As filed with the Securities and Exchange Commission on February 13, 1998
Registration No. 333-39745
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM SB-2/A
Amendment No. 3 to
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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COMTELCO INTERNATIONAL INC.
(Name of Small Business Issuer in Charter)
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Delaware 3661 13-3972779
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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ComTelco International Inc.
Hechtackerstrasse 41
CH-9014
St. Gallen, Switzerland
011 41 71 278 86 33
(Address, including zip code, and telephone number,
including area code, of registrant's executive offices)
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Roland Steiner, President and Chief Executive Officer
ComTelco International Inc.
Hechtackerstrasse 41
CH-9014
St. Gallen, Switzerland
011 41 71 278 86 33
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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With copies to:
Walter M. Epstein, Esq.
Rubin Baum Levin Constant & Friedman
30 Rockefeller Plaza
New York, NY 10112
(212) 698-7700
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement
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If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. |x|
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If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
Registration Statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier Registration Statement for the same
offering. |_|
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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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 such Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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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 ________ __, 1998
PROSPECTUS
COMTELCO INTERNATIONAL INC.
2,000,000 Shares
Common Stock
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This Prospectus relates to 2,000,000 presently outstanding shares (the
"Shares") of common stock, par value $.00001 per Share ("Common Stock"), of
ComTelco International Inc., a Delaware corporation ("ComTelco" or the
"Company") which are being offered for sale by certain selling stockholders (the
"Selling Stockholders"). See "Selling Stockholders."
The Company will not receive any of the proceeds from the sales of the
Shares by the Selling Stockholders. The Shares may be offered from time to time
by the Selling Stockholders through ordinary brokerage transactions in the
over-the-counter market, in negotiated transactions or otherwise, at market
prices prevailing at the time of sale or at negotiated prices.
The Selling Stockholders may be deemed to be "Underwriters" as defined in
the Securities Act of 1933, as amended (the "Act"). If any broker-dealers are
used by the Selling Stockholders, any commissions paid to broker-dealers and, if
broker-dealers purchase any Shares as principals, any profits received by such
broker-dealers on the resales of the Shares, may be deemed to be underwriting
discounts or commissions under the Act. In addition, any profits realized by the
Selling Stockholders may be deemed to be underwriting commissions. All costs,
expenses and fees in connection with the registration of the Shares offered by
the Selling Stockholders will be borne by the Company. Brokerage commissions, if
any, attributable to the sale of the Shares will be borne by the Selling
Stockholders. The Company has agreed to indemnify the Selling Stockholders
against certain liabilities, including liabilities under the Act.
The Shares offered by this Prospectus may be sold from time to time by the
Selling Stockholders or by their transferees, pledgees, donees or other
successors in interest. No underwriting arrangements have been entered into by
the Company or, to the Company's knowledge, the Selling Stockholders. The
distribution of the Shares by the Selling Stockholders may be effected in one or
more transactions, privately-negotiated transactions or through sales to one or
more dealers for resale of such Shares as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or negotiated prices. Usual and customary or specifically negotiated
brokerage fees or commissions may be paid by the Selling Stockholders in
connection with sales of the Shares.
The Company intends to have the Common Stock quoted on the NASD OTC
Bulletin Board (the "Bulletin Board") under the proposed symbol "CMTE".
Unless otherwise specifically provided, all currency amounts in this
document are expressed in United States dollars and are preceded by "$".
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THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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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.
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The date of this Prospectus is ___________, 199_.
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Unless the context otherwise requires, all references to the "Company"
contained in this Prospectus refer to ComTelco International Inc., a Delaware
corporation ("ComTelco"), and its wholly-owned subsidiaries: ComTelco
(Deutschland) GmbH, a German corporation incorporated in September 1994
("ComTelco Germany"); ComTelco Softwarevertriebs-GmbH, an Austrian corporation
incorporated in November 1995 ("ComTelco Austria"), ComTelco Vertriebs AG, a
Swiss corporation incorporated in February 1997 ("ComTelco Vertriebs"), and
ComTelco Research AG, a Swiss corporation incorporated in February 1997
("ComTelco Research"). (ComTelco Germany, ComTelco Austria, ComTelco Vertriebs
and ComTelco Research are collectively referred to as the "Subsidiaries"). For
purposes of the Company's financial information contained herein, ComTelco and
its four Subsidiaries are treated on a consolidated basis unless the context
otherwise requires.
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus and, accordingly, should be read in
conjunction with such information, financial statements and notes. Each
prospective investor is urged to read this Prospectus in its entirety.
The Company
The Company designs, develops, manufactures and markets integrated
hardware and software products designed to enable users to monitor, manage and
integrate their telecommunications activities to achieve greater efficiency and
cost savings. The Company's products, which consist of telemanagement and
computer telephony systems, connect to and interface with most modern private
branch exchange switches ("PBXs"), as well as client/server computer networks,
and are able to process all modes of communication conducted through PBXs. PBXs
are telephone switches or switch boards through which incoming and outgoing
voice and data communications are directed. Telemanagement is the logging and
accounting of and generation of reports on all communications, voice or data,
including facsimile, which are transmitted over an organization's PBXs in one or
multiple locations. The Company's telemanagement systems consist of single and
multi-site call accounting, billing and cost distribution systems. The Company's
computer telephony systems incorporate the functionality of telephones with
networked computer workstations. These systems presently consist of personal
computer ("PC") screen-based telephone dialing and faxing systems. All of the
Company's products are modular and scalable, enabling them to be integrated to
form a more complete telecommunications management system.
The Company's target market consists of corporations and other
organizations which are connected to external communications lines via one or
more PBXs. Presently, the Company's end-user customer base exceeds 3,500
installations, primarily located in Central Europe. The majority of the
Company's revenue has been generated from the sale of telemanagement systems.
For the nine months ended November 30, 1997, approximately 55% of the Company's
net sales were derived from the sale of telemanagement systems and approximately
17% of the Company's net sales was attributable to the sale of computer
telephony products. The balance of the Company's net sales for the period
represented product updates and service and installation. The Company launched
the sale of its computer telephony products during the year ended February 28,
1997 and anticipates a shift in its product mix in favor of these products in
subsequent periods.
The Company sells its products and systems to four primary
buyers/distributors: to original equipment manufacturers ("OEMs"), to
value-added resellers ("VARs"), to telecommunications service providers and, on
a selective basis, to end-users. Representative customers of the Company
include: OEMs such as Ericsson (Austria) GmbH, Ericsson Schweiz AG, Alcatel
(Austria) GmbH, Alcatel Schweiz AG, Philips Schweiz AG, Matra S.A., DeTeWe
Deutsche Telefonwerke GmbH; VARs such as GFT Genossenschaft fuer
Telekommunikation, EgTel Einkaufsgenossenschaft Telekommunikation, Slit
Telematique S.A., Kapsch Telekommunikationssysteme GmbH, Siemens (Austria) AG
and Siemens Schweiz AG; telecommunication service providers such as Swisscom AG
and the National Telephone Company of Austria ("Austrian PTT"); and end-users
such as Credit Suisse, Zuercher Kantonalbank (Zurich State Bank) and UNICEF.
The Company's telemanagement systems (call accounting), of which there are
presently four models, are comprised of proprietary hardware which monitors
communications transmitted through the user's PBXs. The recorded data is then
transmitted via an interface to the user's PC or client/server network
containing the Company's proprietary software. Reports can then be generated
directly from the PC terminals. Depending on the model, the Company's
telemanagement systems can process transmissions carried by single or multiple
telecommunication service providers and for users with up to 999 independent
company structures and up to 999 PBXs per company. As such, these systems can
and are being utilized by small companies with few employees as well as large
multinational companies with numerous branch offices.
The Company's computer telephony systems, presently consisting of PC
screen-based telephone dialing, faxing and cellular massaging systems, are
comprised of proprietary hardware and PC-resident proprietary software. These
systems allow users to dial
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telephone numbers or send facsimiles over the Internet directly from their PC
screen from within any Windows(R) application, enabling them to utilize all
telephone and facsimile numbers accessible through their PC. The systems include
least-cost routing of transmissions which are designed to ensure that the
communication is routed in the cheapest manner available at the particular time
for the particular destination. Such routing may occur, for example, via a
leased communication line, the Internet or independent carriers.
The Company has also developed, and is currently in beta phase testing of,
a workstation-based telephone call recording system which permits users to
digitally record telephone conversations automatically or selectively. Under
beta phase testing, field customers which generally receive the products at a
discounted price or free of charge, test the products for their usability,
stability, reliability and for the existence of any faults or errors. The
Company anticipates that, subject to satisfatory beta phase testing, its
telephone call recording system will be ready for sale approximately in August
1998. The Company's telephone call recording system is designed to store
recorded conversations in a Windows(R) format, allowing the files to be reused
in any multimedia application, transmitted via e-mail or stored for later
reference. The recording system is designed to be installed in workstations on a
selective basis without incurring costs associated with installing larger
centralized systems. The Company intends to develop additional computer
telephony systems which can be integrated with the Company's telemanagement
systems to enable users to communicate in a more efficient and cost-effective
manner.
Organization
ComTelco and its Subsidiaries were founded by Mr. August Steiner, the
Company's Chairman of the Board of Directors and majority stockholder. In
September 1994 and November 1995, Mr. August Steiner founded ComTelco Germany
and ComTelco Austria, respectively, to provide marketing and other services for
MDE AG ("MDE"), a Swiss corporation primarily engaged in the sale of medical
equipment. Mr. August Steiner owns the majority of the stock of MDE, and Messrs.
Roland Steiner, the Company's Chief Executive Officer and President, and Ramon
Inauen, the Company's Chief Operating Officer, own minority interests in MDE. In
December 1996, Mr. August Steiner purchased from MDE assets primarily consisting
of software and hardware development. The purchase price for the assets was
approximately $5,200,000, which amount represented MDE's cost of acquiring
and/or developing the assets. In February 1997, Mr. August Steiner founded
ComTelco Vertriebs and ComTelco Research and contributed to such companies
substantially all of the assets purchased from MDE, which assets presently
comprise substantially all of the Company's software and hardware development
assets. ComTelco was founded in Delaware on February 27, 1997. As of February
28, 1997, the Subsidiaries became wholly-owned subsidiaries of ComTelco in a
transaction pursuant to which Mr. August Steiner purchased 2,500,000 shares of
Common Stock from ComTelco in exchange for all of the outstanding equity
interests in each of the four Subsidiaries.
As of February 28, 1997, ComTelco issued 2,000,000 shares of Common Stock
to Interfinance Inv. Co. Ltd., a Hong Kong corporation ("Interfinance"), in
consideration of $4,000,000, the par value of which shares ($20) was paid in
cash and the balance of which was paid by delivery of a Promissory Note due on
February 28, 1998, in the principal amount of $3,999,980 (the "Interfinance
Note"). The Interfinance Note bears interest at 5.8% per annum and is secured by
a pledge to ComTelco of the shares of Common Stock issued to Interfinance. Under
the terms of the pledge agreement, the shares are subject to release of the
Company's security interest ratably upon partial repayment of the Interfinance
Note. As of November 30, 1997, Interfinance has repaid $1,505,000 of the
principal amount of, and $50,000 of accrued interest on, the Interfinance Note
from funds received from purchasers of a portion of its shares. As a condition
to the sale of the shares to Interfinance, the Company entered into a
Registration Rights Agreement dated as of February 28, 1997, pursuant to which
the Company agreed to register such shares for resale under the Securities Act.
Except as described above, the Company has no relationship with Interfinance or
its principals. See "Selling Stockholders and Plan of Distribution."
The Company's corporate offices are located at Hechtackerstrasse 41,
CH-9014, St. Gallen, Switzerland. The Company's telephone number is
011-41-71-278-86-33.
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The Offering
Common Stock Offered by Selling Stockholders... 2,000,000 shares
Common Stock Presently Outstanding(1).......... 4,500,000 shares
Risk Factors................................... The shares of Common Stock
offered hereby involve a high
degree of risk and should be
purchased only by persons who
can afford to sustain the loss
of their entire investment. See
"Risk Factors."
Use of Proceeds................................ The Company will not receive
any proceeds from the sale of
the Shares offered hereby.
Proposed Bulletin Board Trading Symbol(2)...... CMTE
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(1) Includes the 2,000,000 presently outstanding Shares being offered by the
Selling Stockholders.
(2) There is currently no market for the Common Stock and there can be no
assurance that a market for the Common Stock will develop after the
Offering. The Company intends to apply for quotation of the Common Stock on
the Nasdaq SmallCap Market. There can be no assurance, however, that such
application for listing will be approved, or if approved, will be
maintained. See "Risk Factors--Absence of Public Market; Risks of
Low-Priced Securities; Potential Volatility of Stock Price."
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Summary Financial Data
The following table sets forth summary historical financial data for the
Company for the years ended February 28, 1997, and 1996, as well as for the nine
month periods ended November 30, 1997 and 1996. The historical financial data
are derived from the Consolidated Financial Statements included elsewhere in
this Prospectus. The summary historical financial data should be read in
conjunction with the Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
November 30, Year Ended February 28,
1997 1996 1997 1996
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue: .................................. $ 1,304,584 $ 265,012 $ 292,131 $ 0
Operating Expenses:
Research and development ............... 386,688 -- 57,574 --
Marketing and Selling Expense .......... 458,493 -- -- --
Depreciation and Amortization .......... 46,978 6,138 7,685 2,922
General and Administrative Expense ..... 985,830 314,394 348,923 57,096
Total operating expenses .................. 1,877,989 320,532 414,182 60,018
(Loss) from Operations .................... (1,555,513) (139,827) (210,479) (60,018)
Interest income ........................... 148,944 149 149 9
Other Income (Expense) .................... (34,095) 504 (437) 1,215
Net (Loss) ................................ (1,440,664) (139,174) (210,767) (58,794)
Net Loss per share ........................ (0.52) (0.06) (0.08) (0.02)
----------- ----------- ----------- -----------
Shares used in computing net loss per share 2,749,164 2,500,000 2,500,000 2,500,000
<CAPTION>
November 30, 1997 February 28, 1997
----------------- -----------------
(Unaudited)
<S> <C> <C>
Balance Sheet Data:
Working Capital $ 712,237 $ 1,751,958
Total Assets 6,338,664 6,700,187
Current Liabilities 905,196 78,328
Long-term Liabilities -- --
Accumulated Deficit (1,721,923) (281,259)
Stockholders' Equity 5,433,468 6,621,859
</TABLE>
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(1) Net loss per common share is computed based upon the weighted average
number of shares of Common Stock outstanding during the periods. The net
loss calculations give retroactive recognition to the issuance of
2,500,000 of the Company's shares of Common Stock in exchange for all of
the outstanding equity interests in the Company's Subsidiaries.
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RISK FACTORS
This Prospectus contains forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth below and elsewhere in this Prospectus. In
addition to the other information in this Prospectus, the following risk factors
should be considered carefully in evaluating the Company and its business before
purchasing the Common Stock offered hereby.
Limited Operating History; Net Losses
The Company has incurred net losses since inception. For the fiscal years
ended February 29, 1996 and February 28, 1997, the Company incurred net losses
from operations of $60,018 and $210,479, respectively. The Company's accumulated
deficit as of November 30, 1997 was $1,721,923. The Company's limited operating
history, as well as the Company's recent expansion into the computer telephony
business, makes the prediction of future operating results unreliable. There can
be no assurance that the Company will achieve profitability in the future. The
Company's prospects must be considered in light of the risks encountered by
companies in an early stage of development, particularly companies in new and
rapidly evolving markets. Future operating results will depend on many factors,
including the demand for the Company's products, the level of product and price
competition, the Company's success in attracting and retaining motivated and
qualified personnel, the ability of the Company to develop and market new
products and services and control costs, the acceptance and profitability of new
products the Company may introduce, and general economic conditions. Operating
results for future periods are subject to numerous uncertainties, and there can
be no assurance that the Company will attain or sustain profitability on an
annual or quarterly basis or otherwise be successful in addressing such
uncertainties. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Capital Requirements; Need for Additional Financing
In order to maintain its competitive position and to meet increasing
demands for providing quality products at competitive prices, the Company seeks
to expand both its product offerings and the geographic areas of business and
conducts an ongoing research and development program. Based on its plan of
operation, the Company believes that its existing resources, including the
proceeds which the Company expects to receive upon repayment of the balance of
the Interfinance Note, will be sufficient to fund the Company's operations at
least for the next 12 months. The Company may, however, need to raise additional
capital from public or private equity or debt sources in order to finance its
plan of operation. In addition, the Company may need to raise additional funds
in order to take advantage of unanticipated opportunities, including more rapid
international expansion or investments in, or strategic alliances with,
companies that are complementary to the Company's current operations, or to
develop new products or otherwise respond to unanticipated competitive
pressures. The Company's capital requirements may vary materially from those now
planned due to a number of factors, including the rate at which the Company can
produce its products, the success of the Company in marketing and selling its
products, the ability of the Company to develop new products in an efficient and
timely manner, the competitive position of the Company's products, and the
response of competitors to the Company's products. Also, should Interfinance
fail to pay the Interfinance Note when due, the Company will need additional
capital. There can be no assurance that additional financing will be available
when needed on terms acceptable to the Company, or at all. If additional funds
are raised by issuing equity securities, further dilution to existing
stockholders will result and future investors may be granted rights superior to
those of existing stockholders. Insufficient funds may prevent the Company from
implementing its business strategy or may require the Company to limit its
operations significantly. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Risks Associated with International Operations; Currency Fluctuations
Substantially all of the Company's business is conducted outside the
United States of America. There are certain risks inherent in doing business in
international markets, including tariffs, customs, duties and other trade
barriers, difficulties in staffing and managing foreign operations, problems in
collecting accounts receivable, longer accounts receivable payment cycles,
political instability, expropriation, nationalization and other political risks,
foreign exchange controls, technology export and import restrictions or
prohibitions, delays from customs brokers or government agencies, seasonal
reductions in business activity, subjection to multiple taxation regimes and
potentially adverse tax consequences, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company publishes its consolidated financial statements in United
States Dollars. However, all or substantially all of the Company's revenues and
expenses are denominated in currencies other than the United States Dollar. The
functional currencies for
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the Company's operations are primarily the United States Dollar, the Swiss
Franc, German Mark and Austrian Shilling. Certain of the Company's operations
record revenues in one currency while incurring costs in different currencies.
This currency imbalance has resulted, and may continue to result, in foreign
currency transaction gains and losses. Further, the Company is subject to risks
of currency exchange to the extent of currency fluctuations between the United
States Dollar and other currencies in which the Company transacts its business.
Currently, the Company does not actively hedge against exchange rate
fluctuations, although it may elect to do so in the future. Accordingly, changes
in exchange rates may have a material adverse effect on the Company's net sales,
cost of goods sold, gross margin and net income. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Overview."
Intense Competition; Pricing Pressure
The Company's business is characterized by intense competition, a trend of
declining average selling prices and performance enhancements of competing
products. The Company expects that competition will continue to be intense and
may increase from current or future competitors. In sales of telemanagement
(call accounting) systems, the Company competes primarily with Mer
Telemanagement, Inc. (Israel), Mind Systems Ltd., (Israel), Ring Master Pty.
Ltd. (Ireland), Soffing B.V. (Luxembourg), Moscom Corporation (USA) and Telco
Research, Inc. (USA), as well as numerous smaller regional competitors. In sales
of computer telephony products, the Company's main competitors are CTI Vision
Ltd. (United Kingdom), CTI Data Solutions, Inc. (USA), Callware Technologies,
Inc. (USA), Access Networking GmbH (Austria), Integro Advanced Computer Systems
(USA), Derlinda, Inc. (USA), Phonetastic Corporation (USA) and Dr. Neuhaus
(Germany).
Many of the Company's current and potential competitors have longer
operating histories and significantly greater financial, technical, sales,
marketing and other resources, as well as greater name recognition and larger
customer bases, than the Company. These competitors may respond more effectively
to new or emerging technologies and changes in customer requirements. There can
further be no assurance that one or more of the Company's customers or suppliers
will not develop competitive technology internally, thereby eliminating either
the need to obtain products from the Company or the willingness to provide
products to the Company. The Company expects to continue to experience increased
competition and significant price reductions, which could result in decreased
gross margin, loss of market share and lack of acceptance of the Company's
products. In the event of significant price competition in the market for the
Company's products, the Company believes that it must successfully develop and
introduce on a timely basis new products or products that incorporate new
features that can be sold at gross margins comparable to those on existing
products. To the extent that such new products are not developed in a timely
manner, do not achieve customer acceptance, or do not generate comparable gross
margins, the Company's profitability may decline. There can be no assurance that
the Company will be able to compete successfully in the future or that
competition will not have a material adverse effect on the Company s business,
financial condition and results of operations. See "Business--Marketing, Sales
and Distribution" and "Business--Competition."
Rapid Technological Change
The market for the Company's products is characterized by rapidly changing
technology and frequent new product introductions. The Company's success will
depend to a substantial degree on its ability to develop and introduce in a
timely manner new products and improvements that meet changing customer
requirements and emerging industry standards. The development of new,
technologically advanced products and improvements is a complex and uncertain
process requiring high levels of innovation as well as the anticipation of
technology and market trends. There can be no assurance that the Company will be
able to identify, develop, manufacture, market, sell, or support new products
and improvements successfully, that new products or improvements will achieve
market acceptance, or that the Company will be able to respond effectively to
technology changes, emerging industry standards or product announcements by
competitors. New product announcements by the Company could cause its customers
to defer purchases of existing products or cause distributors to request price
protection credits or stock rotations. The Company's telemanagement and computer
telephony systems are designed for use by users which are connected to external
communications via one or more PBXs. Technological changes could result in
reduced industry utilization of PBXs as a means of communication or even PBX
obsolence. Any of the foregoing events could have a material adverse effect on
the Company's business, financial condition and results of operations.
Dependence on Telemanagement Products; New Product Lines
Approximately 56% of the Company's net sales for the fiscal year ended
February 28, 1997 were derived from the sale of telemanagement systems. For the
nine-month period ended November 30, 1997, approximately 55 % of the Company's
net sales were derived from telemanagement systems, and approximately 17% from
computer telephony products. Although the Company expects the proportion of its
net sales derived from computer telephony products to increase, telemanagement
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systems are expected to continue to account for the majority of net sales for
the foreseeable future. Many of the Company's competitors in the computer
telephony market are better positioned than the Company, having stronger brand
names, more extensive retail channel coverage, deeper consumer knowledge and
experience, and/or greater resources. Net sales and gross margins of the
Company's computer telephony products may be less predictable or less favorable
than its experience with telemanagement systems. In addition, the Company has
limited experience in the design, development, manufacture, marketing, and
support of these products, which are based on different technologies and
production processes. There can be no assurance that the Company will be
successful in this new market. See "Business--Products" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
Dependence on OEMs, VARs and Telecommunications Service Providers
The Company markets its products primarily through distributors such as
OEMs, VARs and telecommunications service providers. This requires considerable
investments in marketing and technical support. The Company can only achieve a
return on such investment if it is able to make substantial sales to its
distributors and other customers over an extended period of time. Distributors,
however, may not purchase a product in sufficient volume as a result of changes
in end-users' preferences or their own decisions regarding product continuation,
further development and marketing. In many instances, the Company will not have
the opportunity or ability to influence its distributors' or end-user customers'
market behavior and may not recover its initial investment in developing and
introducing a new product. See "Business--Sales and Marketing." The Company's
sales have historically consisted primarily of telemanagement systems,
predominantly in Central Europe. The Company has limited experience in marketing
and selling other products and in other than that geographic region. As the
Company seeks to expand its product portfolio and the geographic regions in
which its products are sold, there can be no assurance that the Company will be
able to achieve sufficient market penetration with its products. The failure by
the Company to successfully develop its marketing capabilities could have a
material adverse effect on the Company's business, financial conditions and
results of operations.
Dependence on Few Large Customers
For the year ended February 28, 1997, two customers, Alcatel (Austria)
GmbH and the Austrian PTT, represented 33% and 26% of total revenue,
respectively. For the nine-month period ended November 30, 1997, one customer,
the Zuercher Kantonalbank (Zurich State Bank), accounted for approximately 12%
of total revenue. The revenue generated for the account of specific customers is
likely to vary from period to period, and a major customer in one period may not
purchase the Company's products in a subsequent period. The loss of a large
customer could have a material adverse effect on the Company's business,
financial condition and results of operations. In general, contracts with the
Company's customers do not require the purchase of significant minimum
quantities and most contracts are terminable by the customer without significant
liability to the customer. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview", "Business--Sales and
Marketing" and "Business--Competition."
Dependence on Key Personnel
The Company's success depends to a significant degree on the continued
services of its present executive management, including Mr. Roland Steiner, its
Chief Executive Officer and President, and other key personnel. The Company has
entered into employment agreements with Mr. Roland Steiner, Ms. Claudia Sutter,
its Chief Financial Officer, and Mr. Ramon Inauen, its Chief Operating Officer.
The Company does not maintain life insurance policies on the lives of any of its
employees. The loss of any of such employee could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company's success also depends in part on successful assimilation and retention
of key personnel. Assimilation and retention of personnel may be more difficult
since the Company's management and key personnel are located in various places
worldwide, which requires the Company to coordinate different organizations
separated geographically and time-wise, and to integrate personnel with
disparate business backgrounds, cultures and languages. In addition, the Company
believes that its future success will depend on its ability to attract and
retain highly skilled managerial and other key personnel, the competition for
which is intense. There can be no assurance that the Company will be successful
in attracting and retaining such personnel, and the failure to attract and
retain key personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Personnel" and "Management."
Product Return Risks
The Company is exposed to the risk of product returns by its customers.
Historical net sales may not be indicative of future net sales, in part because
a portion of the Company's net sales may result in increased inventory at the
distributor level. The short product life cycles of certain of the Company's
products and the difficulty in predicting future sales increase the risk that
new product introductions, price reductions or other factors affecting the
telemanagement and computer telephony industry would result in significant
product returns. Although the Company believes that it has provided adequate
allowances for projected returns, from time to time it may experience return
levels in excess of its accruals, and no assurance can be given that such
accruals will be sufficient for actual returns in future periods. In addition,
there can be no assurance that the accruals for price protection will be
sufficient, or that any future price changes will not have a material adverse
effect on the Company's results of operations. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and
"Business -- Customer Service and Technical Support."
8
<PAGE>
Management of Growth
Execution and implementation of the Company's plan of operation will
require significant growth. The Company's current plans for growth will place a
significant strain on the Company's financial, managerial and other resources.
To efficiently manage its expected growth the Company will have to improve its
operational, financial and management information systems and to attract,
motivate and train key employees. If the Company's executives are unable to
manage growth effectively, the Company's business, operating results and
financial condition would be materially and adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Business Strategy."
Dependence on Intellectual Property
The Company's success is heavily dependent upon proprietary technology.
The Company owns no patents and relies primarily on a combination of copyright,
trademark and trade secret laws, as well as nondisclosure agreements and other
contractual provisions to protect its proprietary rights. There can be no
assurance that others will not independently develop similar products or
duplicate the Company's products. As part of its confidentiality procedures, the
Company generally enters into nondisclosure agreements with its employees,
consultants and other third-party providers who work for the Company or have
access to confidential information. In addition, the Company limits access to
and distribution of its software, documentation and other proprietary
information. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy may become a problem. In addition, effective protection
of intellectual property rights may be unavailable or limited in certain
countries in which the Company currently sells products or in countries the
Company may target its sales efforts. Accordingly, there can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop similar
technology. See "Business -- Intellectual Property."
There has also been a substantial amount of litigation in the software
industry regarding intellectual property rights. Although the Company has no
knowledge of any claims that it is infringing third parties' intellectual
property rights, there can be no assurance that third parties will not in the
future claim infringement by the Company with respect to current or future
products, trademarks or other proprietary rights. The Company expects that
software product developers will increasingly be subject to infringement claims
as the number of products and competitors in this industry segment is growing
and the functionality of products is increasingly overlapping. Any such claims,
with or without merit, could be time-consuming, result in costly litigation,
cause product shipment delays or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to the Company or at all, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Liability Exposure and Lack of Insurance
The Company's telemanagement products log and account for all
communications transmitted through the user's PBXs. As such, the Company's
telemanagement products serve as a repository for huge amounts of data. In
addition, the Company's telemanagement products interface with the user's PBXs,
which are responsible for directing most incoming and outgoing
telecommunications transmissions of an organization. Malfunctioning of the
Company's telemanagement products, and, to a lesser extent, its computer
telephone products, whether due to defective parts, defective design, improper
installation or otherwise, could result in irrecoverable losses of large amounts
of data and significant interruption in the business of the user. Other than
insurance coverage for damage caused by Company personnel, the Company does not
maintain insurance coverage with respect to these potential liabilities.
Accordingly, in the event a successful claim is brought against the Company in
respect of such liabilities, the Company's business and financial condition
could be severely and adversely affected.
Voting Control
Mr. August Steiner, the Company's Chairman of the Board of Directors,
beneficially owns approximately 56% of the outstanding shares of Common Stock.
As a result, Mr. August Steiner is able to control most matters requiring
approval by the shareholders of the Company, including the election and removal
of directors and significant corporate transactions. Such control by Mr. August
Steiner could delay, defer or prevent a change in control of the Company, impede
a merger, consolidation, takeover or other business combination involving the
Company, or discourage a potential acquiror from making a tender offer or
otherwise attempting to obtain control of the Company. See "Management" and
"Principal Stockholders."
Future Sales of Restricted Securities; Registration Rights
All of the 4,500,000 currently outstanding shares of Common Stock,
including the 2,000,000 Shares offered hereby, have been issued and sold by the
Company in reliance on exemptions from the registration requirements of the
Securities Act. As such, all of such shares are "restricted securities" as
defined in Rule 144 promulgated under the Securities Act ("Rule 144"), and may
not be sold except pursuant to a current registration statement under the
Securities Act or an exemption from such registration requirements, such as that
afforded by Rule 144. The 2,000,000 Shares offered hereby generally will be
freely tradeable by persons other than affiliates of the Company, without
restriction or further registration under the Securities Act, if purchased from
the Selling Stockholders pursuant to a current registration statement. Absent a
current registration statement, such Shares may only be sold pursuant to an
exemption from registration such as Rule 144. Under Rule 144 (and subject to the
conditions thereof), all of the 2,500,000 shares owned by Mr. August Steiner
will become eligible for sale commencing February 28, 1998. The Registration
Statement of which this
9
<PAGE>
Prospectus forms a part has been filed by the Company pursuant to certain rights
granted to the Selling Stockholders with respect to the registration under the
Securities Act of the Shares. The sale of a substantial number of shares of
Common Stock or the availability of Common Stock for sale could adversely affect
the market price of the Common Stock prevailing from time to time. See
"Description of Securities--Registration Rights" and " Shares Eligible for
Future Sale".
No Dividends
Since its inception, the Company has not paid any dividends on the Common
Stock. The Company intends to retain future earnings, if any, to provide funds
for the operation of its business and, accordingly, does not anticipate to pay
any cash dividends on the Common Stock in the foreseeable future.
Dilution
Purchasers of the Shares offered hereby will suffer dilution in the event
the price at which Shares are purchased exceeds the then net tangible book
value per share. At November 30, 1997, the Company's net tangible book value per
share was $1.64.
Delaware Anti-Takeover Law
The Company is governed by the provisions of Section 203 of the General
Corporation law of the State of Delaware. In general, this law prohibits a
public Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which such person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" is defined to include mergers, asset sales and other transactions
potentially resulting in financial benefit to stockholders. An "interested
stockholder" is defined as a person who, together with affiliates and
associates, owns (or, within the prior three years, did own) 15 percent or more
of the corporation's voting stock.
These provisions could delay, defer or prevent a change of control of the
Company which could prevent the Company's stockholders from realizing a premium
through a non-negotiated change in control. The Company's stockholders, by
adopting an amendment to the Certificate of Incorporation or By-Laws of the
Company, may elect not to be governed by Section 203, effective twelve months
after adoption. Neither the Certificate of Incorporation nor the By-Laws of the
Company currently excludes the Company from restrictions imposed by Section 203.
Holding Company Structure; Reliance on Subsidiaries for Dividends
ComTelco is a holding company, the principal assets of which are its
Subsidiaries. While there are presently no corporate law restrictions under
Swiss, German or Austrian law limiting the Subsidiaries' ability to pay
dividends to the Company out of profits, there can be no assurance that the
Company will be able to cause these Subsidiaries to declare and pay dividends or
make other payments to it. The failure to receive such payments from its
Subsidiaries could have a material adverse effect upon the Company.
No Public Market; Risks of Low-Priced Securities; Potential Volatility of Stock
Price
Prior to this offering, there has been no public market for the Company's
Common Stock. The emergence of an active public trading market will, in part,
depend on a sufficient number of brokerage firms willing to engage in market
making activities with respect to the Company's Common Stock. There can be no
assurance that an active market will develop or continue for the Company's
Common Stock.
The Company will seek to have the Common Stock quoted on the Bulletin
Board. The Bulletin Board is an NASD sponsored and operated inter-dealer
automated quotation system for equity securities not included in the NASDAQ
system. The Bulletin Board has only recently been introduced as an alternative
to "pink sheet" trading of over-the-counter securities. Securities traded on the
Bulletin Board often do not achieve the same degree of investor interest as
securities traded on NASDAQ and other markets with more stringent listing
criteria. This could adversely affect the liquidity and price of the Common
Stock as well as the Company's ability to secure additional financing upon
favorable terms. In addition to the risk of volatile stock prices, low price
stocks are subject to additional risks of federal and state regulatory
requirements and the potential loss of effective trading markets. In particular,
if the trading price of the Common Stock was less than $5.00 per share, the
Common Stock could be subject to Rule 15g-9 under the Exchange Act which, among
other things, requires that broker/dealers satisfy special sales practice
requirements, including making individualized written suitability determinations
and receiving purchasers' written consent, prior to
10
<PAGE>
any transaction. If the Company's securities were also deemed penny stocks under
the Securities Enforcement and Penny Stock Reform Act of 1990, this would
require additional disclosure in connection with trades in the Company's
securities, including the delivery of a disclosure schedule explaining the
nature and risks of the penny stock market. Such requirements could severely
limit the liquidity of the Company's securities and the ability of purchasers in
the Offering to sell their securities in the secondary market.
The market price of the Common Stock following this offering may be highly
volatile. Factors such as variations in the Company's revenue, earnings and cash
flow, the difference between the Company's actual results and the results
expected by investors and analysts and announcements of new product offerings,
marketing plans or price reductions by the Company or its competitors could
cause the market price of the Common Stock to fluctuate substantially. In
addition, the stock markets recently have experienced significant price and
volume fluctuations that particularly have affected companies in the Company's
industry and resulted in changes in the market prices of the stocks of many
companies that have not been directly related to the operating performance of
those companies. Such market fluctuations may materially adversely affect the
market price of the Common Stock.
Enforceability of United States Judgments
All of the Company's directors and executive officers, as well as the
Selling Stockholders named herein, reside outside the United States of America,
and substantially all of the assets of the Company and such persons are located
outside the United States of America. In addition, the Company's offices are
located outside of the United States. As a result, it may be difficult or
impossible for investors to effect service of process upon such persons within
the United States of America or to enforce against such persons in United States
courts judgments obtained in United States courts, including judgments
predicated upon the civil liability provisions of the federal securities laws of
the United States of America.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares
offered hereby. See "Selling Stockholders and Plan of Distribution."
DIVIDEND POLICY
The Company expects that it will retain all earnings, if any, generated by
its operations for the development and growth of its business and does not
anticipate to pay any cash dividends to its stockholders in the foreseeable
future. Any future determination as to dividend policy will be made by the Board
of Directors of the Company in its discretion, and will depend on a number of
factors, including the future earnings, if any, capital requirements, financial
condition and business prospects of the Company and such other factors as the
Board of Directors may deem relevant. See "Risk Factors--Absence of Dividends."
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
November 30, 1997. This table should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in this
Prospectus.
November 30, 1997
-----------------
Short-term Debt $ --
Long-term Debt --
Stockholders' Equity:
Preferred Stock, $.01 par value; 2,000,000 shares
authorized, no shares issued and outstanding --
Common Stock, $.00001 par value, 30,000,000 shares
authorized, 4,500,000 shares issued and outstanding 45
Additional Paid-in Capital 9,454,733
Subscription Receivable (2,494,980)
Accumulated Deficit (1,721,923)
Cumulative Foreign Currency Translation Adjustments (195,593)
-----------
Total Capitalization $ 5,433,468
===========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
ComTelco and its Subsidiaries were founded by Mr. August Steiner, the
Company's Chairman of the Board of Directors and majority stockholder. In
September 1994 and November 1995, Mr. August Steiner founded ComTelco Germany
and ComTelco Austria, respectively, to provide marketing and other services for
MDE, a Swiss corporation primarily engaged in the sale of medical equipment. Mr.
August Steiner owns the majority of the stock of MDE, and Messrs. Roland
Steiner, the Company's Chief Executive Officer and President, and Ramon Inauen,
the Company's Chief Operating Officer, own minority interests in MDE.
In December 1996, Mr. August Steiner purchased from MDE assets, primarily
consisting of software and hardware development. Substantially all of these
assets were subsequently contributed by Mr. Steiner to ComTelco Vertriebs and
ComTelco Research as discussed below. The purchase price for the assets was
approximately $5,200,000 which amount represented MDE's cost of acquiring and/or
developing the assets. Of MDE's recorded cost, 80% was attributable to salaries
and payroll-related costs and the balance was primarily attributable to payments
to independent third parties for the purchase of software and software
development tools.
In accordance with generally accepted accounting principles, software
development costs incurred prior to a determination of technological feasibility
are expensed, and such costs incurred in developing proposed products from the
point of technological feasibility until a determination is made that the
product is available for sale to the general public are capitalized. A
determination of technological feasibility is made upon the establishment of a
detailed program design and the development and successful testing of a working
model. The working model is designed to show the functionality of a proposed new
product and, as such, incorporates essentially the core technology. With the aid
of currently available software development technologies including rapid
prototyping and computer aided software engineering, as well as the Company's
software object library, the process of determining technological feasibility
has proven to be far less expensive and time-consuming for the Company than the
process of developing a technologically feasible working model into a finished
product. As such, through November 30, 1997, the Company has expensed
significantly less in connection with its software research and development
activities than it has capitalized, and the Company expects this trend to
continue. Such a relationship of expense to capitalization is highly unusual for
the software industry in general. Substantially all of the assets purchased by
Mr. Steiner from MDE represent software and hardware development costs incurred
subsequent to a determination of technological feasibility and, as such, have
been capitalized. Of the total research and development expenditures incurred by
MDE related to the software products acquired by the Company, approximately 10%
was expensed and 90% was capitalized by MDE.
Major aspects of the process by which the Company develops a working model
into a finished product include: coordinating activities of multiple development
teams located at the Company's development centers in a number of countries;
establishing development milestones; developing and coding software and user
interfaces; intermediate testing of development stages; developing portability
of products for use in multiple countries and languages; laboratory and field
testing of the product; testing the product for compatibility with hardware and
peripheral devices; developing and testing of installation systems; developing
on-line help systems; preparing product documentation, user manuals and
installation literature; translating product and installation software and
accompanying literature into multiple foreign languages and customizing the same
for use in the intended foreign countries.
The Company continually evaluates its products to determine whether
capitalized software development costs are recoverable through future sales. For
these purposes, the Company presently anticipates achieving sales of its
existing and presently proposed products in excess of $30,000,000, net of
anticipated completion costs, through the year ended February 28, 2002. This is
based upon market analysis, detailed discussions with customers and
distributors, discussions with potential customers of its new products and
assessment of competitors' products. This estimation reflects management's
assessment of factors of which it is presently aware. There will usually be
differences between estimated and actual results, because events and
circumstances frequently do not occur as expected, and these differences may be
material. Events which may cause actual sales to differ from anticipated sales
include, but are not limited to, delays or problems in completing or producing
products, lack of market acceptance of products, competition and adverse market
conditions in general, all of which can result in an inability to sell products
at anticipated volume or price levels. There can be no assurance that the
Company's anticipated sales will be realized.
Prior to acquisition from MDE of the assets from which certain of the
Company's products have been derived, MDE prepared sales projections of these
products. Although the Company believes that its sales have equaled or exceeded
these projections with respect to products currently being sold, these
projections are not deemed relevant to the Company because they were based upon
different assumptions including different target markets.
Approximately $2,500,000 of the purchase price for the assets purchased
from MDE by Mr. Steiner was paid in cash and the balance is to be paid in
$500,000 annual installments thereafter. Of the inventory acquired from MDE,
approximately $5,900 was included in the Company's inventory at November 30,
1997. MDE is primarily engaged in the sale of medical equipment and machinery,
primarily to former Soviet Union countries and China. MDE is the exclusive
representative of Varian Associates, Inc., in Russia and also manufactures and
sells its own brand of laparoscopy instruments and equipment. Varian Associates,
Inc. is a company engaged in the research, development, manufacture, and
marketing of products and services for health care, industrial production,
scientific and industrial research, and environmental monitoring. Since 1996,
MDE has become active as a general contractor for building hospitals and clinics
in developing countries. The assets acquired from MDE constituted approximately
7% of MDE's total assets and were responsible for the generation of
approximately 8% of MDE's total revenue prior to MDE's determination in October
1996 to sell these assets.
In February 1997, Mr. August Steiner founded ComTelco Vertriebs and
ComTelco Research and contributed to such companies substantially all of the
assets purchased from MDE, which assets presently comprise substantially all of
the Company's software and hardware development assets. The Company has no
liability in respect of amounts owing to MDE for the purchase of these assets by
Mr. Steiner from MDE. In addition, approximately $95,000 in legal and
administrative costs relating to the organization of ComTeleco Vertriebs and
ComTeleco Research was funded by Mr. August Steiner and contributed to the two
companies. Such costs are being amortized over five years as the Subsidiaries
involved are expected to continue to represent a significant portion of the
Company's activities. ComTelco was founded in Delaware on February 27, 1997. As
of February 28, 1997, the Subsidiaries became wholly-owned subsidiaries of
ComTelco in a transaction pursuant to which Mr. August Steiner purchased
2,500,000 shares of Common Stock from ComTelco in exchange for all of the
outstanding equity interests in each of the four Subsidiaries.
The Company sells its products and systems to four primary
buyers/distributors: to OEMs, to VARs, to telecommunications service providers
and, on a selective basis, to end-users. Representative customers of the Company
include: OEMs such as Ericsson (Austria) GmbH, Ericsson Schweiz AG, Alcatel
(Austria) GmbH, Alcatel Schweiz AG, Philips Schweiz AG, Matra S.A., DeTeWe
Deutsche Telefonwerke GmbH; VARs such as GFT Genossenschaft fuer
Telekommunikation, EgTel Einkaufsgenossenschaft Telekommunikation, Slit
Telematique S.A., Kapsch Telekommunikationssysteme GmbH, Siemens (Austria) AG
and Siemens Schweiz AG; telecommunication service providers such as Swisscom AG
and the National Telephone Company of Austria ("Austrian PTT"); and end-users
such as Credit Suisse, Zuercher Kantonalbank (Zurich State Bank) and UNICEF.
The Company publishes its consolidated financial statements in United
States Dollars. The functional currencies for the Company's operations, however,
are primarily the United States Dollar, the Swiss Franc, German Mark and
Austrian Shilling. Fluctuations in exchange rates for these foreign currencies
against the United States Dollar may positively or adversely affect the
Company's results of operations. The Company does not actively hedge against
exchange rate fluctuations, although it may elect to do so in the future.
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Net Sales
The following table sets forth the number of products (by product group)
sold and the average sales price during each of the periods presented. Revenue
was also generated in these periods from service and installation, which amounts
totalled approximately $41,000, $196,000 and $43,000 for the nine months ended
November 30, 1996 and 1997 and the year ended February 28, 1997, respectively.
Revenue was also generated in these periods from product upgrades, which
totalled $27,000, $159,000 and $27,000, respectively.
<TABLE>
<CAPTION>
Nine Months ended November 30, 1996 Nine Months ended November 30, 1997
- ----------------------------------------------------------------------------------------------
Product Units sold Average Price Units sold Average Price
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Telemanagement Systems
- ----------------------
Single-site 68 $ 2,162 167 $ 2,042
Systems
- ----------------------------------------------------------------------------------------------
Multi-site -- -- 11 34,909
Systems
- ----------------------------------------------------------------------------------------------
Computer 39 1,231 195 1,164
Telephony Systems
- ----------------------------------------------------------------------------------------------
</TABLE>
For the Fiscal Year ended February 28, 1997
- --------------------------------------------------------------------------------
Product Units sold Average Price
- --------------------------------------------------------------------------------
Telemanagement Systems
- ----------------------
Single-site 76 $ 2,145
Systems
- --------------------------------------------------------------------------------
Multi-site
Systems
- --------------------------------------------------------------------------------
Computer 42 1,214
Telephony Systems
- --------------------------------------------------------------------------------
Net sales increased by 392% from $265,012 for the nine months ended
November 30, 1996 (the "1996 Nine Months") to $1,304,584 for the nine months
ended November 30, 1997 (the "1997 Nine Months"). The increase is primarily
attributable to initiation of sales in Switzerland during the 1997 Nine Months.
Sales of telemanagement systems accounted for approximately 55% of the Company's
net sales in each of the 1996 Nine Months and 1997 Nine Months. Approximately
33% and 17% of the Company's net sales for the 1996 and 1997 Six Months,
respectively, was attributable to the sale of computer telephony products, which
products were launched for sale during the year ended February 28, 1997 ("Fiscal
1997"). Prior to Fiscal 1997 the Company's efforts were devoted to the
preparation of entering its potential markets and no sales were generated prior
to that year. The Company anticipates a shift in its product mix in favor of
computer telephony products in subsequent periods. In addition, the Company has
experienced significant fluctuations in sales in prior quarters due to large
customer purchases. The Company expects similar fluctuations in future quarters.
Gross Profit
Gross profit as a percentage of net sales ("gross profit margin")
decreased from 68% for the 1996 Nine Months to 25% for the 1997 Nine Months.
Substantially all of the decrease is attributable to amortization of software
development costs acquired subsequent to the 1996 Nine Months and related to
goods sold during the 1997 Nine Months.
Marketing and Selling
Marketing and selling expense for the 1996 Nine Months was minimal and was
included as part of general and administrative expense. Marketing and selling
expense was $458,493 for the 1997 Nine Months and was comprised primarily of
payroll and related costs of $274,866, travel and entertainment expense of
$46,992 and advertising expense of $116,635. The increase is primarily the
result of initiation of selling efforts in Switzerland and expansion of selling
efforts in Austria and Germany. The Company anticipates that marketing and
selling expense will increase in future periods as the Company enters new
markets.
Research and Development
Research and development expense for the 1996 Nine Months was minimal and
was included as part of general and administrative expense. Research and
development expense was $386,688 for the 1997 Nine Months and was comprised of
payroll and related costs of $321,688 and rent expense of $65,000. The increase
reflects the fact that the assets used in connection with the Company's research
and development activities were contributed to the Company subsequent to the
1996 Nine Months. The Company anticipates that research and development costs
will increase in future periods as the Company devotes furthers efforts to the
development of new products. Software development costs incurred prior to
technological feasibility are expensed as incurred. The Company defines
establishment of technological feasibility as the completion of a working model.
Software development costs incurred subsequent to the establishment of
technological feasibility through the period of market availability of products
are capitalized and then depreciated over the estimated useful life of the
product.
General and Administrative
General and administrative expense increased by 214% from $314,394 for the
1996 Nine Months to $985,830 for the 1997 Nine Months. The 1997 Nine Months
general and administrative expense was comprised primarily of payroll and
related costs of $694,243, professional fees and consulting expense of $174,605
(primarily legal and accounting fees) and rent expense of $72,928. The increase
is primarily attributable to increases in salaries, rent and professional fees
associated with expanded operations and financing activities. The Company
anticipates that general and administrative expense will increase in future
periods as the Company seeks to expand its operations.
Depreciation and Amortization
Depreciation and amortization expense increased from $6,138 for the 1996
Nine Months to $46,978 for the 1997 Nine Months. The increase primarily reflects
the amortization of organizational costs and property and equipment acquired
subsequent to the end of the 1996 Nine Months. The Company does not foresee a
significant change in the level of depreciation and amortization expense in the
foreseeable future.
Liquidity and Capital Resources
Since 1993 the Company has financed its operations and capital
requirements primarily through equity contributions from its shareholders. As of
November 30, 1997, the Company had working capital of $712,237.
The Company had accounts receivable of $51,127 and $408,390 at February
28, 1997 and November 30, 1997, respectively. At and for the year ended February
28, 1997, one customer accounted for 33% of the Company's revenue and 2% of
accounts receivable, and another customer accounted for 26% of revenue and 74%
of accounts receivable. At and for the nine months ended November 30, 1997, one
customer accounted for 11% of the Company's revenue and none of accounts
receivable. The Company's accounts receivable turnover ratio for the 1997 Nine
Months (sales/average accounts receivable) was 5.68. The Company is not aware
of an industry average turnover ratio. Of accounts receivable at November 30,
1997, approximately 65% was not then due. In future periods, the Company's
accounts receivable turnover ratio will be impacted by, among others, the date
in the period on which products are shipped and payment terms afforded
customers. Customers generally pay within 60-90 days of shipment, although some
large customers require extended payment of 90-120 days. Based upon past
practice and the credit rating of many of its larger customers, the Company
believes that substantially all of its accounts receivable are collectible.
At November 30, 1997, the Company had bank overdrafts in the total amount
of $6,193 which overdrafts are secured by the pledge of the Company's cash
accounts with a Swiss bank. The Company does not have any other loans or other
forms of debt apart from its accounts payables. The Company intends to bridge
cash flow shortfalls, should they arise, through short-term borrowings in the
currency of the subsidiary where such shortfalls arise.
As of February 28, 1997, ComTelco issued 2,000,000 shares of Common Stock
to Interfinance in consideration of $4,000,000, the par value of which shares
($20) was paid in cash and the balance of which was paid by delivery of the
Interfinance Note. The Interfinance Note bears interest at 5.8% per annum and is
secured by a pledge to ComTelco of the shares of Common Stock issued to
Interfinance. Under the terms of the pledge agreement, the shares are subject to
release of the Company's security interest ratably
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upon partial repayment of the Interfinance Note. As of November 30, 1997,
Interfinance has repaid $1,505,000 of the principal amount of, and $50,000 of
accrued interest on, the Interfinance Note from funds received from purchasers
of a portion of its shares.
During the quarter ended November 30, 1997, the Company loaned MDE an
aggregate of $243,079 (adjusted for currency conversion) to bridge working
capital shortfalls. The loan is due on demand and bears interest at 8% per
annum. As of the date hereof, approximately $150,000 in principal amount has
been repaid and the balance (including accrued interest) is expected to be
repaid by February 28, 1998.
Four of the facilities lease agreements which the Company has entered into
are non-cancelable. The minimum lease payments under these agreements for the
years ending February 28, 1998, 1999 and 2000 will be an aggregate of $42,593,
$65,964 and $48,637 respectively. In addition, the Company has entered into
lease agreements covering eight automobiles for use by Company sales and
technical staff. The leases expire in September 1999 and require lease payments
aggregating $26,447, $52,893 and $30,854, for the years ending February 28, 1998
and 1999 and February 29, 2000, respectively. See "Business -- Facilities."
Based on its plan of operation, the Company believes that its existing
resources, including the proceeds which the Company expects to receive upon
repayment of the balance of the Interfinance Note, will be sufficient to fund
the Company's operations at least for the next 12 months. The Company may,
however, need to raise additional capital from public or private equity or debt
sources in order to finance its plan of operation. In addition, the Company may
need to raise additional funds in order to take advantage of unanticipated
opportunities, including more rapid international expansion or investments in,
or strategic alliances with, companies that are complementary to the Company's
current operations, or to develop new products or otherwise respond to
unanticipated competitive pressures. The Company's capital requirements may vary
materially from those now planned due to a number of factors, including the rate
at which the Company can produce its products, the success of the Company in
marketing and selling its products, the ability of the Company to develop new
products in an efficient and timely manner, the competitive position of the
Company's products, and the response of competitors to the Company's products.
Also, should Interfinance fail to pay the Interfinance Note when due, the
Company will need additional capital. There can be no assurance that additional
financing will be available when needed on terms acceptable to the Company, or
at all.
BUSINESS
Overview
The Company designs, develops, manufactures and markets integrated
hardware and software products designed to enable users to monitor, manage and
integrate their telecommunications activities to achieve greater efficiency and
cost savings. The Company's products, which consist of telemanagement and
computer telephony systems, connect to and interface with most modern PBXs, as
well as client/server computer networks, and are able to process all modes of
communication conducted through PBXs. PBXs are telephone switches or switch
boards through which incoming and outgoing voice and data communications are
directed. Telemanagement is the logging and accounting of and generation of
reports on all communications, voice or data, including facsimile, which are
transmitted over an organization's PBXs in one or multiple locations. The
Company's telemanagement systems consist of single and multi-site call
accounting, billing and cost distribution systems. The Company's computer
telephony systems incorporate the functionality of telephones with networked
computer workstations. These systems presently consist of PC screen-based
telephone dialing and faxing systems. The Company's products are modular and
scalable, enabling them to be integrated to form a more complete
telecommunications management system.
The Company's target market consists of corporations and other
organizations which are connected to external communications lines via one or
more PBXs. Presently, the Company's end-user customer base exceeds 3,500
installations, primarily located in Central Europe. The majority of the
Company's revenue has been generated from the sale of telemanagement systems.
For the 1997 Nine Months, approximately 55% of the Company's net sales were
derived from the sale of telemanagement systems, and approximately 17% was
attributable to the sale of computer telephony products. The balance of the
Company's net sales for the period represented product updates and service
installation. The Company launched the sale of its computer telephony products
during the year ended February 28, 1997 and anticipates a shift in its product
mix in favor of these products in subsequent periods.
The Company sells its products and systems to four primary
buyers/distributors: to OEMs, to VARs, to telecommunications service providers
and, on a selective basis, to end-users. Representative customers of the Company
include: OEMs such as Ericsson (Austria) GmbH, Ericsson Schweiz AG, Alcatel
(Austria) GmbH, Alcatel Schweiz AG, Philips Schweiz AG, Matra S.A., DeTeWe
Deutsche Telefonwerke GmbH; VARs such as GFT Genossenschaft fuer
Telekommunikation, EgTel Einkaufsgenossenschaft Telekommunikation, Slit
Telematique S.A., Kapsch Telekommunikationssysteme GmbH, Siemens (Austria) AG
and Siemens Schweiz AG; telecommunication service providers such as Swisscom AG
and the National Telephone Company of Austria ("Austrian PTT"); and end-users
such as Credit Suisse, Zuercher Kantonalbank (Zurich State Bank) and UNICEF.
The Company's telemanagement systems (call accounting), of which there are
presently four models, are comprised of proprietary hardware which monitors
communications transmitted through the user's PBXs. The recorded data is then
transmitted via an interface the user's PC or client/server network containing
the Company's proprietary software. Reports can then be generated directly from
the PC terminals. Depending on the model, the Company's telemanagement systems
can process transmissions carried by single or multiple telecommunication
service providers and for users with up to 999 independent company structures
and up to 999 PBXs per company. As such, these systems can and are being
utilized by small companies with few employees as well as large multinational
companies with numerous branch offices.
The Company's computer telephony systems, presently consisting of PC
screen-based telephone dialing, faxing and cellular messaging systems, are
comprised of proprietary hardware and PC-resident proprietary software. These
systems allow users to dial telephone numbers or send facsimiles directly from
their PC screen from within any Windows(R) application, enabling them to use all
existing telephone and facsimile numbers accessible from their PC. The systems
include least-cost routing of transmissions which are designed to ensure that
the communication is routed in the cheapest manner available at the particular
time for the particular destination. Such routing may occur, for example, via a
leased communication line, the Internet or independent carriers.
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The Company has also developed, and is currently in beta phase testing of,
a workstation-based telephone call recording system which permits users to
digitally record telephone conversations automatically or selectively. Under
beta phase testing field customers which generally receive the products at a
discounted price or free of charge, test the products for their usability,
stability, reliability and for the existence of any faults or errors. The
Company anticipates that, subject to satisfactory beta phase testing, its
telephone call recording system will be ready for sale approximately in August
1998. The Company's telephone call recording system is designed to store
recorded conversations in a Windows(R) format, allowing the files to be reused
in any multimedia application, transmitted via e-mail or simply stored for later
reference. The system can be installed in workstations on a selective basis
without incurring the costs associated with installing larger centralized
systems. The Company intends to develop additional computer telephony systems
which can be integrated with the Company's telemanagement systems to enable
users to communicate in a more efficient and cost-effective manner.
Organization
ComTelco and its Subsidiaries were founded by Mr. August Steiner, the
Company's Chairman of the Board of Directors. In September 1994 and November
1995, Mr. August Steiner founded ComTelco Germany and ComTelco Austria,
respectively, to provide marketing and other services for MDE, a Swiss
corporation primarily engaged in the sale of medical equipment. Mr. August
Steiner owns the majority of the stock of MDE, and Messrs. Roland Steiner, the
Company's Chief Executive Officer and President, and Ramon Inauen, the Company's
Chief Operating Officer, own minority interests in MDE. In December 1996, Mr.
August Steiner purchased from MDE assets primarily consisting of software and
hardware development. The purchase price for the assets was approximately
$5,200,000, which amount represented MDE's cost of acquiring and/or developing
the assets. In February 1997, Mr. August Steiner founded ComTelco Vertriebs and
ComTelco Research and contributed to such companies substantially all of the
assets purchased from MDE, which assets presently comprise substantially all of
the Company's software and hardware development assets. ComTelco was founded in
Delaware on February 27, 1997. As of February 28, 1997, the Subsidiaries became
wholly-owned subsidiaries of ComTelco in a transaction pursuant to which Mr.
August Steiner purchased 2,500,000 shares of Common Stock from ComTelco in
exchange for all of the outstanding equity interests in each of the four
Subsidiaries.
As of February 28, 1997, ComTelco issued 2,000,000 shares of Common Stock
to Interfinance, in consideration for $4,000,000, the par value of which shares
($20) was paid in cash and the balance of which was paid by delivery of a
Promissory Note due on February 28, 1998 in the principal amount of $3,999,980
(the "Interfinance Note"). The Interfinance Note bears interest at 5.8% per
annum and is secured by a pledge to ComTelco of the shares of Common Stock
issued to Interfinance. Under the terms of the pledge agreement, the shares are
subject to release of the Company's security interest ratably upon partial
repayment of the Interfinance Note. As of November 30, 1997, Interfinance has
repaid $1,505,000 of the principal amount of the Interfinance Note from funds
received from purchasers of a portion of its shares. As a condition to the sale
of the shares to Interfinance, the Company entered into a Registration Rights
Agreement dated as of February 28, 1997, pursuant to which the Company agreed to
register such shares for resale under the Securities Act. Except as described
above, the Company has no relationship with Interfinance or its principals.
Business Strategy
The Company's goal is to expand its business by focusing development and
marketing efforts on high value products designed to manage, monitor and
integrate corporate communications systems to achieve efficiency and substantial
cost savings. Key elements of the Company's strategy include:
Strategic Geographic Expansion
The Company will seek to position itself in strategic international
markets in which OEMs and other large customers are located. The Company expects
that this will enable it to provide required back-up support to its customers
and regional customization of its products. The Company intends to build a
network of sales-support and technical-support locations to strategically cover
significant markets. Further expansion of locations will be based on potential
sales and available partners.
Product and Technology Development
The Company attempts to focus its product and technology development
efforts on technology developments and standards which it believes will
represent the next generation of usage. The Company has developed applications
using industry-wide standards such as Computer Supported Telephony Application
(CSTA) and Microsoft's Telephony Application Programming Interface (TAPI)
protocol. The Company designed its product platforms for the Microsoft NT
operating system.
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Development of Scalable Corporate Communications Solutions
The Company is devoted to the development of open, scalable solutions
which can be marketed as individual products, but are designed to form a more
complete, global communications solution when combined. The Company believes
that its target customers will initially use one or several communication
applications to meet its immediate goals, and will then add further applications
and solutions to enhance productivity. By developing scalable solutions,
customers are able to purchase products for specific applications as desired.
These products can later be combined with other products without the need to
upgrade the entire system.
Joint Ventures and Intensification of Relations with OEMs and large customers
The Company will aggressively pursue joint ventures and try to intensify
its relations with OEMs and other large customers to increase its overall market
coverage. The Company believes that this will also reduce the number of markets
in which the Company will be required to devote marketing resources to promote
the Company's ideology for global communications solutions. Intensification of
relations with OEMs and large accounts will further enable the Company to
improve its awareness and knowledge of the areas of activity of its partners
which the Company expects will result in a closer customization of its products
and in closer bonds to its partners.
Expand Platform and Open Interfaces
The expansion of the Company's product platform, which is the common
design specifications enabling the Company's products to interface with one
another, is a prime priority in the development of the Company's products. The
ability of the Company's products to interface with third party products and
systems is also a priority of the Company. Telecommunications and data
processing have historically not been interfaced. The Company believes that
communication management systems will become central parts of modern corporate
information technology systems. Thus the Company's communication management
systems are designed to be interfaced with telecommunications and information
technology.
Industry Background
Telecommunications management as conceived by the Company is the process
by which one or more modes of communication are managed, monitored, and
integrated in a manner designed to achieve high efficiency and substantial cost
savings. Telecommunication management initially took the form of call accounting
and was first utilized in its most basic form by telephone and telegraph
companies to help assure accurate and proper billing. As companies and other
users of telephone and telegraph services began to increasingly utilize these
communications services, they also started to employ call accounting systems.
For communications users, call accounting systems provided a means to monitor
and assess costs (either within a predefined work group or otherwise). Call
accounting allowed the detection of calls which were not directly affiliated
with a company's business, thus allowing the company to identify misuse of the
company's telephone lines. Call accounting made it possible to define the amount
of time spent on the phone by individuals or entire departments and allocating
the cost of telephony to appropriate profit centers. The process by which call
accounting is conducted has not changed significantly since the advent of the
PBX. A PBX is a hardware device which serves a switch, connecting the user's
internal telephone system with external telephone lines. With the popularization
of new modes of communication such as mobile telephones, pagers, facsimile,
Internet access and new communications devices such as Asynchronous Transfer
Mode (ATM) switches, routers, bridges, fax servers, and e-mail gateways,
traditional call accounting systems no longer suffice to accomplish the
end-users' entire communication management needs. Call accounting systems can
only report on communications (mostly only telephony) through a PBX. Call
accounting systems have traditionally been limited in application to a single
PBX rather than multiple PBXs which large organizations with numerous offices
may utilize. As a result, traditional call accounting systems have been limited
in their ability to provide a broad perspective of the communication of large
organizations.
The ComTelco Approach
The Company believes that the core of any modern communication management
system must comprise a central database, which accurately records information
about all incoming/outgoing communications to and from all communications users,
devices and services. The Company thus started the development of its products
with traditional call accounting technology when it was founded, enhancing its
products in a manner designed to permit migrating from call accounting through
telemanagement to complete communication management. The Company's
telemanagement systems suit the purpose of a core communication management
system because they form a scalable platform for an organization's
communication management needs, interacting with peripheral computer telephony
(CT) applications. The Company's telemanagement systems, therefore, not only
manage and account for communications but are designed to make complex
communications procedures available to a wide range of business users. The
Company's telemanagement systems and computer telephony products are comprised
of a number of modular products with varying applications, permitting customers
to combine products to suit their specific needs in an effort to communicate
more efficiently. The Company's telemanagement systems include simple call
accounting products for a single PBX or a platform for global, corporate
communications. The Company's products are restricted to and intended
exclusively for companies which utilize PBXs for their voice or data
communications.
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The Company believes that it offers one of the leading telemanagement call
accounting systems in terms of both hardware and software, offering products
which are adaptable to both large and small users.
Products
Telemanagement
The Company introduced its first product line of telemanagement systems in
Austria in 1995, and has achieved a market share of approximately 85% in
Switzerland and 50% in Austria, respectively. Since December, 1996 the Company
has been aggressively marketing its telemanagement systems in Germany, and the
Company will continue to seek to market its products in other significant
markets.
The Company's telemanagement systems include a number of features which
the Company believes offer advantages over other available systems. The
Company's systems are offered in a number of models, for small single-site users
to multi-site global corporations. The Company's systems are designed to serve
as a platform for other computer telephony applications. Reports on all
connected communication devices can be generated. A report generator allows the
customer to exactly define the types of reports needed. The systems can be fully
automated to produce reports automatically. The Company believes it was the
first supplier of telemanagement systems to provide a 32-bit Windows NT
application. The Company's telemanagement systems rely on proprietary hardware
to collect communication data. Its proprietary hardware permits continuous 24
hour operation due to the fact that unlike in PBXs, there are no moving parts in
the Company's hardware, which could cause the system to break down. The
Company's systems interface with System Management Data Record (SMDR) ports,
making them compatible with most modern communications equipment. The Company's
systems can be installed at a single PBX site or multiple PBX sites, allowing
the connection of remote branch offices.
The Company's telemanagement systems include the following products:
CT-2.5 Low cost call accounting system. This system has a full-fledged network
system allowing 30 to 50 users (telephone extensions) to access the data
at the same time without the possibility of data loss; it is comprised
of the Company's proprietary hardware which the Company believes has a
very high degree of safety concerning data security and loss of data
records.
CT-2.6 Medium range call accounting system. This system has the same features
as the CT-2.5, but additionally provides call accounting for 50 to 300
users.
CT-2.7 Medium range call accounting system: This system has the same features
as CT-2.6, but also allows the handling of multisite call accounting.
The system can calculate multiple carriers rates including special rates
and discounts for each carrier. It can handle prefix based calculation
as well as distance based calculation, has a database including all
major cities, with prefix and longitude and latitude values for each,
thus allowing a distance calculation between any two major cities in the
world. Additionally, CT-2.7 allows multiple branch office's data to be
collected centrally.
MS32 High-end call accounting and telemanagement system: Multi-site,
multi-carrier operation. The system can generate reports consistent with
the user's organizational structure thus allowing insight into the
communications cost and behavior of divisions, departments, work groups
or individuals. The system can handle up to 999 independent company
structures, with 999 telecommunication systems or PBXs per company and
up to 9 organizational levels per company. The system can be used by
very large organizations with multiple branch offices and subsidiaries
worldwide. Users can compare historic data with rates and tariffs of
alternate carriers or infrastructure, enabling the user to predetermine
a more efficient means of conducting its telecommunications. The MS32
system covers a range of business situations, including: time sharing of
workplaces, and one person with multiple workplaces. The system can be
completely automated and all remote sites can be configured from one
central location.
Computer Telephony
The Company's computer telephony applications are developed on a client
server basis and have been devised as open systems to be able to operate from
within any Windows(R) application. The Company's computer telephony applications
are compatible with most existing personal computer networks. The system has
been developed and adapted to most major brands of PBX systems and can be
modified to work with almost any current generation PBX.
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Screen based dialing
The Company's screen based dialing system CD 1.7 allows users to dial
telephone numbers directly from their workstation screen from within any
Windows(R) application, enabling them to use all existing data available on
their networks. (customers, suppliers, employees, electronic telephone
directories, CD-ROM buyer's guides, call back requests by e-mail and many more.)
The system includes least cost routing, ensuring that the cheapest method of
communication is used at any particular time for any particular destination,
including leased lines (if such leased lines are available for the specified
type of communication).
Screen based faxing
The Company's screen based faxing product CD 1.0, works similar to screen
based dialing: the user selects a fax number and a document from within any
Windows(R) application, enters a comment and title page if desired, and sends
the document. Alternatively, the user can print any document directly to the
"virtual fax" printer driver, enter or select the fax number from a list, and
send, or simply press a pre-definable sequence of keys on the computer keyboard
("hot key") from within any application, enter or select the fax number from a
list, and send. The system fully supports least cost routing.
Screen based messaging
The Company's screen based messaging system allows users to highlight a
text from withing any Windows(R) application and to send such text to cellular
pagers or cellular telephones which are otherwise able to receive text messages.
Similarly, messages can be sent to e-mail boxes without having Internet access
or use of a browser or e-mail application.
Personal workstation based, digital, telephony recording devices
The Company is currently in beta phase testing of a telephony-recording
system, which allows the user to digitally record telephone calls at his
workstation manually or automatically. In the case of the Company's computer
telephony products, e.g. a window for the dialing of a telephone number might
appear subsequent to the activation of a certain hot key. With the Company's
telephone call recording system, each workstation can be configured to record
calls on demand, either by pressing a hot key or at the beginning of a call
through a pop up window which asks if the call should be recorded or not.
Alternatively, the system can be configured to record all calls and at the end
of a call, pop up a window, which prompts the user to indicate whether the
recording of the just completed call should be saved or discarded. The system
can also work on a client server base, recording all calls to a central file
server for later review. The recorded conversations can be stored in a standard
Windows format allowing the files to be reused in any multimedia application,
distributed via e-mail or stored for later reference. The system enhances any
workstation to include the feature of call recording at a fraction of the cost
or large centralized systems. The system can also be used for playing existing
sound files over the telephone, providing an easy way to play recurring
information to a caller, or enabling another party to listen to a phone
conversation just held with someone else. The Company believes that because of
the features described, this telephony recording will be superior to the
currently available systems.
Technology
The Company's products have been designed and developed adhering to
international standards and specifications. The design and development of the
products require multiple engineering disciplines such as: mechanical,
electrical, electronic, high and low level software engineering. The design and
development of the Company's hardware takes place in Appenzell, Switzerland. The
production facility is ISO 9000 certified (ISO 9000 is an international
manufacturing standard) and fully equipped to handle four layer Printed Circuit
Boards (PCBs) and robotic, Surface Mounted Device (SMD) assembly. The Company is
conducting basic research in technologies such as: frame relay, Asynchronous
Transfer Mode (ATM), Synchronous Digital Hierarchy (SDH) and other broadband
communication protocols.
The Company is not required to enter into any licensing or other
agreements with respect to any of the technologies used in the design and
development of or incorporated in any of its products.
Most of the Company's research and development resources are devoted to
software design and development as well as to strategic product design.
Approximately 8% of the Company's research and development expenses are
attributable to the development and design of hardware which has been
out-sourced to independent research facilities. Core hardware and technology
design, however, is conducted in the ComTelco development centers. See "Business
- -- Research and Development."
The Company's products incorporate the following principal technologies:
I. Microprocessor technology. Microprocessors are incorporated into the
Company's telemanagement products. The Company employs microprocessors and
software design to permit for the simplest hardware and memory
requirements which can be used consistent with high execution speeds.
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II. Interface technology. The Company's products interface with a number of
systems and devices, both from a traditional telecommunications and an
information technology perspective. Interface capacities are sometimes
limited for a certain task to be performed. The Company therefore utilizes
interface design and implementation to allow for additional connectivity
options and improved data throughput.
III. Integrated Services Digital Network ("ISDN"). Many of the Company's
products are based on ISDN in all European protocols. The Company's OEM
customers often have proprietary ISDN protocols, which continuously
require the Company to maintain a high degree of ISDN expertise.
IV. Memory optimization and hardware compression technology. The Company's
telemanagement systems store large amounts of data, sometimes over a long
period of time. Large amounts of data must be stored and processed in
cost-effective independent hardware devices, which is accomplished through
hardware data compression and decompression.
V. Power management. Since the Company's telemanagement systems are required
to work even in the event of a power outage, the Company has developed
power management systems for its products which provide maximum
accumulator capacity during years of operation. In the event of a complete
black-out, the system can keep its customers from losing data for as long
as 14 days without auxiliary power. The Company's Phantom line driver is a
signal amplification device which can operate without its own power
supply, relying on power relayed by other products of the Company.
VI. Low level software development. The Company's engineers and programmers
from time to time work jointly with OEM customers to assist the customers
with the proper functioning of their own interfaces. The Company maintains
a team from the former Soviet Union space program which has developed low
level software development expertise for this purpose.
VII. High level and API software development. High level software development
and Application Programming Interface (API) design constitute the largest
portion of ComTelco's research and development force. All relevant
software development guidelines and standards are adhered to, to produce
software and user interfaces for products which are fully compatible to
its intended platforms.
Research and Development
The Company's subsidiary, ComTelco Research, is responsible for the four
research and development centers in Switzerland, Austria, Russia and China.
These centers have been geographically placed to address a variety of
international concerns and development specifications. As of December 31, 1997
the Company employed at such centers a total of 21 full time employees, 19 of
whom are dedicated to software development. The Company out-sources most of its
hardware development to a Swiss company located in Appenzell, Switzerland.
Strategic development and research is conducted at the Company's
headquarters in Switzerland. Development engineers are involved in management
and product development and the coordination of all global research and
development activities. The Company believes that Switzerland is an ideal test
ground for new developments and pre-release beta testing.
The research and development center in Austria, was established since many
of the Company's OEM and other large customers have their European testing
centers for computer telephony products in Vienna. The research and development
center in Austria allows the Company to collect data on market developments and
trends. It also allows the Company to form a closer relationship with its OEM
customers through technical cooperation. The University of Vienna provides a
source of skilled development engineers.
At its research and development facility in Russia, the Company is able to
recruit former university level researchers at affordable cost.
In its latest center in China, the Company is able to have skilled
personnel do research and development at low cost and in close proximity to the
South East Asian market. The Company intends to expand the development center in
China, and may also open a hardware development center in China in early 1998.
The Company may seek to enter the United States market in the future and
may open a research and development center in the United States once an East
Coast sales and support office is established.
The Company acquired the assets used in connection with its research and
development activities in February 1997. No amounts were reported for research
and development expenses in any of the last two fiscal years, as all such
amounts were minimal and included as part of general and administrative expense.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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Marketing, Sales and Distribution
The Company's telemanagement and computer telephony products are sold
through the same distribution channels.
Apart from participation in trade shows, the Company has not been involved
in any major advertising or marketing campaigns. The Company intends to expand
its advertising and marketing efforts substantially in the second half of 1997
through professional public relations and media work, advertising campaigns and
direct mailings as well as a web site, intended to provide a potential customer
with live demo systems and existing users with technical support and product
updates. The Company has mainly focused its marketing activities on OEM and
large distribution accounts, and the Company believes that relations with OEM
and large distribution accounts will further its expansion. The Company's goal
is to achieve a mix of sales channels comprising of approximately 30% OEM and
large accounts, approximately 30% large over-regional VARs and large
distributors, approximately 20% small and medium regional dealers, approximately
10% large, global, corporate accounts and approximately 10% direct sales of
small and medium systems.
The Company maintains sales and distribution offices in Switzerland,
Germany, Austria, Russia and China.
Customer Service and Technical Support
The Company maintains customer service and technical support operations in
Switzerland, Germany, Austria, Russia and China. The Company provides different
levels of technical support to its large OEM accounts, to its distributors and
resellers, and to end-users who have purchased products from the Company or one
of its smaller distributors or resellers. All support is limited to installation
trouble shooting, technical problem solving or bug reporting. End-user problems,
which generally require proper user manual referencing, are handled on a pay per
call hotline. The coordination center for international technical support is
managed within ComTelco Research and is located in St. Gallen, Switzerland,
where German, English and French language support is provided. Key French
speaking accounts are serviced from the technical support in Geneva. Local
technical support is provided from Frankfurt for Germany, from Vienna for
Austria, from Shanghai for China and from Moscow for Russia. Hardware defects
are usually handled through the exchange of the defective devices and systems.
Key accounts with service contracts have access to technical support via a
dedicated hot line number, and can be accessed by the Company's remote
diagnostics and technical support feature which is included in all larger
installations of the Company's products.
The Company generally provides a 365-day limited warranty on its products.
Such warranty is limited to defective or non-functioning systems or parts
thereof and excludes malfunction through misuse. The Company offers service
contracts to its customers at generally 10% of the system price annually.
In the markets where the Company is active, it is insured against
liability resulting from malfunctioning of systems or components or errors
caused by its employees. The insurance coverage is set at 4,000,000 Swiss Francs
(approximately $2,700,000). Separate insurance policies are negotiated for each
new market in which the Company intends to becomes active.
Manufacturing
The Company has out-sourced all of its hardware manufacturing. Although
the Company presently utilizes only one manufacturer, kuk electronic AG ("kuk"),
a Swiss corporation located in Switzerland, the Company believes that there are
numerous manufacturers suitable for the Company's needs. During the year ended
February 28, 1997 the Company relied on MDE as its principal supplier, due to
MDE's ability to obtain volume pricing from manufacturers. See "Certain
Transactions." As the Company became able to obtain volume pricing on its own
during the 1997 Nine Months, the Company replaced MDE with kuk as a principal
supplier. The Company is in possession of all proprietary documentation and
materials necessary for manufacturing, and the Company believes that it could
change manufacturers at any time without significant interruption of production
or incurring substantial additional expense. Certain hardware used in the
Company's computer telephony products is imported from Taiwan, fully assembled
pursuant to the Company's specifications. Such components can, however, also be
sourced at a number of other suppliers worldwide. Software media and printed
matter such as user and reference manuals are also out-sourced on an order basis
and can be updated regularly on the basis of digital information exchange.
Product packaging is out-sourced and shipped directly to the hardware
manufacturer where completed products
20
<PAGE>
are packaged, and delivered to the Company, ready to ship. All products are
distributed from Switzerland, either directly to large customers or to the
Company's subsidiaries for further distribution to smaller customers.
Competition
The Company's business is characterized by intense competition, which
results in decreasing sales prices and improvements of competing products. The
Company expects that competition will continue to be intense and may increase
from current or future competitors. In sales of telemanagement (call accounting)
products, the Company competes primarily with Mer Telemanagement, Inc. (Israel),
Mind Systems Ltd. (Israel), Ring Master Pty. Ltd. (Ireland), Soffing B.V.
(Luxembourg), Moscom Corporation (USA) and Telco Research., Inc. (USA), as well
as numerous smaller regional competitors. In sales of computer telephony
products, the Company's main competitors are CTI Vision Ltd. (United Kingdom),
CTI Data Solutions, Inc. (USA), Callware Technologies, Inc. (USA), Access
Networking GmbH (Austria), Integro Advanced Computer Systems (USA), Derlinda,
Inc. (USA), Phonetastic Corporation (USA) and Dr. Neuhaus (Germany).
The Company believes that the principal competitive factors in its markets
include spectrum of products offered, level of technology incorporated in
products, speed of development and implementation of new products, relationships
with OEM and other large customers, price, quality and functionality of products
and degree of physical presence in target market geographic regions. The Company
believes that it competes favorably on the basis of the foregoing factors. The
Company believes that its ability to compete also depends in part on a number of
competitive factors outside of its control, including the development by others
of competitive products and technologies and the price at which others offer
comparable products.
Many of the Company's current and potential competitors have longer
operating histories and significantly greater financial, technical, sales,
marketing and other resources, as well as greater name recognition and larger
customer bases, than the Company. Unlike the Company which has no patent
protection, certain of the Company's competitors may have patents or
intellectual property rights which provide them with an advantage. These
competitors may be able to respond more effectively to new or emerging
technologies and changes in customer requirements. There can be no assurance
that one or more of the Company's customers or suppliers will not develop
competitive technology internally, thereby eliminating either the need to obtain
products from the Company or the willingness to provide products to the Company.
The Company expects to continue to experience increased competition and
significant price deterioration, which could result in decreased gross profit
margin, loss of market share and lack of acceptance of the Company's products.
In the event of significant price competition in the market for the Company's
products, the Company believes that it must successfully develop and introduce
on a timely basis new products or products that incorporate new features that
can be sold at gross margins comparable to those on existing products. To the
extent that such new products are not developed in a timely manner, do no
achieve customer acceptance or do not generate comparable gross margins, the
Company's profitability may decline. There can be no assurance that the Company
will be able to compete successfully in the future or that competition will not
have a material adverse effect on the Company s business, financial condition
and results of operations.
Intellectual Property
The Company's success is dependent upon proprietary technology. The
Company owns no patents and relies primarily on a combination of copyright,
trademark and trade secret laws, as well as nondisclosure agreements and other
contractual provisions to protect its proprietary rights. There can be no
assurance that others will not independently develop similar products or
duplicate the Company's products. As part of its confidentiality procedures, the
Company generally enters into nondisclosure agreements with its employees,
consultants and other third-party providers who serve the Company in any
technical capacity or who have access to confidential information of the
Company. In addition, the Company limits access to and distribution of its
software, documentation and other proprietary information. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Policing unauthorized use of the Company's
products is difficult, and while the Company is unable to determine the extent
to which piracy of its software products exists, software piracy may become a
problem. In addition, effective protection of intellectual property rights may
be unavailable or limited in certain countries in which the Company currently
sells products or in countries the Company may target its sales efforts.
Accordingly, there can be no assurance that the Company's means of protecting
its proprietary rights will be adequate or that the Company's competitors will
not independently develop similar technology.
Personnel
As of December 31, 1997 the Company had a total of 47 permanent and
temporary employees of whom 21 were in research and development, 3 were in
logistics, 10 were in sales, 6 were in administration and 7 were in technical
support. Of the total number of employees, 27 were in Switzerland, 3 were in
Austria, 4 were in Germany, 4 were in China and 9 were in Russia. None of the
Company's European employees are represented by a labor union or subject to
collective bargaining agreements. In certain foreign countries such as China the
Company is subject to laws regarding employee rights which include requirements
similar to collective bargaining agreements. The Company believes that there its
employee relations are good.
The Company's success depends to a significant degree on the continued
contributions of the Company's management and other key employees in the design,
development, marketing and sales areas. The loss of any such personnel could
have a material adverse
21
<PAGE>
effect on the Company's business, its financial condition and results of
operations. Certain of the Company's senior management and other key personnel
have recently joined the Company. The Company's success will depend in part on
the successful assimilation of these and other new employees. Assimilation and
retention of personnel may to some degree be negatively affected because the
Company's management and other key personnel are dispersed throughout various
locations world wide, which requires the Company to coordinate organizations
separated by geographical location and time zone and to integrate personnel with
disparate business backgrounds, cultures and languages. In addition, the Company
believes that the future success will depend on its ability to attract and
retain highly skilled managerial, engineering, operations, marketing and sales
personnel.
Facilities
The Company's operational headquarters comprise approximately 8,000 square
feet of space located in St. Gallen, Switzerland. The space is leased from MDE.
See "Certain Transactions." The annual rent is 145,352 Swiss francs
(approximately $100,000). The lease is for an indefinite period of time and can
be terminated by either party with six months' notice prior to the end of each
calendar quarter. The site houses the Company's corporate management, corporate
and Swiss administrations and accounting, European logistics, technical support
and research and development departments.
In addition to its operational headquarters in Switzerland, the Company
also maintains sales and support offices in Germany and Austria, as well as
software development centers in Austria, Russia and China.
The premises in China and Russia are both subleased from MDE. The leases
have an indefinite term and may be terminated upon three months notice. The
annual rent for the China and Russia premises is $9,000 and $55,000,
respectively. The lease agreements for the premises in Germany and Austria
expire on December 31, 2000 and July 31, 1998, respectively, and provide for an
annual rent of approximately $16,900 and $20,300, respectively. The Company has
also entered into a lease agreement for office space in New York. The lease
expires in September 1999 and provides for an annual rent of $19,200. Effective
January 1, 1998, the Company has rented additional space in Austria. The lease
expires in December 2000 and provides for an annual rent of approximately
$20,500.
Litigation
The Company is not a party to any legal proceedings.
MANAGEMENT
Directors and Executive Officers of the Company
The Company's directors and executive officers are as follows:
Name Age Position with the Company
---- --- -------------------------
August Steiner(1)(2) 56 Chairman of the Board of Directors
Roland Steiner 31 President, Chief Executive Officer and Director
Ramon Inauen 33 Chief Operating Officer and Director
Claudia Sutter 31 Chief Financial Officer, Treasurer and Director
Klaus Brenner(2) 41 Director
Gian Franco Cocilovo(2) 58 Director
- ----------
(1) May be considered a founder of the Company as that term is defined under
the Securities Act of 1933.
(2) Member of the Audit Committee.
August Steiner has served as Chairman of the Board of Directors ComTelco
since inception. Since December 1992, he has also been Chairman and majority
stockholder of MDE, a Swiss corporation founded by Mr. August Steiner in 1990
and engaged in the sale of medical equipment. Prior to founding MDE, Mr. August
Steiner worked for Varian International, Inc. as Area Sales Manager from 1982 to
1990. From 1990 to 1992, Mr. August Steiner was self employed in the medical
equipment business.
Roland Steiner has served as Chief Executive Officer, President and a
director of ComTelco since inception. From July 1993 through January 1997, Mr.
Roland Steiner served as Vice President of MDE. From December 1992 through July
1993, he served as Managing Director of MDE. From March 1990 through November
1992, he was Manager of the telecommunications division of Telepax AG
("Telepax"), a Swiss telecommunications corporation.
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<PAGE>
Ramon Inauen has served as Chief Operating Officer and a director of
ComTelco since inception. From July 1992 through January 1997, Mr. Inauen served
as Sales Manager of MDE. From December 1991 through July 1992, he was employed
by Telepax as Sales Manager.
Claudia Sutter has served as Chief Financial Officer and a director of
ComTelco since inception. From September 1996 through December 1996, she studied
United States accounting in Boston, Massachusetts. From May 1994 through August
1996, she served as Controller of L.N. Asset Management AG, a Swiss investment
company. From January 1987 through April 1994, she worked as an accountant for
ATAG Ernst & Young.
Klaus Brenner has served as a director of ComTelco since October 1, 1997.
Since 1996, Klaus Brenner has served as Chief Executive Officer of Brenner
Industrieholz-Spaene GmbH, Brenner Internationale Holz- und
Spaenehandelsgesellschaft and of Brenner Holding GmbH. From 1986 to 1996 Mr.
Brenner has served as the Chief Executive Officer of Brenner Bois Sprl., the
Belgian subsidiary of Brenner Holding GmbH. These companies are engaged in the
lumber business.
Gian Franco Cocilovo has served as a director of ComTelco since October 1,
1997. Since January 1997, Mr. Cocilovo has served as the President of EPS
d.o.o., an Italian corporation engaged in contracting for large building
projects. From 1989 to 1996 Mr. Cocilovo was Commercial Director of Inso in
Florence, a subsidiary of ENI which was sold to General Electric in 1993.
All directors hold their office until the next annual meeting of
stockholders of the Company and until their successors are elected and
qualified.
All officers of the Company serve at the discretion of the Board of
Directors. There are no family relationships between any of the directors or
executive officers of the Company except that Mr. August Steiner is the father
of Mr. Roland Steiner.
Committees
The Board of Directors has one committee, an Audit Committee. The Audit
Committee has authority to annually recommend to the Board of Directors the
engagement of the Company's independent accountants and to review the
independence of the accounting firm, the audit and non-audit fees of the
independent accountants and the adequacy of the Company's internal control
procedures.
Director Compensation
Directors do not receive any cash compensation for their services as
members of the Board of Directors, although they are reimbursed for their
out-of-pocket expenses incurred in attending Board of Directors and Committee
meetings.
Directors' Limitation of Liability and Indemnification
As permitted by the Delaware General Corporation Law ("DGCL"), the
Company's Certificate of Incorporation includes provisions which (a) eliminate
the personal liability of directors for monetary damages resulting from breaches
of their fiduciary duty (except for liability for breaches of the duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
DGCL, or for any transaction from which the director derived an improper
personal benefit), and (b) indemnify the directors and officers to the fullest
extent permitted by the DGCL, including under circumstances under which
indemnification is otherwise discretionary. The Company's obligation to
indemnify each of its directors and officers applies with respect to all
liability and loss suffered and expenses incurred by such person in any action,
suit or proceeding in which such person was or is made or threatened to be made
a party or is otherwise involved by reason of the fact that such person is or
was a director or officer of the Company. The Company is also obligated to pay
the expenses of the directors and officers incurred in defending such
proceedings, subject to reimbursement if it is subsequently determined that such
person is not entitled to indemnification. The Certificate of Incorporation
further provides that if the DGCL is amended to authorize corporate action
further eliminating or limiting the personal liability of directors then the
liability of a director of the Company shall be eliminated or limited to the
fullest extent permitted by the DGCL as amended or supplemented.
The Company believes that the limitation of liability and indemnification
provisions in its Certificate of Incorporation will enhance the Company's
ability to continue to attract and retain qualified individuals to serve as
directors and officers. There is no pending litigation or proceeding involving a
director, officer or employee of the Company to which the indemnification
provisions would apply, and the Company is not aware of any threatened
litigation or proceeding that may result in a claim for indemnification.
23
<PAGE>
Executive Compensation
During the last three fiscal years the Company did not pay or accrue any
compensation to Mr. Roland Steiner, the Company's Chief Executive Officer and
President, and no executive officer was paid or accrued compensation in excess
of $100,000 in any of such years. As of March 1, 1997, Mr. Roland Steiner, the
Company's President and Chief Executive Officer, is to be compensated at the
rate of $100,000 per annum. No stock options have been granted by the Company.
Employment Agreements
Effective March 1, 1997, the Company entered into employment agreements
with each of Mr. Roland Steiner, Ms. Claudia Sutter and Mr. Ramon Inauen, under
which such individuals are employed as Chief Executive Officer, Chief Financial
Officer and Chief Operating Officer, respectively. Each agreement may be
terminated by either the Company or the executive with or without cause, upon
three months' notice in the case of Messrs. Steiner and Inauen and six months'
notice in the case of Ms. Sutter. Otherwise, each agreement will expire when the
executive reaches the age of 65. The agreements provide for annual salaries of
$100,000 for Mr. Steiner, $95,000 for Ms. Sutter and $90,000 for Mr. Inauen.
Bonuses and incentives are not part of the agreements and may be awarded at the
discretion of the Company. Each executive is entitled to four weeks' paid
vacation, reimbursement for medical aid from and after the second year of
employment, pension fund and social security contributions in accordance with
the Swiss law and reimbursement for business-related travel and other expenses.
Messrs. Steiner and Inauen are each entitled to a car when needed for business
purposes. Mr. Steiner has agreed to devote 40 hour per week and the majority of
his time to the business of the Company. Mr. Inauen and Ms. Sutter have each
agreed to devote 40 hours per week and all of their time to the Company. None of
the agreements contains restrictive covenants which extend beyond the term of
the agreements.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus, certain
information regarding the beneficial ownership of the Company's outstanding
Common Stock by (i) each of the Company's directors, (ii) each of the executive
officers named in the table under "Management--Executive Compensation," (iii)
all directors and executive officers of the Company as a group, and (iv) each
other person known by the Company to beneficially own more than five percent of
the outstanding Common Stock.
Percentage of
Number of Shares Outstanding
Name of Beneficial Owner (1) Beneficially Owned(2) Common Stock
- -------------------------------------- ------------------------- ---------------
August Steiner 2,500,000 55.6%
Interfinance Inv. Co. Ltd. (3) 1,577,166 35.0%
Roland Steiner -- --
Ramon Inauen -- --
Claudia Sutter -- --
Klaus Brenner -- --
Gian Franco Cocilovo -- --
All directors and executive officers
as a group 2,500,000 55.6%
- ----------
(1) Unless otherwise indicated, the address of each beneficial owner is: c/o
ComTelco International, Inc., Hechtackerstrasse 41, CH-9014 St. Gallen,
Switzerland.
(2) Percentage of ownership is based on 4,500,000 shares of Common Stock
outstanding as of the date of this Prospectus.
(3) The address of Interfinance is Steinhaldenring 8, CH-8954 Geroldswil,
Switzerland. Mr. Ueli Ernst controls, and is the managing director of,
Interfinance. As such, he may be deemed to beneficially own shares held by
Interfinance. Mr. Ernst disclaims beneficial ownership to the extent such
shares exceed his proportionate interest therein.
24
<PAGE>
CERTAIN TRANSACTIONS
ComTelco and its Subsidiaries were founded by Mr. August Steiner, the
Company's Chairman of the Board of Directors and majority stockholder. In
September 1994 and November 1995, Mr. August Steiner founded ComTelco Germany
and ComTelco Austria, respectively, to provide marketing and other services for
MDE AG ("MDE"), a Swiss corporation primarily engaged in the sale of medical
equipment. Mr. August Steiner owns the majority of the stock of MDE, and Messrs.
Roland Steiner, the Company's Chief Executive Officer and President, and Ramon
Inauen, the Company's Chief Operating Officer, own minority interests in MDE. In
December 1996, Mr. August Steiner purchased from MDE assets primarily consisting
of software and hardware development. The purchase price for the assets was
approximately $5,200,000, which amount represented MDE's cost of acquiring
and/or developing the assets. In February 1997, Mr. August Steiner founded
ComTelco Vertriebs and ComTelco Research and contributed to such companies
substantially all of the assets purchased from MDE, which assets presently
comprise substantially all of the Company's software and hardware development
assets. In addition, approximately $95,000 in legal and administrative costs
relating to the organization of ComTelco Vertriebs and ComTelco Research was
funded by Mr. August Steiner and contributed as capital to the two companies.
ComTelco was founded in Delaware on February 27, 1997. As of February 28, 1997,
the Subsidiaries became wholly-owned subsidiaries of ComTelco in a transaction
pursuant to which Mr. August Steiner purchased 2,500,000 shares of Common Stock
from ComTelco in exchange for all of the outstanding equity interests in each of
the four Subsidiaries.
As of February 28, 1997, ComTelco issued 2,000,000 shares of Common Stock
to Interfinance in consideration of $4,000,000, the par value of which shares
($20) was paid in cash and the balance of which was paid by delivery of the
Interfinance Note. The Interfinance Note bears interest at 5.8% per annum and is
secured by a pledge to ComTelco of the shares of Common Stock issued to
Interfinance. Under the terms of the pledge agreement, the shares are subject to
release of the Company's security interest ratably upon partial repayment of the
Interfinance Note. As of November 30, 1997, Interfinance has repaid $1,505,000
of the principal amount of the Interfinance Note from funds received from
purchasers of a portion of its shares. As a condition to the sale of the shares
to Interfinance, the Company entered into a Registration Rights Agreement, dated
as of February 28, 1997, pursuant to which the Company agreed to register such
shares for resale under the Securities Act. See "Selling Stockholders and Plan
of Distribution" and "Description of Securities -- Registration Rights."
The Company and its two Swiss subsidiaries, ComTelco Research and ComTelco
Vertriebs, have leased from MDE office and storage space in Switzerland, China
and Russia, see "Business -- Facilities". MDE is a Swiss corporation primarily
engaged in the sale of medical equipment. Mr. August Steiner owns the majority
of the stock of MDE, and Messrs. Roland Steiner, the Company's Chief Executive
Officer and President, and Ramon Inauen, the Company's Chief Operating Officer,
own minority interests in MDE. To secure these leases, the Company pledged bank
accounts totaling 200,000 Swiss Francs ($141,093 at November 30, 1997) to MDE on
February 28, 1997. The pledge agreement does not restrict the Company from
withdrawing or using any available cash funds.
For a discussion of certain management compensation, including employment
agreements entered into with Messrs. Roland Steiner and Ramon Inauen and Ms.
Claudia Sutter, see "Management."
During the fiscal year ended February 28, 1997, the Company purchased the
majority of its inventory from MDE in the total amount of $83,969. See
"Business-Manufacturing."
During the fiscal year ended February 28, 1997, the Company received a
total of $43,269 from MDE in connection with software development activities
performed by ComTelco Austria for and at the request of MDE. Prices charged by
the Company were consistent with prices which the Company would have charged an
unrelated third party.
During the quarter ended November 30, 1997, the Company loaned MDE an
aggregate of $243,079 (adjusted for currency conversion) to bridge working
capital shortfalls. The loan is due on demand and bears interest at 8% per
annum. As of the date hereof, approximately $150,000 in principal amount has
been repaid and the balance (including accrued interest) is expected to be
repaid by February 28, 1998.
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
The Shares offered by this Prospectus may be sold by the Selling
Stockholders, or by their transferees, pledgees, donees or other successors in
interest. The Selling Stockholders have advised the Company that sales of the
Shares may be effected from time to time in transactions (which may include
block transactions) in the over-the-counter market, in negotiated transactions,
through the writing of options on the Shares or a combination of such methods of
sale, at fixed prices that may be changed, at market prices prevailing at the
time of sale, or at negotiated prices. The Selling Stockholders may effect such
transactions by selling the Shares directly to purchasers or through
broker-dealers that may act as agents or principals. Such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Selling Stockholders and/or the purchasers of Shares for whom such
broker-dealers may act as agents or to whom they sell as principals, or
both(which compensation as to a particular broker-dealer might be in excess of
customary commissions).
The Selling Stockholders and any broker-dealers that act in connection
with the sale of the Shares as principals may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Act and any commission received by
them and any profit on the resale of the Shares and/or as principals might be
deemed to be underwriting discounts and commissions under the Act. The Selling
Stockholders may agree to indemnify any agent, dealer or broker-dealer that
participates in transactions involving sales of the Shares against certain
liabilities, including liabilities arising under the Act. The Company will not
receive any proceeds from sales of the
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<PAGE>
Shares by the Selling Stockholders. Sales of the Shares by the Selling
Stockholders, or even the potential of such sales, could have an adverse effect
on the market price of the Common Stock.
There can be no assurance that Selling Stockholders will be able to sell
some or all of the Shares listed for sale herein. There is no established public
trading market for the Common Stock as of the date of this Prospectus.
Certain expenses of this registration will be borne by the Company. The
Company will not receive any of the proceeds from the sale of the Shares. There
are no material relationships between any of the Selling Stockholders and the
Company. Beneficial ownership of the Shares by each Selling Stockholder after
the sale will depend on the number of Shares sold by each Selling Stockholder.
The Shares offered by the Selling Stockholders are not being underwritten. The
Shares are being included in the Registration Statement of which this Prospectus
forms a part pursuant to certain registration rights granted to the holders. See
"Description of Securities--Registration Rights."
The following table sets forth certain information with respect to the
Selling Stockholders for whom the Company is registering the Shares for resale
to the public. The Company has been informed that all of the Selling
Shareholders reside outside of the United States of America.
<TABLE>
<CAPTION>
Beneficial Ownership Amount Number of shares to be beneficially
Selling Stockholder Prior to Offering to be Sold Owned if Full Amount is Sold
- ------------------- ----------------- ---------- ----------------------------
Amount Percent
<S> <C> <C> <C> <C>
Interfinance Inv. Co. Ltd. 1,577,166 35.0 1,577,166 0
Ulisse Albertalli 3,000 * 3,000 0
Adv. Aldo Ferrini 2,500 * 2,500 0
Key Consult S.A. 30,000 * 30,000 0
Banque Julius Baer SA 20,000 * 20,000 0
BHF-Bank (Schweiz) AG 30,000 * 30,000 0
Euromateco Establishment 10,000 * 10,000 0
Hanspeter Iselin 5,000 * 5,000 0
Rene Jourdan 12,000 * 12,000 0
Romofin AG 20,000 * 20,000 0
Triaxis Trust AG 70,000 1.6 70,000 0
Silvano Parrini 5,000 * 5,000 0
Roswitha Diem 10,000 * 10,000 0
E.M. Legarda-Burbano 500 * 500 0
Hans U. Muhmenthaler 2,000 * 2,000 0
Hubert Raub 1,000 * 1,000 0
Rolan Trifoglio 1,000 * 1,000 0
Value Mgmt & Research GmbH 30,000 * 30,000 0
Hedi Zuellig 965 * 965 0
Wolfgang Mueller 1,100 * 1,100 0
Bank Julius Bar & Co. AG 80,000 1.8 80,000 0
Peter Furter 2,069 * 2,069 0
BDL Banca Di Lugano 10,000 * 10,000 0
COOP Bank 1,100 * 1,100 0
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Beneficial Ownership Amount Number of shares to be beneficially
Selling Stockholder Prior to Offering to be Sold Owned if Full Amount is Sold
- ------------------- ----------------- ---------- ----------------------------
Amount Percent
<S> <C> <C> <C> <C>
Maria Rese 1,000 * 1,000 0
Guyerzeller Bank AG 50,000 1.1 50,000 0
Gerhard Rese 6,000 * 6,000 0
Banque Paribas SA 5,000 * 5,000 0
Microsbank Zurich 7,200 * 7,200 0
Alpha Securities 4,400 * 4,400 0
GSL Galli, Schneider
& Lehner AG 2,000 * 2,000 0
James Ladner 7,000 * 7,000 0
Jon Kneist 1,000 * 1,000 0
</TABLE>
- ----------
* Denotes less than one percent.
27
<PAGE>
DESCRIPTION OF SECURITIES
The following summary description of the securities of the Company is
qualified in its entirety by reference to the Company's Certificate of
Incorporation which has been filed as an exhibit to the Registration Statement
on Form SB-2 of which this Prospectus forms a part.
Common Stock
The Company is authorized to issue up to 30,000,000 shares of Common
Stock, par value $.00001 per share, of which 4,500,000 shares are outstanding as
of the date hereof. Holders of Common Stock are entitled to one vote for each
share held of record on each matter submitted to a vote of stockholders. There
is no cumulative voting for election of directors. Subject to the preceding
rights of any series of preferred stock which may from time to time be
outstanding, holders of Common Stock are entitled to receive ratably, dividends
when, as, and if declared by the Board of Directors out of funds legally
available therefor and, upon the liquidation, dissolution, or winding up of the
Company, are entitled to share ratably in all assets remaining after payment of
liabilities and payment of accrued dividends and liquidation preferences on any
preferred stock. See "Risk Factors--No Dividends" and "Dividend Policy." Holders
of Common Stock have no preemptive rights and have no rights to convert their
Common Stock into any other securities. The outstanding Common Stock is validly
authorized and issued, fully paid in, and nonassessable.
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of preferred
stock, par value $.01 per share, of which no shares are outstanding as of the
date hereof. The preferred stock may be issued in one or more series, the terms
of which may be determined at the time of issuance by the Board of Directors,
without further action by stockholders, and may include voting rights (including
the right to vote as a series on particular matters), preferences as to
dividends and liquidation, conversion rights, redemption rights, and sinking
fund provisions. The issuance of any such preferred stock could adversely affect
the rights of the holders of Common Stock and, therefore, reduce the value of
the Common Stock. The ability of the Board of Directors to issue preferred stock
could discourage, delay, or prevent a takeover of the Company. See "Risk
Factors--Anti-Takeover Effects of Certain Provisions of Certificate of
Incorporation and Delaware Law."
Registration Rights
Pursuant to an agreement entered into with Interfinance as of February 28,
1997, the Company agreed to file a registration statement under the Securities
Act covering the resale of the 2,000,000 Shares being offered hereby. The
Company committed to file the registration statement within 180 days of the date
of the agreement. Subject to certain exceptions, the Company agreed to pay all
costs and expenses of the registration. The Company also agreed to indemnify the
holders against certain liabilities in connection with such registration. The
Company has not granted any other registration rights.
Transfer Agent and Registrar
The Company has appointed American Stock Transfer & Trust Company as
transfer agent and registrar for the Common Stock.
Delaware Anti-Takeover Law
The Company is subject to Section 203 of the DGCL ("Section 203") which,
subject to certain exceptions and limitations, prohibits a Delaware corporation
from engaging in any "business combination" with any "interested stockholder"
for a period of three years following the date that such stockholder became an
interested stockholder, unless: (i) prior to such date, the Board of Directors
of the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (for the purposes of determining the number of shares outstanding
under the DGCL, those shares owned (x) by persons who are directors and also
officers, and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, are excluded from the
calculation); or (iii) on or subsequent to such date, the business combination
is approved by the Board of Directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66-2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
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<PAGE>
For purposes of Section 203, "a business combination" includes (i) any
merger or consolidation involving the corporation and the interested
stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested stockholder; (iii)
subject to certain exceptions, any transaction which results in the issuance or
transfer by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation which has the effect
of increasing the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or (v) the receipt
by the interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
Section 203 defines an "interested stockholder" as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
SHARES ELIGIBLE FOR FUTURE SALE
On the date of this Prospectus, the Company has outstanding 4,500,000
shares of Common Stock. Of such shares, all of the 2,000,000 Shares being
offered hereby are freely tradeable without restriction as long as a current
registration statement covering such shares is in effect under the Securities
Act except for any shares purchased by any person who is or thereby becomes an
affiliate of the Company, which shares will be subject to the resale limitations
contained in Rule 144 promulgated under the Securities Act.
All of the 2,500,000 currently outstanding shares of Common Stock not
being registered hereby are restricted securities within the meaning of Rule 144
and, if held for at least one year, will be eligible for sale in the public
market in reliance upon and subject to the limitations of Rule 144. In general,
under Rule 144, as currently in effect, a person (or persons whose shares are
aggregated), including a person who may be deemed to be an affiliate of the
Company as that term is defined under the Securities Act, is entitled to sell,
within any three month period, a number of shares beneficially owned for at
least one year that does not exceed the greater of (i) one percent of the number
of the then outstanding shares of Common Stock or (ii) the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and the availability of current public information about
the Company. Furthermore, a person who is not deemed to have been an affiliate
of the Company during the ninety days preceding a sale by such person and who
has beneficially owned such shares for at least two years is entitled to sell
such shares without regard to the volume, manner of sale or notice requirements.
All 2,500,000 shares of restricted Common Stock not being registered hereby are
held by an affiliate of the Company, and will become eligible for sale under
Rule 144 commencing February 28, 1998.
Prior to the date of this Prospectus, there has been no public market for
the Company's securities. Following the date of this Prospectus, the Company
cannot predict the effect, if any, that market sales of the Common Stock, or the
availability of such shares for sale, will have on the market price prevailing
from time to time. Nevertheless, sales by the existing stockholders of
substantial amounts of Common Stock in the public market could adversely affect
prevailing market prices for the Company's securities.
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other
legal matters will be passed upon for the Company and the Selling Stockholders
by Rubin Baum Levin Constant & Friedman, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of February 28,
1997 and February 29, 1996, respectively, and for the years thus ended have been
included herein and in the Registration Statement of which this Prospectus forms
a part in reliance on the report of Merdinger, Fruchter, Rosen & Corso, P.C.,
independent certified public accountants, appearing elsewhere herein, given on
the authority of that firm as experts in accounting and auditing.
29
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street, N.W., Washington D.C. 20549, a registration
statement on Form SB-2 (the "Registration Statement") under the Securities Act
with respect to the securities offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement and the exhibits
thereto, as permitted by the rules and regulations of the Commission. For
further information, reference is made to the Registration Statement and to the
exhibits filed therewith. Statements contained in this Prospectus as to the
contents of any contract or other document which has been filed as an exhibit to
the Registration Statement are qualified in their entirety by reference to such
exhibits for a complete statement of their terms and conditions. The
Registration Statement and the exhibits thereto may be inspected without charge
at the offices of the Commission and copies of all or any part thereof may be
obtained from the Commission's Public Reference Section at 450 Fifth Street,
N.W., Washington D.C. 20549 or at certain of the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, upon payment
of the fees prescribed by the Commission. The Commission maintains a World Wide
Web site on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
Subsequent to this Offering, the Company will be a reporting company under
the Exchange Act. The Company intends to distribute to its stockholders annual
reports containing audited financial statements with a report therein by
independent public accountants after the end of each fiscal year. In addition,
if the Company is required to prepare such reports, the Company will make
available to its stockholders, upon request, quarterly reports for the first
free quarters of each fiscal year containing unaudited financial statements and
other information after the end of each fiscal quarter, upon written request to
the Secretary of the Company or otherwise as required by law.
30
<PAGE>
COMTELCO INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED BALANCE SHEETS F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 - F-11
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
COMTELCO INTERNATIONAL, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheet of COMTELCO
INTERNATIONAL, INC. AND SUBSIDIARIES as of February 28, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended February 28, 1997 and February 29, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of COMTELCO INTERNATIONAL, INC.
AND SUBSIDIARIES as of February 28, 1997, and the results of its operations and
its cash flows for the years ended February 28, 1997 and February 29, 1996 in
conformity with generally accepted accounting principles.
/s/ Merdinger, Fruchter, Rosen & Corso, P.C.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
March 1, 1997, except for
Note 2q, as to which the date
is January 22, 1998, and
for Note 12 as to which
the date is December 14, 1997
F-2
<PAGE>
COMTELCO INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, 1997 February 28,
(Unaudited) 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 747,427 $ 188,256
Accounts Receivable, net 408,390 51,127
Inventory 82,050 128,267
Receipts on Common Stock Subscribed -- 1,455,020
Prepaid Expenses and Other Current Assets 136,487 7,616
Receivable from Related Parties 243,079 --
----------- -----------
Total Current Assets 1,617,433 1,830,286
----------- -----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $30,678 and $10,332 at
November 30, 1997 and February 28, 1997, respectively 175,642 114,932
----------- -----------
OTHER ASSETS
Software Development Costs, at cost, net
of accumulated amortization at November 30, 1997 and
February 28, 1997 of $610,803 and $-0-, respectively 4,441,165 4,655,891
Organization Expense, at cost, net of accumulated
amortization at November 30, 1997 and February 28, 1997 of
$14,814 and $-0-, respectively 83,952 95,004
Deposits 20,472 4,074
----------- -----------
Total Other Assets 4,545,589 4,754,969
----------- -----------
TOTAL ASSETS $ 6,338,664 $ 6,700,187
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank Overdrafts $ 6,193 $ --
Accounts Payable and Accrued Expenses 899,003 62,192
Accounts Payable - Related Parties -- 16,136
----------- -----------
Total Liabilities 905,196 78,328
----------- -----------
Commitments and Contingencies -- --
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value; 2,000,000 shares
authorized, no shares outstanding -- --
Common Stock, $.00001 par value; 30,000,000
shares authorized; 4,500,000 shares issued and
outstanding 45 45
Additional Paid-In Capital 9,454,733 9,454,733
Subscription Receivable (2,494,980) (2,544,980)
Accumulated Deficit (1,721,923) (281,259)
Cumulative Foreign Currency Translation Adjustment 195,593 (6,680)
----------- -----------
Total Stockholders' Equity 5,433,468 6,621,859
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,338,664 $ 6,700,187
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
COMTELCO INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Nine Months Ended For The Year Ended
------------------------- -------------------
November 30, 1997 November 30, 1996 February 28, February 29,
(Unaudited) (Unaudited) 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 1,304,584 $ 265,012 $ 292,131 $ --
COST OF GOODS SOLD 982,108 84,307 88,428 --
----------- ----------- ----------- -----------
GROSS PROFIT 322,476 180,705 203,703 --
----------- ----------- ----------- -----------
Research and Development Expense 386,688 -- 57,574 --
Marketing and Selling Expense 458,493 -- -- --
Depreciation and Amortization 46,978 6,138 7,685 2,922
General and Administrative Expense 985,830 314,394 348,923 57,096
----------- ----------- ----------- -----------
1,877,989 320,532 414,182 60,018
----------- ----------- ----------- -----------
Loss From Operations (1,555,513) (139,827) (210,479) (60,018)
----------- ----------- ----------- -----------
Other Income (Expense)
Interest Income 148,944 149 149 9
Interest Expense (8,616) (145) (1,121) (13)
Other Income (Expense) (25,479) 649 684 1,228
----------- ----------- ----------- -----------
Total Other Income (Expenses) 114,849 653 (288) 1,224
----------- ----------- ----------- -----------
Net Loss $(1,440,664) $ (139,174) $ (210,767) $ (58,794)
=========== =========== =========== ===========
Loss Per Share $ (.52) $ (.06) $ (.08) $ (.02)
=========== =========== =========== ===========
Weighted Average Shares Outstanding 2,749,164 2,500,000 2,500,000 2,500,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
COMTELCO INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Foreign Total
Common Stock Paid-In Subscription Accumulated Currency Stockholders'
Shares Amount Capital Receivable Deficit Adjustment Equity
--------- -------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 1, 1995 -- $ 29,249 $ -- $ -- $ (11,698) $ 1,964 $ 19,515
Issuance of Common Stock
for Cash -- 25,025 -- -- -- -- 25,025
Net Loss - For the Year Ended
February 28, 1996 -- -- -- -- (58,794) -- (58,794)
Foreign Currency Translation Adjustment -- -- -- -- -- (908) (908)
--------- -------- ----------- ----------- ----------- ----------- -----------
Balance at February 28, 1996 -- 54,274 -- -- (70,492) 1,056 (15,162)
Issuance of Common Stock for Cash -- 382,584 -- -- -- -- 382,584
Issuance of Common Stock for Assets 2,500,000 25 5,017,895 (3,999,980) -- -- 5,017,920
Issuance of Common Stock for
Note Receivable 2,000,000 20 3,999,980 (3,999,980) -- -- 20
Adjustment to Par Value -- (436,858) 436,858 -- -- -- --
Adjustment to Reflect Subsequent
Collection of Subscription
Receivable -- -- -- 1,455,000 -- -- 1,455,000
Net Loss - For the Year Ended
February 28, 1997 -- -- -- -- (210,767) -- (210,767)
Foreign Currency Translation Adjustment -- -- -- -- -- (7,736) (7,736)
--------- -------- ----------- ----------- ----------- ----------- -----------
Balance at February 28, 1997 4,500,000 45 9,454,733 (2,544,980) (281,259) (6,680) 6,621,859
Collection of Subscription Receivable -- -- -- 50,000 -- -- 50,000
Net Loss - For the Nine Months
Ended November 30, 1997 (Unaudited) -- -- -- -- (1,440,664) -- (1,440,664)
Foreign Currency Translation
Adjustment (Unaudited) -- -- -- -- -- 202,273 202,273
--------- -------- ----------- ----------- ----------- ----------- -----------
Balance at November 30, 1997
(Unaudited) 4,500,000 $ 45 $ 9,454,733 $(2,494,980) $(1,721,923) $ 195,593 $ 5,433,463
========= ======== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
COMTELCO INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For The Six Months Ended For The Year Ended
------------------------ ------------------
November 30, 1997 November 30, 1996 February 28, February 29,
(Unaudited) (Unaudited) 1997 1996
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,440,664) $(139,174) $(210,767) $ (58,794)
Adjustments to Reconcile Net Loss to
Net Cash Provided (Used) By Operating Activities:
Depreciation and Amortization 641,058 6,138 7,685 2,922
Write off of Acquired Assets -- -- 57,574 --
Changes in Certain Assets and Liabilities:
Increase in Accounts Receivable (353,486) (123,854) (51,127) --
(Increase) Decrease in Subscription Receivable -- (24,088) -- 32,268
(Increase) Decrease in Inventory 48,099 (16,000) (10,338) --
(Increase) in Receivable from Related Party (230,823) -- -- --
(Increase) Decrease in Prepaid Expenses and
Other Current Assets (125,262) 5,393 3,752 (10,515)
Increase (Decrease) in Accounts Payable and
Accrued Expense 820,586 147,104 (6,576) 66,697
Increase (Decrease) in Accounts Payable -
Related Parties (16,136) 80,308 -- --
----------- --------- --------- ---------
TOTAL CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (656,628) (64,173) (209,797) 32,578
----------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and Equipment (279,320) (9,905) (7,408) (28,278)
----------- --------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (279,320) (9,905) (7,408) (28,278)
----------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank Overdrafts and Loans 6,088 484 -- --
Collection of Subscription Receivable 1,505,000 -- -- --
Sale of Common Stock -- 101,958 382,584 25,025
----------- --------- --------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,511,088 102,442 382,584 25,025
----------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH (15,969) (7,255) (5,653) (795)
----------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 559,171 21,109 159,726 28,530
CASH AND CASH EQUIVALENTS - BEGINNING 188,256 28,530 28,530 --
----------- --------- --------- ---------
CASH AND CASH EQUIVALENTS - ENDING $ 747,427 $ 49,639 $ 188,256 $ 28,530
=========== ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 8,616 $ 145 $ 1,121 $ --
=========== ========= ========= =========
Cash Paid for Income Taxes $ -- $ -- $ -- $ --
=========== ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES:
For the year ended February 28, 1997, a stockholder contributed the following assets as Additional Paid-In Capital:
Inventory $ 117,928
Property and Equipment 91,547
Software or Hardware Development Costs 4,713,465
Organization Costs 94,980
-----------
$ 5,017,920
===========
</TABLE>
2,000,000 shares of common stock were issued for $20 cash and a note receivable
in the amount of $3,999,980.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
COMTELCO INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 1 - NATURE OF OPERATIONS
The Company is engaged primarily in the development and sale of
computer hardware and software products. The operations are based in
Switzerland, Germany and Austria.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The accompanying consolidated financial statements as of February
28, 1997 and for the year then ended include the accounts of
ComTelco International, Inc. ("the Company") and its wholly owned
subsidiaries:
1) ComTelco Vertriebs AG ("ComTelco Vertriebs"), incorporated
under the laws of Switzerland on February 7, 1997.
2) ComTelco Research AG ("ComTelco Research"), incorporated under
the laws of Switzerland on February 7, 1997.
3) ComTelco (Deutschland) GmbH (formerly MDE ComTelco Vertriebs
GmbH) ("ComTelco Germany"), incorporated under the laws of
Germany in June, 1993.
4) ComTelco Softwarevertriebs GmbH (formerly MDE ComTelco
Softwareentwicklungs-und Vertriebs-GmbH) ("ComTelco Austria"),
incorporated under the laws of Austria on November 24, 1995.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
The consolidated statements of operations and cash flows for the
year ended February 29, 1996 reflect the combined accounts of
ComTelco Germany and ComTelco Austria.
b) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
c) Inventory
Inventory consisting of finished goods is stated at the lower of
cost or market. Cost is determined on a first-in, first-out basis.
d) Accounts Receivable
Accounts receivable are realizable at the amounts stated in the
accompanying statement of financial position and, therefore, no
allowance for doubtful accounts is necessary.
e) Property and Equipment
Property and equipment are stated at cost. Expenditures for
maintenance, repairs and renewals are charged to expense, whereas
major additions are capitalized. The cost and accumulated
depreciation of assets retired, sold or otherwise disposed of are
eliminated from the accounts and resulting gains or losses, if any,
are reflected through the statement of income.
Depreciation is computed over the estimated useful asset lives using
the straight-line method.
F-7
<PAGE>
COMTELCO INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
f) Organization Costs
Organization costs consist of legal and other administrative costs
incurred in relation to the formation of the Company and its
subsidiaries. These costs have been capitalized and will be
amortized over a period of five years.
g) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
h) Software Development Costs Acquired computer software costs have
been capitalized in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed", and are
reported at the lower of unamortized cost or net realizable value.
Commencing upon initial product release, these costs will be
amortized over the estimated lives of the products, generally, five
years.
i) Translation of Foreign Currency
The Company translates the foreign currency financial statements of
its foreign subsidiaries in accordance with the requirements of SFAS
No. 52, "Foreign Currency Translation". Assets and liabilities are
translated at current exchange rates, and related revenues and
expenses are translated at average exchange rates in effect during
the period. Resulting translation adjustments are recorded as a
separate component in stockholders' equity. Foreign currency
translation gains and losses are included in determining net income.
See Note 10.
j) Bank Overdraft
As a result of maintaining a consolidated cash management system,
the Company maintains overdraft positions at certain banks. Such
overdraft positions are included in current liabilities.
k) Loss Per Share
Loss per share has been calculated based upon the weighted average
number of shares outstanding and does not include shares issuable on
exercise of outstanding options or warrants, if any, since such
inclusion would be anti-dilutive. Weighted average common shares
outstanding were 2,500,000 for the periods ending February 29, 1996,
November 30, 1996 and February 28, 1997 and 2,749,164 for the period
ended November 30, 1997.
Recognition of Revenue
l) The Company recognizes revenue upon shipment to its distributors.
Generally distributors place their orders when they have orders from
end-users. Distributer agreements contain no provision for product
return. The agreements provide for replacement of defective units
only. Therefore, there is no significant risk of product return.
m) Income Taxes
Income taxes are provided for based on the liability method of
accounting pursuant to SFAS No. 109, "Accounting for Income Taxes".
The liability method requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of
temporary differences between the reported amount of assets and
liabilities and their tax bases.
n) Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" encourages,
but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company
has chosen to continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and
related Interpretations. Accordingly, compensation cost for stock
options, if any, is measured as the excess, if any, of the quoted
market price of the Company's stock, if any, at the date of the
grant over the amount an employee must pay to acquire the stock.
o) Long-Lived Assets
In March 1995, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", was
issued. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to
F-8
<PAGE>
COMTELCO INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
be held and used or disposed of by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The Company
has adopted this statement and determined that no impairment loss
need be recognized for applicable assets of continuing operations.
p) Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued a
new statement titled "Earnings Per Share" (SFAS No. 128). This
statement is effective for both interim and annual periods ending
after December 15, 1997 and specifies the computation, presentation,
and disclosure requirements for earnings per share for entities with
publicly held common stock or potential common stock. After the
effective date, all prior-period EPS data presented shall be
restated to conform with the provisions for SFAS No. 128.
If the provisions of SFAS No. 128 had been adopted in these
financial statements, there would not have been any impact on loss
per share.
q) Interim Financial Information
The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, which
in the opinion of management, are necessary to fairly state the
Company's financial position, the results of its operations and cash
flows for the periods presented. The results of operations for the
nine months ended November 30, 1997 are not necessarily indicative
of results for the entire fiscal year ending February 28, 1998.
NOTE 3 - ACQUISITIONS
As of February 28, 1997, the Company acquired all of the issued and
outstanding shares of the four entities named in Note 2. This
acquisition was effected through the exchange of the Company's newly
issued shares for the subsidiary shares outstanding. The subsidiary
shares were all held by one individual, and this individual was in
control of the Company immediately before and after the exchange of
shares.
Due to the fact that the exchange of shares occurred among entities
under common control, the financial statements reflect the
historical financial statements of the entities acquired, similar to
a pooling of interests.
The financial information presented for the year ended February 29,
1996 reflects the combined financial data of ComTelco Germany and
ComTelco Austria, which were at that time separate unconsolidated
entities.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at February 28, 1997 is summarized as
follows:
Automobile $ 24,419
Furniture, Fixtures & Equipment 100,845
---------
125,264
Less: Accumulated Depreciation (10,332)
---------
$ 114,932
=========
Depreciation expense for the year ended February 28, 1997 was
$7,685.
NOTE 5 - SOFTWARE AND HARDWARE DEVELOPMENT COSTS
Software and Hardware development costs have been contributed to a
subsidiary of the Company by its stockholder. (See Note 6).
Amortization of capitalized computer software costs charged to
expense for the year ended February 28, 1997 were $0 and for the
nine months ended November 30, 1997 were $594,081.
F-9
<PAGE>
COMTELCO INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company and its subsidiaries have entered into various
transactions with another company, MDE AG, a company controlled by
the Company's Chairman of the Board of Directors and its majority
stockholder. Certain other executive officers of the Company are
minority stockholders of MDE AG.
The following table summarizes the transactions between the Company
and MDE AG during the year ended February 28, 1997 and the related
payable balances outstanding at February 28, 1997:
Purchases $83,969
Accounts Payable 16,136
Services performed for MDE AG 43,269
During the nine months ended November 30, 1997, the Company paid
rent totaling $122,811 to MDE AG.
During the nine months ended November 30, 1997, the Company paid the
accounts payable to MDE indicated above. Additionally, during the
quarter ended November 30, 1997, the Company loaned MDE an aggregate
of $243,079 to bridge wotking capital shortfalls. The loan is due on
demand and bears interest at 8% per annum. As of November 30, 1997,
accrued interest on the loan totalled approximately $2,500. The loan
is expected to be repaid by February 28, 1998.
In addition, the Company has pledged cash totaling $135,686 at
February 28, 1997 in favor of MDE AG to secure lease obligations
owing to MDE AG. These funds are available for withdrawal by the
Company at any time.
As mentioned in Notes 5, the Company's majority stockholder has
contributed computer software and hardware development to the
Company. These assets were acquired by the stockholder from MDE AG.
NOTE 7 - SIGNIFICANT CUSTOMERS
The following summarizes the concentration of sales and accounts
receivable for customers with revenue in excess of 10% of total
revenue:
Percentage of February 28, 1997
Percentage of Revenue Accounts Receivable
--------------------- -------------------------------
Customer A 33% 2%
Customer B 26% 74%
For the nine month period ended November 30, 1997, one customer
accounted for approximately 12% of total revenue for the period.
NOTE 8 - MAJOR SUPPLIERS
The Company purchases the majority of its inventory from MDE AG, a
related party (See Note 6), at MDE AG's cost. MDE AG purchases
approximately 63% of its inventory from two vendors.
No purchases of inventory were made from MDE AG during the nine
months ended November 30, 1997. During the nine month period ended
November 30, 1997, the Company purchased approximately 28% of its
inventory from one supplier. This supplier represented approximately
9% of accounts payable at November 30, 1997.
F-10
<PAGE>
COMTELCO INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 9 - SUBSCRIPTION RECEIVABLE
As of February 28, 1997, the Company entered into a stock
subscription agreement with Interfinance Inv. Co., Ltd. to
sell common stock of the Company as follows:
The sale of 2,000,000 shares of the Company's common stock in
exchange for $20 in cash and a promissory note due on February 28,
1998 in the principal amount of $3,999,980, bearing interest at 5.8%
per annum. The note is secured by the 2,000,000 shares of common
stock. The shares securing the note will be released ratably as the
note is paid down. As of November 30, 1997, $1,505,000 principal
amount of this note has been repaid and 752,500 shares have been
released.
NOTE 10 - OPERATIONS
All of the Company's revenues from operations are generated by its
wholly owned subsidiaries, located in Switzerland, Germany, and
Austria (collectively, "Europe"). Substantially all of the Company's
losses from operations occurred in Europe and substantially all of
its identifiable assets, with the exception of the Subscription
Receivables, are employed in European operations.
The functional currency of each subsidiary is as follows:
ComTelco Vertriebs and Comtelco Research Swiss Franc
Comtelco Germany Deutsch Mark
Comtelco Austrian Austrian Schilling.
The functional currency for each subsidiary is the currency of the
primary economic environment in which each subsidiary operates.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company has pledged two cash accounts, totaling $135,686 at
February 28, 1997, in favor of MDE AG, a related party (See Note 6).
This arrangement does not legally restrict withdrawal or usage of
available cash funds.
The Company has entered into several noncancelable operating lease
agreements for office space. The minimum lease payments under these
lease agreements for each of the next five years ending February 28
are as follows:
1998 $ 42,593
1999 65,964
2000 48,637
2001 30,088
2002 0
Rent expense included in the financial statements totaled $26,716
and $4,392 for the years ended February 28, 1997 and February 29,
1996, respectively.
During the nine month periods ended November 30, 1997 and 1996 rent
expense included in the financial statements totaled $157,928 and
$24,795, respectively.
NOTE 12 - SUBSEQUENT EVENTS
Subsequent to February 28, 1997, the Company has received $1,505,000
in principal payments on the subscription receivable note described
in Note 9. The Company received $50,000 as a payment toward accrued
interest income on the above note on September 9, 1997. The Company
believes that all interest income on the Interfinance Note is
realizable due to Interfinance's payment of amounts in advance
before due date. The Company further believes that all remaining
outstanding principal and interest will be collected on or before
the February 28, 1998 due date, although there can be no assurance
thereof.
The Company has entered into lease agreements covering eight
automobiles for use by Company sales and technical staff. The leases
expire in September 1999 and require lease payments aggregating
$26,447, $52,893 and $30,854, for the years ending February 28, 1998
and 1999 and February 29, 2000, respectively.
F-11
<PAGE>
================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations in connection with the Offering made
hereby, and, if given or made, such information or representations must not be
relied upon as having been authorized by the Company or by the Underwriters.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such an offer or solicitation in such jurisdiction.
Neither the delivery of this Prospectus nor any sale made hereunder shall under
any circumstances create any implication that there had been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to the dates as of which such
information is furnished.
---------------------------
TABLE OF CONTENTS
Page
Prospectus Summary.......................................................... 2
Risk Factors................................................................ 6
Use of Proceeds............................................................. 11
Dividend Policy............................................................. 11
Capitalization.............................................................. 12
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 12
Business.................................................................... 14
Management.................................................................. 22
Principal Stockholders...................................................... 24
Certain Transactions........................................................ 25
Selling Stockholders and Plan of Distribution............................... 25
Description of Securities................................................... 28
Shares Eligible for Future Sale............................................. 29
Legal Matters............................................................... 29
Experts..................................................................... 29
Available Information....................................................... 30
Index to Financial Statements............................................... F-1
---------------------------
Until _______, 1998 (25 days from the date hereof) all dealers effecting
transactions in the registered securities, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as an underwriter
and with respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
2,000,000 Shares
COMTELCO INTERNATIONAL INC.
Common Stock
---------------------------
PROSPECTUS
---------------------------
__________, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Under Section 145 of the Delaware General Corporation Law (the "DGCL"),
the Registrant has broad powers to indemnify its directors, officers and other
employees. These sections (i) provide that the statutory indemnification and
advancement of expenses provisions of the DGCL are not exclusive, provided that
no indemnification may be made to or on behalf of any director or officer if a
judgment or other final adjudication adverse to the director or officer
establishes that his acts were committed in bad faith or were the result of
active and deliberate dishonesty and were material to the cause of action so
adjudicated, or that he personally gained in fact a financial profit or other
advantage to which he was not legally entitled, (ii) establish procedures for
indemnification and advancement of expenses that may be contained in the
certificate of incorporation or by-laws, or, when authorized by either of the
foregoing, set forth in a resolution of the stockholders or directors or an
agreement providing for indemnification and advancement of expenses, (iii) apply
a single standard for statutory indemnification for third-party and derivative
suits by providing that indemnification is available if the director or officer
acted in good faith, for a purpose which he reasonably believed to be in the
best interests of the corporation, and, in criminal actions, had no reasonable
cause to believe that his conduct was unlawful, and (iv) permit the advancement
of litigation expenses upon receipt of an undertaking to repay such advance if
the director or officer is ultimately determined not to be entitled to
indemnification or to the extent the expenses advanced exceed the
indemnification to which the director or officer is entitled.
The Registrant's By-laws provide that the Registrant shall indemnify its
officers and directors, as such, to the fullest extent permitted by applicable
law, and that expenses reasonably incurred by any such officer or director in
connection with a threatened or actual action or proceeding shall be advanced or
promptly reimbursed by the Registrant in advance of the final disposition of
such action or proceeding upon receipt of an undertaking by or on behalf of such
officer or director to repay such amount if and to the extent that it is
ultimately determined that such officer or director is not entitled to
indemnification.
Article Seventh of the Registrant's Certificate of Incorporation provides
that to the fullest extent permitted by the DBCL no director of the Registrant
shall be held personally liable to the Registrant or its stockholders for
monetary damages for any breach of duty in his capacity as a director.
The Registrant's By-Laws provide that the Registrant will indemnify its
directors, officers and employees against judgments, fines, amounts paid in
settlement and reasonable expenses to the fullest extent permitted under the
DGCL.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
The following are the estimated expenses of the issuance and distribution
of the securities being registered, all of which will be paid by ComTelco
International, Inc. (the "Registrant").
OTC Bulletin Board application fee ......... $ 10,000
Printing expenses .......................... 15,000
Fees and expenses of counsel ............... 125,000
Fees and expenses of accountants ........... 140,000
Transfer agent and registrar fees .......... 5,000
Blue sky fees and expenses ................. 15,000
Miscellaneous .............................. 10,000
--------
Total ................................. $320,000
========
Item 26. Recent Sales of Unregistered Securities.
Set forth below is information as to securities of the Registrant sold
within the past three years which were not registered under the Securities Act
and were issued based upon the exemption from registration provided by Section
4(2) of the Act. All sales were made to "accredited" investors within the
meaning of the Act and all investors were afforded access to all corporate
information which they desired to know. No underwriters were involved in any of
the sales and there were no underwriting discounts or commissions paid.
II-1
<PAGE>
As of February 28, 1997, Mr. August Steiner purchased 2,500,000 shares of
Common Stock from the Registrant in exchange for all of the outstanding equity
interests in each of the Registrant's four Subsidiaries.
As of February 28, 1997, Interfinance purchased 2,000,000 shares of Common
Stock from the Registrant for the consideration of $4,000,000: the par value of
the shares of $20 was paid in cash and the balance of $3,999,980 was paid by
delivery of a Promissory Note due on February 28, 1998. This Interfinance Note
bears interest at 5.8% per annum and is secured by a pledge to ComTelco of the
shares of Common Stock issued to Interfinance. Under the terms of the pledge
agreement, the shares are subject to release of ComTelco's security interest
ratably upon partial repayment of the Interfinance Note.
Item 27. Exhibits
Exhibit
Number Description
3.1 Certificate of Incorporation of the Registrant.(1)
3.2 By-Laws of the Registrant.(1)
4.1 Specimen form of Common Stock certificate.(1)
5.1 Opinion of Rubin Baum Levin Constant & Friedman regarding
legality.(1)
10.1 Employment Contract between the Registrant and Roland Steiner
dated as of February 20, 1997.(1)
10.2 Employment Contract between the Registrant and Ramon Inauen
dated as of February 20, 1997.(1)
10.3 Employment Contract between the Registrant and Claudia Sutter
dated as of February 20, 1997.(1)
10.4 [Intentionally Omitted]
10.5 Lease Agreement between MDE and the Registrant dated as of
March 3, 1997.(1)
10.6 Lease Agreement between MDE AG and ComTelco Research dated as
of March 3, 1997.(1)
10.7 Lease Agreement between MDE AG and ComTelco Vertriebs dated as
of March 3, 1997.(1)
10.8 5.8% Promissory Note issued by Interfinance Inv. Co. Ltd. to
the Registrant dated as of February 28, 1997.(1)
10.9 Security and Pledge Agreement between Interfinance Inv. Co.
Ltd. and the Registrant dated as of February 28, 1997.(1)
10.10 Subscription Agreement between Interfinance Inv. Co. Ltd. to
the Registrant dated as of February 28, 1997.(1)
10.11 Registration Rights Agreement between Interfinance Inv. Co.
Ltd. and the Registrant dated as of February 28, 1997.(1)
10.12 Equity Purchase Agreement between Mr. August Steiner and the
Registrant dated as of February 28, 1997.(1)
10.13 Agreement for the Contribution of Assets, Software and
Hardware Developments by August Steiner to ComTelco (Research)
AG.(1)
10.14 Agreement for the Contribution of Assets, Software and
Hardware Developments by August Steiner to ComTelco
(Vertriebs) AG.(1)
21.1 Subsidiaries of Registrant.(1)
23.1 Consent of Merdinger, Fruchter, Rosen & Corso, P.C.
24.1 Power of Attorney (included with the signature page to the
registration statement).(1)
27.1 Financial Data Schedule.
- ----------
(1) Previously filed.
Item 28. Undertakings.
(a) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any
II-2
<PAGE>
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(b) The Registrant will:
(1) File during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement;
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment a new registration statement of the securities offered,
and the offering of the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-3
<PAGE>
SIGNATURES
Pursuant to 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 the filing on Form SB-2 and authorized this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City New York, New York, on February 13, 1998.
COMTELCO INTERNATIONAL, INC.
By: /s/ Roland Steiner
-------------------------------------
Roland Steiner
Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and power of attorney have been signed by the following
persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Roland Steiner Chief Executive Officer, February 13, 1998
- ----------------------------- President and Director
Roland Steiner (Principal Executive Officer)
/s/ August Steiner Chairman of the Board of February 13, 1998
- ----------------------------- Directors
August Steiner
/s/ Ramon Inauen Chief Operating Officer February 13, 1998
- ----------------------------- and Director
Ramon Inauen
/s/ Claudia Sutter Chief Financial Officer, February 13, 1998
- ----------------------------- Treasurer and Director
Claudia Sutter (Principal Financial and
Accounting Officer)
* Director February 13, 1998
- -----------------------------
Klaus Brenner
* Director February 13, 1998
- -----------------------------
Gian Franco Cocilovo
* By: /s/ Roland Steiner
--------------------------------
Roland Steiner, attorney-in-fact
II-4
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
3.1 Certificate of Incorporation of the Registrant.(1)
3.2 By-Laws of the Registrant.(1)
4.1 Specimen form of Common Stock certificate.(1)
5.1 Opinion of Rubin Baum Levin Constant & Friedman regarding
legality.(1)
10.1 Employment Contract between the Registrant and Roland Steiner
dated as of February 20, 1997.(1)
10.2 Employment Contract between the Registrant and Ramon Inauen
dated as of February 20, 1997.(1)
10.3 Employment Contract between the Registrant and Claudia Sutter
dated as of February 20, 1997.(1)
10.4 [Intentionally Omitted]
10.5 Lease Agreement between MDE and the Registrant dated as of
March 3, 1997.(1)
10.6 Lease Agreement between MDE AG and ComTelco Research dated as
of March 3, 1997.(1)
10.7 Lease Agreement between MDE AG and ComTelco Vertriebs dated as
of March 3, 1997.(1)
10.8 5.8% Promissory Note issued by Interfinance Inv. Co. Ltd. to
the Registrant dated as of February 28, 1997.(1)
10.9 Security and Pledge Agreement between Interfinance Inv. Co.
Ltd. and the Registrant dated as of February 28, 1997.(1)
10.10 Subscription Agreement between Interfinance Inv. Co. Ltd. to
the Registrant dated as of February 28, 1997.(1)
10.11 Registration Rights Agreement between Interfinance Inv. Co.
Ltd. and the Registrant dated as of February 28, 1997.(1)
10.12 Equity Purchase Agreement between Mr. August Steiner and the
Registrant dated as of February 28, 1997.(1)
10.13 Agreement for the Contribution of Assets, Software and
Hardware Developments by August Steiner to ComTelco (Research)
AG.(1)
10.14 Agreement for the Contribution of Assets, Software and
Hardware Developments by August Steiner to ComTelco
(Vertriebs) AG.(1)
21.1 Subsidiaries of Registrant.(1)
23.1 Consent of Merdinger, Fruchter, Rosen & Corso, P.C.
24.1 Power of Attorney (included with the signature page to the
registration statement).(1)
27.1 Financial Data Schedule.
- ----------
(1) Previously filed.
[LETTERHEAD OF MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.]
ACCOUNTANT'S CONSENT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
COMTELCO INTERNATIONAL, INC.
We consent to the use of our report included herein and to the reference
to our firm under the heading "experts" in the Prospectus.
/s/ Merdinger, Fruchter, Rosen & Corso P.C.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
February 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from ComTelco
International, Inc. and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> FEB-28-1997 FEB-28-1997
<PERIOD-START> MAR-01-1997 MAR-01-1996
<PERIOD-END> NOV-30-1997 FEB-28-1997
<CASH> 747,427 188,256
<SECURITIES> 0 0
<RECEIVABLES> 408,390 51,127
<ALLOWANCES> 0 0
<INVENTORY> 82,050 128,267
<CURRENT-ASSETS> 1,617,433 1,830,286
<PP&E> 206,320 125,264
<DEPRECIATION> 30,678 10,332
<TOTAL-ASSETS> 6,338,664 6,700,187
<CURRENT-LIABILITIES> 905,196 78,328
<BONDS> 0 0
0 0
0 0
<COMMON> 45 33
<OTHER-SE> 5,433,423 6,621,826
<TOTAL-LIABILITY-AND-EQUITY> 6,338,664 6,700,187
<SALES> 1,304,584 292,131
<TOTAL-REVENUES> 1,304,584 292,131
<CGS> 982,108 88,428
<TOTAL-COSTS> 982,108 88,428
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 8,616 1,121
<INCOME-PRETAX> (1,440,664) (210,767)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,440,664) (210,767)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,440,664) (210,767)
<EPS-PRIMARY> (.52) (.08)
<EPS-DILUTED> (.52) (.08)
</TABLE>
