales is variable, based on the
number of minutes of use transmitted and terminated over other carrier
facilities. The Company seeks to lower its cost of sales as a percentage of
revenues by: (i) attempting to negotiate lower rates from suppliers as the
volume of the Company's network traffic increases; (ii) optimizing network
design and operation; (iii) utilizing a greater number of suppliers, thereby
allowing for more effective least-cost call routing; and (iv) introducing new,
higher margin network services.
The Company generally realizes lower costs of sales as a percentage of
revenues from its call-reorigination services than for its wholesale services.
The Company's overall cost of sales margin will fluctuate based on its mix of
wholesale and retail services. The Company expects to price its planned value-
added services to result in lower costs of sales as a percentage of revenues
and thus improved margins over time because, in the Company's estimation,
these services offer greater perceived value to the customer. However, there
can be no assurance that improved margins will be achieved.
Selling expenses primarily consist of advertising expenses and sales
commissions paid to independent sales agents. The Company's decision to use
independent agents as its primary sales force has been driven by
25
<PAGE>
the low initial fixed costs associated with this distribution channel and the
perceived benefits of using individuals and companies with local market
connections and knowledge. See "Risk Factors--Dependence on Independent Sales
Agents" and "Business--Sales, Marketing and Customer Service."
General and administrative expenses include salaries and benefits for all of
the Company's employees, including sales and marketing, costs associated with
the operation and maintenance of the Company's telecommunications network,
professional fees and other operating and overhead costs. Included in general
and administrative expenses are salaries, consulting fees and other costs
relating to the technical development of and market planning for the Company's
planned value-added services.
Depreciation expense includes depreciation of switching and network
equipment as well as of furniture and fixtures. The Company provides for
depreciation using the straight line method of depreciation over the estimated
useful lives of the assets, which range from five to ten years. The Company's
amortization expense relates to organizational costs capitalized and amortized
over a five year period and license acquisition costs that are amortized over
the life of the license. Interest expense consists primarily of accrued
interest on convertible notes and the amortization of debt issuance costs.
RESULTS OF OPERATIONS
Quarter Ended December 31, 1997
The Company expects to announce results for the fourth quarter of 1997 in
early March 1998. At the date of this Prospectus, the Company estimates that
total revenues for the fourth quarter of 1997 will be slightly lower than the
$2.7 million reported for the third quarter of 1997, primarily due to a
decrease in wholesale carrier revenues. This decrease is primarily a result of
the Company's decision in May 1997 to de-emphasize its wholesale carrier
business for the reasons discussed under "Quarterly Results of Operations"
below. The Company also expects to report a small increase in cost of sales as
a percentage of revenues as compared to the quarter ended September 30, 1997
primarily due to an increase in the call-reorigination costs resulting from
the Company having to temporarily re-route traffic previously carried by one
of its principal long-distance suppliers after this supplier ceased providing
services to the Company. Overall, this resulted in only a slight decrease to
operating margins, which was partially offset by a decrease in general and
administrative expense primarily attributable to decreased staffing levels.
The following table sets forth certain financial data for the periods
indicated, as a percentage of revenues:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------- ---------------
1995 1996 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues................................ 100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses:
Cost of sales......................... 91.3 90.1 88.4 84.7
Sales and marketing................... 11.3 7.5 8.5 6.2
General and administrative............ 72.7 63.2 70.2 43.8
Depreciation and amortization......... 5.3 1.1 1.5 1.3
------ ------ ------ ------
Total operating expenses................ 180.6 161.9 168.6 136.0
------ ------ ------ ------
Operating loss.......................... (80.6) (61.9) (68.6) (36.0)
Interest expense........................ (1.6) (2.5) (1.8) (5.5)
------ ------ ------ ------
Net loss................................ (82.2)% (64.4)% (70.4)% (41.5)%
====== ====== ====== ======
</TABLE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Total revenues increased $4.8 million or 83% to $10.6 million in the nine
months ended September 30, 1997 from $5.8 million in the nine months ended
September 30, 1996. Revenues from call-reorigination increased $1.0 million or
17% to $6.8 million in the nine months ended September 30, 1997 from $5.8
million in the nine months ended September 30, 1996. This increase resulted
from increased usage by existing customers and the addition of new customers
as the Company expanded its agent network and commenced
26
<PAGE>
providing services in new countries. Following the relocation of the Company's
primary switching platform to Los Angeles in late 1996, the Company also
commenced selling international long-distance minutes on a wholesale basis to
several interexchange carriers. Wholesale carrier revenues, which commenced in
October 1996, increased to $3.8 million in the nine months ending September
30, 1997. Call-reorigination and wholesale carrier revenues represented 64%
and 36% of the Company's sales, respectively, for the nine months ended
September 30, 1997.
Cost of sales increased $3.8 million or 75% to $9.0 million in the nine
months ended September 30, 1997 from $5.2 million in the nine months ended
September 30, 1996. This increase is primarily attributable to increased
transmission and termination costs associated with greater calling volume. As
a percentage of revenues, cost of sales decreased from 88.4% to 84.7% in the
nine months ended September 30, 1996 and 1997, respectively. This decrease in
cost of sales as a percentage of revenues is primarily attributable to a
decrease in the costs associated with call-reorigination resulting from
implementation of least-cost call routing in late 1996 following the
relocation of the Company's switch to Los Angeles, and to greater calling
volume resulting in reduced cost per minute of use. This decrease was offset,
in part, by higher costs of sales as a percentage of revenues attributable to
the Company's wholesale carrier sales, which commenced in October 1996.
Sales and marketing expense increased $170,000 or 35% to $664,000 in the
nine months ended September 30, 1997 from $494,000 in the nine months ended
September 30, 1996. This increase is primarily attributable to increased sales
commissions. Substantially all of the Company's sales commissions are related
to call-reorigination sales generated by agents. The increase in sales
commissions is attributable to increased levels of sales generated by agents
as well as an increase in the effective commission rate. As a percentage of
revenues, sales and marketing expense declined from 8.5% to 6.2% in the nine
months ended September 30, 1996 and 1997, respectively, resulting in part from
higher levels of wholesale carrier sales not requiring comparable advertising
and sales commissions costs.
General and administrative expense increased $600,000 or 14% to $4.7 million
in the nine months ended September 30, 1997 from $4.1 million in the nine
months ended September 30, 1996. This increase is primarily attributable to
increased compensation costs resulting from increased staffing levels. As a
percentage of revenues, general and administrative expense declined from 70.2%
to 43.8% in the nine months ended September 30, 1996 and 1997, respectively.
This decrease is primarily attributable to economies of scale associated with
the Company's ability to spread costs of operations across a broader revenue
base.
Depreciation and amortization increased $56,000 or 65% to $142,000 in the
nine months ended September 30, 1997 from $86,000 in the nine months ended
September 30, 1996. This increase is primarily attributable to the
depreciation of capital assets acquired in late 1996 and in 1997, including a
new voice switching platform, facility improvements, fax gateway and an
electronic billing and customer interface system.
Interest expense increased $484,000 or 470% to $587,000 in the nine months
ended September 30, 1997 from $103,000 in the nine months ended September 30,
1996. This increase is primarily attributable to an increase in the Company's
outstanding indebtedness, together with amortization of costs associated with
the incurrence of additional debt. Also included in interest expense in the
nine months ended September 30, 1997 is $36,000 of additional debt issuance
amortization costs charged to interest expense as a result of the conversion
of a portion of the Company's indebtedness to common stock.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues increased $7.0 million or 332% to $9.1 million in 1996 from $2.1
million in 1995. Revenues from call-reorigination increased $6.2 million or
292% to $8.3 million in 1996 from $2.1 million in 1995. The increase in call
re-origination revenue was primarily due to increased usage by existing
customers and the addition of new customers as the Company developed its agent
network and commenced providing services in new countries. 1996 revenues also
include $793,000 of sales to carriers, which commenced in October 1996. The
Company's revenues from call-reorigination and wholesale carrier revenues
represented approximately 91% and 9%, respectively, of the Company's revenues
in 1996.
27
<PAGE>
Cost of sales increased $6.3 million or 327% to $8.2 million in 1996 from
$1.9 million in 1995. This increase is primarily attributable to increased
transmission and termination costs associated with greater calling volume. As
a percentage of revenues, these costs decreased from 91.3% to 90.1% in 1995
and 1996, respectively, primarily as a result of better network utilization
offset in part by wholesale carrier revenues, which commenced in October 1996.
Sales and marketing expense increased $444,000 or 187% to $682,000 in 1996
from $238,000 in 1995. These costs are primarily sales commissions paid to the
Company's agents together with advertising costs. The increase in sales
commissions is attributable to increased levels of sales generated by agents
as well as an increase in the effective commission rate. As a percentage of
revenues, sales and marketing expense declined from 11.3% in 1996 to 7.5% in
1997, resulting in part from the initiation of wholesale carrier sales in late
1996, which sales do not require comparable advertising and sales commissions
costs.
General and administrative expense increased $4.3 million or 276% to $5.8
million in 1996 from $1.5 million in 1995. This increase is primarily
attributable to the costs, including wages, salaries, travel and facilities,
associated with the addition of administrative, technical and customer support
personnel as the Company developed its management team and network. During
this period the Company also incurred professional fees, consulting costs and
facilities costs associated with the establishment of its relationship with
Equant and the development of the Company's value-added services. General and
administrative expense declined, as a percentage of revenues, from 72.7% in
1995 to 63.2% in 1996. This decrease is primarily attributable to economies of
scale associated with the Company's ability to spread costs of operations
across a broader revenue base.
Depreciation and amortization decreased $13,000 or 12% from $111,000 in 1995
to $98,000 in 1996. Depreciation expense increased from 1995 to 1996 when the
Company placed in service approximately $329,000 of capital equipment. This
was offset by a decrease in amortization expense from 1995 to 1996 as a result
of the write-off in 1995 of certain organizational costs.
Interest expense increased $191,000 or 568% to $225,000 in 1996 from $34,000
in 1995. This increase is primarily attributable to an increase in the
Company's outstanding indebtedness, together with the amortization of debt
issuance costs.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain quarterly financial data for the
seven quarters ended September 30, 1997. This quarterly information has been
derived from unaudited Consolidated Financial Statements which, in the opinion
of the Company's management, reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
information for the periods presented. Operating results for any quarter are
not necessarily indicative of the results that may be expected in any future
period.
The Company's quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future as a result of a variety of factors,
some of which are outside the Company's control. These factors include general
economic conditions, demand for international telecommunications services,
capital expenditures and other costs relating to the expansion of operations,
the timing of new product introductions by the Company or its competitors,
market availability and acceptance of new and enhanced versions of the
Company's or its competitors' products and services, changes in the mix of
sales and the rates of customer acquisition and retention. See "Risk Factors--
Fluctuations in Quarterly Operating Results."
28
<PAGE>
<TABLE>
<CAPTION>
1996 QUARTER ENDED 1997 QUARTER ENDED
------------------------------------ ---------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30
-------- ------- -------- ------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA:
Revenues................ $ 1,507 $ 2,048 $ 2,275 $ 3,306 $ 4,385 $ 3,589 $ 2,665
Operating expenses:
Cost of sales......... 1,520 1,753 1,882 3,075 3,811 2,992 2,204
Sales and marketing... 122 199 173 188 226 229 209
General and
administrative....... 1,087 1,538 1,470 1,678 1,411 1,497 1,750
Depreciation and
amortization......... 22 24 40 12 18 59 65
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 2,751 3,514 3,565 4,953 5,466 4,777 4,228
------- ------- ------- ------- ------- ------- -------
Operating loss.......... (1,244) (1,466) (1,290) (1,647) (1,081) (1,188) (1,563)
Interest expense........ (20) (21) (62) (122) (169) (240) (178)
------- ------- ------- ------- ------- ------- -------
Net loss................ $(1,264) $(1,487) $(1,352) $(1,769) $(1,250) $(1,428) $(1,741)
======= ======= ======= ======= ======= ======= =======
</TABLE>
Following the relocation of the Company's switch to Los Angeles in the
fourth quarter of 1996, the Company commenced reselling long-distance minutes
on a wholesale basis to certain interexchange carriers. Wholesale carrier
sales accounted for a major portion of the 45% and 33% increase in total sales
for the fourth quarter of 1996 and the first quarter of 1997, respectively.
Wholesale carrier sales increased $1.2 million or 152% to $2.0 million in the
first quarter of 1997 from $793,000 in the fourth of 1996. The Company's cost
of sales increased as a percentage of revenues in the third and fourth
quarters of 1996 as a result of the higher cost of sales, on a percentage of
revenue basis, for wholesale carrier sales, which are typically priced at
lower levels than call-reorigination activity. In the first quarter of 1997,
cost of sales as a percentage of revenues declined to 86.9% in spite of the
increasing proportion of wholesale carrier sales as the Company raised prices
on sales to wholesale customers.
The Company experienced declining revenues in the quarters ended June 30,
1997 and September 30, 1997 in comparison to the prior quarters. This decline
was primarily a result of the Company's decision in May 1997 to temporarily
de-emphasize its wholesale carrier business. Due to the lengthy payment cycles
the Company had experienced with certain of its wholesale carrier customers
and the Company's relatively low cash reserves, the Company reduced its
wholesale carrier sales in order to limit its credit risk, reduce effective
carrying costs associated with carrier accounts receivable and improve gross
margins. Specifically, the Company ceased doing business with two carriers and
reduced its level of business with several others, resulting in a decline in
carrier sales from $2.0 million in the quarter ended March 31, 1997 to
$534,000 in the quarter ended September 30, 1997. This led to an increase in
the Company's gross margin from 13.1% to 17.3% over the same period. In order
to continue to take advantage of the benefits of greater network utilization
and increased buying power, the Company anticipates increasing the level of
carrier sales in the next twelve months as the Company seeks to develop
business relationships with additional interexchange carriers.
Additionally, call-reorigination revenues declined moderately during the
second and third quarters of 1997 in comparison to the preceding quarters. Due
to anticipated capacity constraints and limited access to multiple carriers,
the Company relocated its primary switching platform from Las Vegas to Los
Angeles in late 1996. The Company experienced technical and operational
difficulties in connection with this relocation process which resulted in
service disruptions for a number of customers. Although the Company's sales
were adversely affected during this period, the Company believes that it
resolved these difficulties by June 1997. Increased competitive pressures
encountered by some of the Company's agents also contributed to the decline in
revenues during these two quarters. During the second half of 1997 the Company
installed a new and more capable switching platform, which became fully
operational on November 1, 1997, enabling the Company to offer a wider variety
and more competitive package of services to its agents and customers.
29
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements have been to fund operating
losses, debt service and capital expenditures associated with development of
its customer base and the establishment and upgrade of its network
infrastructure. Through September 30, 1997, the Company had met these cash
requirements largely through financing activities that have included $3.0
million in net proceeds from the sale of Common Stock, $1.0 million in net
proceeds from the sale of Preferred Stock, $6.2 million in net borrowings from
shareholders and others represented by promissory notes (the "Notes"), as well
as revenues from operations. See "Certain Transactions." At September 30,
1997, Notes aggregating approximately $4.2 million remained outstanding, of
which $1.1 million will mature prior to September 30, 1998. Substantially all
of the Notes accrue interest at the rate of ten percent per annum, increasing
to 12 percent when the Notes become past due. Notes outstanding at September
30, 1997, with an aggregate principal amount of $3.9 million are convertible
at the option of the holders thereof into an aggregate of 747,522 shares of
Common Stock, assuming an initial public offering price of $9.00 per share.
Notes aggregating $521,000 were converted into Common Stock subsequent to
September 30, 1997. Warrants to purchase an aggregate of 286,173 shares of
Common Stock were issued in connection with the issuance of the Notes, all of
which remained outstanding at September 30, 1997. Also, in September 1997,
deferred salaries aggregating $1.2 million were converted into warrants to
purchase 215,428 shares of Common Stock. In October 1997 the Company obtained
an additional $550,000 in connection with the issuance of notes to four
individuals. These notes bear interest at a rate of ten percent per annum, are
due in full on March 1, 1999, and are convertible at any time prior to
maturity at the fair market value per share of Common Stock in effect as of
the date of conversion. Warrants exercisable for an aggregate of 11,000 shares
of Common Stock at an exercise price of $5.50 per share were granted in this
round of financing.
In November 1997 the Company obtained an additional $325,000 in connection
with the issuance of notes to three individuals. These notes bore interest at
ten percent per annum and were repaid in full from the proceeds of certain
notes issued in November and December 1997. In addition, each holder of these
notes will receive, following the closing of this Offering, shares of Common
Stock equal to one-half of the principal amount of such holder's note divided
by the initial public offering price.
In November and December 1997 the Company obtained approximately $3.0
million in connection with the issuance of additional notes. These notes (the
"Full Coverage Bridge Notes") bear interest at the rate of ten percent per
annum and are due in full by the earlier of the closing of this Offering or
January 2, 1999. In addition, each holder of a Full Coverage Bridge Note will
receive, following the closing of this Offering, shares of Common Stock (the
"Full Coverage Bridge Note Shares") in an amount equal to the principal amount
of its Full Coverage Bridge Note divided by the initial public offering price
(an aggregate of 331,251 shares assuming an initial public offering price of
$9.00 per share). The Company has agreed to cause the Full Coverage Bridge
Note Shares to be registered under the Securities Act for resale for a period
of up to 180 days commencing 270 days after the closing of this Offering. See
"Description of Securities--Registration Rights."
As a result of the Company's operating losses, available working capital has
not always been sufficient to satisfy the Company's obligations. In the past
the Company has from time to time been in arrears on its payment obligations
to its carriers. In October 1997, the Company failed to pay amounts due to one
of its principal long-distance suppliers within the time period that this
supplier customarily had required payment. As a result, this supplier ceased
providing services to the Company and, under the terms of its agreement with
the Company, could demand a termination payment of up to $1.2 million. The
Company was able to re-route traffic that previously had been carried by this
supplier without any interruption in service to the Company's customers. In
December 1997, after the Company paid this supplier a substantial portion of
the amounts past due, services were restored. The Company has negotiated the
payment terms of the remaining balance owed and does not believe that it will
be required to pay an amount in excess of that owed for carrier services
provided. As of January 31, 1998, the Company was in arrears on approximately
$558,000 due to this supplier. There can be no assurance that the Company will
not be required to pay a penalty to this or any other supplier or that the
Company will not be in default of its obligations to its suppliers in the
future. See "Risk Factors--Dependence on Suppliers."
30
<PAGE>
Net cash used in operating activities was $2.4 million in the first nine
months of 1997. Adjustments to the $4.4 million net loss for the period to
reconcile to net cash used in operating activities consisted primarily of a
$1.4 million increase in accounts payable, accrued liabilities and other,
primarily resulting from the increase in overall operating expenses and the
Company's relatively low level of cash reserves. Other adjustments included
$311,000 in depreciation and amortization and other changes in operating
assets and liabilities, including a $340,000 decrease in accounts receivable
resulting from a decline in wholesale carrier sales. Net cash used in
operating activities was $2.6 million in 1996. Adjustments to the $5.9 million
net loss for the period to reconcile to net cash used in operating activities
consisted primarily of a $3.8 million increase in accounts payable, accrued
liabilities and other resulting from the Company's increasing level of sales
and operations. Other adjustments included $127,000 in depreciation and
amortization and a $1.2 million increase in accounts receivable and other
receivables due primarily to the increase in wholesale carrier sales late in
1996 and a $531,000 increase in customer deposits and prepayments, resulting
from the establishment of new customer accounts. Net cash used in operating
activities in 1995 was $1.0 million.
Net cash used in investing activities was $956,000 in the first nine months
of 1997. Investing activities for the period consisted of $823,000 in capital
expenditures and $133,000 in deposits on equipment, including a new voice
switching platform together with hardware and software to enable the Company
to offer value-added services. Net cash used in investing activities was
$688,000 in 1996. Investing activities for the period consisted of capital
expenditures for hardware and software together with equipment deposits to
improve the Company's switching network. Net cash used in investing activities
was $522,000 in 1995. In addition to $260,000 in capital equipment, the
Company capitalized $262,000 in costs associated with establishing and
organizing the Company and the acquisition of one of the Company's
subsidiaries.
The Company's growth strategy is to seek to minimize its investment in
capital equipment and systems by utilizing, wherever possible, existing third-
party telecommunications infrastructure. Nevertheless, the delivery of new
value-added services will require substantial additional investment for
staffing and capital equipment. At December 31, 1997, the Company had minimum
noncancelable office and certain telecommunications equipment lease and
license payment obligations due in 1998 aggregating $328,076. Although as of
September 30, 1997 the Company had no material commitments for future capital
expenditures, the Company has identified approximately $6.5 million of capital
expenditures it intends to undertake in 1998. The Company intends to finance a
portion of this capital equipment through capital leases, although there can
be no assurance that lease financing will be available or on terms that the
Company finds acceptable.
Net cash provided by financing activities was $2.0 million, $3.0 million,
$1.4 million and $3.1 million in 1995, 1996 and the first nine months of 1996
and 1997, respectively. Financing activities have included the issuance of
Common Stock, Preferred Stock, notes and warrants, the repayment of notes to
shareholders and others, and costs associated with the foregoing.
The net proceeds to the Company from the Offering are estimated to be
approximately $15.4 million, or $17.8 million assuming the exercise of the
Underwriters' over-allotment option. The Company expects that approximately
$5.6 million of such net proceeds will be used to repay outstanding notes,
approximately $6.5 million will be used for capital expenditures, and the
balance will be used for working capital and general corporate purposes. In
addition, the Company may be obligated to repurchase securities of the
Company, if any, tendered in connection with the Rescission Offer in an
approximate amount up to $2.8 million plus statutory interest of approximately
$322,000 (as of February 28, 1998). See "Rescission Offer" and Note 6 of Notes
to Consolidated Financial Statements. The Company believes that, based upon
its present business plan, the net proceeds of the Offering, together with
revenues from operations, will be sufficient to finance operating losses, and
the development and introduction of new services and to meet its other
currently planned working capital and capital expenditure requirements through
the end of 1998. However, due to the need to continue to expand its network
operations and service offerings and other factors, the Company expects that
it will need to raise additional capital in future periods. The Company also
intends to seek lease
31
<PAGE>
financing for a portion of the equipment and systems that it acquires in 1998
and beyond, although there can be no assurance that this financing will be
available or on terms that the Company finds acceptable. If the Company
experiences greater than anticipated capital requirements, if the
implementation of the Company's operating strategy fails to produce the
anticipated revenue growth and cash flows, if lease financing is not available
or if additional working capital is required for any other reason, the Company
will be required to obtain additional capital earlier than currently
anticipated. The timing of the need for additional capital also will be
affected by the extent to which the Rescission Offer is accepted. See "Risk
Factors--Rescission Offer." There can be no assurance that the Company will be
able to obtain equity, debt or lease financing when needed or on terms that
the Company finds acceptable. See "Risk Factors--Need for Additional Capital
and Capital Requirements."
The Company is currently evaluating its computer systems to identify
potential problems relating to the Year 2000 date change, but has not yet
determined whether it has material Year 2000 issues. The Company does not
expect the cost to modify its computer systems to address Year 2000 issues
will be material to its financial condition or results of operations, and does
not anticipate any material disruption in its operations as a result of any
Year 2000 issues. However, the Company does not have any information
concerning the potential impact of Year 2000 issues on any of its suppliers or
customers. In the event that the Company or any of the Company's significant
suppliers or customers does not successfully and timely address Year 2000
issues, the Company's business or operations could be adversely affected.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 "Earnings Per Share" ("SFAS 128"), which revises the calculation and
presentation provisions of Accounting Principles Board Opinion 15 and related
interpretations. SFAS 128 is effective for the Company's year ending
December 31, 1997, and retroactive application is required. The Company does
not expect the implementation of SFAS 128 to have a material effect on
earnings per share amounts previously reported.
FOREIGN CURRENCY AND GEOGRAPHIC AREAS
The Company bills for its services exclusively in U.S. dollars, and as such
has no material foreign exchange exposure. For information concerning the
Company's revenues by geographic areas, see Note 2 of Notes to the
Consolidated Financial Statements.
EFFECTS OF INFLATION
Inflation has not had a significant effect on the Company's operations to
date. Some of the markets in which the Company operates have experienced
significant inflationary periods in past years and may experience high rates
of inflation in the future. A period of significant inflation in any of the
Company's markets could adversely affect the Company's business by increasing
the local currency prices paid by customers for international
telecommunications services, including those provided by the Company.
SEASONAL FLUCTUATIONS
The Company may experience a decrease in customer usage and revenue around
national holidays and traditional vacation periods in some of its markets.
Given the cultural and geographic diversity of the markets in which the
Company operates, the Company does not believe that such seasonal trends have
resulted in any material seasonality to the Company's business taken as a
whole. There can be no guarantee, however, that such trends may not affect the
Company's operations in the future.
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BUSINESS
OVERVIEW
GlobalTel provides international telecommunications services principally to
small- and medium-sized business customers in second-tier telecommunications
markets. Currently, the Company offers international long-distance services,
calling cards and enhanced voice services consisting of voice-mail and
conference calling to more than 8,500 business customers in over 120
countries. The Company began operations in 1995 with its entry into the
international call-reorigination business, capitalizing on the arbitrage
opportunity created by differences between U.S. and foreign originated
international long-distance rates. The Company is leveraging the expertise
derived from, and the established customer base generated by, its call-
reorigination business to provide higher margin enhanced telecommunications
services.
GlobalTel's objective is to become a leading provider of value-added
telecommunications services in markets that historically have been underserved
by large global telecommunications providers and national ITOs. The Company's
strategy is to enter second-tier markets by providing non-regulated or less
regulated telecommunications services, such as international call-
reorigination. The Company plans to continue to service existing customers and
to enter additional markets with less regulated enhanced telecommunications
services, including traditional call-reorigination and value-added data
services and a suite of business-grade Internet services. Most of the
Company's planned services can be provided under existing regulatory
frameworks. As regulatory environments and the availability of capital permit,
GlobalTel intends to migrate its call-reorigination customers and cross-sell
its enhanced service customer base to a more cost effective and competitive
call-through service.
GlobalTel primarily markets its telecommunications services through a
network of over 75 independent sales agents, supplemented by direct marketing
efforts. The Company also has an exclusive agreement with IBNET, the managing
member of the Consortium of Global Commerce, whereby IBNET has agreed to
market the Company's services through several thousand individual chambers of
commerce located in over 200 countries. In addition, the Company's
relationship with Novell provides a distribution channel for the Company's
services through Novell's network of over 25,000 value-added resellers.
GlobalTel's current network architecture consists of: (i) voice switching
and global fax messaging infrastructure in Los Angeles, California; (ii)
access to third party infrastructure through Equant, a global data network
services provider, and other suppliers; (iii) enhanced fax nodes in Hong Kong
and Mexico City; and (iv) a Network Control and Operations Center in Seattle,
Washington. The Company's agreement with Equant allows the Company to utilize
the global reach of the Equant network and co-locate its servers and switches
in many large cities around the world. In addition, GlobalTel's agreement with
Novell provides the Company with access to key network technologies.
MARKET OPPORTUNITY
Second-Tier Markets. Larger telecommunications carriers have focused on
"first-tier" markets, which are characterized by high teledensity (ratio of
telephone lines to inhabitants), an advanced stage of deregulation, a large
volume of international telecommunications traffic and a concentration of
large multinational corporations. First-tier markets include the United
States, the United Kingdom, Germany, France and Japan. Alternatively, the
Company focuses on what it characterizes as second-tier markets, which are (i)
smaller developed countries such as Austria, Switzerland, Ireland, Singapore
and South Africa and (ii) developing markets that typically have less
developed telecommunications infrastructures, are in an earlier stage of
deregulation and have more monopolistic distribution profiles. Based on data
from the ITU, the Company has calculated that the approximately 145 countries
that the Company targets as second-tier markets generated approximately 23.0
billion minutes in outgoing international telecommunications traffic in 1995.
Historic Perspective. Historically, the provisioning of voice telephony
within individual countries has been monopolized by large, typically
government owned or protected entities, often referred to as ITOs. As a
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result, international callers have had little choice but to use the services
provided and pay the prices charged by local ITOs. Deregulation, together with
decreases in the cost of providing services and the introduction of
sophisticated value-added features, has made it possible for new entrants to
compete with the ITOs in providing international voice telecommunications
services. Similarly, in the United States, where regulation of the long-
distance telephone industry has been substantially reduced, competition has
increased as many new providers have entered the market. The resulting
decrease in rates and the emergence of different rate structures for similar
services have produced a resale market for long-distance telecommunications
services, as companies can obtain favorable volume-based rates from third
parties and resell access to such rates to other providers and users. These
and other factors have contributed to an increase in telecommunications usage
and a proliferation of enhanced telecommunications services. The combination
of a continually expanding global telecommunications market, consumer demand
for lower prices and improved quality and service and ongoing deregulation has
created competitive opportunities in many countries. According to the ITU, the
international telecommunications industry accounted for $52.8 billion in
revenues and 61.9 billion minutes of use in 1995. Based upon trends in revenue
growth from 1991 through 1995 measured by the ITU, the Company believes that
international long distance telecommunications revenues will surpass $76
billion by the year 2000 if such trends continue. The International Data
Corporation ("IDC") projects that by the year 2002 the volume of international
telecommunications traffic will expand to 187.1 billion minutes of use.
Convergence of Technology. Deregulation and evolving price competition have
coincided with technological innovation in the telecommunications industry.
New technologies such as fiber optic cable and improvements in digital
compression, computer software and processing technology have contributed to
improvements in quality and increased transmission capacities and speed, with
transmission costs decreasing as a result. For example, fiber optic cable has
dramatically increased the capacity, speed and flexibility of telephone lines
and has eliminated capacity constraints as a technical barrier to entry for
new international telecommunications providers. The improved quality of these
new telephone lines has facilitated the development of global voice-mail and
fax mail and has enhanced data communication. Improvements in computer
software and processing technology have laid a foundation for services such as
itemized and multi-currency billing. In addition, international debiting and
charge networks now allow customers to pay for long-distance calls made from
any telephone using a single home account and callers can now access national
telephone systems in order to benefit from lower long-distance tariffs. The
convergence of conventional telephony and computing technologies also has
created the opportunity for data networks, and computers in general, to become
primary telecommunications tools.
Regulatory Environment. In a deregulated telecommunications market such as
the United States, carriers can establish switching facilities, own or lease
fiber optic cable, enter into operating agreements with foreign carriers and,
accordingly, provide direct access service to customers. In markets that have
not deregulated or are slowly deregulating, international long-distance
carriers have used advances in technology to develop innovative alternative
access methods, such as call-reorigination and other less regulated value-
added data services. In other countries, such as Japan and most EU member
states, where the deregulation process is more advanced but not complete,
carriers often are permitted to offer facilities-based data and facsimile
services, as well as limited voice services. As countries deregulate, demand
for alternative access methods typically decreases as carriers are permitted
to offer a wider range of facilities-based services on a transparent basis.
Call-reorigination, which is the most common form of alternative
international access, avoids the high international rates offered by the ITO
in a particular regulated country by providing a dial tone from a deregulated
country, typically the United States. To place a call using traditional call-
reorigination, a user dials a unique phone number to an international
carrier's switching center and then hangs up. The user then receives an
automated call back providing dial tone from the United States, which enables
the user to complete the call. Technical innovations, such as inexpensive
dialers, have enabled telecommunications carriers to offer a transparent form
of call-reorigination that eliminates the need for the "hang-up" and "call
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back" of traditional call-reorigination. In addition, sophisticated in-country
switching platforms have enabled carriers to offer "call-through" services,
allowing the customer direct access to a provider's network.
The Company believes that as deregulation occurs and competition increases
in markets around the world, the pricing advantage of traditional call-
reorigination to most destinations relative to call-through international
long-distance service will diminish in those markets. The Company also
believes that deregulation will continue to create opportunities for new
entrants in the telecommunications services industry, particularly companies
capable of meeting the challenges presented by remote or underdeveloped
markets.
Private Networks and Emergence of the Internet. Historically, the data
communications services offered by public carriers had limited security
features, were expensive and did not adequately ensure accurate and reliable
transmission. As a result, many corporations with the resources to do so
established and maintained their own private networks to provide network-based
services, such as transaction processing, to their customers and to coordinate
operations between employees, suppliers and business partners. These private
networks were frequently customized and thus had the capability of providing
organizations and users with tailored performance and features, security,
reliability and private-label branding. The demand for private networks has
grown as a result of today's competitive business environment, leading to
other offerings such as VPNs and intranet services.
Despite the attractive capabilities of private networks, their limitations
have impeded or reduced their effectiveness. These networks, which
traditionally have required the use of leased telephone lines with bandwidth
dedicated solely to this purpose and the purchase of vendor-specific
networking equipment, are inherently expensive to set up, operate and
maintain. The Company believes that the costs of maintaining a private network
infrastructure and the risks of investing in new technologies have precluded
many small- and medium-sized businesses from utilizing private network, VPN
and intranet infrastructures.
The emergence of the Internet and the wide spread adoption of IP as a data
transmission standard in the 1990s, combined with deregulation of the
telecommunications industry and advances in telecommunications technology,
have significantly increased the attractiveness of providing data
communication applications and services over a public network. At the same
time, the growth in client/server computing, multi-media personal computers
and on-line computing services and the proliferation of network technologies
has resulted in a large and growing group of people who are accustomed to
using networked computers for a variety of purposes, including e-mail,
electronic file transfers, on-line computing and electronic financial
transactions. These trends increasingly have led businesses to explore
opportunities to provide IP-based applications and services within their
organizations, and to customers and business partners outside the enterprise.
Industry analysts expect the market size for both value-added IP data
services and Internet access to continue to grow rapidly as businesses and
consumers increase their use of the Internet, intranets, and privately managed
IP networks. IDC projects total ISP value-added services revenues alone to
grow from $197.8 million in 1996 to approximately $11.4 billion in the year
2000, reaching average annual growth of approximately 175.6% during that
period.
The ubiquitous nature and relatively low cost of the Internet have resulted
in its wide spread usage for certain applications, most notably Web access and
e-mail. However, use of the Internet for mission-critical business
applications has been impeded by the limited security and unreliable
performance inherent in the structure and management of the Internet. Although
private networks are capable of offering lower and more reliable latency
levels, providers of these emerging applications also desire a network that
will offer their customers full access to the Internet. As a result, these
businesses and applications providers require a network that combines the best
features of the Internet, such as openness and ease of access at low cost made
possible by the IP standard, with the advantages of a private network, such as
high-security, low/fixed latency and customized features.
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GLOBALTEL STRATEGY
GlobalTel's objective is to become a leading provider of value-added
telecommunications services to small- and medium-sized business customers in
markets that historically have been underserved by large telecommunications
providers and national ITOs. The Company's strategy to accomplish this
objective includes the following key elements:
Target Second-Tier Markets. The Company focuses on second-tier markets that
historically have faced less competition from larger telecommunications
providers. The Company believes that, due to the more monopolistic
distribution profile of these markets, small- and medium-sized businesses
traditionally have been underserved and consequently are more receptive to
higher quality, competitively priced services. Initially by offering call-
reorigination services, the Company has gained experience in addressing the
needs of business customers in these markets. The Company believes that this
experience, combined with strategic marketing relationships with IBNET and
Novell, will enable the Company to more effectively penetrate these markets.
Leverage Customer Base Through Enhanced Service Offerings. The Company has
developed and is introducing additional telecommunications services for its
existing customer base of more than 8,500 business customers in over 120
countries. To retain existing and attract new customers, the Company plans to
provide an increasingly broad range of services, such as enhanced
telecommunications services and a suite of business-grade Internet services.
Most of these services can be provided under the existing regulatory
frameworks in the Company's markets. In addition, as the regulatory
environments and availability of capital permits, GlobalTel intends to migrate
its call-reorigination customers and cross-sell its enhanced service customer
base to a more cost effective and competitive call-through service.
Exploit Sales Channels and Strategic Marketing Relationships. In addition to
its over 75 independent sales agents, the Company has access to global
channels of distribution through its strategic marketing relationships. The
Company has an exclusive agreement with IBNET, the managing member of the
Consortium for Global Commerce, through which the individual chambers of
commerce may act as sales and marketing agents for the Company's services. In
addition, the Company's agreement with Novell provides it with access to a
distribution channel through Novell's network of over 25,000 VARs. Management
expects that this will enhance the Company's ability to expand its customer
base as well as establish new relationships with independent ISPs and other
network providers (collectively, "regional ISPs") in its target markets. These
relationships also allow the Company to capitalize on the brand recognition of
its partners. A critical element of the Company's distribution strategy
includes pursuing additional strategic partnerships and expanding its channels
of distribution.
Capitalize on Third Party Networks. GlobalTel intends to minimize its
investment in capital equipment and systems by utilizing, wherever possible,
existing third party telecommunications infrastructure. Through its strategic
relationship with Equant, the Company has access to an infrastructure with
access points in most countries worldwide. This relationship allows the
Company to co-locate its servers and switches at existing Equant switch sites
in many cities around the world. Also, the Company is continuing to seek
additional strategic relationships in order to further its ability to
interconnect with other third party infrastructures.
Employ Flexible, Open Architecture Technology. By using off-the-shelf
technology that is modular and scaleable and allows for the integration of a
variety of technologies, the Company expects to provide its customers with
enhanced services in a timely and cost-efficient manner. The Company is
committed to continue to invest in improvements, through the integration of
technologies, its electronic billing, customer interface and network
management systems, which the Company believes are critical to its cost-
effective delivery of services. The Company expects these systems to provide
it with the ability to quickly upgrade its customers from a single product to
multiple services.
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SERVICES
The Company seeks to address the evolving telecommunications needs of the
small- and medium-sized business customer located in second-tier markets.
Currently, the Company offers international long-distance services, calling
cards, and enhanced telecommunications services such as voice-mail and
conference calling. The Company believes that the growing globalization of
business has increased the mobility of business people and led to the
proliferation of multi-office enterprises, creating greater demand for the
ability to conveniently access electronic information from remote locations
worldwide. As a result, the Company is designing and implementing a range of
next generation business-grade Internet services with business partners such
as Novell. The Company expects these services to include business quality
messaging, global enhanced VPNs and other value-added services. In addition,
to address the needs of independent ISPs and other network providers in the
Company's target markets for increased global reach and value-added services,
GlobalTel is designing a comprehensive "Turnkey Business ISP" solution
incorporating all of the Company's business-grade Internet services. These
service offerings are being designed to emphasize such features as
authentication, security and notification allowing for business-grade
reliability. As changes in regulatory environments and availability of capital
permit, GlobalTel intends to migrate its call-reorigination customers and
cross-sell its enhanced service customer base to a more cost effective and
competitive call-through service.
<TABLE>
<CAPTION>
CURRENT SERVICES SERVICES UNDER DEVELOPMENT
---------------- --------------------------
<S> <C>
International Call-Reorigination Call-Through
Calling Cards Enhanced Fax
Enhanced Voice Services Business-Grade Internet Services
Global Enhanced VPN
Business Quality Messaging
Global Desktop
"Turnkey Business ISP"
</TABLE>
Current Services
.International Call-Reorigination
The Company presently provides voice call-reorigination service to customers
in over 120 countries. The Company's call-reorigination service enables
customers in countries with high international calling rates to call outside
the country at rates competitive with U.S. international service providers.
The customer's call is routed through the Company's switching platform in Los
Angeles, where the call is directed over the least expensive route on the
Company's network depending on distance, country of termination and time of
day. The Company accesses the long-distance networks of a variety of long-
distance providers.
.Prepaid and Postpaid Calling Cards
The Company's prepaid (debit) and postpaid domestic and international
calling cards may be used by customers for international telephone calls from
more than 70 countries to substantially all other countries in the world.
Calling card customers also have access to 24-hour multi-lingual customer
service and certain customization options.
.Enhanced Voice Services
The Company offers enhanced voice services, consisting of voice-mail and
conference calling. Conference calling enables customers to set up "meet me"
dial-in conference calls as well as add-on conference calls, with or without
operator intervention. Conference calling is a higher margin value-added
service to the Company's basic voice services. The Company's services also
enable customers to originate international voice and fax calls over the
Internet by allowing call back service to be activated from their PCs.
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Services Under Development
The Company is developing the following new services which it intends to
offer during 1998:
.Call-Through
The Company will offer call-through or "direct access" service to customers
in selected markets. This service will permit customers to make long-distance
calls at a lower price than that charged on a call-reorigination basis while
lowering the Company's termination cost. Call-through service involves the
installation of an access point in the local market that is connected to the
Company's switch by a dedicated leased long-distance line. The international
customer accesses this connection to the Company's switch either by dialing a
local telephone number or, in markets where the regulatory environment
permits, through an interconnection with the local service provider.
.Enhanced Fax
The Company's enhanced fax service, currently offered only in Hong Kong and
Mexico City, uses advanced technology to provide customers with a higher
quality and less expensive method to send facsimile messages than is typically
obtained using conventional analog fax. Unlike conventional analog fax
service, enhanced fax service: (i) results in significantly fewer transmission
errors, particularly with international transmissions, because it is
transmitted over a digital data network; (ii) is easier to use than
conventional fax, with a feature that will retransmit the fax until it is
successfully received at its destination; and (iii) is much less expensive
because it can be sent as a digital packet in a shorter period of time. A
recent study conducted by Pitney Bowes/Gallup found that international faxes
transmitted over analog phone lines are transmitted twice on average due to
interruptions and quality problems, creating a hidden cost for users. Other
features of the GlobalTel enhanced fax offering include commercial-grade
broadcast fax, fax on demand (or "fax catalog") and timed delivery.
The Company has designed and plans to install during the first half of 1998
an Internet-based fax service interconnecting to its fax gateway in Los
Angeles, California. This service will allow customers with Internet access to
send faxes to any fax machine worldwide and to any Internet based e-mail
address.
.Business-Grade Internet Services
The Company is developing and preparing to offer a suite of value-added
services which will permit business-grade communications utilizing Internet
technologies. The Company expects these business-grade Internet services to
include (i) Global Enhanced VPN, (ii) Business Quality Messaging and (iii)
Global Desktop. These services will combine the best features of the Internet,
such as openness and ease of access at low cost made possible by the IP
standard, with the advantages of a private network, such as high security,
low/fixed latency and customized features. The Company believes that its
service design will overcome many of the perceived inefficiencies of today's
Internet and will allow its customers to conduct business quality transactions
via the Company's network infrastructure.
The Company's business-grade Internet services are being designed in
conjunction with business partners including Novell and other technology
providers. The Company's technology licensing agreement with Novell, for
example, provides the Company with access to certain key networking
technologies. In addition, the Company has become a Novell Business Internet
Services ("BIS") partner, an affiliation which the Company believes will
further enhance its service delivery strategy. BIS partners, which presently
include major telecommunications carriers such as AT&T, Bell Atlantic
Corporation, Nippon Telegraph and Telephone Corporation, Deutsche Telecom AG,
Singapore Telecommunications Limited Corporation and Korea Telecom, have
agreed on standards for interconnecting their respective Internet networks.
Those carriers currently principally focus on first-tier markets. See "--
Network and Operations" and "Sales, Marketing and Customer Service--Strategic
Marketing Relationships."
Global Enhanced VPN
The Company's Global Enhanced VPN service has been designed to enable
customers to establish a wide area network among their offices by using the
Company's network infrastructure, thereby eliminating the cost associated
with establishing and maintaining a dedicated private network. The
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Company's VPN service will be enhanced through the use of a commercial
grade directory infrastructure and certain certification and security
mechanisms. This will allow customers a single sign-on to their VPN from
any of their offices worldwide. Customers also will have the capability of
accessing their VPN from outside their offices with a local telephone call
through access points in many cities. For example, a U.S.-based user
traveling to Hong Kong would be able to access from the user's Hong Kong
office his or her local access network in the United States by entering the
user's name, password and additional security authentication. The user
could then work on the local access network in the United States in
accordance with the user's normal desktop privileges. In addition, the user
could access his or her U.S. e-mail system even if the Hong Kong office did
not have an e-mail system or if it operated on a different messaging
system. The Company's single sign-on capabilities, combined with advanced
security, authentication and notification features, will enable a business
customer to open its VPN in a controlled manner to its customers, vendors
and other business partners (also known as an "extranet"), thus
facilitating secure and reliable electronic commerce.
Business Quality Messaging
The Company's Business Quality Messaging ("BQM") service will provide
customers with the ability to exchange messages, fax, e-mail or voice-mail
in a secure and reliable manner via the Company's network infrastructure.
BQM will allow companies to connect dissimilar mail systems, avoiding
costly replacement of existing messaging infrastructure. Additionally,
customers will have firewall access to the Internet as well as access to
most other proprietary public mail services. BQM will be highlighted by
increased levels of security and reliability through utilization of
authentication, encryption and notification features. The Company expects
that these features will enable it to provide different levels of service
based on customer requirements and to price such service levels
accordingly.
Global Desktop
The Company's Global Desktop product is being designed to combine the
Company's Global Enhanced VPN and BQM services packaged with additional
features targeting the global business traveler. This mobile office desktop
product will allow the user to exchange electronic information from public
switched or wireless service worldwide. The Global Enhanced VPN and BQM
services will be integrated and accessed through a user-friendly software
package that will be available to the Global Desktop user.
.""Turnkey Business ISP"
The Company is designing a comprehensive turnkey service solution that will
include all of the Company's business-grade Internet services for regional
ISPs. This "Turnkey Business ISP" solution is being designed to enable
regional ISPs, which often have limited resources, to seamlessly outsource
certain of their internal business support services, such as billing
functions, settlement capabilities, network management and operations support,
while accessing the Company's suite of enhanced services, including discounted
fax messaging, Global Enhanced VPN, Global Desktop and eventually voice over
IP.
The Company believes that the great majority of regional ISPs need to offer
additional value-added services to remain competitive, but have insufficient
resources to develop these services internally to provide their customers with
the necessary global reach in offering such services. According to an August
1997 report by Business Research Group, 77% of all ISPs in the United States
are regional ISPs, 83% of which lack out-of-region access and have developed
their own billing and tracking systems. GlobalTel's Turnkey Business ISP
solution is being designed to provide the means for regional ISPs to offer
their customers increased global reach and business-grade Internet services,
such as Global Enhanced VPN and BQM. The Company's ability to provide a
comprehensive turnkey product to regional ISPs will in turn expand the reach
of its network infrastructure.
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Completion of Services Under Development
The enhanced services offered by the Company at the date of this Prospectus
were first offered by the Company in November 1997 and to date the Company has
not generated significant revenue from these services. Several other new
services described above are still under development and are not scheduled for
implementation until various times in 1998. Also, the completion of
development and introduction of new services will require the investment of
significant operating capital. It is not uncommon that the introduction of new
telecommunications services is delayed or is occasioned by technical problems.
There can be no assurance that the Company will not encounter delays or
technical problems in the introduction of new services which will prolong the
Company's dependence on traditional call-reorigination service revenues. Also,
there can be no assurance that the Company will have sufficient capital to
complete development and introduction of all of the enhanced services which it
currently plans to offer to its customers. The failure to introduce enhanced
telecommunication and Internet-related services, failures in the systems which
make those services possible or the absence of demand for such services when
introduced would likely have a material adverse affect on the Company's
ability to achieve or sustain profitability in the future. See "Risk Factors--
Recent Introduction and Ongoing Development of Value-Added Services," "--Need
for Additional Capital and Capital Requirements," "--Dependence on New Network
Systems" and "--Competition."
CUSTOMERS
As of September 30, 1997, GlobalTel's customer base consisted of an
aggregate of more than 8,500 business customers in over 120 countries, three
resellers in three countries and four interexchange carriers in the United
States.
Business Customers
The Company's sales and marketing efforts target small- and medium-sized
businesses. The Company's business customers also include some high-volume
residential customers, most of whom are employees of existing business
customers. The Company's business customer base is geographically diversified.
Reseller Customers
The Company's reseller customer base consists of three resellers of the
Company's call-reorigination service offerings located in Hong Kong, Australia
and Singapore. These customers purchase service in bulk from GlobalTel at a
discounted rate for resale to their customers. Resellers are responsible for
billing their users and for providing customer service. The Company believes
that, with the recently implemented switching, billing and customer services
platform improvements, it will be well-positioned to address the needs of the
conventional reseller market and to take advantage of the growth opportunity
this market presents. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
Interexchange Carriers
The Company's interexchange carrier customers are switch-based long-distance
companies that purchase international voice termination service for resale to
their own customers. GlobalTel's carrier sales target non-dominant U.S.-based
telecommunications service providers. The Company currently provides services
to four interexchange carrier customers in the United States. The Company
believes that long-distance services, when sold to telecommunications carriers
and other resellers, are generally a commodity product with the purchase
decision based primarily on price. Although the margins on sales to other
carriers and resellers are lower than sales to business customers, these sales
involve lower operating expenses and help the Company optimize the use of its
network and reduce its cost per minute of use. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Overview."
The Company's revenues from call-reorigination customers and wholesale
carrier customers represented 91% and 9%, respectively, of the Company's total
revenues for 1996 and 64% and 36%, respectively, of the Company's total
revenues for the nine months ended September 30, 1997.
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SALES, MARKETING AND CUSTOMER SERVICE
The Company has employed a network of independent sales agents and a small
number of resellers, supplemented by direct marketing efforts, in selling its
services. GlobalTel intends to leverage its strategic marketing relationships
to expand its customer base. In particular, the Company expects that its
access to Novell's distribution network of over 25,000 VARs and its
relationship with IBNET will facilitate additional contact with many small-
and medium-sized businesses and local ISPs in the Company's target markets.
Independent Sales Agents and Resellers
The Company distributes its international voice services primarily through a
network of over 75 independent sales agents that currently covers more than 80
countries and through a small number of resellers. The Company's agents, who
are paid solely on a commission basis, are typically independent business
persons who concurrently offer other business-to-business services. Agents and
resellers are recruited through advertising in the Company's target markets
and are also identified by referrals from customers and industry contacts. The
Company's agreements with its agents and resellers typically are non-exclusive
and require the agents to offer the Company's services at rates prescribed by
the Company in accordance with the Company's sales and marketing policies.
Agents and resellers pay an initial start-up fee to the Company. Commissions
are paid by the Company monthly based upon paid usage by customers solicited
by the agent. The applicable commission rate varies depending on the agent's
exclusivity, the type of service sold and the sales levels achieved. See "Risk
Factors--Dependence on Independent Sales Agents."
Carrier Sales
The Company's call-reorganization business has resulted in industry contacts
through which the Company resells excess international network capacity to
other U.S.-based resellers and telecommunications carriers. This strategy
allows the Company to generate higher volumes of international telephone
traffic, thereby lowering the cost per minute for traffic purchased from other
interexchange carriers.
Strategic Marketing Relationships
.IBNET
IBNET is the managing member of the Consortium for Global Commerce, which
represents thousands of individual chambers of commerce (the "Chambers") in
over 200 countries. The Consortium for Global Commerce was established to (i)
create a global intranet that enables the Chambers and their members to
exchange information and conduct business transactions electronically and (ii)
obtain more favorable pricing and terms for certain products and services for
such members.
In April 1997, the Company entered into a ten year marketing agreement with
IBNET to provide the Chambers and their members, on a non-exclusive basis,
with telecommunications services including international voice, international
fax, calling card services, Internet services, intranet, VPN and messaging.
The individual Chambers may act as sales and marketing agents for the
Company's services. IBNET has agreed to market GlobalTel's services to the
Chambers by promoting GlobalTel services in Consortium literature, at
Consortium trade shows and speaking engagements, and by listing the Company's
services in the Consortium's databases. In November 1997, the Consortium
launched its marketing campaign which will include the hosting of regional
conferences to provide the Chambers with information about available products
and services, including GlobalTel's services. Under its agreement with IBNET,
the Company also has the right to co-brand its services with the Chambers'
trademarks, a feature that the Company believes will enhance its marketing and
sales efforts because the local chamber brand is typically well recognized and
held in high regard by the local business communities in second-tier markets.
The Consortium's four member organizations are the International Chambers of
Commerce, the Paris Chamber of Commerce and Industry, the G77 (a non-
governmental organization comprised of 137 developing
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countries and China) and IBNET, the managing partner of the Consortium. The
Company believes that its relationship with the Consortium, through IBNET, and
in particular with the G77, will enhance its ability to establish
relationships with regional ISPs and expand its customer base in its target
markets.
.Novell
In October 1997, the Company entered into a three year technology licensing
agreement with Novell that provides the Company with access and support in
marketing to Novell's distribution channel of over 25,000 VARs. Novell VARs
range from small computer networking companies to large system integration
firms. The Company, in conjunction with Novell, intends to create a
certification program for channel partners with respect to the Company's
product offerings. In addition, the Company has become a Novell BIS partner.
Other BIS partners include telecommunications carriers such as Deutsche
Telecom AG, Bell Atlantic Corporation, Nippon Telegraph and Telephone
Corporation and Singapore Telecommunications Limited, which primarily cover
first-tier markets. BIS partners have agreed upon standards for
interconnecting their respective Internet networks. The Company believes that
its status as a BIS partner will allow it to benefit from any future network
connections among the BIS partners.
Direct Sales
The Company plans to deploy a direct sales team consisting of account
executives and corporate sales representatives to further implement its sales
and marketing strategy. The Company expects the account executives to focus on
regional ISPs and other small network providers. The initial targets are
certain niche-oriented Novell VARs, regional ISPs in Europe and in the United
States. The corporate sales representatives will emphasize sales of the
Company's telecommunications services to selected corporate customers. The
Company expects the direct sales team to respond to inquiries about its
services generated through the Consortium and the Novell channel marketing
efforts worldwide.
Customer Service
GlobalTel is committed to providing its customers, sales agents and
resellers with high-quality customer service. As of January 31, 1998, the
Company employed ten customer service representatives at the Company's Network
Control and Operations Center (the "Operations Center") to field customer
service calls, respond to inquiries for new service and conduct telephone
sales functions. Customer service representatives are compensated in part
based on sales and customer retention. The customer service call center is
open 24 hours a day, seven days a week. Customer service is currently provided
in five languages.
Customer service representatives are able to make changes to customer
accounts immediately while the customer is on the line and have the authority
to contact GlobalTel's underlying carriers to obtain assistance for the
Company's customers with respect to carrier difficulties. In addition,
GlobalTel encourages its independent agents to respond to service calls from
their customers because the Company believes that such service strengthens the
agents' relationships with their customers, thus promoting customer retention
and potentially leading to customer referrals.
NETWORK AND OPERATIONS
Current Network
GlobalTel's current network architecture consists of (i) voice switching and
global fax messaging infrastructure in Los Angeles, California, (ii) access to
third party infrastructure through Equant and other suppliers, (iii) enhanced
fax nodes in Hong Kong and Mexico City and (iv) the Operations Center in
Seattle, Washington. By using off-the-shelf technology which is modular and
scaleable and allows for the integration of a variety of technologies, the
Company expects to be able to provide its customers with enhanced services in
a timely and cost-efficient manner. The Company is committed to continue to
invest in improvements, through the integration of technologies, to its
electronic billing, customer interface and network management
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systems, which the Company believes are critical to its cost-effective
delivery of services to its customers. The Company expects these systems to
provide it with the ability to quickly upgrade its customers from a single
product to multiple services.
During 1996 the Company commenced a three phase network upgrade by: (i)
relocating its voice switching platform from Las Vegas to Los Angeles for the
primary purpose of facilitating access to least-cost call routing alternatives
for its call-reorigination business; (ii) upgrading the Company's network
facilities by implementing a more flexible switching platform with enhanced
features, installing an improved and scaleable customer interface and
transitioning to a more flexible and improved customer billing system; and
(iii) implementing an enhanced fax messaging infrastructure. The first phase
of this plan was completed in late 1996. In 1997 the Company completed phases
two and three, with installation and testing of a more capable switching
platform as well as the enhanced customer interface and billing systems.
Cutover of all customers to these new systems was completed in November 1997.
.International Network Switching Center--Los Angeles, California
The Company's switching center is located in the West Coast's principal
telecommunications facility in Los Angeles, California, where most major U.S.
carriers have a switching facility. The 1997 upgrade of the switching center
provided fiber optic access for GlobalTel's network to all major carriers in
the facility. As a protective measure, GlobalTel has diversified its access to
its long-distance providers through contracts with various local access
providers supplying redundancy in the event of single point failures.
The Company employs a Summa Four voice switch which is controlled by a real-
time rating, billing and switching platform. This switching platform has been
designed to provide enhanced voice telecommunications services and additional
capacity to accommodate growth in GlobalTel's customer base. The Company has
further augmented its voice switching platform by leasing a portion of a
Northern Telecom DMS 250 tandem switch (which is connected to the Summa Four
switching platform) to support the Company's carrier traffic.
GlobalTel's International Switching Center also houses the Company's fax
gateway switching platform with e-mail to fax conversion capability and
software for enhanced service features, including fax broadcasting, fax on
demand and fax mail.
.Fax Nodes--Hong Kong and Mexico City
The Company leases and operates two fax nodes in Hong Kong and Mexico City
that are co-located in Equant's facilities. The nodes are serviced and
maintained by Equant on a 24-hour basis and are interconnected to local access
providers. The Company intends to deploy fax nodes in additional locations
during 1998.
.Carriers and Network Access
The Company has resale agreements with a number of long-distance carriers in
order to obtain the best available pricing and service on each route. The
Company's enhanced fax and business-grade Internet services will be carried
through Equant's global data network. The Company's International Switching
Center is connected to the Equant network center through high-speed fiber
optic circuits. The Company's switching nodes have the ability to select
quality and least cost routes, depending on the service selected by the user.
See "--Suppliers."
.Network Control and Operations Center--Seattle, Washington
The Operations Center is located at the Company's headquarters in Seattle,
Washington, and has real-time access to all GlobalTel switching platforms and
enhanced fax nodes. Performance of the Company's conventional circuit switched
network and its data network is monitored by the Operations Center on a 24-
hour basis.
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Strategic Network Plan
In order to quickly expand network services to its customer base, the
Company intends to leverage its existing resale, interconnect and other
partnering agreements with other providers to create a virtual network
infrastructure. This strategy is designed to expand coverage in a cost
effective manner. The Company plans to invest in and deploy additional
physical infrastructure in strategic global network hubs to access regional
low-cost access routes and, over time, in places where traffic volumes warrant
such investment. The Company believes that there is an abundance of network
and switching capacity available worldwide to support this strategy.
A key element of GlobalTel's virtual network strategy is its long-term
agreement with Equant, a global managed data network service provider (the
"Equant Agreement"). The Equant Agreement provides the Company with access to
the Equant network, one of the world's most extensive managed data networks,
with access points in over 200 countries. See "--Suppliers."
Another element of GlobalTel's network strategy is its business partnership
with Novell. As a BIS partner, the Company plans to use its Turnkey Business
ISP offering to aggregate multiple smaller ISPs and other network providers,
creating the opportunity for larger BIS partners to interconnect with smaller
networks through the Company's infrastructure on a multilateral basis. This is
expected to further increase the network reach of the Company.
MANAGEMENT INFORMATION SYSTEMS
Telecommunications service providers generally must record and process large
amounts of data quickly and accurately in order to bill customers in a timely
manner, verify billings from third party carriers, service customer accounts,
respond to customer inquiries and otherwise support operations. The Company
has made a significant investment, particularly during the first nine months
of 1997, in developing an integrated, flexible, electronic billing and
customer interface.
The Company's electronic billing and customer interface system runs on a
relational database system to perform real-time billing and monitor customer
activity. This system provides GlobalTel with real-time reporting capability,
online access to system status, billing information and customer databases
through user-friendly computer screens. This system also allows the Company's
sales agents and resellers to remotely and securely access the Company's
database for provisioning, customer maintenance and access to financial and
usage data.
The Company employs an accounting system which is linked to its billing
system for on-line posting and account information transfer. The system
operates on a multi-user data base, providing the Company with the flexibility
of creating custom accounting modules to support various accounting needs.
The Company is currently evaluating its computer systems to identify
potential problems relating to the Year 2000 date change, but has not yet
determined whether it has material Year 2000 issues. The Company does not
expect the cost to modify its computer systems to address Year 2000 issues
will be material to its business, financial condition or results of
operations, and does not anticipate any material disruption in its operations
as a result of any Year 2000 issues. However, the Company does not have any
information concerning the potential impact of Year 2000 issues on any of its
suppliers or customers. In the event that the Company or any of the Company's
significant suppliers or customers do not successfully and timely address Year
2000 issues, the Company's business, operations, services and competitive
conditions could be adversely affected.
While the Company believes that its information systems are currently
sufficient for its operations, such systems will require enhancements and
ongoing investments as the Company grows. See "Risk Factors--Risk of Managing
Growth; Recent Management Changes and New Information Systems" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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SUPPLIERS
International long-distance providers can generally be categorized by the
extent, if any, of their ownership and use of their own switches and
transmission facilities. The largest U.S. carriers, AT&T, MCI, Sprint and
Worldcom, primarily utilize owned U.S. transmission facilities and generally
use other long-distance providers to carry their overflow traffic. Only the
largest U.S. carriers have operating agreements with, and own transmission
facilities that carry traffic to, the over 200 countries to which major long-
distance providers generally offer service. A significantly larger group of
long-distance providers own and operate their own switches but either rely
solely on resale agreements with other long-distance carriers to terminate
their traffic or use a combination of resale agreements and leased or owned
facilities in order to terminate their traffic as discussed below.
A switched resale arrangement typically involves the wholesale purchase of
termination services by one long-distance provider from another on a variable,
per-minute basis. Such resale, which was first permitted with the deregulation
of the U.S. market, enables the emergence of alternative international
providers that rely at least in part on transmission services acquired on a
wholesale basis from other long-distance providers. A single international
call may pass through the facilities of multiple long-distance resellers
before it reaches the foreign facilities-based carrier that ultimately
terminates the call. Resale arrangements set per-minute prices for different
routes, which may be guaranteed for a set time period or subject to
fluctuation following notice. The resale market for international transmission
is constantly changing, as new long-distance resellers emerge and existing
providers respond to fluctuating costs and competitive pressures. In order to
effectively manage costs when utilizing resale arrangements, long-distance
providers need timely access to changing market data and must quickly react to
changes in costs through pricing adjustments or routing decisions.
The Company has supply contracts with Sprint, Pacific Gateway Exchange,
Inc., Star Vending, Inc. and a number of other interexchange carriers for
long-distance telecommunications services. Typically, these agreements are
terminable with minimal notice. To obtain favorable forward pricing from
certain of its suppliers, the Company has committed to purchase minimum
volumes of a variety of long-distance services during stated periods, whether
or not such volumes are used or, in one case, has agreed to pay a surcharge
equal to a percentage of the Company's shortfall from a specified monthly
minimum volume. During January 1998 the Company's monthly minimum volume
commitments and maximum surcharge totaled approximately $240,000.
The Company utilizes Equant's extensive data network with access points in
most countries worldwide. This network was originally created by a consortium
of airlines to handle their data transport needs. The Equant Agreement allows
the Company to lease network access and co-locate its switches and servers at
Equant sites around the world. The Company believes that co-location will help
reduce the Company's capital and operating costs and accelerate the Company's
ability to implement network access points. The Company receives engineering
and technical support services for the implementation and management of its
value-added services. Equant also facilitates interfacing with local ITOs,
which provide the switched and dedicated last links to the Company's
customers. The Company's network is monitored 24 hours a day, seven days a
week, from Equant's primary control centers located in Singapore, Paris and
Atlanta.
Many of Equant's access points are located in second-tier markets. The
Company intends to use Equant's local "dial up" data service, allowing the
Company's customers to access the Company's network via a local telephone call
in many cities around the world.
The Equant Agreement has an initial term of five years from the time the
Company connects to the full number of locations available under the Equant
Agreement, and a maximum initial term of 15 years, expiring in 2010. At
present, the Company has not connected to all locations available under the
Equant Agreement. Following the initial term, the Equant Agreement provides
for extension upon mutual agreement between the parties and is terminable upon
default or breach by either party. If the Equant Agreement is terminated or if
such agreement is renegotiated to GlobalTel's disadvantage, or if Equant is
unable to provide the Company with services in accordance with its agreement
with the Company, there could be a material adverse effect on the Company's
business, financial condition or results of operations. See "Risk Factors--
Dependence on Suppliers."
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COMPETITION
The global telecommunications industry is extremely competitive and is
characterized by rapid regulatory and technological change. The Company's
success depends upon its ability to compete with a variety of other
telecommunications providers in each of its markets, including with global
alliances between and among some of the world's largest telecommunications
carriers. Other potential competitors include cable television companies,
wireless communications providers, ISPs, electric and other utilities with
rights of way, large end users that have private networks and new entrants
upon niche market opportunities. The Company believes that such competition
will intensify. Many of the Company's current or potential competitors have
substantially greater financial, marketing and other resources than the
Company. If the Company's competitors or potential competitors devote
significant additional resources to the provisioning of telecommunications
services to the Company's target customer base, such action could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be able
to compete successfully against its current or future competitors. See "Risk
Factors--Competition."
Currently, the Company competes with providers and other marketers of
international call-reorigination services, ITOs and other marketers of long-
distance telephone service. Because of their close ties to national ITOs,
regulatory authorities often can be pressured to refrain from adopting
policies and granting regulatory approvals that would result in increased
competition for a local ITO. If an ITO were to successfully pressure its local
regulator, the Company could be denied regulatory approval in a jurisdiction
in which it otherwise would be permitted to offer services. Any delay in
obtaining approval, or failure to obtain approval could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's larger telecommunications competitors include some of the
world's largest telecommunications companies, such as AT&T, MCI, Sprint,
Worldcom, Cable & Wireless p.l.c. and British Telecommunications P.L.C. and
other global telecommunications providers including USA Global Link, Inc.,
Telegroup, Inc. and IDT Corporation. In addition, numerous smaller carriers
have emerged, both in the United States and in newly deregulated markets
around the world, many of which specialize in offering international telephone
services similar to the Company's call-reorigination services.
Competition for customers in the telecommunications markets in which the
Company operates is primarily based on price, and to a lesser extent on the
type and quality of services offered. The Company anticipates that
deregulation and increased competition will result in decreased prices for
telecommunications services. The Company believes that the effects of such
decreases will be at least partially offset by increased telecommunications
usage and decreased costs. However, to the extent that this does not occur,
there could be an adverse effect on the Company's margins and financial
profits, and the Company's business, financial condition and results of
operations could be materially and adversely affected.
The market for value-added data services, such as the business-grade
Internet service under development by the Company, is extremely competitive
and the Company expects that competition will intensify in the future. The
Company believes that its ability to compete successfully in the value-added
services market depends upon a number of factors, including: market presence;
the capacity, reliability, low/fixed latency and security of network
infrastructure; technical expertise and functionality, performance and quality
of services; customization; ease of access to and navigation of the network;
the pricing policies of competitors; customer support; the ability to support
existing and emerging industry standards; and industry and general economic
trends.
The Company's current and prospective competitors in the value-added
services business include many large companies that have substantially greater
market presence and financial, technical, marketing and other resources than
the Company. As a result, they may be able to develop and expand their
communications and network infrastructures more quickly, adapt more swiftly to
new or emerging technologies and changes in customer requirements, take
advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their products than the
Company. In addition to the Company's
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traditional telecommunications competitors, the Company's value-added services
business competes or will compete with two additional categories of
competitors: (i) ISPs including on-line service providers such as American
Online, Inc., UUNET Technologies Inc., Netcom On-line Communication Services,
Inc., Bolt Beranek & Newman, Inc., Microsoft Corporation and other national
and regional Internet providers, who provide public access to the Internet and
limited business-grade access and services; and (ii) enhanced messaging
providers, including a number of newer companies such as Xpedite System, Inc.,
FaxSav Incorporated and Premier Technologies, Inc., that were recently
established to provide niche services and have grown by expanding their
service offerings. There can be no assurance that the Company will have the
financial resources, technical expertise or marketing and support capabilities
to compete successfully.
The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications
companies will enter the value-added services market, resulting in even
greater competition. In addition, the ability of some of the Company's
competitors to bundle other services and products with VPN, global roaming
services or both could place the Company at a significant competitive
disadvantage. Increased competition in the value-added services market could
result in significant price competition, which in turn could result in
significant reductions in the average selling price of the Company's value-
added services. In addition, competition could cause the Company to incur
increased selling and marketing expenses, which could adversely affect the
Company's profitability. There can be no assurance that the Company will be
able to offset the effects of any such price reductions through an increase in
the number of its customers, higher revenues from enhanced services, cost
reductions or otherwise. Increased competition, price or otherwise, could
result in erosion of the Company's customer base and adversely affect the
Company's operating results.
The telecommunications industry is in a period of rapid technological
evolution marked by the introduction of new product and service offerings and
increasing capacity for services similar to those provided and under
development by the Company. Examples of some new technologies include
satellite-based systems, such as the proposed Iridium World Communications
Ltd., GlobalStar Telecommunications Limited and Teledesic Corp. systems,
utilization of the Internet for voice and data transmission and digital
wireless communications systems. The Company is unable to predict which of
many possible future product and service offerings will be important to
maintain its competitive position or what expenditures will be required to
develop and provide such products and services. See "Risk Factors--Rapid
Changes in Technology."
REGULATION
The Company provides both value-added enhanced services as well as call-
reorigination services to customers in the United States and abroad. These
services are regulated to some degree both in the United States and in many
foreign countries. In the United States, the FCC regulates telecommunications
services. Many countries also have a regulatory body, or otherwise integrate
regulatory functions in the state-owned monopoly in the telecommunications
sector. In addition, international telecommunications services are subject to
rules and policies promulgated by multilateral organizations. The ITU and the
World Trade Organization ("WTO") both potentially influence governmental
policies regulating international telecommunications as well.
In the past few years, the regulation of international telecommunications
has undergone dramatic changes. Many countries have begun to liberalize their
markets, allowing competition in telecommunications services for the first
time. Because of the uncertainty involved in dealing with regulatory
authorities in many countries and the volatility of the market, some degree of
risk exists. Government authorities, both in the United States and abroad,
could potentially issue regulations or decisions that could have substantial
adverse effects on the Company's profitability. If the Company is unable to
provide the services it is presently providing, or intends to provide, or to
use existing or contemplated transmission methods due to its inability to
receive or retain formal or informal approvals for such services or
transmission methods, or for any other reason related to regulatory compliance
or lack thereof, such events could have a material adverse effect on the
Company's business, financial condition and results of operations
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Telecommunications
In 1995, the FCC granted the Company authorization to resell international
switched services pursuant to Section 214 of the Communication Act of 1934.
The Company uses this Section 214 license to provide call-reorigination
services to customers in foreign countries using a number of methods. Some
methods involve completed calls and other communications to the United States
from foreign countries, and other methods, such as traditional call back
service, involve incomplete calls which avoid the high international rates
offered by the ITO in a particular regulated country by providing a dial tone
from a deregulated country, typically the United States. To place a call using
traditional call back service, a user dials a unique phone number to an
international carrier's switching center and then hangs up after it rings. The
user then receives an automated call back providing a dial tone from the
United States, which enables the user to complete the call. In its effort to
drive down international telecommunications accounting rates, the FCC has
endorsed the provisioning of call-reorigination services by U.S. operators.
However, there is a substantial risk involved in providing traditional call
back services. A substantial number of countries consider call-reorigination
adverse to the interests of their national telecommunications sectors and in
some cases, these countries have passed laws to make traditional call back
services illegal.
In June 1995, the FCC issued an order stating that it would consider
enforcement action against operators based in the United States engaged in
call-reorigination by means of the traditional call back method in countries
where this activity is expressly prohibited. The FCC confirmed in the order
that call-reorigination by means of traditional call back service does not
violate either United States domestic law or international law. Under the FCC
order, a party requesting enforcement assistance from the FCC must provide
sufficient documentation of the illegality of traditional call back service
and detailed evidence of the operator's violation of the law by virtue of its
provision of traditional call back services in the country. The FCC also
requires the party to provide documentation of the declaratory or enforcement
action taken by the applicable country's national authorities against the
operator before requesting the FCC's assistance in enforcing the country's
laws against the operator. At November 30, 1997, 31 countries had filed
documents with the FCC alleging that certain forms of call-reorigination
services violate their respective domestic laws. Of those 31 countries, only
the Philippines and Saudi Arabia had fully complied with the FCC's
documentation requirements. Sales by agents located in the Philippines and
Saudi Arabia represented approximately 2.2% and 1.4% of the Company's call-
reorigination revenues and total revenues during the first nine months of
1997, respectively, and revenues from agents located in those 31 countries
represented approximately 11.7% and 7.5% of the Company's call-reorigination
revenues and total revenues during the first nine months of 1997,
respectively. To date, the FCC has not specified the types of actions it might
take against an operator, but possible enforcement remedies include the
issuance of a cease-and-desist order, imposition of a monetary sanction, or,
in an extreme case, revocation of the operator's Section 214 license. The FCC
recently took enforcement action by revoking the operator's Section 214
license in a case involving the Philippines. The Company provides call-
reorigination services in certain of these countries. Any enforcement action
taken by the FCC, in addition to any actions taken by the foreign country's
authorities, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Within the United States, the interstate and international
telecommunications services currently provided by GlobalTel are subject to the
exclusive jurisdiction of the FCC. In the event that the Company decides to
offer intrastate telecommunications services, such activity will be subject to
the jurisdiction of the individual states in which the Company provides such
services. In the majority of states it is necessary to obtain a certificate of
public convenience and necessity from the appropriate state agency prior to
offering intrastate telecommunications services. The Company will apply for
and obtain the required certificates and any other approvals prior to the time
it offers any intrastate telecommunications services, although there can be no
assurance that the Company will be successful in obtaining such certificates
and approvals. See "Risk Factors--Regulatory Risks."
Value-Added Services
The Company provides enhanced data services to customers in the United
States and abroad, including enhanced fax, enhanced e-mail, Internet access
and intranet services. These services are potentially subject to
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some regulation in the United States and in several of the foreign countries
in which the Company operates. Countries that are signatories to the General
Agreement on Trade in Services must grant WTO member states most favored
nation status with respect to provisioning of enhanced services pursuant to
the Telecommunications Annex to that Agreement. This requires WTO member
states to accord non-discriminatory treatment to companies seeking to provide
enhanced services. In addition, the WTO provides a forum for dispute
settlement in the event that a signatory country violates the most favored
nation treatment principle.
In the United States and abroad, enhanced and value-added services are
essentially unregulated. The FCC's Computer II decision in 1980 and the 1996
Telecommunications Act establish that enhanced services of the type provided
by the Company are outside the definition of regulated telecommunications or
common carrier services. The Company's enhanced services also are exempt from
local access charges pursuant to FCC rules. This exemption, however, has been
threatened from time to time both by Congress and the FCC. In addition, as
part of the 1996 Telecommunications Act, all telecommunications operators
providing certain domestic telecommunications services are required to make
contributions to the Universal Service Fund established thereunder, which
provides a subsidy to facilitate the provision of telecommunications services
to high-cost areas. While the Company's current operations do not subject it
to such requirement, it is possibile that enhanced services providers may be
required in the future to contribute some portion of their revenues to the
Universal Service Fund. This issue arose during the FCC's implementation of
the 1996 Telecommunications Act and to date remains largely unsettled. If the
FCC were to respond to congressional pressure from some members of Congress to
eliminate the local access charge exemption, or if it were to begin regulating
enhanced services in some other way, the Company's business, financial
condition and results of operations could be materially adversely affected.
Although to date no such legislation has been introduced, a law requiring the
Company to contribute to the Universal Service Fund would result in higher
costs for the Company, and there could be a material adverse effect on the
Company's business, financial condition and results of operations. The Company
cannot predict the impact, if any, that future regulation or regulatory
changes may have on the Company's enhanced services business.
The Company is also subject to local laws in each country in which it
provides enhanced services. In most countries, the Company must secure a
license to provide these services. The Company places license requirements for
data transmission into three basic categories according to the regulatory
environment and requirements for conducting business as follows: (i) open
class and required registration; (ii) formal application process; and (iii)
local partner requirement. In most developed and deregulated countries, such
as Australia and the United Kingdom, the provisioning of data services
requires an "open class" filing with the local jurisdictional authority in
conjunction with the establishment of an in-country legal entity. The open
class filing is essentially a statement of the class of services being offered
by the provider. However, in some countries, such as in Japan and Germany, a
more detailed registration may be required with local authorities which may
entail a full description of the service provider and detailed descriptions of
the services being provided, together with rates and other information. In
other countries, the provisioning of data transmission and value-added
services requires approval by local jurisdictional authorities. This process
may differ significantly from country to country, but generally entails the
review of a formal application in order to obtain the necessary license. This
process may take three to six months. Examples of markets in which the formal
application process are required include Hong Kong and Singapore. Because the
Company plans to initiate business in countries which have adopted
deregulatory policies, the Company believes that the risk of not being able to
obtain required licenses in target markets is not material; however, the time
and legal expense required to complete the licensing process could affect the
timing of the introduction of the Company's services and the start-up costs
involved in launching service. In certain countries with extremely restrictive
regulatory environments, obtaining licenses may be difficult or impossible. In
such cases, the Company may elect to work with a local partner, such as an
independent commercial and/or government-related entity, such as an ITO.
Local laws and regulations differ significantly among the jurisdictions in
which the Company operates, and the interpretation and enforcement of such
laws and regulations vary or are often based on the informal views of the
local ministries which in some cases are subject to influence by the domestic
operator. There can
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be no assurance that the Company has accurately predicted the enforcement of
applicable laws and regulations or regulatory and enforcement trends in a
given jurisdiction or will be found in compliance with all such laws and
regulations. Failure to predict the enforcement of applicable laws accurately,
or incorrect interpretations of applicable laws and regulations, could cause
the Company to lose or to be unable to obtain regulatory approvals necessary
for it to be able to provide certain of the services the Company markets. Such
failure could result in material adverse effects on the Company's ability to
provide services. See "Risk Factors--Regulatory Risks."
INTELLECTUAL PROPERTY
The Company owns U.S. Registration No. 1,944,078 for the mark PRIMECALL for
reselling long-distance telecommunications services. The Company has filed
applications in the national trademark offices of Australia, Hong Kong and
Japan and in the regional European Community trademark office to register the
service mark PRIMECALL. There can be no assurance that the Company's trademark
applications will result in any registration being issued, or that such
registration will be held valid and enforceable if challenged. The Company
currently does not hold any registered patents or copyrights.
The Company currently does not hold any trademark registrations for the mark
GLOBALTEL. The Company relies primarily on common law rights to establish and
protect its trade secrets and other intellectual property. The Company is
aware of a pending U.S. application by Cellnet Corporation ("Cellnet") to
register the mark GLOBALTEL for providing international wireless telephone
communication services on a temporary basis, including renting telephones
therefor. The Company believes that it may have commenced using the mark
GLOBALTEL before Cellnet and is assessing whether to oppose Cellnet's
application. The Company is also aware that Interactive Media Technologies,
Inc. is doing business in the area of international callback services under
the trade name GlobalTel. There can be no assurance that the Company's use of
the mark GLOBALTEL will continue unimpeded or the Company's measures to
protect its intellectual property will deter or prevent the unauthorized use
of the Company's intellectual property. The Company could incur substantial
costs and diversion of management resources relating to the enforcement of its
intellectual property rights. In addition, if the Company is unable to
adequately protect its intellectual property, including existing service marks
and trademarks, there could be an adverse material effect on the Company's
business, financial condition and results of operations.
While the Company is not aware of any assertion that it infringes the
proprietary rights of any third parties, there can be no assurance that third
parties will not assert such claims against the Company in the future or that
such claims will be unsuccessful. The Company could incur substantial costs
and diversion of management resources with respect to the defense of any
claims relating to proprietary rights. Furthermore, parties making such claims
could secure a judgment awarding substantial damages, as well as injunctive or
other equitable relief against the Company, which could effectively block the
Company's ability to use the proprietary rights of those third parties. Such a
judgment would have a material adverse effect on the Company's business,
financial condition and results of operation. In the event a claim relating to
proprietary rights is asserted against the Company, the Company may seek
licenses to such proprietary rights. There can be no assurance however, that
licenses could be obtained on commercially reasonable terms, if at all, or
that the terms of any offered licenses will be acceptable to the Company. The
failure to obtain any necessary licenses or other rights could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors-- Rapid Changes in Technology."
EMPLOYEES
As of January 31, 1998, the Company had 31 full-time employees. The Company
expects to hire additional personnel as needed to meet future growth. None of
the Company's employees is represented by a labor union and the Company
considers its relationship with its employees to be good.
PROPERTIES
The Company leases approximately 4,800 square feet of office space for its
headquarters and Operations Center in Seattle, Washington under a lease that
expires on December 31, 1998 and requires monthly
50
<PAGE>
payments of $5,850. In addition, the Company leases approximately 1,500 square
feet of space in Los Angeles, California, for switch equipment under a lease
that expires on June 30, 2006 and requires monthly payments of $5,040.
LEGAL PROCEEDINGS
The Company is not a party to any litigation that is expected to have a
material adverse impact on the business, financial condition or results of
operations of the Company.
51
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Ronald P. Erickson............... 54 Chairman of the Board, Chief Executive
Officer and President
Senior Vice President, Marketing and
German F.H. Burtscher............ 38 Sales and Secretary
Eric D. Orse..................... 33 Director of Finance and Treasurer
Director, Senior Vice President and
Ronald B. Fox.................... 52 President of Primecall
John E. Cox...................... 70 Vice President, Network Services
Bruce L. Crockett (1)............ 53 Director
Randall J. Ottinger (2).......... 39 Director
Lyman C. Hamilton, Jr. .......... 71 Director
Michael S. Brownfield (1)(2)..... 57 Director
Steven S.V. Wong (1)(2).......... 56 Director
Paul H.F.M. van de Plas.......... 37 Director
Frank Krentzman.................. 40 Director
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Ronald P. Erickson has served as Chairman of the Board, President, Chief
Executive Officer and a Director of the Company since January 1996. From
August 1994 to January 1996, he was Managing Director of Globalvision L.L.C.,
an international strategic consulting firm. From September 1992 to August
1994, he served variously as Chairman and Vice Chairman of the Board,
President and Chief Executive Officer of Egghead Software, Inc., a retailer of
software and computer peripheral products. He was also the co-founder and a
director of Microrim, Inc., a database software developer from November 1981
to May 1992. Currently, he is also a director of ITEX Corporation, a trading
and financial services company, Westower Corporation, a wireless
communications company and Intrinsyc Software, Inc., a developer of software
tools and components. Mr. Erickson holds a B.A. from Central Washington
University, an M.A. from the University of Wyoming and a J.D. from the
University of California, Davis, School of Law.
German F.H. Burtscher has served as the Company's Senior Vice President,
Marketing and Sales since February 1997 and served as its Vice President,
Strategic Marketing and Product Development from October 1995 to February
1997. In addition, Mr. Burtscher has certain rights to serve on the Board of
Directors. See "--Board of Directors Composition." In January 1995, he co-
founded Ratsten International Telecommunications, Inc., a telecommunications
services provider, and served as its President until October 1995. He also
served as Regional Sales Manager and Senior Account Executive of World Call
Telecommunications, a long distance telephone carrier, from June 1992 to
January 1995. Mr. Burtscher holds a B.A. in Business and Sociology from the
University of Austria, Innsbruck and an M.B.A. in Finance and International
Marketing from the University of Austria, Graz.
Eric D. Orse has served as the Company's Director of Finance and Treasurer
since October 1997, and served as an outside financial consultant to the
Company from June 1997 to September 1997. He is also the owner and principal
of Orse & Co., Inc., a financial consulting firm. From May 1995 to October
1996, he served as Chief Financial Officer of First Nationwide Automotive
Acceptance, Inc., an automotive leasing finance company. He also served as
Senior Accountant and Senior Consultant at Price Waterhouse LLP from
52
<PAGE>
January 1994 to April 1995 and from July 1989 to January 1992. From February
1992 to December 1993, Mr. Orse was enrolled in a Masters in Business
Administration program. Mr. Orse is a C.P.A. and holds a B.A. in Accounting
and an M.B.A. in Finance and Business Management, both from Seattle
University.
Ronald B. Fox has served as the Company's Senior Vice President since
October 1997, as President of the Company's subsidiary, Primecall, Inc., since
September 1997 and as a Director of the Company since December 1997. From
January 1994 to February 1997, he served as Vice President of Hi Rim
Communications, Inc., an international facilities-based telecommunications
carrier. In April 1997, subsequent to Mr. Fox's resignation as an officer, Hi
Rim Communications, Inc. filed a petition under the federal bankruptcy laws in
the United States Bankruptcy Court for the District of Nevada. From June 1988
to March 1994, he served as President of Ronald B. Fox & Associates, a
telecommunications consulting firm. Mr. Fox holds an A.S. in Business
Marketing from Lansing Community College.
John E. Cox has served as a consultant to the Company since August 1997 and
will enter into an employment agreement concurrent with the closing of this
Offering to become the Company's Vice President, Network Services. From
January 1996 to August 1997, he was the Company's Vice President, Network
Services Development. Prior to joining the Company, he was a self-employed
consultant from September 1995 to December 1995 and served as Vice President
of Ascent Logic Corporation, a computer software company, from March 1989 to
August 1995. Earlier in his career, Mr. Cox served as Senior Vice President of
Transmission Products at DSC Communications, Vice President of Telephone
Network Products at MA-Com, Technical Director of ITT Corporation's System 12
Distributed Digital Switching program and Vice President of Engineering for
Western Union. Mr. Cox holds an M.S. in Computer Science from Stevens
Institute of Technology.
Bruce L. Crockett has served as a Director of the Company since September
1997 and is a member of the Company's Compensation Committee. From February
1992 to July 1996 he served as President, Chief Executive Officer and a
Director of COMSAT Corporation, a global telecommunications company. He is
also a director, chairman of the compensation committee and member of the
audit committee of ACE Limited, a multi-link insurance company, and a director
and trustee of mutual funds managed by AIM Management Group Inc., a mutual
fund company. Mr. Crockett holds an A.B. in Geography from the University of
Rochester, a B.S. in Accounting from the University of Maryland and an M.B.A.
in Finance from Columbia University.
Randall J. Ottinger has served as a Director of the Company since September
1997 and is a member of the Company's Audit Committee. Mr. Ottinger was the
Company's President from March 1997 to August 1997 and its Vice President,
Marketing from January 1996 to February 1997. Since September 1997, he has
served as Senior Vice President, Marketing and Business Development of Richter
Systems International Inc., a software company. From June 1993 to January 1996
he served as Senior Vice President of Marketing of the Air-to-Ground Division
of Claircom, Inc., a division of McCaw Cellular, Inc., and from February 1992
to May 1993 he was Head of Strategic Planning at Egghead Software, Inc. Mr.
Ottinger holds a B.A. in Psychology from Cornell University and an M.B.A. from
Harvard University.
Lyman C. Hamilton has served as a Director of the Company since November
1997. He also served as President and Chief Executive Officer of Interdigital
Communications Corporation from 1994 to 1995. Prior to that, Mr. Hamilton
served as Chairman of the Board from 1993 to 1994, and as President and Chief
Executive Officer from 1991 to 1993, of Alpine Polyvision, Inc., a developer
of flat panel displays. Mr. Hamilton was employed by ITT Corporation from 1962
to 1979 where he served as President from 1977 to 1979 and as Chief Executive
Officer in 1978 and 1979. Currently, he is a director of Marine Management
Systems, Inc., a provider of shipboard hardware and software management
systems, Scan-Optics, Inc., a provider of optical character recognition
equipment, and Polyvision Inc., a provider of visual display equipment and
developer of flat panel displays. Mr. Hamilton holds a B.A. from Principia
College and an M.P.A. from Harvard University.
53
<PAGE>
Michael S. Brownfield has served as a Director of the Company since January
1996 and is a member of the Company's Compensation and Audit Committees. Mr.
Brownfield, a private investor, is also a director of NW Cascade Inc., a
construction service and supply company, Cutter & Buck, Inc. a men's apparel
company, and Accurate Molded Plastics Inc., a plastics manufacturer. Mr.
Brownfield holds a B.S. from the University of Oregon.
Steven S.V. Wong, whose principal residence is located in Singapore, has
served as a Director of the Company since March 1996 and is a member of the
Company's Audit and Compensation Committees. Mr. Wong has been a private
investor since 1991. Currently, he is also the non-executive Chairman of the
Board of Directors of John Hancock Life Assurance Company, and a director of
Gereg Capital Corporation, Beijing AusAsean Investment Advisors, Sinoelectric
Technology, Northeastern Holdings and Dupont Ltd. Mr. Wong holds a B.S. in
Mathematics from the University of Singapore and an M.S. in Actuarial Science
from Northeastern University.
Paul H.F.M. van de Plas, whose principal residence is located in the
Netherlands, has served as a Director of the Company since September 1997. He
has also served as Director of N.I.B. Securities N.V., a Dutch investment
bank, since May 1996, as Director of Carparkers Nederland B.V., a Dutch
investment bank, since May 1995 and as head of Equity Investment since May
1996. Prior to that, he served as Director of Institutional Sales at Credit
Lyonnais Nederland Bank from August 1993 to April 1996. In addition, he served
as an Institutional Sales Advisor at BZW, an investment bank, from August 1990
to September 1996 and at ABN AMRO, a Dutch commercial bank, from July 1987 to
September 1990. Mr. van de Plas holds an M.Sc. from the University of Tilburg.
Frank Krentzman has served as a Director of the Company since January 1997
and was the Company's Senior Vice President from January 1996 to August 1997.
See "--Board of Directors Composition." Currently, he is serving as President
of Succint Communications, a telecommunications consulting company. In January
1994, he co-founded Ratsten International Telecommunications, Inc. and served
as its Vice President until October 1995.
BOARD OF DIRECTORS COMPOSITION
The Company's Board of Directors will be divided into three classes at the
1998 Annual Meeting of Shareholders. The Class I directors will serve an
initial term until the 1999 Annual Meeting of Shareholders, the Class II
directors will serve an initial term until the 2000 Annual Meeting of
Shareholders and the Class III directors will serve an initial term until the
2001 Annual Meeting of Shareholders. Each class will be elected for three-year
terms following its respective initial term. Officers of the Company are
elected at the first meeting of the Board of Directors following the meeting
of the shareholders at which directors are elected and serve at the discretion
of the Board of Directors. See "Description of Securities--Certain Provisions
in Restated Articles." There are no family relationships among the Company's
directors and executive officers.
Under the terms of a warrant issued to Dupont Ltd., an affiliate of Steven
S.V. Wong, Dupont has the right to require the Company to appoint a person
selected by Dupont to the Board of Directors and to nominate and recommend
that designee for election to the Board by the shareholders of the Company.
Mr. Wong is not Dupont's designee and to date, Dupont has not elected to
exercise this right. See "Certain Transactions." In addition, pursuant to the
Company's 1995 agreement to acquire GFP Group, Inc., German F.H. Burtscher and
Frank Krentzman have the right to occupy a seat on the Board of Directors in
alternating calendar years. See "Certain Transactions." Messrs. Burtscher and
Krentzman also have the joint right to nominate an additional designee for
election to the Board of Directors by the shareholders and each has a right to
attend Board meetings notwithstanding which of them is currently serving on
the Board of Directors. Paul H.F.M. van de Plas is currently Messrs.
Burtscher's and Krentzman's designee to the Board of Directors. Messrs.
Burtscher's and Krentzman's rights to Board representation and appointment of
a designee renew for
54
<PAGE>
a three year rolling term until terminated by the Company. To date, the
Company has not elected to terminate these rights.
BOARD COMMITTEES
The Board of Directors currently has an Audit Committee and a Compensation
Committee. The Audit Committee oversees the actions taken by the Company's
independent auditors and reviews the Company's internal financial and
accounting controls and policies. The Compensation Committee is responsible
for determining salaries, incentives and other forms of compensation for
officers and other employees of the Company and administers the Company's
incentive compensation and benefit plans.
DIRECTOR COMPENSATION
Directors who are not officers of the Company are reimbursed by the Company
for reasonable costs and expenses incurred in attending Board meetings. On
October 30, 1997, the Company granted options to purchase 2,000, 1,000, 2,000,
1,000 and 2,000 shares of the Company's Common Stock at an exercise price of
$5.50 per share to each of Messrs. Brownfield, Crockett, Wong, van de Plas and
Krentzman, respectively, in consideration of their service on the Board. These
options were exercisable in full upon grant. On October 30, 1997, the Company
also issued 2,000 shares of Common Stock to each non-employee director. Upon
his appointment to the Board on November 11, 1997, the Company granted Mr.
Hamilton 2,000 shares of Common Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, the Company established a Compensation Committee currently
consisting of Messrs. Wong, Brownfield and Crockett. From time to time, the
Company has entered into transactions with members of the Compensation
Committee. See "Certain Transactions."
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
The Company's amended and restated articles of incorporation (the "Restated
Articles") include a provision permitted by Washington law that limits the
liability of the Company's directors. Under the provision, no director will be
personally liable to the Company or its shareholders for monetary damages for
conduct as a director, excluding, however, liability for acts or omissions
involving intentional misconduct or knowing violations of law, illegal
distributions or transactions from which the director receives benefits to
which the director is not legally entitled. In addition, Washington law
provides for broad indemnification by the Company of its officers and
directors. The Company's Bylaws and indemnification agreements entered into
between the Company and its directors implement this indemnification to the
fullest extent permitted by law. Insofar as the indemnity against liabilities
arising under the Securities Act may be applicable to directors or officers
pursuant to the foregoing provisions, the Company has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
55
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
compensation awarded to, earned by or paid to the Company's Chief Executive
Officer and to the other executive officers whose total annual salary and
bonus exceeded $100,000 (collectively, the "Named Executive Officers") in the
fiscal year ended December 31, 1997.
Several of the Named Executive Officers resigned from the Company in August
1997. Michael S. Sims resigned as Chief Operating Officer and was replaced by
Ronald B. Fox. John E. Cox resigned as the Company's Vice President, Network
Services Development. Since then he has served as a consultant to the Company
and will enter into an employment agreement concurrent with the closing of the
Offering. Alan H. Chin resigned as a Senior Vice President in August 1997 and
as a Director in December 1997. Currently, he is working as an agent for the
Company pursuing business opportunities in Asia. See "Certain Transactions."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
----------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND POSITION SALARY BONUS OPTIONS COMPENSATION
----------------- -------- ----- ------------ ------------
<S> <C> <C> <C> <C>
Ronald P. Erickson
Chairman of the Board, President
and Chief Executive Officer...... $154,479(1) -- 4,000 --
German F.H. Burtscher
Senior Vice President, Marketing
and Sales........................ 143,718(2) -- 4,000 --
Michael S. Sims.................... 169,499(3) -- 15,000 --
John E. Cox........................ 128,960(4) -- 10,000 --
Alan H. Chin....................... 127,864(5) -- 4,000 --
</TABLE>
- --------
(1) Includes $70,787 of deferred salary, plus accrued interest thereon at an
annual rate of ten percent. On September 22, 1997, this sum, together with
$34,434 of compensation earned during 1996, was converted into a warrant
to purchase 19,131 shares of Common Stock at an exercise price of $0.05
per share.
(2) Includes $60,026 of deferred salary, plus accrued interest thereon at an
annual rate of ten percent. On September 22, 1997, this sum, together with
$18,045 of compensation earned during 1996, was converted into a warrant
to purchase 14,194 shares of Common Stock at an exercise price of $0.05
per share.
(3) Includes $107,807 of deferred salary, plus accrued interest thereon at an
annual rate of ten percent. On September 22, 1997, this sum, together with
$163,400 of compensation earned during 1996, was converted into a warrant
to purchase 49,310 shares of Common Stock at an exercise price of $0.05
per share.
(4) Includes $67,267 of deferred salary, plus accrued interest thereon at an
annual rate of ten percent. On September 22, 1997, this sum, together with
$76,363 of compensation earned during 1996, was converted into a warrant
to purchase 26,114 shares of Common Stock at an exercise price of $0.05
per share.
(5) Includes $64,440 of deferred salary, plus accrued interest thereon at an
annual rate of ten percent. On September 22, 1997, this sum, together with
$60,429 of compensation earned during 1996, was converted into a warrant
to purchase 22,703 shares of Common Stock at an exercise price of $0.05
per share.
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<PAGE>
Option Grants Table
The following table contains information concerning stock option grants made
to each of the Named Executive Officers during the fiscal year ended December
31, 1997.
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERMS (2)
OPTIONS EMPLOYEES PER EXPIRATION ----------------
NAME GRANTED (1) IN 1997 SHARE DATE 5% 10%
---- ----------- ---------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Ronald P. Erickson...... 4,000 4.5 $5.50 2/21/07 $13,836 $ 35,062
German F.H. Burtscher... 4,000 4.5 5.50 2/21/07 13,836 35,062
Michael S. Sims......... 15,000 16.9 5.50 2/21/07 51,884 131,483
John E. Cox............. 10,000 11.3 5.50 2/21/07 34,589 87,656
Alan H. Chin............ 4,000 4.5 5.50 2/21/07 13,836 35,062
</TABLE>
- --------
(1) Grants generally vest 25% on the date of grant and 25% on each yearly
anniversary date during the three years following the date of grant, as
long as the optionee remains an employee with, consultant to or director
of the Company. Vesting of options may be accelerated at the discretion of
the administrator of the Company's 1996 Plan. The maximum term of each
option granted is ten years from the date of grant. The exercise price is
equal to the fair market value of the stock on the grant date as
determined by the Board of Directors. See "--Benefit Plans--Stock Option
Plan."
(2) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
the future Common Stock price. Actual gains, if any, on stock option
exercises are dependent on the future financial performance of the
Company, overall market conditions and the option holders' continued
employment through the vesting period.
Option Values. The following table contains information concerning options
to purchase Common Stock held by each of the Named Executive Officers as of
December 31, 1997. None of the Named Executive Officers exercised any stock
options during 1997.
FISCAL 1997 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
NAME DECEMBER 31, 1997 (#) DECEMBER 31, 1997 ($) (1)
---- ------------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Ronald P. Erickson...... 4,500 -- -- --
German F.H. Burtscher... 4,329 -- -- --
Michael S. Sims......... 42,933 -- -- --
John E. Cox............. 26,500 -- -- --
Alan H. Chin............ 9,100 -- -- --
</TABLE>
- --------
(1) Options are "in the money" if the fair market value of the underlying
securities exceeds the exercise price of the options. The exercise prices
for all options granted to the Named Executive Officers were equivalent to
the fair market value of the Common Stock of the Company, as determined by
the Board of Directors, as of December 31, 1997.
57
<PAGE>
EMPLOYMENT AGREEMENTS
Effective upon the closing of this Offering, the Company will enter into
employment agreements with each of Messrs. Erickson, Burtscher, Fox, Orse and
Cox (collectively, the "Executives") for a term of one year. The employment
agreements will provide for an annual salary of $200,000, $150,000, $150,000,
$120,000 and $150,000 for Messrs. Erickson, Burtscher, Fox, Orse and Cox,
respectively. The employment agreements also include the grant of an option to
each of Messrs. Erickson, Burtscher, Fox, Orse and Cox to purchase 100,000,
60,000, 60,000, 20,000 and 40,000 shares of Common Stock, respectively, under
the 1996 Plan at an exercise price equal to the initial public offering price.
Each option will expire ten years from the date of grant and will vest over a
period of three years or upon a schedule based on the Company's performance
against goals to be established by the Compensation Committee of the Board of
Directors. Each Executive may terminate the agreement upon three months
notice. If an Executive's employment is terminated by the Company without
cause as defined in the agreement, the Company will be required to pay that
Executive severance pay in the amount equivalent to six months' salary and
benefits. Pursuant to the employment agreements, each Executive will agree not
to compete with the Company for a period of one year following termination of
his employment.
BENEFIT PLANS
Stock Option Plan. In 1996, the Company adopted the GlobalTel Resources,
Inc. 1996 Stock Option Plan (the "1996 Plan"), which contains an incentive
option component, pursuant to which options for the purchase of Common Stock
are intended to qualify under Internal Revenue Code Section 422 ("Incentive
Options"), and a nonqualified stock option component, under which options for
the purchase of Common Stock will not qualify under Section 422 ("Nonqualified
Options"). The Company's Compensation Committee is currently the Plan
Administrator for the 1996 Plan. Incentive Options may be granted to any
employee, including employees who are directors, and Nonqualified Options may
be granted to such persons as the Plan Administrator shall select. The Plan
Administrator determines the terms and conditions of options granted under the
1996 Plan, including the exercise price, provided that the exercise price for
Incentive Options must be equal to or greater than the fair market price of
the Common Stock on the date of grant. Unless otherwise provided by the Plan
Administrator, options granted under the 1996 Plan vest 25 percent on the date
of grant and thereafter at 25 percent per year over a three-year period so
that all options are fully vested after three years. Options granted under the
1996 Plan generally are exercisable for a period of ten years from the date of
grant, except that Incentive Options granted to persons who beneficially own
more than ten percent of the Common Stock terminate after five years.
Options granted under the Plan are not transferable other than by will or
the laws of descent and distribution.
There are 700,000 shares of Common Stock authorized for issuance pursuant to
the 1996 Plan, subject to approval by the Company's shareholders. Upon
completion of this Offering, there will be an aggregate of 528,426 shares of
Common Stock subject to outstanding options under the 1996 Plan, of which
options to purchase an aggregate of 218,426 shares of Common Stock at an
exercise price of $5.50 per share will be held by 51 individuals and options
to purchase 310,000 shares of Common Stock at an exercise price equal to the
initial public offering price will be held by five officers of the Company.
See "--Employment Agreements."
Employee Stock Purchase Plan. The Company has adopted an employee stock
purchase plan (the "Purchase Plan"), which is intended to qualify under
Internal Revenue Code Section 423. The Purchase Plan provides that 300,000
shares of the Company's Common Stock be reserved for issuance upon exercise of
purchase rights granted thereunder, subject to adjustment for stock dividends,
stock splits, reverse stock splits and similar changes in the Company's
capitalization. The Purchase Plan is designed to encourage stock ownership by
employees of the Company.
58
<PAGE>
Under the Purchase Plan, an eligible employee will be entitled to purchase
shares of Common Stock from the Company through payroll deductions ranging
from one percent to ten percent of total compensation, at a price equal to the
lesser of 85 percent of the fair market value of the Company's Common Stock on
the first or the last day of each six month offering period under the Purchase
Plan. The offering periods will commence approximately on January 1 and July 1
of each year, with the first offering period commencing on a date to be
determined by the Board of Directors.
59
<PAGE>
CERTAIN TRANSACTIONS
The Company was incorporated in November 1994. In December 1994, the Company
issued an aggregate of 421,760 shares of a class of its common stock to ten
persons and entities. Alan H. Chin and Curtis E. Lew, both co-founders of the
Company, and Kenji Sato were each issued 80,000 shares of stock in exchange
for past and future services. Katsuhiko Okunuki purchased 75,046 shares for
cash at a purchase price of $2.65 per share. Osamu Ishii was issued 8,000
shares of stock in exchange for past and future services and purchased 37,502
shares at a purchase price of $2.65 per share. In December 1995, the Company
issued 785,041 shares of Common Stock in exchange for all outstanding shares
of the various classes of its common stock on a one-to-one basis. The Company
repurchased all of Messrs. Sato's, Ishii's and Okunuki's shares in a series of
transactions during 1995 and 1996 at a purchase price of $5.50 per share.
In December 1995, the Company acquired GFP Group. Inc. ("GFP") through the
issuance of 216,791 shares of Common Stock in a one-for-one exchange for all
of the outstanding capital stock of GFP. Pursuant to this transaction, North
Willow Family L.P., a limited partnership in which Ronald P. Erickson, the
Company's Chairman, President and Chief Executive Officer, and his two
daughters are limited partners, was issued 54,000 shares of Common Stock;
Sirius International Communications, a general partnership in which German
F.H. Burtscher, the Company's Senior Vice President, Marketing and Sales, and
Frank Krentzman, a director and former Senior Vice President of the Company,
were the sole partners, was issued 95,791 shares of Common Stock; and Laura
Street Family L.P. ("Laura Street"), a limited partnership in which Craig
Palmer, a former director and officer of the Company, and certain members of
his immediate family are partners, was issued 54,000 shares of Common Stock.
In connection with the acquisition, the Company also agreed to issue to each
of Messrs. Burtscher and Krentzman 30,000 shares of Common Stock, and to grant
Mr. Erickson an option to purchase 30,000 shares of Common Stock, all
conditioned upon the Company obtaining certain financing as determined by the
Company's Board of Directors. Additionally, the Company assumed GFP's
obligations under employment agreements with Messrs. Erickson, Burtscher,
Krentzman and Palmer. By mutual consent of the parties, the terms of these
employment agreements were never performed. In addition, Messrs. Burtscher and
Krentzman have certain rights to serve on the Board of Directors. See
"Management--Board of Directors Composition."
During late 1995 and early 1996, the Company paid Craig Palmer approximately
$150,000 in commissions in connection with financial consulting services. In
August 1996, in connection with Mr. Palmer's termination as an officer of the
Company, the Company entered into a one-year consulting agreement with Laura
Street. Pursuant to the terms of this agreement, the Company paid Laura Street
consulting fees of approximately $125,000, issued an aggregate of 3,636 shares
of Common Stock to Mr. Palmer's two sons and granted Laura Street a warrant to
purchase 30,000 shares of Common Stock at an exercise price of $5.50 per
share. This warrant expires upon the earlier of August 15, 1999 or the date
the Company closes a public offering of Common Stock with aggregate net
proceeds to the Company of at least $25 million.
In December 1995, as part of the Company's acquisition of GFP, the Company
assumed GFP's obligations under two demand promissory notes payable to Michael
S. Brownfield, a director of the Company, both bearing interest at a rate of
ten percent per annum, increasing to 12 percent per annum when the notes are
past due. Both of these notes are secured by a pledge of certain shares of GFP
stock held by the Company. The first note was issued in October 1995 in the
amount of $50,000 and the second note was issued in November 1995 in the
amount of $20,000. In connection with the assumption of these notes, the
Company also issued to Mr. Brownfield a warrant to purchase for nominal
consideration 5,679 shares of Common Stock. Concurrently therewith, the
Company sold to Mr. Brownfield 90,909 shares of Common Stock for a purchase
price of $5.50 per share and granted Mr. Brownfield a warrant to purchase
9,091 shares of Common Stock at an exercise price of $5.50 per share. In
February 1996, Mr. Brownfield loaned the Company $100,000 at an interest rate
of ten percent per annum, increasing to 12 percent per annum when the debt is
past due, and maturing on February 22, 1997. In consideration of this loan,
the Company granted to Mr. Brownfield a warrant to purchase 1,200 shares of
Common Stock at an exercise price of $5.50 per share. This warrant expires on
the earlier of: (a) the date the Company closes a public offering of Common
Stock with aggregate
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net proceeds to the Company of at least $25 million; or (b) February 22, 1999.
In April 1996, Mr. Brownfield loaned the Company $300,000 pursuant to a
promissory note bearing interest at a rate of ten percent per annum,
increasing to 12 percent per annum when the note is past due, and maturing on
April 15, 1997. In consideration of this loan, the Company granted to Mr.
Brownfield a warrant to purchase 3,600 shares of Common Stock at an exercise
price of $5.50 per share. This warrant expires on the earlier of: (a) the date
the Company closes a public offering of Common Stock with aggregate net
proceeds to the Company of at least $25 million; or (b) April 15, 1999. In
June 1996, the Company granted Mr. Brownfield a warrant to purchase 840 shares
of Common Stock at an exercise price of $5.50 per share in exchange for
forbearance on the October and November 1995 notes. This warrant expires on
the earlier of: (a) the date the Company closes a public offering of Common
Stock with aggregate net proceeds to the Company of at least $25 million; or
(b) June 24, 1999. In October 1997, Mr. Brownfield loaned the Company $150,000
pursuant to a promissory note bearing interest at a rate of ten percent per
annum and maturing on February 15, 1999. In consideration of this loan, the
Company granted Mr. Brownfield a warrant to purchase 3,000 shares of Common
Stock at an exercise price of $5.50 per share. This warrant expires on the
earlier of: (a) the date the Company closes a public offering of Common Stock
with aggregate net proceeds to the Company of at least $25 million; or
(b) October 2, 2000. In November 1997, Mr. Brownfield agreed to convert
$235,000 in principal plus interest accrued thereon owed under past due
promissory notes into 50,490 shares of Common Stock. Mr. Brownfield also
agreed to reschedule an additional $235,000 in principal plus accrued interest
owed under past due promissory notes into a new note bearing interest at a
rate of ten percent per annum prior to default and 15 percent per annum
thereafter. This note will mature upon the earlier of: (a) an initial public
offering of the Company's Common Stock; or (b) January 1, 1999. In November
1997, Mr. Brownfield loaned the Company $25,000 pursuant to a Full Coverage
Bridge Note bearing interest at a rate of ten percent per annum, increasing to
15 percent per annum when the note is past due. See "Description of
Securities--Full Coverage Bridge Notes." This Full Coverage Bridge Note
matures upon the earlier of: (a) the closing of the Offering; or (b) January
2, 1999. In consideration of this loan, the Company has agreed to issue to
Mr. Brownfield shares of Common Stock worth $25,000 at the initial public
offering price concurrent with and conditioned upon the closing of the
Offering. If the Offering is not completed by July 1, 1998, the Company has
agreed to grant Mr. Brownfield a warrant to purchase 4,545 shares of Common
Stock at an exercise price of $5.50 per share. This warrant will expire three
years from the date of grant. As of January 31 1998, the Company owed Mr.
Brownfield $410,000 in principal, plus accrued interest under outstanding
notes.
In November 1995, Gereg Capital Corporation ("Gereg") purchased 120,000
shares of Common Stock from the Company for a purchase price of $5.50 per
share. In consideration of this purchase of Common Stock, the Company granted
Gereg a warrant to purchase 12,000 shares of Common Stock. The warrant has an
exercise price of $5.50 per share and expires on the earlier of: (a) the date
the Company closes a public offering of Common Stock with aggregate net
proceeds to the Company of at least $25 million; or (b) December 29, 1998. In
October 1996, Gereg loaned the Company $150,000 pursuant to a promissory note
bearing interest at a rate of ten percent per annum and maturing on October
14, 1997. In consideration of this loan, the Company granted Gereg a warrant
to purchase 3,000 shares of Common Stock at an exercise price of $5.50 per
share. This warrant expires on the earlier of: (a) the date the Company closes
a public offering of Common Stock with aggregate net proceeds to the Company
of at least $25 million; or (b) October 14, 1998. In May 1997, the Company
repaid Gereg the full amount of principal and interest totaling $158,075
required to retire the note. Concurrent with and conditioned upon the closing
of the Offering, Gereg has agreed to convert warrants to purchase 15,000
shares of Common Stock into shares of Common Stock at an exercise price of
$3.50 per share in a cashless conversion transaction whereby the purchase
price is paid by reducing the number of shares issued upon exercise by an
amount equal to the aggregate cash exercise price for the warrant divided by
the initial public offering price per share ("Cashless Conversion
Transaction"). Stephen S.V. Wong, a director of the Company, is Chairman and a
controlling shareholder of Gereg.
In November 1996, Dupont Ltd. ("Dupont") loaned the Company $500,000
pursuant to a convertible promissory note bearing interest at a rate of ten
percent per annum and maturing on May 22, 1998. In
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<PAGE>
consideration of this loan, the Company granted Dupont a warrant to purchase
20,000 shares of Common Stock at an exercise price of $5.50 per share. This
warrant expires on the earlier of: (a) the date the Company closes a public
offering of Common Stock with aggregate net proceeds to the Company of at
least $25 million;
or (b) November 22, 1999. In April 1997, Dupont loaned the Company an
additional $2,000,000 pursuant to a convertible promissory note bearing
interest at a rate of ten percent per annum and maturing on December 31, 1999.
In consideration of this loan, the Company granted Dupont a warrant to
purchase 80,000 shares of Common Stock at an exercise price of $5.50 per
share. The warrant expires on the earlier of: (a) the date the Company closes
a public offering of Common Stock with aggregate net proceeds to the Company
of at least $25 million; or (b) April 29, 2000. Under the terms of this
warrant, Dupont has the right to require the Company to appoint a person
selected by Dupont to the Board of Directors and to nominate and recommend
that designee for election to the Board by the shareholders of the Company. In
September 1997, Dupont converted the full amount of principal and accrued
interest owed under the November 1996 note into 98,693 shares of Common Stock.
Dupont has agreed to convert its warrants to purchase an aggregate of 100,000
shares of Common Stock into shares of Common Stock at an exercise price of
$3.50 per share in a Cashless Exercise Transaction concurrent with and
conditioned upon the closing of the Offering. In December 1997, the Company
agreed to amend the April 1997 note to repay a minimum of $1,000,000 owed to
Dupont out of the proceeds of the Offering and to convert the remaining
$1,000,000 plus accrued interest into shares of Common Stock at the price of
$3.85 per share concurrent with and conditioned upon the closing of the
Offering. Trans-Pacific Consultants Pte. Ltd. ("Trans-Pacific"), an affiliate
of Dupont, also received a warrant to purchase 15,000 shares of Common Stock
as payment of a finder's fee in connection with the Dupont loan transactions.
Trans-Pacific's warrant has an exercise price of $5.50 per share and expires
on the earlier of: (a) the date the Company closes a public offering of Common
Stock with aggregate net proceeds to the Company of at least $25 million; or
(b) April 24, 2000. Trans-Pacific has agreed to convert this warrant into
shares of Common Stock at an exercise price of $3.50 per share in a Cashless
Conversion Transaction concurrent with and conditioned upon the closing of the
Offering. Stephen S.V. Wong, a Director of the Company, is Chairman and 50
percent owner of Dupont and is Chairman and a controlling shareholder of
Trans-Pacific.
In December 1996, PBIG-GTR Partners, L.P. ("PBIG") loaned the Company
$900,000 maturing June 1998 pursuant to a promissory note bearing interest at
a rate of ten percent per annum, increasing to 12 percent per annum after
default. In consideration of this loan, the Company granted PBIG a warrant to
purchase 36,000 shares of Common Stock at an exercise price of $5.50 per
share. This warrant expires upon the earlier of : (a) the date the Company
closes a public offering of Common Stock with aggregate net proceeds to the
Company of at least $25 million; or (b) December 5, 1999. In March 1997, PBIG
loaned the Company $400,000 maturing June 1998 pursuant to a promissory note
bearing interest at a rate of ten percent per annum, increasing to 12 percent
per annum after default. In consideration of this loan, the Company granted
PBIG a warrant to purchase 16,000 shares of Common Stock at an exercise price
of $5.50 per share. This warrant expires upon the earlier of: (a) the date the
Company closes a public offering of Common Stock with aggregate net proceeds
to the Company of at least $25 million; or (b) March 12, 2000. In September
1997, PBIG elected to convert $30,000 of principal owed under the December
1996 note and $200,000 of principal owed under the March 1997 note into 44,194
shares of Common Stock. As of January 31, 1998, the Company owed PBIG
$1,070,000 in principal, plus accrued interest, under outstanding notes.
In May 1997, Hare & Co. purchased 250,000 shares of Series A Convertible
Preferred Stock for a purchase price of $4 per share. Hare & Co. has agreed to
convert all 250,000 shares plus accrued dividends into shares of Common Stock
at $5.50 per share concurrent with and conditioned upon the closing of the
Offering.
In June 1996, Mr. Erickson loaned the Company $150,000 pursuant to a
promissory note bearing interest at a rate of ten percent per annum,
increasing to 12 percent per annum when the note is past due, and maturing on
June 21, 1997. In consideration of this loan, the Company granted to Mr.
Erickson a warrant to purchase 1,800 shares of Common Stock at an exercise
price of $5.50 per share. The warrant expires on the
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<PAGE>
earlier of: (a) the date the Company closes a public offering of Common Stock
with aggregate net proceeds to the Company of at least $25 million; or (b)
June 21, 1999. In November 1997, Mr. Erickson elected to convert $171,805 in
principal and accrued interest owed under this note into 31,237 shares of
Common Stock. In November 1997, Mr. Erickson agreed to convert his warrant to
purchase 1,800 shares of Common Stock into shares of Common Stock at an
exercise price of $3.50 per share in a Cashless Conversion Transaction
concurrent with and conditioned upon the closing of the Offering.
In July 1996, Paul van de Plas, a Director of the Company, loaned the
Company $100,000 pursuant to a promissory note bearing interest at a rate of
ten percent per annum and maturing on January 31, 1998. In consideration of
this loan, the Company granted to Mr. van de Plas a warrant to purchase 6,000
shares of Common Stock. The warrant has an exercise price of $5.50 per share
and expires on the earlier of: (a) the date the Company closes a public
offering of Common Stock with aggregate net proceeds to the Company of at
least $25 million; or (b) July 31, 1999. In September 1997, Mr. van de Plas
converted $112,040 in principal and accrued interest owed under the note into
20,371 shares of Common Stock. In November 1997, Mr. van de Plas agreed to
convert his warrant to purchase 6,000 shares of Common Stock into shares of
Common Stock at an exercise price of $3.50 per share in a Cashless Conversion
Transaction concurrent with and conditioned upon the closing of the Offering.
In November 1997, N.I.B. Securities, of which Mr. van de Plas is a director,
loaned the Company $20,000 pursuant to a Full Coverage Bridge Note bearing
interest at a rate of ten percent per annum, increasing to 15 percent per
annum after default. See "Description of Securities--Full Coverage Bridge
Notes." This Full Coverage Bridge Note matures upon the earlier of: (a) the
closing of the Offering; or (b) January 2, 1999. In consideration of this
loan, the Company has agreed to issue N.I.B. Securities shares of Common Stock
worth $20,000 at the initial public offering price concurrent with and
conditioned upon the closing of the Offering. If the Offering is not completed
by July 1, 1998, the Company has agreed to grant N.I.B. Securities a warrant
to purchase 3,636 shares of Common Stock at an exercise price of $5.50 per
share. This warrant will expire three years from the date of grant.
In April 1997, the Company entered into an Exclusive Services and Marketing
Agreement with IBNET. See "Business--Sales, Marketing and Customer Service--
Strategic Marketing Relationships." Pursuant to this agreement, the Company
granted to IBNET a warrant to purchase 2,000 shares of Common Stock, and will
grant additional warrants if the Company reaches certain revenue targets. The
warrants all have an exercise price of $5.50 per share and expire three years
from the date of grant. The Company also agreed to pay IBNET certain fees
based upon a percentage of the Company's gross margin for services purchased
by customers referred to the Company by IBNET. In return, IBNET agreed to
issue to the Company 100,000 shares of common stock of IBNET. Ronald P.
Erickson, Lyman C. Hamilton and Bruce L. Crockett, all Directors of the
Company, are also directors of IBNET and each holds options to purchase 50,000
shares of IBNET's common stock. In addition, Mr. Hamilton owns 100,000 shares
of IBNET's common stock (or approximately 2% of IBNET's total outstanding
Common Stock).
During 1996 and 1997, Randall J. Ottinger, a Director of the Company,
accrued $183,229 in deferred salary, plus interest thereon at an annual rate
of ten percent. In September 1997, he elected to receive this compensation in
the form of a warrant to purchase 33,314 shares of Common Stock at an exercise
price of $0.05 per share.
In July 1996, Michael S. Sims, the Company's former Chief Operating Officer,
loaned the Company $100,000 pursuant to a promissory note bearing interest at
a rate of ten percent per annum and maturing on July 1, 1997. In consideration
of this loan, the Company granted to Mr. Sims a warrant to purchase
6,000 shares of Common Stock at an exercise price of $5.50 per share. This
warrant expires on the earlier of: (a) the date the Company closes a public
offering of Common Stock with aggregate net proceeds to the Company of at
least $25 million; or (b) July 1, 1999. In October 1996, Mr. Sims' wife,
Marianne Sims, loaned the Company $20,000 pursuant to a promissory note
bearing interest at a rate of ten percent per annum. In consideration of this
loan, the Company granted to Mrs. Sims a warrant to purchase 2,800 shares of
Common Stock at an exercise price of $5.50 per share. This warrant expires on
the earlier of: (a) the date the Company closes a public offering of Common
Stock with aggregate net proceeds to the Company of at least $25 million;
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<PAGE>
or (b) October 9, 1999. In September 1997, Mr. Sims converted $113,177 of
principal and accrued interest owed under his note into 20,577 shares of
Common Stock and Mrs. Sims converted $21,978 of principal and accrued interest
owed under her note into 3,996 shares of Common Stock.
In August 1995 Alan H. Chin, a co-founder, former director and former Senior
Vice President of the Company, purchased 18,751 shares of a class of the
Company's common stock at a purchase price of $2.65 per share. In November
1995, Speedway V Partnership, a limited partnership in which Mr. Chin is
managing partner, purchased 19,060 shares of a class of the Company's Common
Stock at a purchase price of $5.50 per share. Mr. Chin also has guaranteed
several of the Company's leases for furniture and equipment. In June 1996, the
Company agreed to indemnify Mr. Chin for the full amount of these guarantees.
In August 1995, Curtis E. Lew, a co-founder, former director and former
Senior Vice President of the Company, purchased 18,325 shares of a class of
the Company's common stock at a purchase price of $2.65 per share. In November
1995, Mr. Lew purchased 11,800 shares of a class of the Company's common stock
at a purchase price of $5.50 per share. During 1996 and 1997, Mr. Lew accrued
$124,868 in deferred salary, plus interest thereon at an annual rate of ten
percent. In September 1997, he elected to receive this compensation in the
form of a warrant to purchase 22,703 shares of Common Stock at an exercise
price of $0.05 per share. Mr. Lew has also guaranteed several of the Company's
leases for furniture and equipment. In June 1996, the Company agreed to
indemnify Mr. Lew for the full amount of these guarantees.
In August 1997, Frank Krentzman's employment as the Company's Senior Vice
President was terminated, although Mr. Krentzman continues to serve as a
Director of the Company. Pursuant to the terms of his severance agreement with
the Company, Mr. Krentzman elected to receive $133,333 of severance
compensation in the form of 24,242 shares of Common Stock, and was issued
30,000 shares of Common Stock pursuant to the Company's agreement to acquire
GFP described above.
In June 1997, the Company entered into a letter of intent with Netlink
International Inc. and Kunming Dayu Biological Engineering Co. Ltd. to explore
the potential of jointly providing telecommunications services in the People's
Republic of China through an entity in which the Company would potentially
have an equity interest. In September 1997, Alan H. Chin and Curtis E. Lew
entered into an agreement with the Company to implement the letter of intent
in exchange for five percent of any equity the Company obtains in the Chinese
venture.
In December 1995, Ulrich Kallausch, a former director of the Company, was
issued 5,000 shares of Common Stock as part of the GFP acquisition in exchange
for his shares of stock in GFP. In December 1995, Mr. Kallausch purchased
36,000 shares of Common Stock from the Company at a purchase price of $5.50
per share. In October 1997, the Company granted Mr. Kallausch an option to
purchase 2,000 shares of Common Stock at an exercise price of $5.50 per share
in consideration of his service on the Board of Directors. This option was
exercisable in full upon grant.
In November 1997, ITEX Corporation, a company of which Ronald P. Erickson is
a director, loaned the Company $200,000 and agreed to provide certain future
services valued at $200,000 to the Company in exchange for a Full Coverage
Bridge Note in the principal amount of $200,000, which provides for interest
at a rate of ten percent per annum, increasing to 15 percent per annum after
default. See "Description of Securities--Full Coverage Bridge Notes." The full
amount of principal and interest owed under the note will be repaid out of the
proceeds of the Offering. In addition, ITEX will receive shares of Common
Stock equal to $400,000 divided by the initial public offering price
concurrent with and conditioned upon the closing of the Offering.
In November 1997, Stephen S.V. Wong loaned the Company $25,000 pursuant to a
promissory note bearing interest at a rate of ten percent per annum,
increasing to 15 percent after default. This note was repaid in full in
December 1997. In addition, Mr. Wong will receive shares of Common Stock equal
to $12,500 divided by the initial public offering price concurrent with and
conditioned upon the closing of the Offering.
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<PAGE>
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and
its officers, directors and principal shareholders and their affiliates will
be approved by a majority of the Board of Directors, including a majority of
the independent and disinterested directors of the Board of Directors, and
will be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of January 31, 1998 and as adjusted
to reflect the sale of the Common Stock offered hereby, by (i) each person who
is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each director of the Company, (iii) each of the Named
Executive Officers, and (iv) all of the Company's directors and executive
officers as a group. Except as otherwise indicated, the address of each person
listed below is 1520 Eastlake Avenue East, Seattle, Washington 98102.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED(1)(2)
------------------------
SHARES
BENEFICIALLY BEFORE AFTER
NAMES AND ADDRESSES OWNED OFFERING OFFERING
------------------- ------------ -------- --------
<S> <C> <C> <C>
Steven S.V. Wong (3)................... 585,344 26.4% 11.5%
20 Queen Astrid Park,
Singapore 266824
Dupont Ltd. (4)........................ 441,622 19.9% 8.7
20 Queen Astrid Park,
Singapore 266824
PBIG-GTR Partners L.P. (5)............. 225,922 10.8 4.6
Michael S. Brownfield (6).............. 199,763 10.1 4.1
Hare & Co. (7)......................... 190,211 9.8 4.0
Burgring 1G, A 8010
Graz, Austria
Alan H. Chin (8)....................... 149,901 7.6 3.1
Curtis E. Lew (9)...................... 141,929 7.2 2.9
Ronald P. Erickson (10)................ 139,968 7.0 2.9
Gereg Capital Corporation (11)......... 129,166 6.7 2.7
20 Queen Astrid Park,
Singapore 266824
Michael S. Sims (12)................... 128,117 6.3 2.6
Frank E. Krentzman (13)................ 107,036 5.5 2.2
German F.H. Burtscher (14)............. 90,103 4.6 1.9
Randall J. Ottinger (15)............... 56,051 2.8 1.2
John E. Cox (16)....................... 52,614 2.6 1.1
Paul H.F.M. van de Plas (17)........... 29,259 1.5 *
Bruce L. Crockett (18)................. 5,777 * *
Lyman C. Hamilton...................... 2,000 * *
All directors and executive officers
as a group(19) (12 persons)........... 1,277,773 52.2 22.6
</TABLE>
- --------
* Less than one percent of the outstanding shares of Common Stock.
(1) Assumes no exercise of the Underwriters' over-allotment option.
Beneficial ownership is determined in accordance with Rule 13d-3 under
the Securities and Exchange Act of 1934, as amended (the "Exchange Act").
In computing the number of shares beneficially owned by a person and the
percentage of ownership of that person, shares subject to options held by
that person that are exercisable within 60 days of January 31, 1998 are
deemed outstanding only when determining the amount and percentage of
Common Stock owned by such person. Except pursuant to applicable
community property laws or as indicated in the footnotes to this table,
to the Company's knowledge, each person identified in the table possesses
sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned thereby.
(2) Before Offering applicable percentage of ownership for each shareholder
is based on 1,933,823 shares of Common Stock outstanding as of January
31, 1998, after giving effect to the Preferred Stock Conversion. After
Offering applicable percentage of ownership is based on 4,799,356 shares
of Common Stock outstanding after taking into account the 2,000,000
shares of Common Stock offered hereby and the Offering Issuances. See
footnote (1) to "The Offering."
(3) Includes 2,000 shares of Common Stock issuable upon exercise of options
under the 1996 Plan, 1,388 shares of Common Stock issuable upon the
closing of the Offering in connection with a bridge loan promissory note
in the original principal amount of $20,000 that has been repaid, 61,111
shares of
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Common Stock issuable upon the cashless conversion of outstanding warrants
held by Dupont Ltd., 9,166 shares of Common Stock issuable upon the
cashless conversion of outstanding warrants held by Trans-Pacific
Consultants Pte Ltd., 9,166 shares of Common Stock issuable upon the
cashless conversion of outstanding warrants held by Gereg Capital
Corporation and 120,000 shares of Common Stock held by Gereg Capital
Corporation. Also includes 281,818 shares of Common Stock issuable upon
conversion of $1,000,000 in principal, plus accrued interest as of January
31, 1998, pursuant to a promissory note held by Dupont Ltd. See "Certain
Transactions." Mr. Wong, a director of the Company, is Chairman and a 50
percent owner of Dupont Ltd. and is Chairman and a controlling shareholder
of Gereg Capital Corporation and Trans-Pacific Consultants Pte, Ltd.
(4) Includes 61,111 shares of Common Stock issuable upon the cashless
conversion of outstanding warrants and 281,818 shares of Common Stock
issuable upon conversion of a $1,000,000 in principal, plus accrued
interest as of January 31, 1998, pursuant to a promissory note held by
Dupont Ltd. See "Certain Transactions."
(5) Includes 10,800 shares of Common Stock issuable upon exercise of
outstanding warrants, 25,177 shares of Common Stock issuable upon the
cashless conversion of outstanding warrants and 145,751 shares of Common
Stock issuable upon conversion of two outstanding promissory notes in the
aggregate principal amount of $1,070,000, plus accrued interest as of
January 31, 1998. See "Certain Transactions." PBIG-GTR Partners is
controlled by Kenneth Huang. Mr. Huang's address is 20987 Fairwoods
Drive, Cupertino, CA 90541.
(6) Includes 17,731 shares of Common Stock issuable upon exercise of
outstanding warrants, 2,000 shares of Common Stock issuable upon exercise
of options under the 1996 Plan, 2,777 shares of Common Stock issuable
upon the closing of the Offering in connection with a Full Coverage
Bridge Note (see "Description of Securities") in the principal amount of
$25,000 and 28,181 shares of Common Stock issuable upon conversion of a
promissory note in the principal amount of $150,000, plus accrued
interest as of January 31, 1998. See "Certain Transactions."
(7) Includes 190,211 shares of Common Stock issuable upon conversion of
250,000 shares of Series A Convertible Preferred Stock. Hare & Co. holds
the Series A Convertible Preferred Stock as a nominee for Security
Kapital AG, an Austrian investment company that is majority-owned by
Grazer Wechselseitige Versicherung, an Austrian insurance company. The
address of Grazer Wechselseitige Versicherung is Burgring 1G, A 8010
Graz, Austria.
(8) Includes 9,100 shares of Common Stock issuable upon exercise of options
under the 1996 Plan, 22,990 shares of Common Stock issuable upon exercise
of outstanding warrants and 19,060 shares of Common Stock held by
Speedway V Partnership, a limited partnership in which Mr. Chin is
managing partner.
(9) Includes 9,100 shares of Common Stock issuable upon exercise of options
under the 1996 Plan and 22,703 shares of Common Stock issuable upon
exercise of outstanding warrants.
(10) Includes 19,131 shares of Common Stock issuable upon conversion of
outstanding warrants, 1,100 shares of Common Stock issuable upon the
cashless conversion of outstanding warrants, 34,500 shares of Common
Stock issuable upon exercise of options under the 1996 Plan, and
54,000 shares of Common Stock held by North Willow Family L.P., a limited
partnership in which Mr. Erickson and his two daughters are partners. See
"Certain Transactions."
(11) Includes 9,166 shares of Common Stock issuable upon the cashless
conversion of outstanding warrants. See "Certain Transactions."
(12) Includes 55,310 shares of Common Stock issuable upon exercise of
outstanding warrants and 42,933 shares of Common Stock issuable upon
exercise of options under the 1996 Plan. Also includes 2,800 shares of
Common Stock issuable upon exercise of outstanding warrants and 3,996
shares of Common Stock held by Mr. Sims' wife.
(13) Includes 398 shares of Common Stock issuable upon exercise of options
under the 1996 Plan.
(14) Includes 30,000 shares of Common Stock to be issued to Mr. Burtscher
contingent upon completion of this Offering, 4,329 shares of Common Stock
issuable upon exercise of options under the 1996 Plan,
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<PAGE>
14,194 shares of Common Stock issuable upon exercise of outstanding
warrants and 185 shares of Common Stock held by Mr. Burtscher's parents.
See "Certain Transactions."
(15) Includes 12,737 shares of Common Stock issuable upon exercise of options
under the 1996 Plan, 33,314 shares of Common Stock issuable upon exercise
of outstanding warrants and 3,000 shares of Common Stock held by the
Ottinger Family Trust.
(16) Includes 26,500 shares of Common Stock issuable upon exercise of options
under the 1996 Plan and 26,114 shares of Common Stock issuable upon
exercise of outstanding warrants.
(17) Includes 1,000 shares issuable upon exercise of options under the 1996
Plan, 3,666 shares of Common Stock issuable upon the cashless conversion
of outstanding warrants and 2,222 shares of Common Stock issuable upon the
closing of the Offering in connection with a Full Coverage Bridge Note in
the principal amount of $20,000. See "Certain Transactions" and
"Description of Securities."
(18) Includes 1,000 shares of Common Stock issuable upon exercise of options
under the 1996 Plan and 2,777 shares of Common Stock issuable upon closing
of the Offering in connection with a Full Coverage Bridge Note in the
principal amount of $25,000. See "Description of Securities."
(19) Includes 204,559 shares of Common Stock issuable upon exercise of
outstanding warrants, 120,465 shares of Common Stock issuable upon
exercise of options under the 1996 Plan, 9,164 shares of Common Stock
issuable upon the closing of the Offering in connection with promissory
notes in the aggregate principal amount of $90,000 and 309,999 shares of
Common Stock issuable upon conversion of outstanding promissory notes in
the aggregate principal amount of $1,150,000, plus accrued interest as of
January 31, 1998.
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DESCRIPTION OF SECURITIES
Upon completion of the Offering, the Company's authorized capital stock will
consist of 50,000,000 shares of Common Stock, par value $0.05 per share, and
5,000,000 shares of preferred stock, par value $0.01 per share.
COMMON STOCK
As of January 31, 1998, there were 1,724,778 shares of Common Stock issued
and outstanding and held of record by 72 shareholders. Holders of Common Stock
are entitled to cast one vote for each share held of record on all matters
submitted to a vote of the shareholders. Holders of Common Stock do not have
cumulative voting rights and, except as required under applicable law, a
majority vote is sufficient for any act of the shareholders. Holders of Common
Stock are entitled to receive ratably such dividends if, as and when declared
by the Company's Board of Directors out of funds legally available therefor,
subject to the payment of any preferential dividends with respect to any
preferred stock that from time to time may be outstanding. In the event of any
liquidation, dissolution or winding up of the Company, each holder of Common
Stock will be entitled to participate, subject to prior distribution rights of
the holders of any outstanding preferred stock, ratably in all assets of the
Company remaining after payment of liabilities. Holders of Common Stock have
no preemptive, conversion or other subscription rights. All outstanding shares
of Common Stock are, and all shares of Common Stock offered hereby, when
issued, will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this Offering, each of the 275,000 shares of Series A
Convertible Preferred Stock outstanding as of January 31, 1998, will be
converted automatically into approximately 0.73 shares of Common Stock. Under
the terms of the Series A Convertible Preferred Stock, dividends accrue at the
rate of six percent per annum. Upon the closing of this Offering, accrued
unpaid dividends will be converted into Common Stock at a price of $5.50 per
share. No preferred stock will remain outstanding immediately after this
Offering.
The Board of Directors has the authority without further action by the
shareholders to issue up to 5,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights,
redemption rights, liquidation preferences and the number of shares
constituting any series. The issuance of preferred stock in certain
circumstances may have the effect of delaying, deferring or preventing a
change in control of the Company, may discourage bids for the Company's Common
Stock at a premium over the market price of the Common Stock and may adversely
affect the market price of, and the voting and other rights of the holders of,
the Common Stock. At present, the Company has no plans to issue any additional
shares of preferred stock.
WARRANTS
Since inception, the Company from time to time has issued warrants to
purchase Common Stock. As of January 31, 1998, warrants to purchase 622,347
shares of Common Stock were issued and outstanding and exercisable into shares
of Common Stock at a weighted average price of $3.47 per share. Warrants
issued in connection with financing transactions generally provide for
increases in the number of shares issuable if the Company has not closed a
major financing transaction within specified periods. All of the warrants
issued pursuant to financing transactions provide for customary antidilution
protection in the event of stock splits, stock dividends, reorganizations and
other similar events, and all expire on the earlier of (i) three years from
the date of issuance, and (ii) the closing of a public offering of Common
Stock with net proceeds to the Company of at least $25 million.
In addition to warrants granted in connection with financing transactions,
the Company has granted warrants pursuant to contracts with strategic partners
and consultants. These warrants are all exercisable at an exercise price of
$5.50 per share and contain customary antidilution and other protections.
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Holders of warrants to purchase an aggregate of 264,760 shares of Common
Stock have agreed to convert their warrants into shares of Common Stock in a
Cashless Conversion Transaction at an exercise price of $3.50 per share
concurrent with and conditioned upon the closing of this Offering.
REPRESENTATIVES' WARRANTS
The Company has agreed to sell to the Representatives warrants to purchase
from the Company up to 225,000 shares of Common Stock at an exercise price per
share equal to 120% of the initial public offering price (the
"Representatives' Warrants"). The Representatives' Warrants are exercisable
for a period of four years beginning one year from the date of this
Prospectus, and are non-transferable except in limited circumstances. The
Representatives' Warrants include a net exercise provision permitting the
holders to pay the exercise price by cancellation of a number of shares with a
fair market value equal to the exercise price of the Representatives'
Warrants. The holders of the Representatives' Warrants will have, in that
capacity, no voting, dividend or other shareholder rights. During the exercise
period, the holders of the Representatives' Warrants are entitled to certain
demand and "piggyback" registration rights that will expire five years after
the date of this Prospectus and that may require the Company to register for
public resale the shares of Common Stock issuable upon exercise of the
Representatives' Warrants. The number of shares covered by the
Representatives' Warrants and the exercise price thereof are subject to
adjustment in certain events to prevent dilution. See "Underwriting."
CONVERTIBLE NOTES
As of January 31, 1998, promissory notes in the aggregate principal amount
of $4,100,000 convertible into an aggregate of approximately 771,411 shares of
Common Stock were outstanding, of which $25,000 was past due. The notes
generally bear interest at a rate of ten percent per annum, are for a term of
12 or 18 months and are convertible into Common Stock upon the completion of
offerings of the Company's securities with aggregate gross proceeds to the
Company of $25 million or more. The conversion price of the notes is the price
per share of Common Stock in such offerings in which the $25 million threshold
is met. In the event of default, the notes will bear interest at an annual
rate of 12 percent and, at the option of the note holder, will become
immediately due and payable. See "Certain Transactions."
FULL COVERAGE BRIDGE NOTES
Promissory notes issued by the Company in November and December 1997 (the
"Full Coverage Bridge Notes") in the aggregate principal amount of $2,981,500
are outstanding. These notes bear interest at a rate of ten percent per annum,
increasing to 15 percent after default, and are due upon the closing of this
Offering. In addition to repayment of principal and interest, note holders are
entitled to receive shares of Common Stock equal to the principal amount of
the Full Coverage Bridge Notes divided by the initial public offering price
concurrent with and conditioned upon the closing of this Offering. If the
Offering is not completed by July 1, 1998, the Company has agreed to grant to
these noteholders warrants to purchase the number of shares of Common Stock
equal to the principal amount of the note divided by $5.50. These warrants
will have an exercise price of $5.50 per share and will expire three years
from the date of grant.
REGISTRATION RIGHTS
Registration Rights for the Existing Preferred Shareholders
Following the closing of this Offering, the holders of approximately 209,045
shares of Common Stock issued upon conversion of the Preferred Stock (the
"Holders") will be entitled to certain rights with respect
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to the registration of such shares under the Securities Act. Under the terms
of an agreement between the Company and such Holders, beginning one year after
the effective date of this Offering, the Holders have the right to require the
Company, on not more than two occasions, to file a registration statement
under the Securities Act to register all or any part of their shares of Common
Stock ("Demand Registration"). The Company may in certain circumstances defer
such registrations. Further, the Holders may require the Company to register
all or a portion of their shares on Form S-3 under the Securities Act, when
such form becomes available to the Company, subject to certain conditions and
limitations ("Form S-3 Registration"). In the event that the Company proposes
to register any of its securities under the Securities Act, either for its own
account or the account of other securityholders, the Holders also are entitled
to include their shares of Common Stock in such registration, subject to
certain marketing and other limitations ("Piggyback Registration"). The
Company is required to bear the expense (except for underwriting discounts,
selling commissions and stock transfer taxes) of Demand and Piggyback
Registrations, while the Holders are required to bear the expense, on a pro
rata basis, of any Form S-3 Registrations.
Registration Rights for Certain Warrantholders
Holders of warrants to purchase an aggregate of 162,068 shares of Common
Stock (the "Piggyback Warrant Shares") are entitled to certain piggyback
registration rights under the Securities Act for their Piggyback Warrant
Shares pursuant to warrant agreements between the Company and such holders. If
the Company registers any of its securities under the Securities Act at any
time on or before December 5, 1999, either for its own account or the account
of other securityholders, such warrant holders would be entitled to include
their Piggyback Warrant Shares in such registration, subject to certain
marketing and other limitations. The Company is required to bear the expense
of such registrations, except for underwriting discounts, selling expenses and
the cost of the attorneys' fees for the warrantholders' own attorneys.
Registration Rights for Full Coverage Bridge Note Shares
The Company has agreed to cause the Full Coverage Bridge Note Shares to be
registered under the Securities Act for resale in the public market for a
period of up to 180 days commencing 270 days after the closing of this
Offering.
WASHINGTON ANTITAKEOVER STATUTE
Washington law contains certain provisions that may have the effect of
delaying or discouraging a hostile takeover of the Company. In addition,
Chapter 23B.19 of the Washington Business Corporation Act ("WBCA") prohibits a
corporation, with certain exceptions, from engaging in certain significant
business transactions with an "Acquiring Person" (defined as a person who
acquired ten percent or more of the corporation's voting securities without
the prior approval of the corporation's board of directors) for a period of
five years after such acquisition. The prohibited transactions include, among
others, a merger with, disposition of assets to, or issuance or redemption of
stock to or from, the Acquiring Person, or allowing the Acquiring Person to
receive any disproportionate benefit as a shareholder. An Acquiring Person is
further prohibited from engaging in certain significant business transactions
with the target corporation unless the per share consideration paid to holders
of outstanding shares of Common Stock and other classes of stock of the target
corporation meet certain minimum criteria. The per share minimum criteria
apply only to significant business transactions involving either (i) a merger,
share exchange, or consolidation of a target corporation with an Acquiring
Person or an affiliate or associate of the Acquiring Person, or (ii) the
liquidation or dissolution of a target corporation proposed by, or pursuant to
an agreement, arrangement or understanding with an Acquiring Person or an
affiliate or associate of an Acquiring Person, which transaction is not
otherwise approved by an affirmative vote of a majority of the disinterested
shareholders of the target corporation. These provisions may have the effect
of delaying, deterring or preventing a change in control of the Company.
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CERTAIN PROVISIONS IN RESTATED ARTICLES
The Restated Articles provide for the division of the Company's Board of
Directors into three classes, as nearly equal in number as possible, each for
a three-year term, with one class being elected each year by the Company's
shareholders. Directors may be removed only for cause and only by a vote of
not less than a majority of the shares of the Company's capital stock entitled
to vote on an election of the director whose removal is sought.
The Restated Articles require that certain business combinations (including
a merger, share exchange or the sale, lease, exchange, mortgage, pledge,
transfer or other disposition of a substantial part of the Company's assets)
be approved by the holders of not less than two-thirds of the outstanding
shares, unless such business combination shall have been approved by a
majority of Continuing Directors (defined as those individuals who were
members of the Board of Directors on the date of this Prospectus or were
elected thereafter on the recommendation of a majority of the Continuing
Directors), in which case the affirmative vote required shall be a majority of
the outstanding shares.
Under the Restated Articles, the shareholders may call a special meeting
only upon the request of holders of at least 25 percent of the outstanding
shares. The Restated Articles also provide that changes to certain provisions
of the Articles of Incorporation, including those regarding amendment of
certain provisions of the Bylaws or Restated Articles, the classified Board of
Directors, special voting provisions for business combinations and special
meetings of shareholders, must be approved by the holders of not less than
two-thirds of the outstanding shares.
It is possible that the provisions discussed above may delay, deter or
prevent a change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
ChaseMellon Shareholder Services.
RESCISSION OFFER
Immediately after the closing of this Offering, the Company intends to
commence the Rescission Offer in accordance with the federal securities laws
and the Washington Securities Act with respect to the following securities
which were issued or sold by the Company from 1995 through 1997 to
approximately 40 individuals and entities who the Company believes at the time
of purchase were residents of the State of Washington:
(i) an aggregate of 239,112 shares of Common Stock, of which 96,748 and
142,364 shares were issued at $2.65 and $5.50 per share, respectively
(the "Cash Rescission Stock");
(ii) an aggregate of 90,909 shares of Common Stock (the "1995 Rescission
Stock") which were issued to one individual at $5.50 per share,
together with a warrant to purchase approximately 9,091 shares of
Common Stock;
(iii) an aggregate of 166,446 shares of Common Stock (the "Converted Note
Rescission Stock") issued upon conversion of promissory notes,
together with warrants to purchase an aggregate of approximately
13,600 shares of Common Stock delivered in conjunction with the
issuance of such promissory notes;
(iv) $350,000 in aggregate principal amount of promissory notes (the
"Rescission Notes"), together with warrants to purchase an aggregate of
approximately 7,000 shares of Common Stock; and
(v) an aggregate of 6,130 shares of Common Stock (the "Converted Warrants
Rescission Stock") to be issued upon the closing of this Offering upon
conversion of certain warrants (the "Converted Warrants").
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The Converted Warrants were originally issued to certain individuals in
conjunction with promissory notes that were subsequently converted (together
with accrued interest thereon) into shares of Converted Note Rescission Stock.
The Cash Rescission Stock, 1995 Rescission Stock, Converted Note Rescission
Stock and Converted Warrants Rescission Stock are hereinafter collectively
referred to as the "Rescission Stock." The Converted Warrants, together with
the warrants delivered in connection with the 1995 Rescission Stock, Converted
Note Rescission Stock and Rescission Notes are hereinafter collectively
referred to as the "Rescission Warrants." The Rescission Notes, the Rescission
Stock and the Rescission Warrants are hereinafter collectively referred to as
the "Rescission Securities." On January 23, 1998 the Company filed the
Rescission Offer Registration Statement registering the Rescission Offer under
the Securities Act.
The Company believes that the Rescission Securities may have been issued or
sold in violation of the registration requirements of the Washington
Securities Act. As a precaution against potential claims by holders of
Rescission Securities, and without admitting non-compliance with the
Washington Securities Act, the Company plans to offer to rescind such prior
issuances and sales by offering to repurchase the Rescission Securities at the
price paid therefor plus interest at the statutory rate of eight percent per
annum from the date of purchase to the expiration of the Rescission Offer. The
price paid will be based upon the price paid for the original security
purchased by the purchaser from the Company, regardless of the type of
Rescission Security currently held by the purchaser. The price paid for the
Cash Rescission Stock is $2.65 per share with respect to 96,748 shares and
$5.50 per share with respect to 142,364 shares, for an aggregate price of
$1,039,386. The price paid for the 1995 Rescission Stock is $5.50 per share
for an aggregate price of approximately $500,000. The price paid for the
Converted Note Rescission Stock is equal to the principal amount of the
original promissory notes related thereto for an aggregate price of $791,000.
The aggregate price paid for the Rescission Notes is $350,000. There is no
separate price for the Converted Warrants Rescission Stock because by the
terms and conditions of the Rescission Offer, the Converted Warrants
Rescission Stock must be surrendered if the holder of the related Converted
Note Rescission Stock elects to accept the Rescission Offer with respect to
its Converted Note Rescission Stock. The aggregate accrued interest with
respect to all of the Rescission Securities as of February 28, 1998 will be
approximately $322,000. If all holders of Rescission Securities were to accept
the Rescission Offer, the Company would be required to make payments
aggregating approximately $3.1 million, plus the aggregate amount of any
additional interest thereon that accrues after February 28, 1998. The
Rescission Offer will expire 15 days after the offer is transmitted. The
Company currently expects to use a portion of the proceeds from this Offering
to make payments under the Rescission Offer, if any are required. Offerees who
do not accept the Rescission Offer will thereafter hold registered Rescission
Securities under the Securities Act which, in the case of the Rescission
Stock, will be freely tradeable by non-affiliates in the public market as of
the effective date of the Rescission Offer Registration Statement.
As of the date hereof, management is not aware of any claims for rescission
against the Company. Also, current and former officers and directors of the
Company holding an aggregate of $1.4 million (including statutory interest
accrued thereon as of February 28, 1998) of the Rescission Securities have
indicated their intent not to accept the Rescission Offer, although no formal
Rescission Offer has been made to them and they have not and may not agree to
reject the Rescission Offer until the Rescission Offer Registration Statement
has been declared effective by the Securities and Exchange Commission and the
Rescission Offer has commenced. There can be no assurance that all or a
substantial portion of the Rescission Securities will not be tendered in
response to the Rescission Offer. Use of a portion of the proceeds of this
Offering in connection with the Rescission Offer will reduce the amount of
working capital available to the Company and require it to seek additional
capital sooner than otherwise might be required. The Rescission Offer is being
made in order to limit, so far as may be permitted under applicable federal
and state securities laws, the potential liability of the Company with respect
to the offer and sale of the Rescission Securities. Although the Company
believes that the offer and sale of the Rescission Securities were made in
compliance with the registration requirements of federal securities laws, if a
holder of the Rescission Securities were to assert a claim that the Rescission
Securities were sold in violation thereof, the position of the Securities and
Exchange Commission is that liabilities under the federal securities laws are
not terminated by making a rescission
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offer. Furthermore, notwithstanding the Rescission Offer, there can be no
assurance that the Company will not be subject to penalties or fines relating
to past securities issuances or that other holders of the Company's securities
will not assert or prevail in claims against the Company for rescission or
damages under state or federal securities laws. See "Risk Factors--Need for
Additional Capital and Capital Requirements," "--Rescission Offer," "Use of
Proceeds," "Shares Eligible for Future Sale" and Note 6 of Notes to the
Consolidated Financial Statements.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
4,799,356 shares of Common Stock (5,099,356 shares if the over-allotment
option is exercised in full). Of these shares, the 2,000,000 shares sold in
this Offering (plus any shares issued upon exercise of the Underwriters' over-
allotment option and any shares of Common Stock subject to the Rescission
Offer) will be freely tradeable without restriction under the Securities Act,
unless purchased or held by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act and the regulations promulgated
thereunder, or subject to lock-up agreements with Cruttenden Roth. Prior to
this Offering, there has been no public market for the Common Stock of the
Company and no predictions can be made as to the effect, if any, that market
sales of shares of Common Stock may have on the market price of the Common
Stock prevailing from time to time. Nevertheless, sales of significant numbers
of shares of the Common Stock in the public market after the lapse of existing
resale restrictions may adversely affect the market price of the Common Stock
offered hereby and could impair the Company's future ability to raise capital
through an offering of its equity securities.
Concurrent with the closing of this Offering, the Company has committed to
file a registration statement under the Securities Act (the "Resale
Registration Statement") to register for resale 321,253 shares to be issued in
connection with the Full Coverage Bridge Notes and other bridge loan
promissory notes. See "Certain Transactions" and "Description of Securities."
All of these shares are subject to lock-up agreements, pursuant to which the
holders thereof will not sell, contract to sell or grant any option to
purchase or otherwise dispose of any of these shares for a period of 270 days
after the Effective Date. Upon the expiration of these lock-up agreements and
the effectiveness of the Resale Registration Statement, these shares will be
available for sale in the public market, subject to Rule 144 volume
limitations applicable to affiliates.
The approximately 2,478,103 remaining shares of Common Stock outstanding
upon completion of this Offering (or any securities exercisable for or
convertible into the Company's Common Stock) are "restricted securities"
within the meaning of Rule 144 under the Securities Act ("Restricted Shares").
Restricted Shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
under the Securities Act, which are summarized below. Sales of the Restricted
Shares in the public market, or the availability of such shares for sale,
could adversely affect the market price of the Common Stock. The numbers of
shares that will be available for sale in the public market will be as
follows: (i) approximately 337,512 Restricted Shares will be freely tradeable
upon completion of this Offering; (ii) beginning 270 days after the Effective
Date, approximately 2,068,490 Restricted Shares will become eligible for sale
in the public market upon expiration of the lock-up agreements, subject in
certain cases to certain volume limitations and other resale restrictions
pursuant to Rule 701 and Rule 144; and (iii) one year after the closing of
this Offering, the approximately 72,101 remaining Restricted Shares will all
be eligible for sale in the public market.
The Company's officers, directors, holders of Common Stock holding an
aggregate of approximately 1,846,846 shares, holders of options to purchase an
aggregate of approximately 190,349 shares of Common Stock, holders of warrants
to purchase an aggregate of approximately 468,019 shares of Common Stock,
holders of shares of the Series A Convertible Preferred Stock convertible into
209,045 shares of Common Stock and holders of promissory notes convertible
into approximately 159,372 shares of Common Stock have agreed that they will
not, without the prior written consent of Cruttenden Roth, offer, sell,
contract to sell or grant any option to purchase or otherwise dispose of any
shares of Common Stock for a period of 270 days after the Effective Date. See
"Underwriting."
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In general, under Rule 144, as currently in effect, beginning 90 days after
the Effective Date, a person (or persons whose share are aggregated) who has
beneficially owned Restricted Shares for at least one year would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 47,790 shares immediately after
this Offering); or (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed
to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years, is entitled to sell such shares without complying
with the manner of sale, public information, volume limitation or notice
provisions of Rule 144.
Beginning 90 days after the Effective Date, unless subject to lock-up
agreements, certain shares issued upon exercise of options granted by the
Company prior to the date of this Prospectus will also be available for sale
in the public market pursuant to Rule 701 under the Securities Act. Any
employee, officer or director of or consultant to the Company who purchased
his or her shares pursuant to a written compensatory plan or contract may be
entitled to rely on the resale provision of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell such shares in reliance on Rule 144 without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. In both cases, a holder of Rule 701 shares is required to wait until
90 days after the date of this Prospectus before selling such shares.
Upon completion of this Offering, options to purchase 528,426 shares of
Common Stock will be outstanding. After this Offering, the Company intends to
file a registration statement under the Securities Act on Form S-8 covering
the shares of Common Stock reserved for issuance under the 1996 Plan and
Purchase Plan. Shares of Common Stock issued pursuant to such registration
statement will be available for sale in the public market, subject to Rule 144
volume limitations applicable to affiliates and to applicable lock-up
agreements.
As of January 31, 1998, in addition to the shares to be covered by the
Resale Registration Statement, the holders of options, warrants and Series A
Convertible Preferred Stock convertible into approximately 372,068 shares of
Common Stock are entitled to certain registration rights with respect to such
shares. If a large number of such shares were registered and sold in the
public market, such sales could have an adverse effect on the market price for
the Company's Common Stock. If the Company were required to include in a
Company-initiated registration the shares held by such holders pursuant to the
exercise of their registration rights, such sales could have an adverse effect
on the Company's ability to raise needed capital. See "Description of
Securities--Registration Rights."
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UNDERWRITING
The Underwriters named below, for whom Cruttenden Roth Incorporated and
Ferris, Baker Watts Incorporated are acting as the Representatives, have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement, to purchase from the Company the number of shares of Common Stock
set forth opposite their respective names below at the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Cruttenden Roth Incorporated.....................................
Ferris, Baker Watts Incorporated.................................
------
Total..........................................................
======
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters are
committed to purchase all shares of Common Stock offered hereby if any of such
shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the shares of Common Stock directly to the public
at the public offering price set forth on the cover page of this Prospectus
and to certain dealers at such public offering price less a concession not to
exceed $ per share. The Underwriters may allow, and such dealers may
reallow, a discount not to exceed $ per share in sales to certain other
dealers. After the Offering, the public offering price and concessions and
discounts may be changed by the Representatives.
The Company granted to the Underwriters an option, exercisable not later
than 45 days after the date of this Prospectus, to purchase up to an
additional 300,000 shares of Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the table above bears to the number of shares of
Common Stock offered hereby, and the Company will be obligated pursuant to the
option to sell such shares to the Underwriters. The Underwriters may exercise
the option only to cover over-allotments, if any, made in connection with the
distribution of the shares of Common Stock to the public.
The Company has agreed to pay Cruttenden Roth at closing a non-accountable
expense allowance equal to two and one-half percent (2.5%) of the aggregate
public offering price of the shares of Common Stock sold in the Offering (less
any advances), which will include proceeds from the over-allotment option, if
exercised. Cruttenden Roth's expenses in excess of the non-accountable expense
allowance, including its legal expenses, will be borne by Cruttenden Roth.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of shares of the Common Stock offered hereby to any
accounts over which they exercise discretionary authority.
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The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
in certain events to any liabilities incurred by the Underwriters in
connection with the sale of shares of Common Stock.
The Company, its officers, directors and certain securityholders have agreed
not to sell, offer to sell, contract to sell or otherwise dispose of any of
their shares of Common Stock or any other security convertible into or
exercisable or exchangeable for, or options or warrants to purchase or
acquire, shares of Common Stock without the prior written consent of
Cruttenden Roth for a period of 270 days after the Effective Date. See "Shares
Eligible for Future Sale."
The Company has agreed to sell to the Representatives warrants to purchase
from the Company up to 200,000 shares of Common Stock at an exercise price per
share equal to 120% of the public offering price (the "Representatives'
Warrants"). The Representatives' Warrants are exercisable for a period of four
years beginning one year from the date of this Prospectus, and are non-
transferable except (i) to officers of the Representatives; (ii) to general
partnerships whose general partners are either Representative and one or more
officers thereof; (iii) to successors to the Representatives in any merger or
consolidation; (iv) to a purchaser of all or substantially all of a
Representative's assets; or (v) by will or by the laws of descent or
distribution. The Representatives' Warrants include a net exercise provision
permitting the holders to pay the exercise price by cancellation of a number
of shares with a fair market value equal to the exercise price of the
Representatives' Warrants. The holders of the Representatives' Warrants will
have, in that capacity, no voting, dividend or other shareholder rights.
During the exercise period, the holders of the Representatives' Warrants are
entitled to certain demand and "piggyback" registration rights that will
expire five years after the date of this Prospectus and that may require the
Company to register for public resale the shares of Common Stock issuable upon
exercise of the Representatives' Warrants. The number of shares covered by the
Representatives' Warrants and the exercise price thereof are subject to
adjustment in certain events to prevent dilution. Any profit realized by the
Representatives on the sale of securities issuable upon exercise of the
Representatives' Warrants may be deemed to be additional underwriting
compensation.
The foregoing sets forth the material terms and conditions of the
Underwriting Agreement, but does not purport to be a complete statement of the
terms and conditions thereof. The Underwriting Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part, and
copies thereof are on file at the offices of the Representatives, the Company
and the Securities and Exchange Commission. See "Additional Information."
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price was negotiated between the Company and the
Representatives and does not necessarily bear any relationship to the assets,
book value, earnings history of the Company or to other investment criteria.
Among the factors considered in determining the initial public offering price
were prevailing market conditions, the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, the
capital structure of the Company, 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 prices at
which the Common Stock will trade in the public market following the Offering
will not be lower than the initial public offering price.
Certain persons participating in the Offering may overallot or effect
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid, or the effecting of any purchase, for the purpose of
pegging, fixing or maintaining the price of the Common Stock. A syndicate
covering transaction means the placing of any bid on behalf of the
underwriting syndicate or the effecting of any purchase to reduce a short
position created in connection with the Offering. A penalty bid means an
arrangement that permits the Underwriters to reclaim a selling concession from
a syndicate member in connection with the Offering when shares of Common Stock
sold by the syndicate member in connection with the Offering are
77
<PAGE>
purchased in syndicate covering transactions. Such transactions may be
effected on the Amex, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Heller Ehrman White & McAuliffe, Seattle, Washington. The validity
of the statements as to matters of law and legal conclusions concerning
federal telecommunications regulatory matters included under the captions
"Risk Factors--Regulatory Risks" and "Business--Regulation" in this Prospectus
have been passed upon by Squire, Sanders & Dempsey, Washington, D.C., federal
telecommunications regulatory counsel for the Company. Certain legal matters
relating to the Offering will be passed upon for the Underwriters by Stoel
Rives LLP, Seattle, Washington.
EXPERTS
The audited consolidated financial statements included in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form SB-2
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Certain items
are omitted in accordance with the rules and regulations of the Commission.
For further information with respect to the Company and the Common Stock
offered hereby, reference is made to the Registration Statement and the
exhibits and schedules filed as a part thereof. Statements contained in this
Prospectus as to the contents of any contract or any other document referred
to are not necessarily complete, and, in each instance, if such contract or
document is filed as an exhibit, reference is made to the copy of such
contract or document filed as an exhibit to the Registration Statement, each
such statement being qualified in all respects by such reference to such
exhibit. The Registration Statement, including exhibits and schedules thereto,
may be inspected without charge at the public reference facilities maintained
by the Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices located at the North Western
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and Seven World Trade Center, 13th Floor, New York, NY 10048, and copies of
all or any part thereof may be obtained from such office after payment of fees
prescribed by the Commission. The Commission maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements examined by an independent public
accounting firm and quarterly reports for the first three quarters of each
year containing interim unaudited financial information. Upon completion of
the offering contemplated hereby, the Company will be subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will be filing reports and other information with the Commission.
78
<PAGE>
GLOSSARY OF TERMS
access point--A location where a long-distance carrier has installed
transmission equipment in a service area that serves as, or relays calls to, a
network switching center of that long-distance carrier.
accounting or settlement rate--The per minute rate negotiated between
carriers in different countries for termination of international long distance
traffic in, and return traffic to, the carriers' respective countries.
business-grade Internet--An Internet network offering private network like
security and reliability.
call-reorigination (or "call back")--A form of dial-up access that allows a
user to access a telecommunications company's network by placing a telephone
call, hanging up, and waiting for an automated callback. The callback then
provides the user with dial tone which enables the user to initiate and
complete a call.
call-through--The provision of international long distance service through
conventional long-distance or a "transparent" form of call re-origination
without the usual "hang up" and "call back" whereby the call is automatically
and swiftly processed by a programmed switch.
co-location--The Company's ability to locate the Company's network equipment
at the facility of another telecommunications provider.
dedicated or direct access--A means of accessing a network through the use
of a permanent point-to-point circuit typically leased from a facilities-based
carrier. The advantage of dedicated access is simplified premises-to-anywhere
calling, faster call set-up times and potentially lower access and
transmission costs (provided there is sufficient traffic over the circuit to
generate economies of scale).
dial-up access--A form of service whereby access to a network is obtained by
dialing an international toll-free number or a paid local access number.
Equant--Equant Network Services International Corporation (formerly known as
Scitor International Telecommunications Services, Inc.), a global data network
service provider.
facilities-based carrier--A carrier which transmits a significant portion of
its traffic over its own transmission facilities.
fiber optic--A transmission medium consisting of high-grade glass fibers
through which light beams are transmitted carrying a high volume of
telecommunications traffic.
Global Enhanced VPN (Virtual Private Network)--The Company's enhanced VPN
service.
IBNET--International Business Network for World Commerce and Industry, Ltd.,
the managing member of the Consortium of Global Commerce.
IDC--International Data Corporation.
intranet--A company's internal wide area network utilizing Internet
technologies.
IP--Internet Protocol.
ISP--Internet services provider.
ITO (Incumbent Telephone Operator)--The dominant carrier or carriers in each
country, often, but not always, government-owned or protected.
79
<PAGE>
ITU--International Telecommunications Union.
LAN--Local area network. A data communications network designed to
interconnect PCs, workstations, minicomputer, file servers and other
communications and computing devices within a localized environment.
latency--The time that elapses between the moment when a command is sent to
the time that a response is recieved. On a network, latency is due to delays
in routers or switches, congestion delays on a crowded backbone and the time
required for electrons to travel a great distance between nodes on a network.
node--A specially configured piece of telecommunications equipment which
provides the interface between the local ITO where the node is located and the
Company's gateway switch. A node collects and concentrates call traffic from
its local area and transfers it to Company's switch via private line for call
processing. Nodes permit the Company to extend its network into a new
geographic location by accessing the local ITO without requiring the
deployment of a switch.
private line--A dedicated telecommunications connection between end user
locations.
resale--Resale by a provider of telecommunications services of services sold
to it by other providers or carriers on a wholesale basis.
switching facility--A device that opens or closes circuits or selects the
paths or circuits to be used for transmission of information. Switching is a
process of interconnecting circuits to form a transmission path between users.
VAR--Value-Added Reseller.
Value-Added Tax (VAT)--A consumption tax levied on end-consumers of goods
and services in applicable jurisdictions.
VPN--Virtual Private Network. A network capable of providing the tailored
services of private network (i.e., low latency, high throughput security and
customization) while maintaining the benefits of a public network (i.e.,
ubiquity and economies of scale).
WTO--World Trade Organization.
80
<PAGE>
GLOBALTEL RESOURCES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Common Stock Subject to Rescission and
Shareholders' Deficit ................................................... F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
GlobalTel Resources, Inc.:
We have audited the accompanying consolidated balance sheets of GlobalTel
Resources, Inc. (a Washington corporation) and subsidiaries as of December 31,
1995 and 1996, and the related consolidated statements of operations, common
stock subject to rescission and shareholders' deficit 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.
As discussed in Note 6, the Company plans to commence an offer to rescind a
significant portion of the Company's common stock and bridge loans. In
addition, as discussed in Note 5, a significant portion of the Company's
bridge loans call for principal repayment during 1998. Management's current
projections indicate that there will not be sufficient cash flows from
operations to fund these obligations. Management is currently planning to pay
off these obligations with the proceeds of a public offering of common stock.
However, if management is unsuccessful in that effort, consideration will be
given to the slowdown of its growth strategies and renegotiating the terms of
the bridge loans due in 1998.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GlobalTel Resources, Inc.
and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington,
April 11, 1997 (except with respect
to the matters discussed in Note 9,
as to which the date is December 18, 1997)
F-2
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS AS OF SEPTEMBER 30, 1997 ARE UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash................................. $ 715,987 $ 446,257 $ 237,428
Accounts receivable, net of allowance
for doubtful accounts of $62,000,
$207,000, and $180,000.............. 376,118 1,288,047 947,985
Other receivables.................... 100,424 333,181 289,487
Other current assets................. 66,890 149,178 146,956
----------- ----------- ------------
Total current assets............... 1,259,419 2,216,663 1,621,856
Furniture and equipment, net........... 310,092 670,712 1,387,117
Other assets:
License agreement, net............... 175,398 163,573 154,705
Organizational costs, net............ 119,693 110,114 84,064
Bridge loan issue costs, net......... 2,846 107,356 211,274
Deposits on equipment................ -- 374,075 507,388
Other................................ 10,906 58,994 35,500
----------- ----------- ------------
Total assets....................... $ 1,878,354 $ 3,701,487 $ 4,001,904
=========== =========== ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable..................... $ 425,229 $ 2,570,745 $ 3,184,757
Accrued liabilities.................. 260,394 1,937,154 1,326,253
Bridge loans......................... 265,000 1,840,000 2,035,000
Due to shareholders.................. 649,015 -- --
Notes payable........................ -- 92,310 27,372
Customer deposits and prepayments.... 493,908 1,024,743 871,272
----------- ----------- ------------
Total current liabilities.......... 2,093,546 7,464,952 7,444,654
Bridge loans........................... -- 2,282,500 2,120,000
----------- ----------- ------------
Total liabilities.................. 2,093,546 9,747,452 9,564,654
----------- ----------- ------------
Commitments and contingencies (see
Notes 6 and 8)
Common stock subject to rescission; par
value $0.05; 310,885, 326,385 and
386,497 shares issued and outstanding. 1,434,137 1,519,387 1,850,004
----------- ----------- ------------
Shareholders' deficit:
Series A convertible preferred stock;
par value $0.01; 5,000,000 shares
authorized; 0, 0, and 275,000 shares
issued and outstanding.............. -- -- 987,027
Common stock; par value $0.05;
50,000,000 shares authorized;
1995--1,119,165 shares issued,
690,947 shares outstanding;......... 150,033 -- --
1996--675,447 shares issued and
outstanding;........................ -- 64,783 --
1997--1,133,110 shares issued and
outstanding......................... -- -- 2,388,642
Common stock warrants................ 10,751 52,306 1,334,406
Accumulated deficit.................. (1,810,113) (7,682,441) (12,122,829)
----------- ----------- ------------
Total shareholders' deficit........ (1,649,329) (7,565,352) (7,412,754)
----------- ----------- ------------
Total liabilities and shareholders'
deficit........................... $ 1,878,354 $ 3,701,487 $ 4,001,904
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 ARE
UNAUDITED)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................... $ 2,113,047 $ 9,135,935 $ 5,830,203 $10,639,495
Operating expenses:
Cost of sales............ 1,928,396 8,229,546 5,155,035 9,006,799
Sales and marketing...... 238,168 682,332 493,920 664,421
General and
administrative.......... 1,536,215 5,773,133 4,095,125 4,657,840
Depreciation and
amortization............ 111,062 98,288 85,904 141,582
----------- ----------- ----------- -----------
Total operating expenses... 3,813,841 14,783,299 9,829,984 14,470,642
----------- ----------- ----------- -----------
Operating loss............. (1,700,794) (5,647,364) (3,999,781) (3,831,147)
Interest expense, including
$1,291, $61,350, $30,272
and $213,797 to related
parties................... (33,681) (224,964) (103,066) (587,442)
----------- ----------- ----------- -----------
Net loss before provision
for income taxes.......... (1,734,475) (5,872,328) (4,102,847) (4,418,589)
Provision for income taxes. -- -- -- --
----------- ----------- ----------- -----------
Net loss................... $(1,734,475) $(5,872,328) $(4,102,847) $(4,418,589)
=========== =========== =========== ===========
Series A convertible
preferred stock dividends. -- -- -- (21,799)
----------- ----------- ----------- -----------
Net loss applicable to
common shareholders....... $(1,734,475) $(5,872,328) $(4,102,847) $(4,440,388)
=========== =========== =========== ===========
Pro forma:
Net loss per share....... $ (3.17) $ (2.39)
=========== ===========
Weighted average number
of shares outstanding... 1,854,822 1,858,992
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION AND
SHAREHOLDERS' DEFICIT
(AMOUNTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997 ARE UNAUDITED)
<TABLE>
<CAPTION>
SERIES A
COMMON STOCK SUBJECT CONVERTIBLE
TO RESCISSION PREFERRED STOCK COMMON STOCK
-------------------- -------------------- ---------------------- COMMON
NUMBER DOLLAR NUMBER DOLLAR NUMBER OF DOLLAR STOCK
OF SHARES AMOUNT OF SHARES AMOUNT SHARES AMOUNT WARRANTS
--------- ---------- --------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994...................... -- $ -- -- $ -- 421,760 $ 330,000 $ --
Issuance of common stock to founders........... -- -- -- -- 23,499 -- --
Issuance of common stock ($0.42 per share) and
obligation to issue 60,000 shares ($0.14 per
share) to acquire GFP (see Notes 1 and 7).... -- -- -- -- 216,791 100,000 --
Sale of common stock ($2.665 per share)........ 96,748 256,382 -- -- 110,910 297,344 --
Sale of common stock ($5.50 per share)......... 214,137 1,177,755 -- -- 180,560 993,078 --
Cost of common stock issuances................. -- -- -- -- -- (126,236) --
Issuance of common stock warrants.............. -- -- -- -- -- -- 10,751
Repurchase of common stock ($5.50 per share)... -- -- -- -- (262,573) (1,444,153) --
Net loss....................................... -- -- -- -- -- -- --
------- ---------- ------- ---------- --------- ----------- ----------
BALANCE, December 31, 1995...................... 310,885 1,434,137 -- -- 690,947 150,033 10,751
Repurchase of common stock ($5.50 per share)... -- -- -- -- (18,000) (99,000) --
Sale of common stock to employees ($5.50 per
share)....................................... 15,500 85,250 -- -- -- -- --
Sale of common stock to third party ($5.50 per
share)....................................... -- -- -- -- 2,500 13,750 --
Issuance of common stock warrants.............. -- -- -- -- -- -- 41,555
Net loss....................................... -- -- -- -- -- -- --
------- ---------- ------- ---------- --------- ----------- ----------
BALANCE, December 31, 1996...................... 326,385 1,519,387 -- -- 675,447 64,783 52,306
Issuance of Series A convertible preferred
stock ($4.00 per share, see Note 3).......... -- -- 275,000 1,100,000 -- -- --
Cost of Series A convertible preferred stock
issuances.................................... -- -- -- (134,772) -- -- --
Partial settlement of 1995 obligation to issue
common stock to acquire GFP (see Note 7)..... -- -- -- -- 30,000 -- --
Employment contract converted to common stock
($5.50 per share)............................ -- -- -- -- 24,242 133,333 --
Bridge loans converted to common stock ($5.50
per share)................................... 60,112 330,617 -- -- 403,421 2,218,811 --
Cost of common stock conversions............... -- -- -- -- -- (28,285) --
Deferred salaries converted to common stock
warrants..................................... -- -- -- -- -- -- 1,184,856
Issuance of common stock warrants.............. -- -- -- -- -- -- 97,244
Cumulative Series A convertible preferred stock
dividends.................................... -- -- -- 21,799 -- -- --
Net loss....................................... -- -- -- -- -- -- --
------- ---------- ------- ---------- --------- ----------- ----------
BALANCE, September 30, 1997 (unaudited)......... 386,497 $1,850,004 275,000 $ 987,027 1,133,110 $ 2,388,642 $1,334,406
======= ========== ======= ========== ========= =========== ==========
<CAPTION>
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT DEFICIT
------------ -------------
<S> <C> <C>
BALANCE, December 31, 1994...................... $ (75,638) $ 254,362
Issuance of common stock to founders........... -- --
Issuance of common stock ($0.42 per share) and
obligation to issue 60,000 shares ($0.14 per
share) to acquire GFP (see Notes 1 and 7).... -- 100,000
Sale of common stock ($2.665 per share)........ -- 297,344
Sale of common stock ($5.50 per share)......... -- 993,078
Cost of common stock issuances................. -- (126,236)
Issuance of common stock warrants.............. -- 10,751
Repurchase of common stock ($5.50 per share)... -- (1,444,153)
Net loss....................................... (1,734,475) (1,734,475)
------------ -----------
BALANCE, December 31, 1995...................... (1,810,113) (1,649,329)
Repurchase of common stock ($5.50 per share)... -- (99,000)
Sale of common stock to employees ($5.50 per
share)....................................... -- --
Sale of common stock to third party ($5.50
per share)................................... -- 13,750
Issuance of common stock warrants.............. -- 41,555
Net loss ...................................... (5,872,328) (5,872,328)
------------ -----------
BALANCE, December 31, 1996...................... (7,682,441) (7,565,352)
Issuance of Series A convertible preferred
stock ($4.00 per share, see Note 3).......... -- 1,100,000
Cost of Series A convertible preferred stock
issuances.................................... -- (134,772)
Partial settlement of 1995 obligation to issue
common stock to acquire GFP (see Note 7)..... -- --
Employment contract converted to common stock
($5.50 per share)............................ -- 133,333
Bridge loans converted to common stock
($5.50 per share)............................ -- 2,218,811
Cost of common stock conversions............... -- (28,285)
Deferred salaries converted to common stock
warrants..................................... -- 1,184,856
Issuance of common stock warrants.............. -- 97,244
Cumulative Series A convertible preferred
stock dividends.............................. (21,799) --
Net loss....................................... (4,418,589) (4,418,589)
------------ -----------
BALANCE, September 30, 1997 (unaudited)..... $(12,122,829) $(7,412,754)
============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 ARE
UNAUDITED)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss................... $(1,734,475) $(5,872,328) $(4,102,847) $(4,418,589)
Adjustments to reconcile
net loss to net cash used
in operating activities--
Depreciation and
amortization............ 118,966 127,287 107,653 300,326
Loss on disposal of
assets.................. -- 12,538 12,538 --
Employment contract
converted to common
stock................... -- -- -- 133,333
Changes in certain assets
and liabilities:
Accounts receivable..... (376,118) (911,929) (224,047) 340,062
Other receivables and
other current assets... (160,061) (315,045) (554,925) 11,322
Accounts payable,
accrued liabilities and
other.................. 658,421 3,807,276 3,100,088 1,423,187
Customer deposits and
prepayments............ 493,908 530,835 358,597 (153,471)
----------- ----------- ----------- -----------
Net cash used in operating
activities................ (999,359) (2,621,366) (1,302,943) (2,363,830)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of furniture and
equipment................. (260,449) (329,390) (264,154) (823,070)
Proceeds from disposition
of assets................. -- 15,000 15,000 --
Organizational costs
incurred.................. (162,929) -- -- --
Acquisition of business,
net of cash acquired...... (99,003) -- -- --
Deposits made to purchase
furniture and equipment... -- (374,075) (374,075) (133,313)
----------- ----------- ----------- -----------
Net cash used in investing
activities................ (522,381) (688,465) (623,229) (956,383)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of
bridge loans.............. 265,000 3,857,500 2,062,500 2,651,708
Payments made on bridge
loans..................... -- -- -- (305,000)
Payments made on due to
shareholders.............. (707,956) (649,015) (649,015) --
Borrowings under notes
payable................... -- -- -- 12,967
Payments on notes payable.. -- (33,342) -- (77,905)
Cash paid for bridge loan
issue costs............... -- (76,954) (27,654) (193,702)
Proceeds from issuance of
common stock, net......... 2,598,323 99,000 -- --
Repurchase of common stock. (200,000) (99,000) -- --
Proceeds from issuance of
Series A convertible
preferred stock, net...... -- (58,088) -- 1,023,316
----------- ----------- ----------- -----------
Net cash provided by
financing activities...... 1,955,367 3,040,101 1,385,831 3,111,384
----------- ----------- ----------- -----------
Net increase (decrease) in
cash...................... 433,627 (269,730) (540,341) (208,829)
Cash, beginning of period.. 282,360 715,987 715,987 446,257
----------- ----------- ----------- -----------
Cash, end of period........ $ 715,987 $ 446,257 $ 175,646 $ 237,428
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period
for--
Interest................. $ 26,585 $ 17,446 $ 17,446 $ 33,099
Income taxes ............ -- -- -- --
SUPPLEMENTAL DISCLOSURE OF
SIGNIFICANT NONCASH
INVESTING AND FINANCING
ACTIVITIES:
Issuance of common stock
warrants related to bridge
loans..................... $ 10,751 $ 41,555 $ 22,746 $ 97,244
Bridge loans and accrued
interest converted to
common stock.............. -- -- -- 2,549,428
Deferred salaries converted
to common stock warrants.. -- -- -- 1,184,856
Issuance of notes payable
to finance common stock
repurchase................ 1,244,153 -- -- --
Issuance of notes payable
to finance equipment
purchases................. -- 125,652 91,020 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
GlobalTel Resources, Inc. ("the Company"), a Washington corporation, was
formed on November 17, 1994, to provide international telecommunications
services. The Company began operations in 1995 with its entry into the
international call-reorigination business. The Company also markets long-
distance calling cards, and enhanced voice services including voice mail and
conference calling.
On December 29, 1995, the Company acquired GFP Group, Inc. ("GFP"), a
Washington corporation formed on September 15, 1995. GFP was formed primarily
for the purpose of acquiring Ratsten International Telecommunications, Inc.
d/b/a Netstar Telecommunications, Inc. ("Ratsten") and thereafter being
acquired by the Company. Ratsten held certain license rights critical to the
Company's mission of providing global telecommunications services.
The Company provides global long-distance call-reorigination services
through Primecall, Inc., a wholly owned subsidiary. The Company began
generating revenue in March 1995. Prior to January 1, 1995, the Company's sole
operations consisted of general and administrative activities, which amounted
to $75,638 for the year ended December 31, 1994. As these results of
operations are not material, the Company's financial statements as of and for
the year ended December 31, 1994 are not presented.
During the Company's limited operating history, it has generated substantial
operating losses and expects to incur additional operating losses. These
losses have been principally funded by a combination of common and preferred
stock sales and bridge loans, which mature in 1998 and early 1999 (see Notes 3
and 5). In addition, the Company will require additional capital to bring
certain past due trade accounts payable current and finance its short- and
long-term growth strategies. There can be no assurance that the Company will
be able to obtain the necessary additional capital, or that its operations
will be sufficient to generate future positive operating results.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated Financial Statements
The accompanying consolidated financial statements include the financial
accounts of the Company and its wholly owned subsidiaries, Primecall and GFP.
All intercompany transactions have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
Interim Results
The accompanying consolidated balance sheet as of September 30, 1997, and
the consolidated statements of operations, common stock subject to rescission
and shareholders' deficit and cash flows for the nine-month periods ended
September 30, 1996 and 1997 are unaudited. In the opinion of management, the
interim unaudited consolidated statements have been prepared on the same basis
as the historical audited
F-7
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
consolidated financial statements and include all adjustments, consisting of
normal recurring adjustments necessary for the fair statement of interim
periods. The data disclosed in these notes to the consolidated financial
statements for these interim periods is also unaudited.
Cash
For purposes of the consolidated statements of cash flows, cash includes all
amounts on deposit with financial institutions. The Company has no short-term
investments.
Furniture and Equipment
Furniture and equipment consist of office furniture and computer and
telecommunications equipment. Furniture and equipment are recorded at cost and
are depreciated using the straight-line method over the estimated useful lives
of the related assets, which range from 5 to 10 years. Repairs, maintenance
and minor renewals are charged to expense as incurred. Major renewals and
betterments which substantially extend the useful life of the assets are
capitalized. Upon sale or other disposition of assets, the cost and the
related accumulated depreciation are removed from the accounts and a gain or
loss, if any, is reflected in the consolidated statements of operations.
Furniture and equipment is composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- --------- -------------
<S> <C> <C> <C>
Telecommunications equipment............ $281,965 $ 587,791 $ 936,113
Furniture, fixtures and other........... 83,399 206,391 681,139
-------- --------- ----------
365,364 794,182 1,617,252
Less--Accumulated depreciation.......... (55,272) (123,470) (230,135)
-------- --------- ----------
Furniture and equipment, net............ $310,092 $ 670,712 $1,387,117
======== ========= ==========
</TABLE>
The Company recorded depreciation expense of $55,272, $76,884, $69,852 and
$106,665 for the years ended December 31, 1995 and 1996, and for the nine-
month periods ended September 30, 1996 and 1997, respectively.
Other Assets
Other assets consist primarily of a license agreement, organizational costs,
bridge loan issue costs and deposits on telecommunications equipment. The
license agreement purchased by the Company (see Note 7) is being amortized on
a straight-line basis over 15 years. The Company recorded amortization expense
related to the license agreement of $1,970, $11,825, $8,868 and $8,867 for the
years ended December 31, 1995 and 1996, and for the nine-month periods ended
September 30, 1996 and 1997, respectively.
Certain organizational costs (primarily legal expenses) incurred in
connection with establishing and organizing the Company and its subsidiaries
are being amortized over a period of five years. The Company recorded
amortization expense related to these organizational costs of $53,820, $9,579,
$7,184 and $26,050 for the years ended December 31, 1995 and 1996, and for the
nine-month periods ended September 30, 1996 and 1997, respectively.
F-8
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
Bridge loan issue costs incurred in connection with obtaining bridge loans
have been capitalized and are being amortized into interest expense over the
lives of the loans. During 1995 and 1996, and the nine-month periods ended
September 30, 1996 and 1997, the Company recognized $7,904, $28,999, $21,749
and $122,491, respectively, in additional interest expense from amortization
of the bridge loan issue costs.
At December 31, 1996 and September 30, 1997, the Company had made non-
refundable deposits of $374,075 and $507,388, respectively, toward the
purchase of certain telecommunications equipment. The Company expects to take
delivery of this equipment in the fourth quarter of 1997 and in the first
quarter of 1998.
Accrued Liabilities
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- ---------- -------------
<S> <C> <C> <C>
Telecommunications costs................. $ 82,000 $ 511,550 $ 758,958
Deferred salaries........................ -- 667,000 --
Other.................................... 178,394 758,604 567,295
-------- ---------- ----------
$260,394 $1,937,154 $1,326,253
======== ========== ==========
</TABLE>
As of December 31, 1996, the Company had deferred salaries payable to
certain members of the Company's management. Interest accrued on the deferred
balances at an annual rate of 10%. During 1997, an additional $517,856 of
deferred salaries was accrued. During the nine-month period ended
September 30, 1997, the deferred salaries were converted to common stock
warrants (see Note 3).
Equity-Based Compensation
The Company accounts for employee equity-based compensation following the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." In accordance with the provisions
of APB 25, the Company has not recognized deferred compensation or
compensation expense in connection with its equity-based plans as the exercise
price of the options granted was equal to fair value at the date of grant (see
Note 3).
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," requires expanded disclosures of
equity-based compensation arrangements with employees and does not require,
but encourages, compensation cost to be measured based on the fair value of
equity instruments when awarded. The Company, as allowed, intends to continue
to measure employee equity-based compensation under APB 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument
awarded.
Revenue Recognition and Cost of Sales
Revenues and related cost of sales are recognized in the period services are
provided. The related accruals for sales, cost of sales and unearned revenues
are included in the consolidated balance sheets.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
To date, the Company has fully reserved all net deferred tax assets.
F-9
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
Concentrations of Risk
During October 1996, the Company began wholesaling long-distance minutes to
other long-distance carriers. As of December 31, 1996, $793,483 of the
Company's accounts receivable was due from a single long-distance carrier.
This receivable was fully collected during the first quarter of 1997.
Approximately 85% of the Company's call-reorigination revenues are from
customers outside of the United States. The geographic origin of revenues
including wholesale carrier revenues approximates the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- ----------------------
1995 1996 1996 1997
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Africa........................ $ 731,000 $3,180,000 $2,300,000 $ 1,940,000
Asia.......................... 361,000 1,550,000 1,100,000 1,100,000
Australia..................... 130,000 557,000 340,000 1,180,000
Europe........................ 230,000 987,000 790,000 480,000
North America................. 371,000 1,629,000 600,000 4,460,000
South America................. 290,000 1,233,000 700,000 1,480,000
----------- ----------- ---------- -----------
$ 2,113,000 $ 9,136,000 $5,830,000 $10,640,000
=========== =========== ========== ===========
</TABLE>
Cost of sales as a percentage of revenues do not vary significantly from
region to region. There are no other direct costs incurred outside the United
States, nor does the Company own material assets located outside of the United
States. The continued legality and competitive advantage of call-reorigination
businesses in certain foreign countries is uncertain, due to changing
regulatory environments.
The Company's call-reorigination business is facilitated by a single switch
located in Los Angeles, California.
Pro Forma Net Loss Per Share
Pro forma net loss per share is based on the weighted average number of
shares of common stock and common equivalent shares outstanding using the
treasury stock method and upon conversion of the Company's outstanding Series
A preferred stock at September 30, 1997. Common stock equivalents are excluded
from the calculation of pro forma net loss per share due to their antidilutive
effect except that pursuant to Securities and Exchange Commission
requirements, common and common equivalent shares issued during the 12-month
period prior to the initial filing of a registration statement relating to the
Company's proposed initial public offering have been included in the
calculation as if they were outstanding for all periods presented using the
treasury stock method, based on the initial public offering price of $9.00 per
share.
Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to shares of Series A preferred stock that
are assumed to convert to common stock upon the closing of the Company's
initial public offering (using the if-converted method). If the offering
contemplated by the prospectus is consummated, all of the Series A preferred
stock outstanding as of the effective date of the offering is assumed to be
converted into an aggregate of 209,045 shares of common stock.
F-10
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
Effect of New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings Per Share," which revises the calculation and presentation
provisions of APB 15 and related interpretations. SFAS 128 is effective for
the Company's fiscal year ending December 31, 1997, and retroactive
application is required. The Company does not expect the implementation of
SFAS 128 to have a material effect on earnings per share amounts reported
prior to that date.
3. SHAREHOLDERS' DEFICIT
Series A Convertible Preferred Stock
Each share of Series A Convertible Preferred Stock is entitled to a dividend
at a per annum rate equal to 6% of the issuance price, deferrable at the
election of the Company but payable in preference to dividends on any other
securities issued by the Company. All accrued and unpaid dividends on a share
must be paid before dividends on other securities. Each share is also
entitled, in liquidation, to a preferred distribution of the initial issuance
price plus all accrued but unpaid dividends. Each share is subject to
automatic conversion to common stock upon the sale of all or substantially all
of the assets of the Company, an election to convert by two-thirds of the
holders of such shares, or upon the closing of an initial public offering, the
net proceeds of which exceed $15 million if certain other conditions are
satisfied. Any unpaid cumulative dividends at the time of conversion may be
paid at the option of the Company in cash, common stock, or as notes payable
to the preferred shareholders. Each share of Series A preferred stock has a
voting right based upon the number of shares of common stock into which the
Series A preferred stock would then be convertible in addition to certain
demand and piggyback registration rights.
During 1996, the Company incurred $58,088 in connection with its issuance of
Series A convertible preferred stock. These costs were capitalized as other
assets in the accompanying December 31, 1996 consolidated balance sheet and
were subsequently reclassified as a charge to equity in connection with the
Company's private placement of Series A convertible preferred stock.
Common Stock
During 1995, the Company executed a stock purchase agreement with certain
common shareholders to buy back 262,573 shares of the Company's common stock
at a price of $5.50 per share. The Company paid $200,000 in cash and issued
$1,244,153 in promissory notes (classified as due to shareholders in the
accompanying December 31, 1995 consolidated balance sheet) bearing interest at
8% to finance the repurchase. These promissory notes were paid in full as of
December 31, 1996.
During September 1997, several holders of bridge loans accepted an offer
from the Company to convert their bridge loans in the amount of $2,314,208,
and related unpaid interest of $235,220 into shares of common stock at a value
equal to $5.50 per share (See Note 5).
During September 1997, the Company issued 24,242 shares of common stock with
an agreed value of $133,333 to a former employee in satisfaction of the
Company's obligations under the employee's severance agreement. The value of
the common stock issued was charged to compensation expense in the
accompanying consolidated statement of operations for the nine-month period
ended September 30, 1997.
F-11
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
Equity-Based Compensation
During 1996, the Company approved the 1996 Stock Option Plan (the "Plan")
which provides for the granting of qualified and nonqualified stock options.
The Company has reserved 700,000 shares of common stock subject to shareholder
approval for granting of stock options under the Plan. The Company's Board of
Directors ("the Board") has the authority to determine all matters relating to
options to be granted under the Plan, including the selection of individuals
to be granted options, the number of shares to be subject to each option, the
exercise price and the term and vesting period, if any. The Company recognized
no compensation expense from the vesting of options granted for the years
ended December 31, 1995 and 1996 or for the nine-month periods ended September
30, 1996 and 1997.
The following table summarizes activity related to stock options granted to
certain executives and employees of the Company:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PRICE PER
SHARES SHARE
--------- ---------
<S> <C> <C>
Balance at January 1, 1995............................. -- $ --
Grants............................................... 73,100 5.50
Exercised............................................ -- --
Canceled............................................. -- --
-------
Balance at December 31, 1995........................... 73,100 5.50
Grants............................................... 128,926 5.50
Exercised............................................ -- --
Canceled............................................. (30,000) 5.50
-------
Balance at December 31, 1996........................... 172,026 5.50
Grants............................................... 88,533 5.50
Exercised............................................ -- --
Canceled............................................. (60,533) 5.50
-------
Balance at September 30, 1997.......................... 200,026 5.50
=======
</TABLE>
There were 13,100, 63,609 and 90,125 options exercisable as of December 31,
1995 and 1996, and as of September 30, 1997, respectively. The outstanding
options at December 31, 1996, have a weighted average remaining contractual
life of 9.7 years. As of September 30, 1997, there were 319,974 shares
available for future option grants.
Pro forma information regarding results of operations and loss per share is
required by SFAS 123 for awards granted after December 31, 1994 as if the
Company had accounted for its stock-based awards to employees under a
valuation method permitted by SFAS 123. The value of the Company's stock-based
awards to employees in 1995, 1996 and 1997 was estimated using the minimum
value method. Should the Company complete an initial public offering ("IPO")
of its common stock, options granted after the IPO will be valued using the
Black-Scholes option pricing model. Among other things, the Black-Scholes
model considers the expected volatility of the Company's stock price,
determined in accordance with SFAS 123, in arriving at an option valuation.
The minimum value method does not consider stock price volatility. Had
compensation cost for the Plan been determined consistent with SFAS 123, the
Company's net loss for the years ended December 31, 1995 and 1996 would have
been increased to $1,748,144 and $5,918,197, respectively. The Company intends
to make the complete annual disclosures required under SFAS 123 for all 1997
activity in its consolidated financial statements as of and for the year ended
December 31, 1997.
F-12
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
The weighted average fair value of the Company's stock-based awards granted
to employees was $1.05 and $0.90 as of December 31, 1995 and 1996,
respectively, and was estimated assuming no expected dividends and the
following weighted average assumptions:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Risk-free interest rate.................................... 5.4% 6.2%
Expected life.............................................. 4 years 3 years
</TABLE>
Common Stock Warrants
In connection with the bridge loans issued by the Company, warrants to
purchase 21,501, 78,910 and 185,762 shares of the Company's common stock were
issued in 1995, 1996 and for the nine-month period ended September 30, 1997,
respectively. The 1996 and 1997 warrants generally provide for increases in
the number of shares of common stock issuable if the Company has not closed a
major financing transaction within specified periods. The 1996 and 1997
warrants have an exercise price of $5.50 and the 1995 warrants are exercisable
at no cost. All of the warrants were exercisable immediately upon issuance.
The Company estimated the value of these warrants to be $10,751, $41,555 and
$97,244 in 1995, 1996 and 1997, respectively, and accordingly, recorded this
value as bridge loan issue costs to be amortized as interest expense over the
life of the bridge loans.
The Company also issued warrants to purchase 2,406, 55,800 and 22,600 shares
of common stock at an exercise price of $0, $5.50 and $5.50 per share, to
various individuals in consideration for consulting and other services
received during 1995, 1996, and 1997, respectively. With respect to the 1996
warrants, 30,000 vest upon the earlier of two years or the filing of a
registration statement in connection with a public offering. The remaining
25,800 warrants were exercisable immediately upon issuance. The 1995 and 1997
warrants were also immediately exercisable upon issuance. The fair market
value of these warrants when issued were not considered to be material.
During September 1997, several former employees accepted common stock
warrants in lieu of salaries owed to them. Accordingly, deferred salaries of
$1,184,856 were converted into warrants to purchase 215,428 shares of common
stock with an exercise price of $0.05 per share. These warrants were
immediately exercisable upon issuance and have a three-year term.
4. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
--------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward.................. $ 468,000 $ 1,422,000
Start-up costs................................... 95,000 813,000
Other deferred tax assets........................ 39,000 373,000
Valuation allowance.............................. (538,000) (2,528,000)
--------- -----------
Total deferred tax assets...................... 64,000 80,000
Deferred tax liabilities:
Depreciation of furniture and equipment.......... (4,000) (24,000)
Amortization of other long-term assets........... (60,000) (56,000)
--------- -----------
Total deferred tax liabilities................. (64,000) (80,000)
--------- -----------
Net deferred taxes............................. $ -- $ --
========= ===========
</TABLE>
F-13
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
The Company's net operating loss carryforward is subject to limitations and
begins expiring in 2010. The Company has determined that its deferred tax
assets do not satisfy the recognition criteria set forth under the provisions
of SFAS 109, "Accounting for Income Taxes." Accordingly, a valuation allowance
has been recorded against the applicable deferred tax assets. Therefore, no
tax benefits have been recorded in the accompanying consolidated statements of
operations. The valuation allowance increased by $538,000 and $1,990,000
during 1995 and 1996, respectively.
The difference between the statutory tax rate of approximately 34% and the
tax benefit of zero recorded by the Company is primarily due to the Company's
full valuation allowance against its net deferred tax assets.
5. BRIDGE LOANS
To fund operations and capital expenditures of the Company and, in 1995, to
assist in the purchase of Ratsten (see Note 7), the Company obtained bridge
loans from certain investors, some of whom are shareholders or management of
the Company. All bridge loans bear interest at 10% annually and in certain
cases increase to 12% if the loans are past due. In addition, stock warrants
were granted to certain of these investors as discussed in Note 3. Bridge
loans outstanding were:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- ---------- -------------
<S> <C> <C> <C>
Payable to shareholders and management:
Maturing December 1995 through March 1996,
due upon demand after maturity date....... $210,000 $ 210,000 $ 226,000
Maturing February 1997 through May 1998,
payable in full or convertible at the
option of the holder to common stock upon
closing of additional equity financing
over $25 million, at the price per share
paid by investors in the equity financing. -- 1,105,000 800,000
Payable to other related parties:
Principal and accrued interest converted to
98,693 shares of common stock in September
1997...................................... -- 500,000 --
Maturing December 1999, convertible in
whole or in part at the option of the
holder to common stock at a conversion
price equal to the ratio of annualized
revenues over common shares outstanding at
the time of conversion.................... -- -- 2,000,000
Payable to third parties:
Maturing December 1995 through March 1996,
due upon demand after maturity date....... 55,000 55,000 14,000
Due upon demand............................ -- 150,000 --
Maturing February 1997 through May 1998,
payable in full or convertible at the
option of the holder to common stock upon
closing of additional equity financing
over $25 million, at the price per share
paid by investors in the equity financing. -- 1,202,500 45,000
Maturing June 1998, convertible in whole or
in part at the option of the holder to
common stock upon closing of additional
equity financing over $15 million, at the
price per share paid by investors in the
equity financing. The conversion price to
common stock is the ratio of 1.50 times
annualized revenues over the number of
common shares outstanding................. -- 900,000 1,070,000
-------- ---------- ----------
Total bridge loans........................... 265,000 4,122,500 4,155,000
Less current portion (see Note 6)............ 265,000 1,840,000 2,035,000
-------- ---------- ----------
Long-term bridge loans (see Note 9).......... $ -- $2,282,500 $2,120,000
======== ========== ==========
</TABLE>
F-14
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
In conjunction with the conversion of certain bridge loans to common stock
mentioned in Note 3, capitalized debt issue costs of $64,537 were written-off.
Debt issue costs in the amount of $28,285 related to bridge loans that were
converted at the holders' discretion according to the terms of the bridge loan
agreements were charged to equity. Debt issue costs of $36,253 related to
bridge loans that were extinguished were charged to interest expense in the
Company's consolidated statement of operations for the period ended September
30, 1997.
6. SECURITIES SUBJECT TO RESCISSION
The Company believes that certain of its outstanding shares of common stock
("Rescission Stock") and bridge loans and warrants to purchase shares of
common stock (collectively, the "Rescission Securities") may have been issued
in violation of certain state securities laws. As a result, conditioned on
completion of the proposed IPO, the Company plans to offer to rescind such
prior sales by offering to repurchase the Rescission Securities (the
"Rescission Offer") at the price originally paid plus interest at the annual
statutory rate of eight percent from the date of purchase to the expiration of
the Rescission Offer. As such, the shares of common stock and bridge loans
making up the Rescission Securities have been classified as common stock
subject to rescission and current liabilities, respectively, in the
accompanying consolidated financial statements. As of September 30, 1997,
there were 386,497 shares of common stock, $496,000 in aggregate principal
amounts of bridge loans and warrants to purchase an aggregate of approximately
67,000 shares of common stock identified for possible rescission. In addition,
the Company expects to repay $430,000 in bridge loans from proceeds of the IPO
that would otherwise be identified for possible rescission. If all holders of
Rescission Securities as of September 30, 1997 were to accept the Rescission
Offer, the Company would be required to pay approximately $2.7 million
including statutory accrued interest.
The Company estimates that the total amount of its obligation for the
statutory accrued interest with respect to Rescission Stock could aggregate
approximately $234,000 as of September 30, 1997, if all offerees holding
Rescission Stock were to accept the Rescission Offer. Because of the
contingent nature of this liability and because the ultimate amount to be
paid, if any, is not presently known, the potential interest liability with
respect to Rescission Stock has not been accrued in the accompanying
consolidated financial statements, but will be recorded as an expense and a
liability of the Company if and when the shares of common stock subject to
rescission are tendered pursuant to the Rescission Offer. The statutory rate
of interest with respect to the bridge loans covered by the Rescission Offer
is less than the interest that has already been accrued by the Company under
the original terms of the bridge loans.
The Company plans to make the Rescission Offer if it is able to complete the
proposed IPO. A portion of the proceeds of the IPO will be used to fund
payments pursuant to the repurchase of the Rescission Securities, if any are
required. However, there can be no assurance that the proposed IPO will be
successfully completed. The consolidated financial statements do not include
any adjustments that might result from the outcome of the Rescission Offer.
Furthermore, notwithstanding the Rescission Offer, there can be no assurance
that the Company will not be subject to penalties or fines relating to past
issuances or that other holders of securities from the Company will not assert
or prevail in claims against the Company for rescission or damages under state
or federal securities laws.
F-15
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
7. ACQUISITIONS
Ratsten International Telecommunications, Inc.
On October 18, 1995, GFP purchased 50% of the outstanding common stock of
Ratsten for $100,000 and the other 50% for 108,791 shares of GFP's common
stock in a business acquisition accounted for using the purchase method of
accounting, the purpose of which was to acquire certain licensing rights held
by Ratsten. Prior to the Ratsten acquisition, GFP had issued 108,000 shares of
common stock to its founders. In total, GFP's common stock issued was valued
at $91,000. Of the total purchase price, including the obligation to issue
shares described below, $177,368 was assigned to the license agreement, with
the remainder assigned to certain assets acquired and liabilities assumed. No
goodwill was recognized from the purchase. The sellers of Ratsten made certain
warranties to the Company, primarily that the license agreement was valid and
fully transferable to GFP after the purchase.
The acquisition agreement included an obligation for the issuance of an
additional 60,000 shares of the Company's common stock to the sellers of one-
half of Ratsten, contingent upon the Company obtaining additional financing
(other than bridge funding) in excess of a certain amount. This contingent
obligation was valued at $9,000 as of the date of the agreement. During the
nine-month period ended September 30, 1997, 30,000 of these shares had been
issued.
GFP
On December 29, 1995, pursuant to a share exchange agreement and statutory
share exchange, the Company issued 216,791 of voting common stock on a one-
for-one basis for all of GFP's issued and outstanding common stock. GFP's only
significant asset was the license agreement which had been acquired from
Ratsten in anticipation of the share exchange agreement. GFP did not have any
material operations during the period from its inception through December 29,
1995.
8. COMMITMENTS AND CONTINGENCIES
The Company has entered into noncancelable operating lease agreements
involving office space and equipment, certain telecommunications equipment and
licensing agreements with lease terms extending through 2006. Minimum lease
payments are subject to change as provided for in the lease agreements. The
Company's future minimum noncancelable lease payments as of December 31, 1996,
are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1997........................................................ $ 622,521
1998........................................................ 436,884
1999........................................................ 272,989
2000........................................................ 249,573
2001........................................................ 41,100
Thereafter.................................................. 188,375
----------
$1,811,442
==========
</TABLE>
Lease expense for the years ended December 31, 1995 and 1996 and for the
nine-month periods ended September 30, 1996 and 1997 was $125,413, $442,292,
$336,142 and $575,935, respectively.
F-16
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
9. SUBSEQUENT EVENTS (AUDITED)
Initial Public Offering and Reverse Stock Split
On November 10, 1997, the Board approved the filing of a registration
statement with the Securities and Exchange Commission covering the proposed
sale by the Company of up to $25 million of its common stock to the public.
The Board also approved $200,000 in bonuses to be paid to certain individuals
upon successful completion of the IPO. In addition, the Board approved a
reverse common stock split and increased the authorized number of common
shares from 20 million to 50 million. The ratio of the reverse common stock
split is 1:5. All share and per share amounts have been retroactively adjusted
in these consolidated financial statements to reflect the reverse common stock
split.
Bridge Loans
In March 1997, the Company obtained additional bridge financing of $651,708,
$451,708 of which was converted to common stock as discussed in Note 3, and
the remainder matures June 1998. In connection with this funding, the Company
initially granted 26,068 warrants to purchase shares of the Company's common
stock at an exercise price of $5.50 per share. In April 1997, a note for
$2,000,000 was issued which matures December 31, 1999. Associated with this
note, the Company granted warrants to purchase 80,000 shares of the Company's
common stock at an exercise price of $5.50. In October 1997, additional bridge
loans of $550,000 were issued which mature in March 1999. Warrants to purchase
11,000 shares of common stock at an exercise price of $5.50 per share were
granted in association with this round of financing. The bridge loans are
convertible at the option of the holder at any time prior to maturity at the
per share common stock price of the most recent institutional financing or, if
no such financing has occurred, at the fair value per share common stock price
in effect as of the date of conversion. All bridge loans bear interest at an
annual rate of ten percent. The warrants granted in association with these
bridge loan issuances were valued at approximately $59,000 and were recorded
as debt issue costs.
In December 1997, a holder of a $2,000,000 bridge note outstanding at
September 30, 1997 agreed to convert $1,000,000 in principal plus interest
into 281,817 shares of common stock at a price of $3.85 per share following
the closing of the IPO. In addition, the remaining $1,000,000 in principal
plus interest will be repaid in full from the proceeds of the IPO.
In November 1997, the Company obtained additional bridge financing of
$325,000 which was repaid in full from the proceeds of the bridge loans issued
in December 1997. Following the closing of the IPO, each original holder of
these notes will receive shares of common stock in an amount equal to one half
of the initial principal amount of the note divided by the IPO price per
share.
During November and December 1997, the Company obtained additional bridge
note financing of $2,981,500. These notes bear interest at an annual rate of
ten percent and are due in full at the earlier of the closing of the IPO or
January 1999. In addition, following the closing of the IPO, each holder of
these notes will receive shares of common stock equal to the initial principal
amount of the note divided by the IPO price per share. If the IPO has not
closed by July 1, 1998, these bridge note holders will receive warrants to
purchase shares of common stock equal to the initial principal amount of the
note divided by $5.50. The warrants associated with these bridge loans will
have an exercise price of $5.50 per share. Closing costs incurred associated
with these notes included approximately $280,000 in cash, 4,000 shares of
common stock
F-17
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
and warrants to purchase 27,600 shares of common stock at strike prices of
either 120% or 140% of the IPO price per share.
In December 1997, $521,000 of bridge loans outstanding at September 30, 1997
were converted to 111,352 shares of common stock at $5.50 per share. In
addition, $500,000 of bridge loans currently due at September 30, 1997 were
extended to January of 1999. Other terms (such as interest rates and
conversion features) were not affected. Of the $521,000 of bridge loans
converted to common stock, all but $25,000 is subject to rescission and are
classified as current liabilities in the accompanying consolidated September
30, 1997 balance sheet.
Common Stock Warrants and Options
On November 10, 1997, the Board amended certain common stock warrant
agreements whereby certain warrant holders could exercise their warrants at a
price of $3.50 per share in a cashless conversion to common stock rather than
at the original exercise price of $5.50 per share, concurrent with the
Company's proposed IPO. As of December 18, 1997, holders of warrants
representing 264,760 shares of common stock had indicated their intention to
exercise their warrants under these amended terms. As a result, the Company
recognized approximately $280,000 of additional debt issue costs and $250,000
of additional interest expense. The value of these warrants will continue to
be adjusted based on the fair market value of the Company's common stock until
exercised.
In December 1997, the Company had granted warrants to purchase 30,829 shares
of common stock at an exercise price of $0.05 per share to certain consultants
and advisors of the Company, and recognized consulting expense of
approximately $170,000. The Company had also granted warrants to purchase
48,400 shares of common stock at an exercise price of $5.50 per share to
certain existing bridge loan holders and advisors to the Company. In addition,
the Company granted 16,400 stock options with an exercise price of $5.50 per
share, 8,000 of which vested immediately and the remainder vest ratably over a
three-year period.
Issuance of Common Stock
During November 1997, an aggregate of $187,704 in trade payables due to
certain vendors were converted into 34,128 shares of common stock.
In December 1997, the Board issued 14,000 shares of common stock to certain
Board members in recognition of past services rendered to the Company. The
Company recognized consulting expense of approximately $77,000 in connection
with these stock issuance.
Employment Agreements
Effective upon the closing of the Company's proposed IPO, the Company will
enter into employment agreements with five of its executive officers. In
conjunction with these agreements, the officers will be granted options to
purchase a total of 280,000 shares of common stock at the IPO price per share.
These options will expire in ten years and will vest upon the earlier of three
years or upon the attainment of certain performance goals to be established by
the Board.
F-18
<PAGE>
[ARTWORK: MULTICOLOR GRAPHIC MAP WITH LIST OF THE COMPANY'S SERVICES.]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, sales representative or other person has been authorized to give
any information or to make any representation other than those contained in
this Prospectus and, if given or made, such information or representation must
not be relied upon as having been authorized by the Company or any
Underwriter. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the date hereof or that
the information contained herein is correct as of any date subsequent to the
date hereof. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities offered hereby by anyone in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so or to
anyone to whom it is unlawful to make such offer or solicitation.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
page
<S> <C>
Summary................................................................... 3
The Company............................................................... 3
The Offering.............................................................. 4
Summary Consolidated Financial Data....................................... 5
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 20
Dividend Policy........................................................... 20
Dilution.................................................................. 21
Capitalization............................................................ 22
Selected Consolidated Financial Data...................................... 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 24
Business.................................................................. 33
Management................................................................ 52
Certain Transactions...................................................... 60
Principal Shareholders.................................................... 66
Description of Securities................................................. 69
Rescission Offer.......................................................... 72
Shares Eligible for Future Sale........................................... 74
Underwriting.............................................................. 76
Legal Matters............................................................. 78
Experts................................................................... 78
Available Information..................................................... 78
Glossary of Terms......................................................... 79
Index to Consolidated Financial Statements................................ F-1
</TABLE>
---------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,000,000 SHARES
[LOGO OF GLOBALTEL]
COMMON STOCK
-------------------
PROSPECTUS
-------------------
Cruttenden Roth
I N C O R P O R A T E D
Ferris, Baker Watts
I N C O R P O R A T E D
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a corporation to indemnify its
directors, officers, employees and agents against certain liabilities they may
incur in such capacities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"). The Company's Bylaws (Exhibit 3.2
hereto) and indemnification agreements entered into between the Company and
its directors implement this indemnification to the fullest extent permitted
by law, including under circumstances in which indemnification is otherwise
discretionary. Section 23B.08.320 of the WBCA authorizes a corporation to
limit or eliminate its directors' liability to the corporation or its
shareholders for monetary damages for breaches of fiduciary duties, other than
for (1) acts or omissions that involve intentional misconduct or a knowing
violation of law, (2) improper declaration of dividends, or (3) transactions
from which a director derives an improper personal benefit. The Company's
Articles of Incorporation (Exhibit 3.1 hereto) contain provisions limiting the
liability of directors to the Company and to its shareholders to the fullest
extent permitted by Washington law.
The above discussion of the WBCA and the Company's Bylaws and Articles of
Incorporation is not intended to be exhaustive and is qualified in its
entirety by such statute, the Bylaws and the Articles of Incorporation,
respectively.
The Company has obtained officers' and directors' liability insurance for
its officers and directors. In addition, the Underwriting Agreement (Exhibit
1.1 hereto) contains provisions for the indemnification of, among others,
controlling persons, directors and officers of the Company for certain
liabilities.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in
connection with the sale of the Common Stock being registered. All amounts are
estimated except the SEC Registration Fee, the NASD Filing Fee and the
American Stock Exchange Listing Fees.
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
SEC Registration Fee................................................... $ 5,900
AMEX Original Listing Fee.............................................. 15,000
AMEX One-time Listing Fee.............................................. 5,000
NASD Filing Fee........................................................ 2,570
Blue Sky Qualification Fees and Expenses............................... *
Accounting Fees and Expenses........................................... *
Legal Fees and Expenses................................................ *
Transfer Agent and Registrar Fees...................................... *
Printing and Engraving................................................. *
Miscellaneous.......................................................... *
-------
Total.............................................................. $ *
=======
</TABLE>
- --------
* To be completed by amendment.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Company has made the following sales of its securities for the
consideration indicated during the past three years, which sales were not
registered under the Securities Act. Except as indicated below, none of
II-1
<PAGE>
such sales involved an underwriter. All shares of Common Stock issued in
connection with the 1995 recapitalization described below were issued in
reliance on the exemption from registration set forth at Section 3(a)(9) of
the Securities Act as an exchange by an issuer with its existing security
holders where no commission or other remuneration is paid or given for
soliciting such exchange. All warrants or options issued to employees,
directors or consultants of the Company, and all shares of Common Stock issued
in connection with the conversion or exercise of warrants or options held by
employees, directors or consultants, were issued in reliance on the exemption
from registration provided by Rule 701, as transactions pursuant to a
compensatory benefit plan or a written contract relating to compensation, or
the exemption from registration provided by Section 4(2) of the Securities Act
as transactions not involving a public offering. All sales of Common Stock and
issuances of convertible promissory notes for cash consideration were made in
reliance on the exemption from registration provided by Rule 506 under the
Securities Act. All other securities described below were issued in reliance
on the exemption from registration provided by Section 4(2) of the Securities
Act.
Initial Capitalization. On December 30, 1994 the Company issued 298,000
shares of a class of common stock to seven individuals in exchange for
services rendered and to be rendered. In the period from December 1994 to
September 1995 the Company sold 331,418 shares of a class of common stock to
19 individuals and entities at $2.65 per share. In the period from September
1995 to December 1995 the Company sold an additional 394,697 shares of a class
of common stock to 25 individuals and entities at $5.50 per share. Purchasers
of Common Stock for $5.50 per share also received warrants to purchase an
aggregate of 22,000 shares of common stock at an exercise price of $5.50 per
share.
Recapitalization. In December 1995 the Company issued 785,041 shares of
Common Stock to all of its shareholders in exchange for all then-outstanding
common equity securities of the Company.
GFP Acquisition. On December 29, 1995 the Company issued 216,791 shares of
voting common stock to seven persons or entities in exchange for all
outstanding equity securities of GFP Group, Inc. and assumed notes of GFP
Group Inc. payable to six individuals in the aggregate principal amount of
$265,000. At the same time the Company issued warrants to purchase for nominal
consideration 21,501 shares of Common Stock to the holders of the assumed
notes.
Repurchase of Common Stock. In December 1995, the Company issued promissory
notes in the aggregate principal amount of $1,244,153 to repurchase 226,209
shares of a class of the Company's common stock from six individuals. These
notes were repaid in full during 1996.
Convertible Promissory Notes. From December 1995 to October 1997, the
Company issued promissory notes (the "Financing Notes") in the approximate
aggregate principal amount of $7,324,208 to 37 individuals and entities. In
connection with the issuance of all but eight of the Financing Notes, the
Company also issued to the holders thereof warrants to purchase shares of
Common Stock. Financing Notes are convertible into shares of Common Stock at a
price of $5.50 per share.
Common Stock Issuance. In early 1996, the Company issued an aggregate of
23,499 shares of Common Stock to one person and one entity in exchange for
services rendered and equipment provided to the Company.
Series A Convertible Preferred Stock. In May and July 1997, the Company sold
for cash 275,000 shares of Series A Convertible Preferred Stock to three non-
U.S. persons for an aggregate offering price of $1.1 million.
Grants of Warrants to Strategic Partners. During 1997 the Company granted
warrants to purchase an aggregate of 4,000 shares of Common Stock, subject to
adjustment, at an exercise price of $5.50 per share to two strategic partners.
Officer Severance. In September 1997, the Company issued 54,242 shares of
Common Stock to a former officer of the Company in satisfaction of a number of
obligations.
II-2
<PAGE>
Deferred Compensation Warrants. In September 1997 the Company issued to nine
employees or consultants warrants to purchase 215,428 shares of Common Stock
at an exercise price of $0.05 per share in exchange for the rights of such
employees or consultants to be paid deferred compensation.
Conversions of Promissory Notes. During September 1997 the Company issued
466,108 shares of Common Stock in connection with conversions of Financing
Notes in the aggregate principal amount of $2,314,208 held by 25 holders.
Conversions of Trade Payables. During November 1997 the Company issued
34,128 shares of Common Stock in satisfaction of trade payables in the amount
of $187,706.
Bridge Notes. During November 1997 the Company issued promissory notes in
the aggregate principal amount of $325,000 to three accredited individuals.
These notes were repaid in full in December 1997.
Full Coverage Bridge Notes. During November and December 1997 the Company
issued promissory notes in the aggregate principal amount of $2,981,500 to 56
accredited investors. These transactions were arranged through the investment
firms of Trautman Kramer & Co. and State Street Securities Inc. These notes
will be repaid out of the Offering proceeds.
II-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER(1) DESCRIPTION OF DOCUMENT NUMBER
--------- ----------------------- ----------
<C> <S> <C>
**1.1 Form of Underwriting Agreement
3.1 Restated Articles of Incorporation
3.2 Amended and Restated Bylaws
*4.1 Specimen Common Stock Certificate
4.2 Form of Stock Purchase Warrant
4.3 Form of Stock Purchase Warrant
4.4 Form of Stock Purchase Warrant
4.5 Form of Stock Purchase Warrant
4.6 Form of Promissory Note
4.7 Form of Promissory Note
4.8 Form of Promissory Note
4.9 Form of Promissory Note
**5.1 Opinion of Heller Ehrman White & McAuliffe
**5.2 Opinion of Squire, Sanders & Dempsey
10.1 GlobalTel Resources, Inc. 1996 Stock Option Plan
10.2 Form of Incentive Stock Option Agreement
10.3 Form of Nonqualified Stock Option Agreement
10.4 Form of Director Nonqualified Stock Option Agreement
10.5 Form of Indemnification Agreement with officers and
directors
10.6 Form of Employment Agreement
10.7 Office lease dated as of June 10, 1996 by and between
the Company, as Lessee, and One Wilshire Arcade
Imperial, Ltd., as Lessor, together with First
Amendment thereto dated June 24, 1997.
+10.8 Carrier Agreement dated as of August 20, 1996 by and
between Primecall, Inc. and Cable & Wireless, Inc.
+10.9 Reciprocal Telecommunications Agreement dated as of
December 3, 1996 by and between STAR Vending, Inc. and
Primecall, Inc.
+10.10 Switch Port Lease and Service Agreement dated as of
August 7, 1996 by and between Primecall, Inc. and World
Touch, Inc.
+10.11 Trilogy Telemanagement Service Agreement dated as of
April 2, 1997 by and between Trilogy Telemanagement,
L.L.C. and Primecall, Inc.
+10.12 Agreement for Managed Data Network Services dated April
28, 1995 (the "Equant Agreement") by and between
NetStar International Telecommunications, Inc.
("NetStar") and Equant Network Services International
Corporation (f/k/a Scitor International
Telecommunications Services, Inc.) ("Equant"), together
with Amendment No. 1 to the Scitor ITS Agreement dated
February 21, 1996 between NetStar, Equant and GFP
Group, Inc.
+10.13 Exclusive Services and Marketing Agreement dated as of
April 15, 1997 between the Company and International
Business Network for World Commerce & Industry, Ltd.
+10.14 Master Task Agreement dated as of September 19, 1997 by
and between GFP Group, Inc. and Novell, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
------- ----------------------- ----------
<C> <S> <C>
+10.15 Novell Business Internet Services Affiliate Service
Platform Statement of Work to Agreement No. 97-GlobalTel-
001 dated October 21, 1997 between Novell, Inc. and GFP
Group, Inc.
10.16 Share Exchange Agreement dated as of December 29, 1995 by
and among the Company and certain holders of shares of
capital stock of GFP Group, Inc.
10.17 GlobalTel Resources, Inc. 1997 Employee Stock Purchase
Plan
*10.18 Letter of Intent dated June 16, 1997 by and among
Primecall, Inc., Netlink International Inc. and Kunmung
Dayu Biological Engineering Co. Ltd.
*10.19 Letter Agreement dated November 6, 1997 by and among the
Company, Alan H. Chin and Curtis E. Lew
*10.20 Employment Agreement dated October 31, 1997 by and
between the Company and German F.H. Burtscher
*10.21 Employment Agreement dated October 31, 1997 by and
between the Company and John Cox
*10.22 Employment Agreement dated October 31, 1997 by and
between the Company and Ronald P. Erickson
*10.23 Employment Agreement dated October 31, 1997 by and
between the Company and Ronald B. Fox
*10.24 Employment Agreement dated October 31, 1997 by and
between the Company and Eric D. Orse
*11.1 Statement of computation of net income per share
*21 Subsidiaries of the registrant
**23.1 Consent of Heller Ehrman White & McAuliffe (contained in
Exhibit 5.1)
*23.2 Consent of Arthur Andersen LLP, Independent Public
Accountants
**23.3 Consent of Squire, Sanders & Dempsey
24.1 Power of Attorney
27.1 Financial Data Schedule
</TABLE>
- --------
(1) Unless otherwise indicated, exhibit was filed as an identically numbered
exhibit to this Registration Statement on Form SB-2 as originally filed
with the Commission on December 22, 1997.
+ Portions of this exhibit have been omitted pursuant to an application for
an order granting confidential treatment. The omitted portions have been
separately filed with the Commission.
* Exhibit is filed herewith.
** To be filed by amendment.
II-5
<PAGE>
ITEM 28. UNDERTAKINGS
The small business issuer 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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
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 small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of 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.
The small business issuer will, for determining any liability under the
Securities 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 pursuant
to Rule 424(b)(1), or (4), or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it effective.
The small business issuer will, for determining any liability under the
Securities 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.
II-6
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND AUTHORIZED AMENDMENT NO. 2
TO THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
IN THE CITY OF SEATTLE, STATE OF WASHINGTON ON FEBRUARY 3, 1998.
GLOBALTEL RESOURCES, INC.
By:/s/ Eric D. Orse
_________________________________
Eric D. Orse
Director of Finance and Treasurer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE OFFICE DATE
--------- ------ ----
<S> <C> <C>
Ronald P. Erickson * Chairman of the Board, February 3, 1998
____________________________________ President and Chief
Ronald P. Erickson Executive Officer
(Principal Executive
Officer)
/s/ Eric D. Orse Director of Finance and February 3, 1998
____________________________________ Treasurer
Eric D. Orse (Principal Financial and
Accounting Officer)
Ronald B. Fox * Senior Vice President and February 3, 1998
____________________________________ Director
Ronald B. Fox
Randall J. Ottinger * Director February 3, 1998
____________________________________
Randall J. Ottinger
Bruce L. Crockett * Director February 3, 1998
____________________________________
Bruce L. Crockett
Frank E. Krentzman * Director February 3, 1998
____________________________________
Frank E. Krentzman
Michael S. Brownfield * Director February 3, 1998
____________________________________
Michael S. Brownfield
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE OFFICE DATE
--------- ------ ----
<S> <C> <C>
Paul H.F.M. van de Plas * Director February 3, 1998
____________________________________
Paul H.F.M. van de Plas
Steven S.V. Wong * Director February 3, 1998
____________________________________
Steven S.V. Wong
Lyman C. Hamilton * Director February 3, 1998
____________________________________
Lyman C. Hamilton
*By: /s/ Eric D. Orse February 3, 1998
_______________________________
Eric D. Orse
Attorney-In-Fact
</TABLE>
II-8
<PAGE>
GLOBALTEL RESOURCES, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER(1) DESCRIPTION OF DOCUMENT
--------- -----------------------
<C> <S>
**1.1 Form of Underwriting Agreement
3.1 Restated Articles of Incorporation
3.2 Amended and Restated Bylaws
*4.1 Specimen Common Stock Certificate
4.2 Form of Stock Purchase Warrant
4.3 Form of Stock Purchase Warrant
4.4 Form of Stock Purchase Warrant
4.5 Form of Stock Purchase Warrant
4.6 Form of Promissory Note
4.7 Form of Promissory Note
4.8 Form of Promissory Note
4.9 Form of Promissory Note
**5.1 Opinion of Heller Ehrman White & McAuliffe
**5.2 Opinion of Squire, Sanders & Dempsey
10.1 GlobalTel Resources, Inc. 1996 Stock Option Plan
10.2 Form of Incentive Stock Option Agreement
10.3 Form of Nonqualified Stock Option Agreement
10.4 Form of Director Nonqualified Stock Option Agreement
10.5 Form of Indemnification Agreement with officers and directors
10.6 Form of Employment Agreement
10.7 Office lease dated as of June 10, 1996 by and between the Company,
as Lessee, and One Wilshire Arcade Imperial, Ltd., as Lessor,
together with First Amendment thereto dated June 24, 1997.
+10.8 Carrier Agreement dated as of August 20, 1996 by and between
Primecall, Inc. and Cable & Wireless, Inc.
+10.9 Reciprocal Telecommunications Agreement dated as of December 3, 1996
by and between STAR Vending, Inc. and Primecall, Inc.
+10.10 Switch Port Lease and Service Agreement dated as of August 7, 1996
by and between Primecall, Inc. and World Touch, Inc.
+10.11 Trilogy Telemanagement Service Agreement dated as of April 2, 1997
by and between Trilogy Telemanagement, L.L.C. and Primecall, Inc.
+10.12 Agreement for Managed Data Network Services dated April 28, 1995
(the "Equant Agreement") by and between NetStar International
Telecommunications, Inc. ("NetStar") and Equant Network Services
International Corporation (f/k/a Scitor International
Telecommunications Services, Inc.) ("Equant"), together with
Amendment No. 1 to the Scitor ITS Agreement dated February 21, 1996
between NetStar, Equant and GFP Group, Inc.
+10.13 Exclusive Services and Marketing Agreement dated as of April 15,
1997 between the Company and International Business Network for
World Commerce & Industry, Ltd.
+10.14 Master Task Agreement dated as of September 19, 1997 by and between
GFP Group, Inc. and Novell, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
+10.15 Novell Business Internet Services Affiliate Service Platform Statement
of Work to Agreement No. 97-GlobalTel-001 dated October 21, 1997
between Novell, Inc. and GFP Group, Inc.
10.16 Share Exchange Agreement dated as of December 29, 1995 by and among
the Company and certain holders of shares of capital stock of GFP
Group, Inc.
10.17 GlobalTel Resources, Inc. 1997 Employee Stock Purchase Plan
*10.18 Letter of Intent dated June 16, 1997 by and among Primecall, Inc.,
Netlink International Inc. and Kunmung Dayu Biological Engineering Co.
Ltd.
*10.19 Letter Agreement dated November 6, 1997 by and among the Company, Alan
H. Chin and Curtis E. Lew
*10.20 Employment Agreement dated October 31, 1997 by and between the Company
and German F.H. Burtscher
*10.21 Employment Agreement dated October 31, 1997 by and between the Company
and John Cox
*10.22 Employment Agreement dated October 31, 1997 by and between the Company
and Ronald P. Erickson
*10.23 Employment Agreement dated October 31, 1997 by and between the Company
and Ronald B. Fox
*10.24 Employment Agreement dated October 31, 1997 by and between the Company
and Eric D. Orse
*11.1 Statement of computation of net income per share
*21 Subsidiaries of the registrant
**23.1 Consent of Heller Ehrman White & McAuliffe (contained in Exhibit 5.1)
*23.2 Consent of Arthur Andersen LLP, Independent Public Accountants
**23.3 Consent of Squire, Sanders & Dempsey
24.1 Power of Attorney
27.1 Financial Data Schedule
</TABLE>
- --------
(1) Unless otherwise indicated, exhibit was filed as an identically numbered
exhibit to this Registration Statement on Form SB-2 as originally filed
with the Commission on December 22, 1997.
+ Portions of this exhibit have been omitted pursuant to an application for
an order granting confidential treatment. The omitted portions have been
separately filed with the Commission.
* Exhibit is filed herewith.
** To be filed by amendment.
<PAGE>
EXHIBIT 4.1
NUMBER GLOBALTEL SHARES
INCORPORATED UNDER SEE REVERSE FOR CERTAIN
THE LAWS OF THE DEFINITIONS
STATE OF WASHINGTON CUSIP 379388 10 7
This Certifies that
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.01 PAR VALUE, OF
GLOBALTEL RESOURCES, INC.
transferable 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 until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
German Burtscher Ronald D. Erickson
SECRETARY PRESIDENT
[SEAL OF GLOBALTEL RESOURCES]
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
The Corporation will furnish to any stockholder, upon request and without
charge, a statement of the powers, designations, preferences, and relative
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights, insofar as the same shall have been fixed, and of the authority
of the Board of Directors to designate any preferences, rights and limitations
of any wholly unissued series. Any such request should be directed to the
Secretary of the Corporation at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- ...........Custodian............
(Cust) (Minor)
under Uniform Gifts to Minors
Act.............................
(State)
UNIF TRF MIN ACT -- ......Custodian (until age ....)
(Cust)
.........under Uniform Transfers
(Minor)
to Minors Act...................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint ___________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _______________________________
X _______________________________________
X _______________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By __________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED MEDALLION
SIGNATURE GUARANTEE PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 10.18
LETTER OF INTENT
----------------
Date: June 16, 1997
Place: Kunming, China
Companies US Company:
PRIMECALL, INC.
1520 Eastlake Ave East, Second Floor, Seattle, WA 98102
USA
China Companies:
NETLINK INTERNATIONAL INC.
No. 46 Sanlitun, Chaoyang District, Beijing 100027
Peoples Republic of China
KUNMING DAYU BIOLOGICAL ENGINEERING CO. LTD.
R406 4/th/ Floor A Building of Skycity Garden
257 Nanba Lu Rd of Double Dragon Bridge, Kunming,
650034
Peoples Republic of China
By and among the above listed companies:
This letter (the "Letter of Intent") confirms the tentative agreement of
Primecall, Inc. and China Companies to proceed to evaluate the proposed
transaction described below (the "Transaction"). This Letter of Intent
represents only our current good faith intention to proceed to evaluate the
Transaction, subject to a more complete review of a definitive agreement in a
form acceptable to both parties. It is not, and is not intended to be, a binding
agreement between us, and none of us shall have any liability to the other if we
fail to execute a definitive agreement for any reason. Statements below as to
what either party will do, or agrees to do, or the like, are so expressed for
convenience only, and are understood in all instances to be subject to our
mutual continued willingness to proceed with any transaction as our negotiations
take place.
1. Project and Market
------------------
Development of a four (4) year exclusive relationship in China where Primecall
grants to the above China Companies the right to market its International
Callback services and such right to be based on performance conditions to be
identified.
Construct parameters for future additions to the agreement to provide additional
communications services to the China market as identified in Netlink
International Inc's Business License description of scope of business. [See
attached business license registration no. 10002369-9(4-2)]
Primecall, Inc. to provide favorable rates to the cooperate relationship to
market International Callback services in China.
<PAGE>
2. Cooperation of Joint Relationship
---------------------------------
Refine the organizational relationship between Primecall and China Companies to
perform the business in China. (See exhibit A)
Both parties agree that time is of the essence and shall proceed to research and
deliver information to each other on the legal structure of the cooperate
relationship, banking and payments, taxation and other relevant items to move
the relationship forward to a successful agreement.
3. Financial Relationship
----------------------
Develop a suitable financial relationship that encompasses:
(a) Securing customer deposits and payments via direct bank transfer
of funds.
(b) Securing payments from China companies to Primecall, Inc.
(c) Providing a one time payment requirement of US$500,000.00.
necessary to obtain approval through the National Ministry of Public
Security in order to sell communications services in China by the
cooperate relationship. A schedule of payments shall be worked out to
pay the deposit from profits of the new cooperate relationship.
(d) Primecall, Inc. must negotiate a satisfactory compensation for
the liaison and individuals or company that make the cooperate
relationship possible.
AGREED BY:
/s/ Alan Chin 6/16/97
- ------------------------------------------- --------------------
Alan Chin, Senior Vice President and Co-founder Date
PRIMECALL, INC.
/s/ Zhang Yu 17/6/97
- ------------------------------------------- --------------------
Zhang Yu, President Date
NETLINK INTERNATIONAL, INC.
/s/ Yuan Hua 6/16/97
- ------------------------------------------- --------------------
Yuan Hua, President Date
KUNMING DAYU BIOLOGICAL ENGINEERING CO., LTD.
<PAGE>
EXHIBIT "A"
COOPERATE RELATIONSHIP
----------------------
[GRAPH APPEARS HERE]
---------------------- 100% ----------------------
--------------
NEWCO NEWCO
(outside of China) 100% (inside of China)
--------------
---------------------- ----------------------
- ------------------------------------- ------------------------------------
- ------ --------- ----------- ------ --------- ----------
DAYU NETLINK PRIMECALL DAYU NETLINK PRIMECALL
30% 30% 40% 30% 30% 40%
- ------ --------- ----------- ------ --------- ----------
<PAGE>
EXHIBIT 10.19
GLOBALTEL
6 November 1997
GlobalTel Resources, Inc.
1520 Eastlake Avenue East
Seattle, WA 98112
Dear Sirs:
The undersigned, Curt Lew and Alan Chin, hereby agree that they accept the
terms of the agreement between themselves and GlobalTel Resources, Inc.
regarding the proposed venture between the Company, Netlink and Dayu, as set
forth in the minutes of the meeting of the Board of Director's of the COmpany of
September 11, 1997, a copy of the relevant page of which is attached hereto and
incorporated herein by this reference.
The undersigned agree to enter into a formal written contract in a form and
substance to be mutually agreed upon between the parties should the Company so
require.
Sincerely,
/s/ Curt Lew /s/ Alan Chin
Curt Lew Alan Chin
Attachment (The relevant portion of the minutes of the Board of Director's
meeting of GlobalTel Resources, September 11, 1997)
<PAGE>
MINUTES OF A SPECIAL MEETING
OF
BOARD OF DIRECTORS
OF GLOBALTEL RESOURCES, INC.
September 11, 1997
A special meeting of the Board of Directors of GlobalTel Resources, Inc., a
Washington corporation (the "Corporation"), was held on September 11, 1997, at
the Corporation's offices, 1520 Eastlake Avenue East, Suite 210, Seattle,
Washington 98102.
The following members of the Board of Directors were in attendance,
constituting a quorum of the Board: Ronald P. Erickson, Curt E. Lew, Alan H.
Chin, Ulrich Kallausch (by telephone), Steven S. V. Wong (by telephone), Michael
Brownfield (by Telephone), Randy Ottinger (by telephone) and Frank Krentzman (by
telephone). Also in attendance as guests were Mike Sims, Bruce Crockett (by
telephone), John W. Hanley, Jr. (by telephone), Douglas C. Maclellan and Ronald
Fox. All telephone connections were by speakerphone, by which all participants
could be heard by all other participants.
The Chairman called the meeting to order at 3:05 p.m. Ronald P. Erickson
acted as Chairman of the meeting, and asked John W. Hanley, Jr. to act as
secretary. All directors in attendance waived notice of the meeting.
2
<PAGE>
The next order of business was review of a proposed agency agreement
submitted to the Corporation by Mr. Chin and Mr. Lew. Mr. Brownfield reported
for the Compensation Committee that the Committee had reviewed the proposal,
which features future compensation to the agents based on the lesser of 3% of
gross receipts of 25% net margin realized on revenues from the proposed China
venture. In addition, the Corporation would provide, as an additional incentive,
5% of the ownership interest in the China venture entity that will come to the
Corporation, but only when the venture entity achieves a liquidation event. Mr.
Brownfield confirmed that the Committee determined that these were fair terms
reflective of market conditions. Mr Chin indicated his (and Mr. Lew's)
willingness to proceed on the basis of these terms. After further discussion,
upon motion to be made and seconded (Wong/Brownfield), and with directors Chin
and Lew abstaining, it was, by unanimous vote
3
<PAGE>
RESOLVED that the terms of the proposed agency agreement with Messrs. Chin
and Lew approved by the Compensation Committee are hereby adopted and
approved by the Board of Directors, and the Chairman and the President of
the Corporation are each authorized to execute and deliver an agency
agreement incorporating those terms on behalf of the Corporation.
4
<PAGE>
EXHIBIT 10.20
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") dated October 31, 1997 is made
between GLOBALTEL RESOURCES, INC. (the "Company"), and GERMAN BURTSCHER
----------------
("Executive"). By its terms, this agreement shall, on and after the IPO Date
supersede all prior employment agreements between the parties hereto. In
consideration of the mutual covenants and conditions set forth in this
Agreement, the parties agree as follows:
This Agreement shall become effective on the date the Company completes an
initial public offering of its common stock that yields, to the Company, net
proceeds in excess of Fifteen Million Dollars ($15,000,000) (the "IPO Date"). If
the IPO Date has not occurred by March 31, 1998, for any reason whatsoever
(including but not limited to a decision by the Company not to offer its common
stock for sale in a public offering), this Agreement shall be null and void,
without the need for further action by either party. If the IPO Date occurs
prior to March 31 1998, the Company shall employ Executive on the following
terms and Conditions.
1 - ENGAGEMENT
.1 TERM
----
The term of employment pursuant to this Agreement will extend from the IPO Date
for a period of one (1) year, unless earlier terminated as hereinafter provided.
.2 Title and Location
------------------
Executive will serve as a SENIOR VICE PRESIDENT of the Company and shall perform
---------------------
all functions customarily assigned to such a position. Absent Executive's
concurrence, Executive's primary place of employment shall be Seattle,
Washington.
2 - COMPENSATION
.1 Salary
------
Executive will receive an annual Base Salary of $150,000.00 per annum.
-----------
1
<PAGE>
.2 Bonus
-----
Executive will be entitled to receive during the term of this Agreement
incentive or bonus payments of up to one times annual salary pursuant to any
plans or agreements approved by the Company's Compensation Committee of the
Board and the Board of Directors, and payable by their express terms and
conditions to Executive.
.3 Benefits
--------
During the term of this Agreement, the Company shall provide Executive with
health, life, disability and other appropriate insurance, vacation, sick leave
and other benefits as are generally provided to other management-level employees
holding similar positions with the Company. Executive will have at least four
weeks of paid vacation per year.
.4 Stock Options
-------------
On the IPO Date, the Company shall issue to Executive stock options, pursuant to
its 1996 Stock Option Plan (the "Plan"), exercisable at a price per share equal
to the per share price at which common stock is sold in the public offering
completed on the IPO Date. The number of shares for which options are issued
shall be equivalent to the number of shares that Executive would have held on
the IPO Date had he held 300.000 shares on the date of this Agreement, giving
-------
effect to all recapitalizations, stock splits and other adjustments to the
Company's capital structure that may occur between the date of this Agreement
and the IPO Date. The options shall, to the extent permitted by the Plan, be
Incentive Stock Option and shall otherwise be Non-Qualified Stock Options.
Said options shall be governed by the terms and conditions of the Plan and,
in addition, said options shall vest over three years based upon performance
criteria as established by the Compensation Committee of the Board of Directors
of the Company. The foregoing additional vesting requirements shall be deemed
fully satisfied if, prior to the third (3rd) calendar anniversary of the IPO
Date, there is a Change of Control Event. As used herein, a "Change of Control
Event" is a sale or merger of the Company to or with a non-affiliate or a change
in the identity of the majority of the Board of Directors other than through
normal transition. All options not exercised prior to the tenth (10th) calendar
anniversary of the IPO Date, whether or not vested, shall expire.
2
<PAGE>
3 -NEGATIVE COVENANTS
.1 Non-Competition
---------------
Without the written consent of the Company, Executive will not, during the term
of employment under this Agreement and for six (6) months following the
termination of employment under this Agreement, work directly or indirectly (as
and employee, consultant, advisor or owner, except as a holder of less than 5%
of a public company) for any business or activity which is in a business
substantially similar to that of the Company, anywhere in the Company's
marketplace. For purposes of this covenant, a business activity is substantially
similar to the business of the Company if it involves a product or service that
the Company was developing, manufacturing, marketing or distributing, or
otherwise commercially exploiting during the Executive's employment with the
Company.
.2 Nondisclosure
-------------
Executive acknowledges that in the course of carrying out his responsibilities
to the Company under this Agreement he will have access to and be entrusted with
confidential information relating to the patents, copyrights, trademarks, trade
secrets, technology, business and finances of the Company. All of this
information, except information that is in the public domain through no fault of
Executive, is collectively referred to as "Confidential Information." Executive
shall keep in confidence and trust all Confidential Information. Without the
Company's prior written consent, Executive shall not use or disclose any
Confidential Information, during or after his employment with the Company,
except as required in the ordinary course of his duties for the Company.
.3 Relief for Breach
-----------------
Executive agrees that damages for breach of the covenants contained in sections
3.1 and 3.2 would be difficult to determine and therefore agrees that these
provisions may be enforced by temporary or permanent injunction. The right to
such injunctive relief shall be in addition to and not in place of any further
remedies to which the Company may be entitled.
.4 Reasonableness
--------------
Executive agrees that the provisions of sections 3.1, 3.2 and 3.3 are
reasonable. However, if any court of competent jurisdiction
3
<PAGE>
determines that any provision within these sections is unreasonable in any
respect, the parties intend that the provisions of these sections should be
enforced to the fullest extent allowed by such court.
.5 Survival of Covenants
---------------------
The provisions of this Article shall survive the termination of employment under
this Agreement.
- DUTIES
4
.1 Duties
------
Executive agrees that during the term of this Agreement he/she will diligently
perform all duties assigned to him/her by the Company which are reasonably
commensurate with the positions held by Executive pursuant to 1.2 above, and
will devote all of his/her efforts to those duties on a full-time basis and to
the best of his/her skill and ability. It is understood that Executive may have
other investment activities and sit on, subject to the limitations in Section 3
above, boards of directors of other companies.
- TERMINATION
5
.1 Termination Prior to the End of Term
------------------------------------
(a) The Company may terminate this Agreement on written notice of not less
than six (6) months, except as otherwise provided in sections 5.1(b), 5.1(c)
and 5.2. Executive may terminate employment under this Agreement on written
notice of not less than three (3) months.
(b) The Company may, at its option, terminate employment under this
Agreement at any time without notice in the event that Executive commits a
felony for which Executive is found guilty by a court of competent jurisdiction
or commits any intentional damage to or misappropriation of the property or
business of the Company. Any such termination shall be considered a termination
for cause. In the event of a termination for cause, Executive shall be paid all
compensation and benefits earned through the date of termination, but shall not
be entitled to receive any further compensation or benefits other than payments
already due as of that date.
(c) This Agreement shall terminate in the event that Executive dies, or is
unable to perform his/her duties as a
4
<PAGE>
result of a physical or mental disability at any time during the term of this
Agreement. In the event of a termination under this subsection, Executive or
his/her estate shall be paid all compensation and benefits earned through the
date of such termination, but shall not be entitled to receive any compensation
or benefits other than payments already due as of that date. For purposes of
this Agreement, Executive will be considered unable to perform his/her duties as
a result of a physical or mental disability if that disability exists, or is
reasonably expected to exist, for more than ninety (90) days in any twelve (12)
consecutive calender months.
.2 Severance Pay
-------------
If the Company gives notice under section 5.1(a), then at the Company's option:
(a) The Company shall honor Executive's employment contract to the stated
end of the employment term and thereafter pay Executive severance pay equal to
Executive's then-current monthly Base Salary multiplied by six (6); or
(b) the Company may terminate Executive's employment prior to the end of
the notice period, in exchange for severance pay equal to Executive's
then-current monthly salary multiplied by (i) the number of months remaining in
the notice period plus (ii) six (6).
Executive agrees to accept this amount as full compensation for the
termination. Severance pay under this section will be paid in payments made
according to the Company's regular payroll practices over the remainder of the
notice period and the six-month severance period. Executives options and all
other benefits shall be accrue until the date of termination and in the case of
stock options shall be vested on a prorated basis up to and including the date
of termination.
.3 Payment on Resignation
----------------------
If Executive gives notice under Section 5.1(a), the Company may, at its option,
elect to terminate Executive's employment prior to the end of the notice period.
Regardless of whether the Company elects to have Executive continue to work
through the notice period provided in Section 5.1(a), or elects to terminate
Executive's employment prior to the end of that notice period, Executive shall
be paid all compensation and benefits earned through his/her last day of work,
but shall not be entitled to receive any further compensation or benefits other
than payments already due as of that date.
5
<PAGE>
.4 Return of Property
------------------
Upon termination, Executive will deliver to the Company, in a reasonable state
of repair, all property, both real and personal, including documents and copies
thereof, and including computer software and files, produced, owned, or leased
by the Company and used by or in the possession of Executive while employed by
the Company. Except, if the Executive possesses, the Executive shall be
permitted to keep the company owned home computer, printer, and fax machine in
his home and the company owned cellular phone.
6 - GENERAL
.1 Assignment
----------
Executive may not assign any right, benefit or interest in this Agreement
without the written consent of the Company, and any purported assignment without
such consent will be void. This agreement shall be binding upon the Company, its
successors and assigns.
.2 Severability
------------
If any provision of this Agreement is unenforceable or invalid for any reason,
it will be severable from the remainder of this Agreement. The Agreement will
then be construed as though such provision was not contained herein, and the
remainder of the Agreement will continue in full force and effect.
.3 Waiver and Consent
------------------
No consent or waiver, express or implied, by either party to or of any breach or
default by the other party of any or all of its obligations under this Agreement
will be valid unless it is in writing and stated to be a consent or waiver
pursuant to this section.
.4 Binding Effect
--------------
This Agreement will inure to the benefit of and be binding upon the respective
legal representatives and successors.
.5 Counterparts
------------
This Agreement may be executed in any number of counterparts with the same
effect as if all parties to this Agreement or such other
6
<PAGE>
writing had signed the same document. All counterparts will be construed
together and will constitute one instrument.
.6 Headings
--------
The section headings in this Agreement are for reference and shall not by
themselves determine the construction or interpretation of the Agreement.
.7 Arbitration
-----------
All disputes between the parties relating to this Agreement shall be submitted
to binding arbitration before JAMS/Endispute in Seattle, Washington. Either
party may commence the arbitration by delivery of a written notice to the
other, describing the issue in dispute and its position with regard to the
issue. The arbiter shall determine the extent of discovery allowable. Except as
otherwise provided in this Agreement, the arbitration shall be conducted in
accordance with the rules of the American Arbitration Association then in
effect. The award of the arbiter shall be final and binding, and judgment upon
an award may be entered in any court of competent jurisdiction. In any such
arbitration, the prevailing party shall receive their reasonable attorneys fees
and costs of arbitration. Nothing contained in this section shall prevent the
Company from exercising its rights as provided in Article 3.
.8 Entire Agreement
----------------
This Agreement constitutes the entire agreement between the parties and
supersedes all prior oral or written agreements or understandings between the
parties with respect to the subject matter of this Agreement.
IN WITNESS WHEREOF the parties hereto have executed this Agreement effective as
of the day and year first above-written.
GLOBALTEL RESOURCES, INC. EXECUTIVE:
By: /s/ Ronald P. Erickson /s/ German Burtscher
----------------------------- -----------------------------
Title: Chairman & CEO Name:________________________
------------------------ German Burtscher
7
<PAGE>
EXHIBIT 10.21
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") dated October 31, 1997 is made
between GLOBALTEL RESOURCES, INC. (the "Company"), and JOHN COX ("Executive").
--------
By its terms, this agreement shall, on and after the IPO Date supersede all
prior employment agreements between the parties hereto. In consideration of the
mutual covenants and conditions set forth in this Agreement, the parties agree
as follows:
This Agreement shall become effective on the date the Company completes an
initial public offering of its common stock that yields, to the Company, net
proceeds in excess of Fifteen Million Dollars ($15,000,000) (the "IPO Date"). If
the IPO Date has not occurred by March 31, 1998, for any reason whatsoever
(including but not limited to a decision by the Company not to offer its common
stock for sale in a public offering), this Agreement shall be null and void,
without the need for further action by either party. If the IPO Date occurs
prior to March 31, 1998, the Company shall employ Executive on the following
terms and conditions.
1 - ENGAGEMENT
.1 Term
----
The Term of employment pursuant to this Agreement will extend from the IPO Date
for a period of one (1) year, unless earlier terminated as hereinafter provided.
.2 Title and Location
------------------
Executive will as a VICE PRESIDENT, NETWORK SERVICES of the Company and shall
--------------------------------
perform all functions customarily assigned to such a position. Absent
Executive's concurrence, Executive's primary place of employment shall be
Seattle, Washington.
2 - COMPENSATION
.1 Salary
------
Executive will receive an annual Base Salary of $150,000.00 per annum.
-----------
1
<PAGE>
.2 Bonus
-----
Executive will be entitled to receive during the term of this Agreement
incentive or bonus payments of up to one times annual salary pursuant to any
plans or agreements approved by the Company's Compensation Committee of the
Board and the Board of Directors, and payable by their express terms and
conditions to Executive.
.3 Benefits
--------
During the term of this Agreement, the Company shall provide Executive with
health, life, disability and other appropriate insurance, vacation, sick leave
and other benefits as are generally provided to other management-level employees
holding similar positions with the Company. Executive will have at least four
weeks of paid vacation per year.
.4 Stock Options
-------------
On the IPO Date, the Company shall issue to Executive stock options, pursuant to
its 1996 Stock Option Plan (the "Plan"), exercisable at a price per share equal
to the per share price at which common stock is sold in the public offering
completed on the IPO Date. The number of shares for which options are issued
shall be equivalent to the number of shares that Executive would have held on
the IPO Date had he held 200,000 shares on the date of this Agreement, giving
-------
effect to all recapitalizations, stock splits and other adjustments to the
Company's capital structure that may occur between the date of this Agreement
and the IPO Date. The options shall, to the extent permitted by the Plan, be
Incentive Stock Option and shall otherwise be Non-Qualified Stock Options. Said
options shall be governed by the terms and conditions of the Plan and, in
addition, said options shall vest over three years based upon performance
criteria as established by the Compensation Committee of the Board of Directors
of the Company. The foregoing additional vesting requirements shall be deemed
fully satisfied if, prior to the third (3rd) calendar anniversary of the IPO
Date, there is a Change of Control Event. As used herein, a "Change of Control
Event" is a sale or merger of the Company to or with a non-affiliate or a change
in the identity of the majority of the Board of Directors other than through
normal transition. All options not exercised prior to the tenth (10th) calendar
anniversary of the IPO Date, whether or not vested, shall expire.
2
<PAGE>
3 - NEGATIVE COVENANTS
.1 Non-Competition
---------------
Without the written consent of the Company, Executive will not, during the term
of employment under this Agreement and for six (6) months following the
termination of employment under this Agreement, work directly or indirectly (as
an employee, consultant, advisor or owner, except as a holder of less than 5% of
a public company) for any business or activity which is in a business
substantially similar to that of the Company, anywhere in the Company's
marketplace. For purposes of this covenant, a business activity is substantially
similar to the business of the Company if it involves a product or service that
the Company was developing, manufacturing, marketing or distributing, or
otherwise commercially exploiting during the Executive's employment with the
Company.
.2 Nondisclosure
-------------
Executive acknowledges that in the course of carrying out his responsibilities
to the Company under this Agreement he will have access to and be entrusted with
confidential information relating to the patents, copyrights, trademarks, trade
secrets, technology, business and finances of the Company. All of this
information, except information that is in the public domain through no fault of
Executive, is collectively referred to as "Confidential Information." Executive
shall keep in confidence and trust all Confidential Information. Without the
Company's prior written consent, Executive shall not use or disclose any
Confidential Information, during or after his employment with the Company,
except as required in the ordinary course of his duties for the Company.
.3 Relief for Breach
-----------------
Executive agrees that damages for breach of the covenants contained in sections
3.1 and 3.2 would be difficult to determine and therefore agrees that these
provisions may be enforced by temporary or permanent injunction. The right to
such injunctive relief shall be in addition to and not in place of any further
remedies to which the Company may be entitled.
.4 Reasonableness
--------------
Executive agrees that the provisions of sections 3.1, 3.2 and 3.3 are
reasonable. However, if any court of competent jurisdiction
3
<PAGE>
determines that any provision within these sections is unreasonable in any
respect, the parties intend that the provisions of these sections should be
enforced to the fullest extent allowed by such court.
.5 Survival of Covenants
---------------------
The provisions of this Article shall survive the termination of employment under
this Agreement.
4 - DUTIES
.1 Duties
------
Executive agrees that during the term of this Agreement he/she will diligently
perform all duties assigned to him/her by the Company which are reasonably
commensurate with the positions held by Executive pursuant to 1.2 above, and
will devote all of his/her efforts to those duties on a full-time basis and to
the best of his/her skill and ability. It is understood that Executive may have
other investment activities and sit on, subject to the limitations in Section 3
above, boards of directors of other companies.
5 - TERMINATION
.1 Termination Prior to the End of Term
------------------------------------
(a) The Company may terminate this Agreement on written notice of not less
than six (6) months, except as otherwise provided in sections 5.1(b), 5.1(c) and
5.2. Executive may terminate employment under this Agreement on written notice
of not less than three (3) months.
(b) The Company may, at its option, terminate employment under this
Agreement at any time without notice in the event that Executive commits a
felony for which Executive is found guilty by a court of competent jurisdiction
or commits any intentional damage to or misappropriation of the property or
business of the Company. Any such termination shall be considered a termination
for cause. In the event of a termination for cause, Executive shall be paid all
compensation and benefits earned through the date of termination, but shall not
be entitled to receive any further compensation or benefits other than payments
already due as of that date.
(c) This Agreement shall terminate in the event that Executive dies, or is
unable to perform his/her duties as a
4
<PAGE>
result of a physical or mental disability at any time during the term of this
Agreement. In the event of termination under this subsection, Executive or
his/her estate shall be paid all compensation and benefits earned through the
date of such termination, but shall not be entitled to receive any compensation
or benefits other than payments already due as of that date. For purposes of
this Agreement, Executive will be considered unable to perform his/her duties as
a result of a physical or mental disability if that disability exists, or is
reasonably expected to exist, for more than ninety (90) days in any twelve (12)
consecutive calendar months.
.2 Severance Pay
-------------
If the Company gives notice under section 5.1(a), then at the Company's option:
(a) The Company shall honor Executive's employment contract to the stated
end of the employment term and thereafter pay Executive severance pay equal to
Executive's then-current monthly Base Salary multiplied by six (6); or
(b) the Company may terminate Executive's employment prior to the end of
the notice period, in exchange for severance pay equal to Executive's then
- -current monthly salary multiplied by (i) the number of months remaining in the
notice period plus (ii) six (6).
Executive agrees to accept this amount as full compensation for the
termination. Severance pay under this section will be paid in payments made
according to the Company's regular payroll practices over the remainder of the
notice period and the six-month severance period. Executives options and all
other benefits shall be accrue until the date of termination and in the case of
stock options shall be vested on a prorated basis up to and including the date
of termination.
.3 Payment on Resignation
----------------------
If Executive gives notice under Section 5.1(a), the Company may, at its option,
elect to terminate Executive's employment prior to the end of the notice
period. Regardless of whether the Company elects to have Executive continue to
work through the notice period provided in Section 5.1(a), or elects to
terminate Executive's employment prior to the end of that notice period,
Executive shall be paid all compensation and benefits earned through his/her
last day of work, but shall not be entitled to receive any further compensation
or benefits other than payments already due as of that date.
5
<PAGE>
.4 Return of Property
------------------
Upon termination, Executive will deliver to the Company, in a reasonable state
of repair, all property, both real and personal, including documents and copies
thereof, and including computer software and files, produced, owned, or leased
by the Company and used by or in the possession of Executive while employed by
the Company. Except, if the Executive possesses, the Executive shall be
permitted to keep the company owned home computer, printer, and fax machine
in his home and the company owned cellular phone.
6 - GENERAL
.1 Assignment
----------
Executive may not assign any right, benefit or interest in this Agreement
without the written consent of the Company, and any purported assignment without
such consent will be void. This agreement shall be binding upon the Company,
its successors and assigns.
.2 Severability
------------
If any provision of this Agreement is unenforceable or invalid for any reason,
it will be severable from the remainder of this Agreement. The Agreement will
then be construed as though such provision was not contained herein, and the
remainder of the Agreement will continue in full force and effect.
.3 Waiver and Consent
------------------
No consent or waiver, express or implied, by either party to or of any breach or
default by the other party of any or all of its obligations under this Agreement
will be valid unless it is in writing and stated to be a consent or waiver
pursuant to this section.
.4 Binding Effect
--------------
This Agreement will inure to the benefit of and be binding upon the respective
legal representatives and successors.
.5 Counterparts
------------
This Agreement may be executed in any number of counterparts with the same
effect as if all parties to this Agreement or such other
6
<PAGE>
writing had signed the same document. All counterparts will be construed
together and will constitute one instrument.
.6 Headings
--------
The section headings in this Agreement are for reference and shall not by
themselves determine the construction or interpretation of the Agreement.
.7 Arbitration
-----------
All disputes between the parties relating to this Agreement shall be submitted
to binding arbitration before JAMS/Endispute in Seattle, Washington. Either
party may commence the arbitration by delivery of a written notice to the other,
describing the issue in dispute and its position with regard to the issue. The
arbiter shall determine the extent of discovery allowable. Except as otherwise
provided in this Agreement, the arbitration shall be conducted in accordance
with the rules of the American Arbitration Association then in effect. The award
of the arbiter shall be final and binding, and judgment upon an award may be
entered in any court of competent jurisdiction. In any such arbitration, the
prevailing party shall receive their reasonable attorneys fees and costs of
arbitration. Nothing contained in this section shall prevent the Company from
exercising its rights as provided in Article 3.
.8 Entire Agreement
----------------
This Agreement constitutes the entire agreement between the parties and
supersedes all prior oral or written agreements or understandings between the
parties with respect to the subject matter of this Agreement.
IN WITNESS WHEREOF the parties hereto have executed this Agreement effective as
of the day and year first above-written.
GLOBALTEL RESOURCES, INC. EXECUTIVE:
By: /s/ Ronald P. Erickson /s/ John E. Cox
------------------------ ----------------------
Title: Chairman & CEO Name: John E. Cox
--------------------- -----------------
John Cox
7
<PAGE>
EXHIBIT 10.22
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the ("Agreement") dated October 31, 1997 is made
between GLOBALTEL RESOURCES, INC. (the "Company"), and RONALD P. ERICKSON
------------------
("Executive"). By its terms, this agreement shall, on and after the IPO Date
supersede all prior employment agreements between the parties hereto. In
consideration of the mutual covenants and conditions set forth in this
Agreement, the parties agree as follow:
This Agreement shall become effective on the date the Company completes an
initial public offering of its common stock that yields, to the Company, net
proceeds in excess of Fifteen Million Dollars ($15,000,000) (the "IPO Date"). If
the IPO Date has not occurred by March 31, 1998, for any reason whatsoever
including but not limited to a decision by the Company not to offer its common
stock for sale in a public offering), this Agreement shall be null and void,
without the need for further action by either party. If the IPO Date occurs
prior to March 31, 1998, the Company shall employ Executive on the following
terms and conditions.
1 - ENGAGEMENT
.1 Term
----
The term of employment pursuant to this Agreement will extend from the IPO Date
for a period of one (1) year, unless earlier terminated as hereinafter provided.
.2 Title and Location
------------------
Executive will serve as a CHAIRMAN, PRESIDENT & CHIEF EXECUTIVE OFFICER of the
---------------------------------------------
Company and shall perform all functions customarily assigned to such a position.
Absent Executive's concurrence, Executive's primary place of employment shall be
Seattle, Washington.
2 - COMPENSATION
.1 Salary
------
Executive will receive an annual Base Salary of $200,000 per annum.
--------
1
<PAGE>
.2 Bonus
-----
Executive will be entitled to receive during the term of this Agreement
incentive or bonus payments of up to one times annual salary pursuant to any
plans or agreements approved by the Company's Compensation Committee of the
Board and the Board of Directors, and payable by their express terms and
conditions to Executive.
.3 Benefits
--------
During the term of this Agreement, the Company shall provide Executive with
health, life, disability and other appropriate insurance, vacation, sick leave
and other benefits as are generally provided to other management-level employees
holding similar positions with the Company. Executive will have at least four
weeks of paid vacation per year.
.4 Stock Options
-------------
On the IPO Date, the Company shall issue to Executive stock options, pursuant to
its 1996 Stock Option Plan (the "Plan"), exercisable at a price per share equal
to the per share price at which common stock is sold in the public offering
completed on the IPO Date. The number of shares for which options are issued
shall be equivalent to the number of shares that Executive would have held on
the IPO Date had he held 500,000 shares on the date of this Agreement, giving
-------
effect to all recapitalizations, stock splits and other adjustments to the
Company's capital structure that may occur between the date of this Agreement
and the IPO Date. The options shall, to the extent permitted by the Plan, be
Incentive Stock Option and shall otherwise be Non-Qualified Stock Options. Said
Options shall be governed by the terms and conditions of the Plan and, in
addition, said options shall vest over three years based upon performance
criteria as established by the Compensation Committee of the Board of Directors
of the Company. The foregoing additional vesting requirements shall be deemed
fully satisfied if, prior to the third (3rd) calendar anniversary of the IPO
Date, there is a Change of Control Event. As used herein, a "Change of Control
Event" is a sale of merger of the Company to or with a non-affiliate or a change
in the identity of the majority of the Board of Directors other than through
normal transition. All options not exercised prior to the tenth (10th) calendar
anniversary of the IPO Date, whether or not vested, shall expire.
2
<PAGE>
3 - NEGATIVE COVENANTS
.1 Non-Competition
---------------
Without the written consent of the Company, Executive will not, during the term
of employment under this Agreement and for six (6) months following the
termination of employment under this Agreement, work directly or indirectly (as
an employee, consultant, advisor or owner, except as a holder of less than 5% of
a public company) for any business of activity which is in a business
substantially similar to that of the Company, anywhere in the Company's
marketplace. For purposes of this covenant, a business activity is substantially
similar to the business of the Company if it involves a product or service that
the Company was developing, manufacturing, marketing or distributing, or
otherwise commercially exploiting during the Executive's employment with the
Company.
.2 Nondisclosure
-------------
Executive acknowledges that in the course of carrying out his responsibilities
to the Company under this Agreement he will have access to and be entrusted with
confidential information relating to the patents, copyrights, trademarks, trade
secrets, technology, business and finances of the Company. All of this
information, except information that is in the public domain through no fault of
Executive, is collectively referred to as "Confidential Information." Executive
shall keep in confidence and trust all Confidential Information. Without the
Company's prior written consent, Executive shall not use or disclose any
Confidential Information, during or after his employment with the Company,
except as required in the ordinary course of his duties for the Company.
.3 Relief for Breach
-----------------
Executive agrees that damages for breach of the covenants contained in sections
3.1 and 3.2 would be difficult to determine and therefore agrees that these
provisions may be enforced by temporary or permanent injunction. The right to
such injunctive relief shall be in addition to and not in place of any further
remedies to which the Company may be entitled.
.4 Reasonableness
--------------
3
<PAGE>
Executive agrees that the provisions of sections 3.1, 3.2 and 3.3 are
reasonable. However, if any court of competent jurisdiction determines that any
provision within these sections is unreasonable in any respect, the parties
intend that the provisions of these sections should be enforced to the fullest
extent allowed by such court.
.5 Survival of Covenants
---------------------
The provisions of this Article shall survive the termination of employment under
this Agreement.
4 - DUTIES
.1 Duties
------
Executive agrees that during the term of this Agreement he/she will diligently
perform all duties assigned to him/her by the Company which are reasonably
commensurate with the positions held by Executive pursuant to 1.2 above, and
will devote all of his/her efforts to those duties on a full-time basis and to
the best of his/her skill and ability. It is understood that Executive may have
other investment activities and sit on, subject to the limitations in Section 3
above, boards of directors of other companies.
5 - TERMINATION
.1 Termination Prior to the End of Term
------------------------------------
(a) The Company may terminate this Agreement on written notice of not less
than six (6) months, except as otherwise provided in sections 5.1(b), 5.1(c) and
5.2. Executive may terminate employment under this Agreement on written notice
of not less than three (3) months.
(b) The Company may, at its option, terminate employment under this
Agreement at any time without notice in the event that Executive commits a
felony for which Executive is found guilty by a court of competent jurisdiction
or commits any intentional damage to or misappropriation of the property or
business of the Company. Any such termination shall be considered a termination
for cause. In the event of a termination for cause, Executive shall be paid all
compensation and benefits earned through the date of termination, but shall not
be entitled to receive any further compensation or benefits other than payments
already due as of that date.
4
<PAGE>
(c) This Agreement shall terminate in the event that Executive dies, or is
unable to perform his/her duties as a result of a physical or mental disability
at any time during the term of this Agreement. In the event of a termination
under this subsection, Executive or his/her estate shall be paid all
compensation and benefits earned through the date of such termination, but shall
not be entitled to receive any compensation or benefits other than payments
already due as of that date. For purposes of this Agreement, Executive will be
considered unable to perform his/her duties as a result of a physical or mental
disability if that disability exists, or is reasonably expected to exist, for
more than ninety (90) days in any twelve (12) consecutive calendar months.
.2 Severance Pay
-------------
If the Company gives notice under section 5.1(a), then at the Company's option:
(a) The Company shall honor Executive's employment contract to the stated
end of the employment term and thereafter pay Executive severance pay equal to
Executive's then-current monthly Base Salary multiplied by six (6); or
(b) the Company may terminate Executive's employment prior to the end of
the notice period, in exchange for severance pay equal to Executive's then-
current monthly salary multiplied by (i) the number of months remaining in the
notice period plus (ii) six (6).
Executive agrees to accept this amount as full compensation for the
termination. Severance pay under this section will be paid in payments made
according to the Company's regular payroll practices over the remainder of the
notice period and the six-month severance period. Executives options and all
other benefits shall be accrue until the date of termination and in the case of
stock options shall be vested on a prorated basis up to and including the date
of termination.
.3 Payment on Resignation
----------------------
If Executive gives notice under Section 5.1(a), the Company may, at its option,
elect to terminate Executive's employment prior to the end of the notice period.
Regardless of whether the Company elects to have Executive continue to work
through the notice period provided in Section 5.1(a), or elects to terminate
Executive's employment prior to the end of that notice period, Executive shall
be paid all compensation and benefits earned through his/her last day of work,
but shall not be entitled to
5
<PAGE>
receive any further compensation or benefits other than payments already due as
of that date.
.4 Return of Property
------------------
Upon termination, Executive will deliver to the Company, in a reasonable state
of repair, all property, both real and personal, including documents and copies
thereof, and including computer software and files, produced, owned, or leased
by the Company and used by or in the possession of Executive while employed by
the Company. Except, if the Executive possesses, the Executive shall be
permitted to keep the company owned home computer, printer, and fax machine in
his home and the company owned cellular phone.
6 - GENERAL
.1 Assignment
----------
Executive may not assign any right, benefit or interest in this Agreement
without the written consent of the Company, and any purported assignment without
such consent will be void. This agreement shall be binding upon the Company, its
successors and assigns.
.2 Severability
------------
If any provision of this Agreement is unenforceable or invalid for any reason,
it will be severable from the remainder of this Agreement. The Agreement will
then be construed as though such provision was not contained herein, and the
remainder of the Agreement will continue in full force and effect.
.3 Waiver and Consent
------------------
No consent or waiver, express or implied, by either party to or of any breach or
default by the other party of any or all of its obligations under this Agreement
will be valid unless it is in writing and stated to be a consent or waiver
pursuant to this section.
.4 Binding Effect
--------------
This Agreement will inure to the benefit of and be binding upon the respective
legal representatives and successors.
.5 Counterparts
------------
6
<PAGE>
This Agreement may be executed in any number of counterparts with the same
effect as if all parties to this Agreement or such other writing had signed the
same document. All counterparts will be construed together and will constitute
one instrument.
.6 Headings
--------
The section headings in this Agreement are for reference and shall not by
themselves determine the construction or interpretation of the Agreement.
.7 Arbitration
-----------
All disputes between the parties relating to this Agreement shall be submitted
to binding arbitration before JAMS/Endispute in Seattle, Washington. Either
party may commence the arbitration by delivery of a written notice to the other,
describing the issue in dispute and its position with regard to the issue. The
arbiter shall determine the extent of discovery allowable. Except as otherwise
provided in this Agreement, the arbitration shall be conducted in accordance
with the rules of the American Arbitration Association then in effect. The award
of the arbiter shall be final and binding, and judgment upon an award may be
entered in any court of competent jurisdiction. In any such arbitration, the
prevailing party shall receive their reasonable attorneys fees and costs of
arbitration. Nothing contained in this section shall prevent the Company from
exercising its rights as provided in Article 3.
.8 Entire Agreement
----------------
This Agreement constitutes the entire agreement between the parties and
supersedes all prior oral or written agreements or understandings between the
parties with respect to the subject matter of this Agreement.
IN WITNESS WHEREOF the parties hereto have executed this Agreement
effective as of the day and year first above-written.
GLOBALTEL RESOURCES, INC. EXECUTIVE:
By: /s/ German Burtscher /s/ Ronald P. Erickson
--------------------------------- -----------------------------------
TITLE: SR. VICE PRESIDENT NAME: Ronald P. Erickson
-----------------------------
7
<PAGE>
EXHIBIT 10.23
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") dated October 31, 1997 is made
between GLOBALTEL RESOURCES, INC. (the "Company"), and RONALD B. FOX
-------------
("Executive"). By its terms, this agreement shall, on and after the IPO Date
supersede all prior employment agreements between the parties hereto. In
consideration of the mutual covenants and conditions set forth in this
Agreement, the parties agree as follows:
This Agreement shall become effective on the date the Company completes an
initial public offering of its common stock that yields, to the Company, net
proceeds in excess of Fifteen Million Dollars ($15,000,000) (the "IPO Date"). If
the IPO Date has not occurred by March 31, 1998, for any reason whatsoever
(including but not limited to a decision by the Company not to offer its common
stock for sale in a public offering), this Agreement shall be null and void,
without the need for further action by either party. If the IPO Date occurs
prior to March 31, 1998, the Company shall employ Executive on the following
terms and conditions.
1 - ENGAGEMENT
.1 Term
----
The term of employment pursuant to this Agreement will extend from the IPO Date
for a period of one (1) year, unless earlier terminated as hereinafter provided.
.2 Title and Location
------------------
Executive will serve as a SENIOR VICE PRESIDENT, PRESIDENT OF PRIMECALL of the
---------------------------------------------
Company and shall perform all functions customarily assigned to such a position.
Absent Executive's concurrence, Executive's primary place of employment shall be
Seattle, Washington.
2 - COMPENSATION
.1 Salary
------
Executive will receive an annual Base Salary of $150,000.00 per annum.
-----------
1
<PAGE>
.2 Bonus
-----
Executive will be entitled to receive during the term of this Agreement
incentive or bonus payments of up to one times annual salary pursuant to any
plans or agreements approved by the Company's Compensation Committee of the
Board and the Board of Directors, and payable by their express terms and
Conditions to Executive.
.3 Benefits
--------
During the term of this Agreement, the Company shall provide Executive with
health, life, disability and other appropriate insurance, vacation, sick leave
and other benefits as are generally provided to other management-level employees
holding similar positions with the Company. Executive will have at least four
weeks of paid vacation per year.
.4 Stock Options
-------------
On the IPO Date, the Company shall issue to Executive stock options, pursuant to
its 1996 Stock Option Plan (the "Plan"), exercisable at a price per share equal
to the per share price at which common stock is sold in the public offering
completed on the IPO Date. The number of shares for which options are issued
shall be equivalent to the number of shares that Executive would have held on
the IPO Date had he held 300,000 shares on the date of this Agreement, giving
-------
effect to all recapitalizations, stock splits and other adjustments to the
Company's capital structure that may occur between the date of this Agreement
and the IPO Date. The options shall, to the extent permitted by the Plan, be
Incentive Stock Option and shall otherwise be Non-Qualified Stock Options. Said
options shall be governed by the terms and conditions of the Plan and, in
addition, said options shall vest over three years based upon performance
criteria as established by the Compensation Committee of the Board of Directors
of the Company. The foregoing additional vesting requirements shall be deemed
fully satisfied if, prior to the third (3rd) calendar anniversary of the IPO
Date, there is a Change of Control Event. As used herein, a "Change of Control
Event" is a sale or merger of the Company to or with a non-affiliate or a change
in the identity of the majority of the Board of Directors other than through
normal transition. All options not exercised prior to the tenth (10th)
calendar anniversary of the IPO Date, whether or not vested, shall expire.
2
<PAGE>
3 - NEGATIVE COVENANTS
.1 Non-Competition
---------------
Without the written consent of the Company, Executive will not, during the term
of employment under this Agreement and for six (6) months following termination
of employment under this Agreement, work directly or indirectly (as an employee,
consultant, advisor or owner, except as a holder of less than 5% of a public
company) for any business or activity which is in a business substantially
similar to that of the Company, anywhere in the Company's marketplace. For
purposes of this covenant, a business activity is substantially similar to the
business of the Company if it involves a product or service that the Company
was developing, manufacturing, marketing or distributing, or otherwise
commercially exploiting during the Executive's employment with the Company.
.2 Nondisclosure
-------------
Executive acknowledges that in the course of carrying out his responsibilities
to the Company under this Agreement he will have access to and be entrusted with
confidential information relating to the patents, copyrights, trademarks, trade
secrets, technology, business and finances of the Company. All of this
information, except information that is in the public domain through no fault of
Executive, is collectively referred to as "Confidential Information." Executive
shall keep in confidence and trust all Confidential Information. Without the
Company's prior written consent, Executive shall not use or disclose any
Confidential Information, during or after his employment with the Company,
except as required in the ordinary course of his duties for the Company.
.3 Relief for Breach
-----------------
Executive agrees that damages for breach of the covenants contained in sections
3.1 and 3.2 would be difficult to determine and therefore agrees that these
provisions may be enforced by temporary or permanent injunction. The right to
such injunctive relief shall be in addition to and not in place of any further
remedies to which the Company may be entitled.
.4 Reasonableness
--------------
3
<PAGE>
Executive agrees that the provisions of sections 3.1, 3.2 and 3.3 are
reasonable. However, if any court of competent jurisdiction determines that any
provision within these sections is unreasonable in any respect, the parties
intend that the provisions of these sections should be enforced to the fullest
extent allowed by such court.
.5 Survival of Covenants
---------------------
The provisions of this Article shall survive the termination of employment under
this Agreement.
- DUTIES
4
.1 Duties
------
Executive agrees that during the term of this Agreement he/she will diligently
perform all duties assigned to him/her by the Company which are reasonably
commensurate with the positions held by Executive pursuant to 1.2 above, and
will devote all of his/her efforts to those duties on a full-time basis and to
the best of his/her skill and ability. It is understood that Executive may have
other investment activities and sit on, subject to the limitations in Section 3
above, boards of directors of other companies.
- TERMINATION
5
.1 Termination Prior to the End of Term
------------------------------------
(a) The Company may terminate this Agreement on written notice of not less
than six (6) months, except as otherwise provided in sections 5.1(b), 5.1(c) and
5.2. Executive may terminate employment under this Agreement on written notice
of not less than three (3) months.
(b) The Company may, at its option, terminate employment under this
Agreement at any time without notice in the event that Executive commits a
felony for which Executive is found guilty by a court of competent jurisdiction
or commits any intentional damage to or misappropriation of the property or
business of the Company. Any such termination shall be considered a termination
for cause. In the event of a termination for cause, Executive shall be paid all
compensation and benefits earned through the date of termination, but shall not
be entitled to receive any further compensation or benefits other than payments
already due as of that date.
4
<PAGE>
(c) This Agreement shall terminate in the event that Executive dies, or is
unable to perform his/her duties as a result of a physical or mental disability
at any time during the term of this Agreement. In the event of a termination
under this subsection, Executive or his/her estate shall be paid all
compensation and benefits earned through the date of such termination, but shall
not be entitled to receive any compensation or benefits other than payments
already due as of that date. For purposes of this Agreement, Executive will be
considered unable to perform his/her duties as a result of a physical or mental
disability if that disability exists, or is reasonably expected to exist, for
more than ninety (90) days in any twelve (12) consecutive calendar months.
.2 Severance Pay
-------------
If the Company gives notice under section 5.1(a), then at the Company's option:
(a) The Company shall honor Executive's employment contract to the stated
end of the employment term and thereafter pay Executive severance pay equal to
Executive's then-current monthly Base Salary multiplied by six (6); or
(b) the Company may terminate Executive's employment prior to the end of
the notice period, in exchange for severance pay equal to Executive's then-
current monthly salary multiplied by (i) the number of months remaining in the
notice period plus (ii) six (6).
Executive agrees to accept this amount as full compensation for the
termination. Severance pay under this section will be paid in payments made
according to the Company's regular payroll practices over the remainder of the
notice period and the six-month severance period. Executives options and all
other benefits shall be accrue until the date of termination and in the case of
stock options shall be vested on a prorated basis up to and including the date
of termination.
.3 Payment on Resignation
----------------------
If Executive gives notice under Section 5.1(a), the Company may, at its option,
elect to terminate Executive's employment prior to the end of the notice period.
Regardless of whether the Company elects to have Executive continue to work
through the notice period provided in Section 5.1(a), or elects to terminate
Executive's employment prior to the end of that, notice period, Executive shall
be paid all compensation and benefits earned through his/her last day of work,
but shall not be entitled to
5
<PAGE>
receive any further compensation or benefits other than payments already due as
of that date.
.4 Return of Property
------------------
Upon termination, Executive will deliver to the Company, in a reasonable state
of repair, all property, both real and personal, including documents and copies
thereof, and including computer software and files, produced, owned, or leased
by the Company and used by or in the possession of Executive while employed by
the Company. Except, if the Executive possesses, the Executive shall be
permitted to keep the company owned home computer, printer, and fax machine in
his home and the company owned cellular phone.
- GENERAL
6
.1 Assignment
----------
Executive may not assign any right, benefit or interest in this Agreement
without the written consent of the Company, and any purported assignment without
such consent will be void. This agreement shall be binding upon the Company, its
successors and assigns.
.2 Severability
------------
If any provision of this Agreement is unenforceable or invalid for any reason,
it will be severable from the remainder of this Agreement. The Agreement will
then be construed as though such provision was not contained herein, and the
remainder of the Agreement will continue in full force and effect.
.3 Waiver and Consent
------------------
No consent or waiver, express or implied, by either party to or of any breach or
default by the other party of any or all of its obligations under this Agreement
will be valid unless it is in writing and stated to be a consent or waiver
pursuant to this section.
.4 Binding Effect
--------------
This Agreement will inure to the benefit of and be binding upon the respective
legal representatives and successors.
.5 Counterparts
------------
6
<PAGE>
This Agreement may be executed in any number of counterparts with the same
effect as if all parties to this Agreement or such other writing had signed the
same document. All counterparts will be construed together and will constitute
one instrument.
.6 Headings
--------
The section headings in this Agreement are for reference and shall not by
themselves determine the construction or interpretation of the Agreement.
.7 Arbitration
-----------
All disputes between the parties relating to this Agreement shall be submitted
to binding arbitration before JAMS/Endispute in Seattle, Washington. Either
party may commence the arbitration by delivery of a written notice to the other,
describing the issue in dispute and its position with regard to the issue. The
arbiter shall determine the extent of discovery allowable. Except as otherwise
provided in this Agreement, the arbitration shall be conducted in accordance
with the rules of the American Arbitration Association then in effect. The award
of the arbiter shall be final and binding, and judgment upon an award may be
entered in any court of competent jurisdiction. In any such arbitration, the
prevailing party shall receive their reasonable attorneys fees and costs of
arbitration. Nothing contained in this section shall prevent the Company from
exercising its rights as provided in Article 3.
.8 Entire Agreement
----------------
This Agreement constitutes the entire agreement between the parties and
supersedes all prior oral or written agreements or understandings between the
parties with respect to the subject matter of this Agreement.
IN WITNESS WHEREOF the parties hereto have executed this Agreement effective as
of the day and year first above-written.
GL0BALTEL RESOUCES, INC. EXECUTIVE:
By: /s/ Ronald P. Erickson /s/ Ronald B. Fox
---------------------------- --------------------------
Title: Chairman & CEO Name: Ronald B. Fox
-------------------------
7
<PAGE>
EXHIBIT 10.24
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") dated October 31, 1997 is made
between GLOBALTEL RESOURCES, INC. (the "Company"), and ERIC D. ORSE
------------
("Executive"). By its terms, this agreement shall, on and after the IPO Date
supersede all prior employment agreements between the parties hereto. In
consideration of the mutual covenants and conditions set forth in this
Agreement, the parties agree as follows:
This Agreement shall become effective on the date the Company completes an
initial public offering of its common stock that yields, to the Company, net
proceeds in excess of Fifteen Million Dollars ($15,000,000) (the "IPO Date"). If
the IPO Date has not occurred by March 31, 1998, for any reason whatsoever
(including but not limited to a decision by the Company not to offer its common
stock for sale in a public offering), this Agreement shall be null and void,
without the need for further action by either party. If the IPO Date occurs
prior to March 31, 1998, the Company shall employ Executive on the following
terms and conditions.
1 - ENGAGEMENT
.1 Term
----
The term of employment pursuant to this Agreement will extend from the IPO Date
for a period of one (1) year, unless earlier terminated as hereinafter provided.
.2 Title and Location
------------------
Executive will serve as a DIRECTOR OF FINANCE of the company and shall perform
-------------------
all functions customarily assigned to such a position. Absent Executive's
concurrence, Executive's primary place of employment shall be Seattle,
Washington.
2 - COMPENSATION
.1 Salary
------
Executive will receive an annual Base Salary of $120,000.00 per annum.
-----------
1
<PAGE>
.2 Bonus
-----
Executive will be entitled to receive during the term of this Agreement
incentive or bonus payments of up to one times annual salary pursuant to any
plans or agreements approved by the Company's Compensation Committee of the
Board and the Board of Directors, and payable by their express terms and
conditions to Executive.
.3 Benefits
--------
During the term of this Agreement, the Company shall provide Executive with
health, life, disability and other appropriate insurance, vacation, sick leave
and other benefits as are generally provided to other management-level employees
holding similar positions with the Company. Executive will have at least four
weeks of paid vacation per year.
.4 Stock Options
-------------
On the IPO Date, the Company shall issue to Executive stock options, pursuant to
its 1996 Stock Option Plan (the "Plan"), exercisable at a price per share equal
to the per share price at which common stock is sold in the public offering
completed on the IPO Date. The number of shares for which options are issued
shall be equivalent to the number of shares that Executive would have held on
the IPO Date had he held 100,000 shares on the date of this Agreement, giving
-------
effect to all recapitalizations, stock splits and other adjustments to the
Company's capital structure that may occur between the date of this Agreement
and the IPO Date. The options shall, to the extent permitted by the Plan, be
Incentive Stock Option and shall otherwise be Non-Qualified Stock Options. Said
options shall be governed by the terms and conditions of the Plan and, in
addition, said options shall vest over three years based upon performance
criteria as established by the Compensation Committee of the Board of Directors
of the Company. The foregoing additional vesting requirements shall be deemed
fully satisfied if, prior to the third (3rd) calendar anniversary of the IPO
Date, there is a Change of Control Event. As used herein, a "Change of Control
Event" is at sale or merger of the Company to or with a non-affiliate or a
change in the identity of the majority of the Board of Directors other than
through normal transition. All options not exercised prior to the tenth (10th)
calendar anniversary of the IPO Date, whether or not vested, shall expire.
2
<PAGE>
3 - NEGATIVE COVENANTS
.1 Non-Competition
---------------
Without the written consent of the Company, Executive will not, during the term
of employment under this Agreement and for six (6) months following the
termination of employment under this Agreement, work directly or indirectly (as
an employee, consultant, advisor or owner, except as a holder of less than 5% of
a public company) for any business or activity which is in a business
substantially similar to that of the Company, anywhere in the Company's
marketplace. For purposes of this covenant, a business activity is substantially
similar to the business of the Company if it involves a product or service that
the Company was developing, manufacturing, marketing or distributing, or
otherwise commercially exploiting during the Executive's employment with the
Company.
.2 Nondisclosure
-------------
Executive acknowledges that in the course of carrying out his responsibilities
to the Company under this Agreement he will have access to and be entrusted with
confidential information relating to the patents, copyrights, trademarks, trade
secrets, technology, business and finances of the Company. All of this
information, except information that is in the public domain through no fault of
Executive, is collectively referred to as "Confidential Information." Executive
shall keep in confidence and trust all Confidential Information. Without the
Company's prior written consent, Executive shall not use or disclose any
Confidential Information, during or after his employment with the Company,
except as required in the ordinary course of his duties for the Company.
.3 Relief for Breach
-----------------
Executive agrees that damages for breach of the covenants contained in sections
3.1 and 3.2 would be difficult to determine and therefore agrees that these
provisions may be enforced by temporary or permanent injunction. The right to
such injunctive relief shall be in addition to and not in place of any further
remedies to which the Company may be entitled.
.4 Reasonableness
--------------
Executive agrees that the provisions of sections 3.1, 3.2 and 3.3 are
reasonable. However, if any court of competent jurisdiction
3
<PAGE>
determines that any provision within these sections is unreasonable in any
respect, the parties intend that the provisions of these sections should be
enforced to the fullest extent allowed by such court.
.5 Survival of Covenants
---------------------
The provisions of this Article shall survive the termination of employment under
this Agreement.
4 - DUTIES
.1 Duties
------
Executive agrees that during the term of this Agreement he/she will diligently
perform all duties assigned to him/her by the Company which are reasonably
commensurate with the positions held by Executive pursuant to 1.2 above, and
will devote all of his/her efforts to those duties on a full-time basis and to
the best of his/her skill and ability. It is understood that Executive may have
other investment activities and sit on, subject to the limitations in Section 3
above, boards of directors of other companies.
5 - TERMINATION
.1 Termination Prior to the End of Term
------------------------------------
(a) The Company may terminate this Agreement on written notice of not
less than six (6) months, except as otherwise provided in sections 5.1(b),
5.1(c) and 5.2. Executive may terminate employment under this Agreement on
written notice of not less than three (3) months.
(b) The Company may, at its option, terminate employment under this
Agreement at any time without notice in the event that Executive commits a
felony for which Executive is found guilty by a court of competent jurisdiction
or commits any intentional damage to or misappropriation of the property or
business of the Company. Any such termination shall be considered a termination
for cause. In the event of a termination for cause, Executive shall be paid all
compensation and benefits earned through the date of termination, but shall not
be entitled to receive any further compensation or benefits other than payments
already due as of that date.
(c) This Agreement shall terminate in the event that Executive dies, or is
unable to perform his/her duties as a
4
<PAGE>
result of a physical or mental disability at any time during the term of this
Agreement. In the event of a termination under this subsection, Executive or
his/her estate shall be paid all compensation and benefits earned through the
date of such termination, but shall not be entitled to receive any compensation
or benefits other than payments already due as of that date. For purposes of
this Agreement, Executive will be considered unable to perform his/her duties as
a result of a physical or mental disability if that disability exists, or
is reasonably expected to exist, for more than ninety (90) days in any twelve
(12) consecutive calender months.
.2 Severence Pay
-------------
If the Company gives notice under section 5.1(a), then at the Company's option:
(a) The Company shall honor Executive's employment contract to the stated
end of the employment term and thereafter pay Executive severance pay equal to
Executive's then-current monthly Base Salary multiplied by six (6); or
(b) the Company may terminate Executive's employment prior to the end of
the notice period, in exchange for severance pay equal to Executive's
then-current monthly salary multiplied by (i) the number of months remaining in
the notice period plus (ii) six (6).
Executive agrees to accept this amount as full compensation for the
termination. Severance pay under this section will be paid in payments made
according to the Company's regular payroll practices over the remainder of the
notice period and the six-month severance period. Executives options and all
other benefits shall be accrue until the date of termination and in the case of
stock options shall be vested on a prorated basis up to and including the date
of termination.
.3 Payment on Resignation
----------------------
If Executive gives notice under Section 5.1(a), the Company may, at its option,
elect to terminate Executive's employment prior to the end of the notice period.
Regardless of whether the Company elects to have Executive continue to work
through the notice period provided in Section 5.1(a), or elects to terminate
Executive's employment prior to the end of that notice period, Executive shall
be paid all compensation and benefits earned through his/her last day of work,
but shall not be entitled to receive any further compensation or benefits other
than payments already due as of that date.
5
<PAGE>
EXHIBIT 11.1
GLOBALTEL RESOURCES, INC.
COMPUTATION OF PRO FORMA NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996(1) SEPTEMBER 30, 1997
-------------------- ------------------
<S> <C> <C>
Weighted average number of
common stock outstanding 997,869 1,026,758
Common stock and common stock
equivalents issued during the
12 months period prior to the
filing of the Company's
initial public offering,
using the treasury stock
method and an assumed
initial public offering
price of $9.00 856,953 832,233
--------- ---------
1,854,822 1,858,992
========= =========
</TABLE>
(1) Number of shares apply to all periods prior to 1997.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
NET INCOME (LOSS) NET INCOME (LOSS)
(IN THOUSANDS) (PER SHARE)
----------------- -----------------
<S> <C> <C>
Year Ended December 31, 1995 $(1,735) $(0.94)
Year Ended December 31, 1996 $(5,872) $(3.17)
Nine Months Ended September 30, 1996 $(4,103) $(2.21)
Nine Months Ended September 30, 1997 $(4,440) $(2.39)
</TABLE>
Page 1
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiary State of Incorporation
- ---------- ----------------------
<S> <C>
Primecall, Inc. Washington
GFP Group, Inc. Washington
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington
February 2, 1998
