<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1996
REGISTRATION NO. 333-12981
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT
NO. 1
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
USTEL, INC.
(Name of small business issuer in its charter)
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MINNESOTA 4813 95-4362330
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
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2775 SOUTH RAINBOW BOULEVARD, #102
LAS VEGAS, NEVADA 89102
(702) 247-7400
(Address and telephone number of principal executive offices)
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2775 SOUTH RAINBOW BOULEVARD, #102
LAS VEGAS, NEVADA 89102
(702) 247-7400
(Address and telephone number of principal place of business or intended place
of business)
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ROBERT L.B. DIENER
PRESIDENT, CHIEF EXECUTIVE OFFICER
2775 SOUTH RAINBOW BOULEVARD, #102
LAS VEGAS, NEVADA 89102
(702) 247-7400
(Name, address, and telephone number of agent for service)
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COPIES TO:
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LEIB ORLANSKI, ESQ.
SUSAN B. KALMAN, ESQ. KENNETH J. BARONSKY, ESQ.
FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN MILBANK, TWEED, HADLEY & MCCLOY
9100 Wilshire Boulevard, 8th Floor East 601 South Figueroa Street
Beverly Hills, California 90212 Los Angeles, California 90017-5735
Telephone (310) 273-1870 Telephone (213) 892-4000
Facsimile (310) 274-8357 Facsimile: (213) 629-5063
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Approximate date of Commencement of Proposed Sale to Public: As soon as
practicable after the effective date of this Registration Statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM PRICE MAXIMUM OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY(1) PRICE(1) FEE
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Common Stock $0.01 par value(2).......... 2,875,000 $6.00 $17,250,000 $6,345.52
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Representative's Warrants(3)............. 160,000 $0.001 $160 $0.055
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Common Stock $0.01 par value(4).......... 160,000(5) $7.20 $1,152,000 $397.24
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Total....................................................................................... $6,345.58
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(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457 by reference to the last sale price reported on the
Nasdaq Market on September 25, 1996. This amount was previously paid.
(2) Includes 375,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(3) To be issued to the Representative of the Underwriters.
(4) Represents the exercise price of the Representative's Warrants.
(5) Issuable pursuant to the exercise of the Representative's Warrant.
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, as amended, or until the 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 OCTOBER 25, 1996
PROSPECTUS
2,500,000 SHARES
LOGO
COMMON STOCK
------------------------------
Of the 2,500,000 shares of Common Stock offered hereby, 2,000,000 shares
are being sold by UStel, Inc. ("UStel" or the "Company") and 500,000 by certain
stockholders of the Company (the "Selling Stockholders"). See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of Common Stock by the Selling Stockholders. The last sale price for the
Common Stock on the Nasdaq Small-Cap Market on October 18, 1996 was $6.00 per
share. See "Price Range of Common Stock." The Company has applied for quotation
of the Common Stock on the Nasdaq National Market System, effective upon
completion of this offering. The Company's Nasdaq Small-Cap symbol is "USTL."
------------------------
SEE "RISK FACTORS" BEGINNING AT PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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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UNDERWRITING PROCEEDS TO
DISCOUNTS AND PROCEEDS TO SELLING
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER
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Per Share.................. $ $ $ $
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Total(3)................... $ $ $ $
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(1) Excludes the value of warrants (the "Representative's Warrants") to purchase
up to 160,000 shares of Common Stock. The Company and the Selling
Stockholders have agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses estimated at $1,114,820 payable by the Company
including, the Representative's non-accountable expense allowance. See
"Underwriting."
(3) The Company has granted the Underwriters a 45-day option to purchase up to
375,000 additional shares of Common Stock, on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. To the extent
that the option is exercised, the Underwriters will offer the additional
shares at the Price to Public shown above. If the option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ , and $ ,
respectively. See "Underwriting."
The shares of Common Stock are being offered severally by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, subject to the right to reject any order in whole or in part and
certain other conditions. It is expected that delivery of such shares will be
made against payment therefor at the offices of Cruttenden Roth Incorporated,
Irvine, California, or through the facilities of the Depository Trust Company on
or about , 1996.
------------------------------
CRUTTENDEN ROTH
I N C O R P O R A T E D
The date of this Prospectus is , 1996
<PAGE> 3
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company with the Commission in accordance with the Exchange Act may
be inspected and copied at the public reference facilities of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the following regional offices of the Commission: 7 World Trade Center, Suite
1300, New York, New York 10048 and Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, such material concerning the Company
can be inspected at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act of 1933, as amended (the "Securities Act") with
respect to the shares of Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. A copy of the Registration Statement, and the
exhibits and schedules thereto, may be inspected without charge at the public
reference facilities maintained by the Commission in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Public Regional Office, 5670
Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3848, and copies
of all or any part of the Registration Statement may be obtained from such
offices or by mail from the Public Reference Section of the Commission at its
principal office upon the payment of the fees prescribed by the Commission. The
Company also intends to file a Registration Statement on Form S-3 covering
2,217,851 shares of Common Stock to be sold by certain selling stockholders and
warrant holders and a Registration Statement on Form S-4 covering 1,076,923
shares of Common Stock to be issued in the Merger (as hereinafter defined).
The Commission also maintains a World Wide Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ SMALL-CAP MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE ACT. SEE "UNDERWRITING."
2
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PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act that
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 under "Risk Factors" and
elsewhere in the Prospectus. The following summary is qualified in its entirety
by the more detailed information and the Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. Except as otherwise noted herein, all
information in this Prospectus (i) assumes that the Underwriters' over-allotment
option and the Representative's Warrants (as defined below) are not exercised;
(ii) assumes that an aggregate of 310,000 options and 1,021,000 warrants
outstanding are not exercised; (iii) gives effect to the issuance of 275,000
shares of Common Stock to be sold by a Selling Stockholder in this Offering upon
conversion of a portion of the Series A Convertible Preferred Stock; (iv) does
not give effect to the issuance of 1,076,923 shares of Common Stock pursuant to
the Merger (as defined below); and (v) does not give effect to the conversion of
a $500,000 convertible debentures into 71,429 shares of Common Stock, or the
conversion of the remaining Series A Convertible Preferred Stock into 275,000
shares of Common Stock. See "Capitalization," "Business -- Recent Developments,"
"Description of Securities," and "Underwriting."
THE COMPANY
UStel provides long distance telecommunications services, consisting
primarily of direct dial long distance telephone transmissions, to commercial
customers throughout the United States. Customers who have selected the Company
as their long distance carrier can call any point in the United States or any
foreign country at rates that generally are lower than those charged by AT&T
Corp. ("AT&T"), MCI Telecommunications Corporation ("MCI") and Sprint
Communications, L.P. ("Sprint").
Since commencing operations in January, 1993, the Company's subscriber base
has grown to approximately 12,500 customers at June 30, 1996. The Company's
monthly revenues have increased from approximately $10,000 in January, 1993 to
approximately $2,000,000 in June, 1996.
In addition to long distance telecommunications services, the Company also
offers a variety of service options, including "1 +" dialing, "800" service,
calling cards, operator services, private line networks and data transmission.
Separate rates are charged for interstate, intrastate and international calls.
While intrastate rates vary depending upon the state and international rates
vary based upon the country called, interstate calls, regardless of destination,
generally are charged on a flat rate per minute (or increment thereof) based
upon the time of day.
In mid-1995, UStel entered into a non-exclusive sales agency agreement with
Consortium 2000, Inc. ("Consortium 2000"). Consortium 2000 provides
telecommunications consulting services to a diversified client base by analyzing
the customer's long distance calling patterns, usage volume and specialized
telecommunications needs, and recommending calling plans and carriers (or
combinations of carriers) to achieve the most cost-effective result. Consortium
2000 acts as a sales agent for a broad base of long distance carriers. For a
significant portion of its clients, however, UStel frequently represents the
low-cost provider and, as of June 30, 1996, approximately 70% of Consortium
2000's clients were customers of UStel. Consortium 2000 is principally
compensated in the form of commissions payable by each carrier with whom
business is placed. As of June 30, 1996 approximately 75% of UStel's customers
were referred to the Company by Consortium 2000.
On August 14, 1996, UStel, Consortium 2000 and Consortium Acquisition
Corporation entered into a Merger Agreement and Plan of Reorganization (the
"Merger Agreement" and "Merger") pursuant to which 1,076,923 shares of UStel are
to be issued to the shareholders of Consortium 2000, in exchange for all of the
outstanding shares of Consortium 2000. The Merger is subject to approval by the
stockholders of UStel and certain other conditions. Upon consummation of the
Merger, Consortium 2000 will become a wholly-owned subsidiary of UStel. The
Merger is not expected to be completed or approved by the stockholders of the
Company prior to the closing of this offering. See "Risk Factors -- Consummation
and Implementation of the Merger" and "Business -- Recent Developments".
3
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The Company believes it can achieve significant benefits through the
Merger. The Company will realize immediate cost savings because a substantial
portion of the commissions historically paid by UStel to Consortium 2000 for
customer referrals will be eliminated. In addition, members of Consortium 2000's
management, who have recently joined the Company, plan to implement several
programs designed to increase the Company's customer base and profitability. For
example, management intends to implement a new in-house billing system in order
to reduce the amount of time between the provision of services by the Company
and the collection of payments from its customers.
The Company was incorporated in California on March 11, 1992, as U.S. Tel,
Inc. and changed its corporate name to UStel, Inc. on April 20, 1992. The
Company commenced operations as a long distance carrier in January 1993. On
January 4, 1994, the Company effected a recapitalization of its capital stock in
connection with its reincorporation merger to Minnesota prior to its initial
public offering of Common Stock. The Company intends to reincorporate in
California by the end of 1996. Its corporate headquarters are located at 2775
South Rainbow Boulevard, Suite 102, Las Vegas, Nevada 89102 and its telephone
number is (702) 247-7400.
THE OFFERING
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Common Stock offered hereby:
By the Company............................. 2,000,000
By the Selling Stockholders(1)............. 500,000
Common Stock to be outstanding after this
offering(1)(2)............................. 4,401,851 shares
Use of Proceeds.............................. The net proceeds to the Company will be used
for repayment of debt, capital expenditures,
working capital and other general corporate
purposes. See "Use of Proceeds."
Risk Factors................................. Prospective investors should consider
carefully the factors set forth under "Risk
Factors."
Nasdaq Small-Cap and proposed NMS Symbol..... "USTL"
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(1) Includes 275,000 shares of Common Stock to be sold by a Selling Stockholder
that will be issued by the Company upon the conversion of 275,000 shares of
Series A Convertible Preferred Stock and 225,000 shares of Common Stock to
be sold by the Trust.
(2) Excludes 1,076,923 shares of Common Stock to be issued in connection with
the Merger.
4
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SUMMARY FINANCIAL DATA
The following table sets forth summary historical and pro forma financial
data for UStel for the years ended December 31, 1992 through 1995 and for the
six months ended June 30, 1995 and 1996. Such information and data should be
read in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Financial Statements and
Pro Forma Condensed Financial Statements including, in each case, the related
Notes thereto included elsewhere in this Prospectus.
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<CAPTION>
PERIOD FROM
MARCH 11, 1992 SIX MONTHS ENDED
(INCEPTION) TO YEARS ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ---------------------------------------------------- --------------------------------------
-------------- PRO FORMA PRO FORMA
OPERATIONS DATA: 1992 1993 1994 1995 1995(1)(3) 1995 1996 1996(1)(3)
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Revenues........ $ 5,740 $1,600,147 $6,118,480 $16,127,575 $17,877,642 $6,996,751 $ 10,526,503 $11,515,057
Total operating
expenses...... (318,890) (2,286,981) (6,982,051) (16,252,143) (17,810,535) (6,940,582) (10,268,526) (11,446,285)
Income (loss)
from
operations.... (313,150) (686,834) (863,571) (124,568) 67,107 56,169 257,977 68,772
Net interest
expense....... -- (41,686) (117,780) (136,377) (147,051) (8,031) (186,013) (183,602)
Net income
(loss)........ (313,150) (765,552) (1,075,442) (371,711) (302,856) 48,138 71,964 (114,830)
Net income
(loss) per
share......... (0.33) (0.81) (0.83) (0.23) (0.11) 0.03 0.03 (0.03)
Weighted average
common shares
outstanding... 950,000 950,000 1,291,913 1,600,000 2,676,923 1,600,000 2,735,195 3,812,118
</TABLE>
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<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
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OTHER INFORMATION: 1993 1994 1995 1995 1996
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Traffic volume (minutes)............ 9,317,640 38,683,886 103,093,699 48,176,139 66,941,903
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<CAPTION>
JUNE 30, 1996
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PRO FORMA
AS
BALANCE SHEET DATA: ACTUAL AS ADJUSTED(2) ADJUSTED(1)(3)
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Working capital............................................. $ 2,024,586 $10,569,766 $11,072,232
Total assets................................................ 14,801,610 18,574,515 23,418,198
Notes payable to banks...................................... 4,025,691 3,125,691 3,225,691
Notes payable to others..................................... 1,484,000 148,000 148,000
Total long-term debt........................................ 500,000 500,000 537,381
Total stockholders' equity.................................. 5,433,440 15,478,620 19,678,620
</TABLE>
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(1) As adjusted to give effect to the consummation of the Merger. For
information regarding pro forma adjustments made to the Company's
historical financial data, see the Pro forma Condensed Financial
Statements, and the Notes thereto, contained elsewhere in this Prospectus.
See "Business -- Recent Developments."
(2) As adjusted to reflect the issuance of 275,000 shares of Common Stock upon
conversion of a portion of the Series A Preferred Stock and the sale of
2,000,000 shares of Common Stock by the Company at an assumed price of
$6.00 per share and the application of the net proceeds therefrom. See "Use
of Proceeds."
(3) See Note 6 of Notes to Financial Statements of Consortium 2000.
5
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RISK FACTORS
Investment in the securities offered hereby involves a high degree of risk.
Prospective investors should carefully consider all of the information in this
Prospectus, including the following risk factors.
LACK OF IN-HOUSE BILLING SYSTEM; PRESSURE ON WORKING CAPITAL
Because the Company does not yet have an in-house billing system, it is
dependent upon a third-party billing services provider to send out bills to the
Company's customers for usage of the services provided by the Company. Because
of the reliance on an outside billing service, it is uneconomical for the
Company to render bills more frequently than once a month. Typically, this
results in bills for services being mailed out between 20 to 30 days after the
end of the month in which the services are rendered. The Company is required to
pay for the use of third-party long distance lines in advance of the receipt of
payment by the Company from its customers for the use of the services provided
by the Company. This condition requires the Company to utilize its working
capital facility to finance payables, pending collection of its receivables. In
September, 1996, the Company entered into an agreement with WilTel to finance a
portion of its approximately $5,600,000 outstanding payable due to WilTel.
Pursuant to this agreement, WilTel agreed to defer payment on approximately
$3,900,000 owed by the Company to WilTel. Such amount bears interest at 15% per
annum and will be paid out of the proceeds of this offering, and in any event,
no later than November 10, 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations and Financial
Condition -- Liquidity and Capital Resources."
The Company intends to apply a portion of the proceeds of this offering to
install an in-house billing system that the Company expects will enable it to
render its bills on a more frequent billing cycle and to receive payments from
its customers more rapidly. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
COMPETITION; TECHNOLOGICAL ADVANCES
The Company is primarily engaged in providing telecommunications services
in the long distance telephone industry. This industry is highly competitive and
is significantly affected by new service introductions and the market activity
of major industry participants. As a service provider in the long distance
telecommunications industry, the Company competes with numerous carriers
including the three dominant carriers, AT&T, MCI and Sprint, all of which have
substantially greater name recognition, more extensive transmission networks,
significantly greater engineering and marketing capabilities and substantially
greater financial and personnel resources than those available to the Company.
AT&T continues to be the leading provider of long distance telephone
service, and its pricing and services largely determine the prices and services
offered by resellers and other long distance telephone carriers. Generally, the
Company endeavors to provide its long distance telephone services at a lower
cost than comparable services offered by AT&T, MCI or Sprint. Accordingly, the
ability of the Company to compete effectively in the long distance
telecommunications industry will depend upon its ability to offer and maintain
services at competitive rates.
In addition, under current government policy, almost any entity with
sufficient capital can freely enter the domestic long distance
telecommunications market. Moreover, recent legislation eliminated the ban on
local telephone companies competing in the long distance market. The Company may
therefore face additional new competition. Furthermore, a continuing trend
toward consolidations, mergers, acquisitions and strategic alliances in the
telecommunications industry could also give rise to significant market entry of
new competitors to the Company or to significant competition for the Company's
customers. There can be no assurance that the Company will be able to compete
successfully with existing or future competitors. See "Business -- Competition."
The telecommunications industry has been characterized by steady
technological change, frequent new service introductions and evolving industry
standards. The Company believes that its future success will depend on its
ability to anticipate such changes and to offer market responsive services on a
timely basis that
6
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meet these evolving industry standards. There can be no assurance that the
Company will have sufficient resources to make the investments necessary to
acquire new technology or to introduce new services that would satisfy an
expanded range of customer needs.
LIMITED OPERATING HISTORY; LOSSES IN PRIOR PERIODS
The Company commenced operations in 1993 and has only a limited operating
history upon which potential investors may base an evaluation of its
performance. Potential investors, therefore, have limited historical financial
information upon which to base an evaluation of the Company's performance and an
investment in shares of the Company's Common Stock. The Company's prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of development.
The Company reported net losses of $765,552, $1,075,442 and $371,711 for
the years ended December 31, 1993, 1994 and 1995, respectively. Losses incurred
through December 31, 1994 were attributable primarily to startup costs required
to develop the Company's long distance telephone operations and the costs
associated with transmitting calls on behalf of a rapidly expanding customer
base. While the Company reported net income of $71,964 for the six months ended
June 30, 1996, there can be no assurance that the Company will sustain
profitability or positive cash flows from operating activities in the future. If
the Company is unable to maintain profitability or positive cash flow from
operating activities, it may be unable to meet its working capital or future
debt service requirements, which would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations and Financial Condition" and the Company's Financial Statements and
the Notes thereto contained elsewhere in this Prospectus.
DEPENDENCE UPON THIRD PARTY TRANSMISSION FACILITIES
The future profitability of the Company is based upon its ability to
transmit its customers' long distance telephone calls on a cost effective basis
over transmission facilities leased from facilities based long distance carriers
that compete with the Company. The Company owns only a limited portion of the
transmission facilities needed to complete all of its customers' long distance
telephone calls. Accordingly, the Company is vulnerable to changes in its lease
arrangements and the Company's direct dial long distance telephone business and
the profitability thereof is dependent upon its ability to enter into cost
effective lease arrangements, both long and short term, with facilities based
carriers for the transmission of calls. While the Company believes that it has
ample access to transmission facilities at attractive rates and expects to
continue to have such access, there can be no assurance that leased capacity
will continue to be available at cost-effective rates. See
"Business -- Transmission Network."
CONSUMMATION AND IMPLEMENTATION OF THE MERGER
The Merger is subject to the approval of a majority of the Company's
outstanding Common Stock, as well as certain other closing conditions. The
Company expects to schedule a special meeting of stockholders, to be held
approximately 60 to 90 days after the effective date of this offering, for the
purpose of voting on the Merger. Consequently, the Merger will not be approved
by the Company's stockholders prior to the expected closing date of this
offering. Because of Minnesota's control share acquisition statute, only an
estimated 404,101 of the 612,750 shares held by the Trust will be entitled to
vote on the Merger. See "Description of Securities." Although the Company has no
reason to believe that the Merger will not be completed in due course, the
Company has no written or oral agreement, relationship, or understanding with
any stockholders of the Company with respect to the vote on the Merger.
Accordingly, there can be no assurance that the Merger will be approved by the
Company's stockholders or that there will not be a delay in consummating the
Merger. In the event that the Merger is not consummated, or if there is a
significant delay, the Company will not realize the anticipated business
benefits from a combination of Consortium 2000 with the Company and the business
strategy and prospects of the Company could be materially adversely affected.
UStel believes the Merger provides significant benefits to UStel, although
there can be no assurance as to how the Consortium 2000 customers who look to it
for independent advice will perceive Consortium 2000
7
<PAGE> 9
after it becomes a wholly-owned subsidiary of UStel. Consortium 2000's clients
accounted for approximately 75% of the Company's customer base at June 30, 1996.
If, as a result of the Merger or for any other reason, Consortium 2000 is no
longer able to successfully market the Company's services, the Company's
business would be materially and adversely affected. See "Business -- Consortium
2000," and "Description of Securities."
RECENT RAPID GROWTH; ABILITY TO MANAGE GROWTH
Although the Company has experienced significant growth in a relatively
short period of time and intends to continue to grow rapidly, there can be no
assurance that the growth experienced by the Company will continue or that the
Company will be able to achieve the growth contemplated by its business
strategy. Implementation of the Company's growth strategy, including the pending
acquisition of Consortium 2000, will place additional demands upon the Company's
management, operational and other resources and will require additional long
distance transmission capacity, additional working capital and billing and
information systems. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." The
Company's ability to continue to grow may be affected by various factors, many
of which are not within the Company's control, including federal and state
regulation of the telecommunications industry, competition, the transmission
capacity of the Company's long distance carriers and adverse changes in customer
attrition, minute-usage patterns or response rates to the Company's marketing
efforts. While the Company believes that its capital resources, network and
infrastructure provide a platform for future growth, the Company's ability to
continue to manage its growth successfully will require it to further enhance
its operational, management, financial and information systems and controls and
to expand, train and manage its employee base. In addition, as the Company
increases its service offerings and expands its targeted markets, there will be
additional demands on its customer service support and sales, marketing and
administrative resources. There can be no assurance that the Company will
successfully manage its expanding operations, and if the Company's management is
unable to manage growth effectively, the Company's business, operating results,
and financial condition could be materially and adversely affected.
GOVERNMENT REGULATION
Certain of the Company's operations are subject to regulation by the
Federal Communications Commission (the "FCC") under the Communications Act of
1934, as amended (the "Communications Act"). In addition, certain of the
Company's businesses are subject to regulation by state public utility or public
service commissions. Changes in the regulation of, or the enactment or changes
in interpretation of legislation affecting, the Company's operations could have
a material adverse affect on the Company and the value of the Common Stock.
Recently, the federal government enacted the Telecommunications Act of 1996 (the
"Telecommunications Act"), which, among other things, allows the regional bell
operating companies ("RBOCs") and others to enter the long distance business.
Entry of the RBOCs or other entities, such as electric utilities and cable
television companies, into the long distance business may have a negative impact
on the Company or its customers. The Company anticipates that certain of such
entrants will be strong competitors because, among other reasons, they may enjoy
one or more of the following advantages: they may (i) be well capitalized; (ii)
already have substantial end user customer bases; or (iii) enjoy cost advantages
relating to local loops and access charges. The introduction of additional
strong competitors into the switched long distance business would mean that the
Company would face substantially increased competition. This could have a
material adverse effect on the Company and the value of the Common Stock. In
addition, the Telecommunications Act provides that state proceedings may in
certain instances determine access charges the Company is required to pay to the
local exchange carriers ("LECs"). No assurance can be given that such
proceedings will not result in increases in such rates. Such increases could
have a material adverse effect on the Company or its customers and on the value
of the Common Stock. See "Business -- Government Regulation."
8
<PAGE> 10
EQUIPMENT FAILURES; NATURAL DISASTER
Although the Company carries "commercial property/business interruption"
insurance, such insurance does not include coverage of certain natural
disasters. A major equipment failure or a natural disaster affecting any one of
the Company's switching facilities could have a material adverse effect on the
Company's operations.
CONTROL BY PRINCIPAL STOCKHOLDERS; ANTI-TAKEOVER CONSIDERATIONS
Immediately following this offering, the officers and directors of the
Company will own or control approximately 31.5% of the outstanding shares of
Common Stock. Consequently, such persons will likely have the power to control
the Company. See "Principal and Selling Stockholders." Upon completion of this
offering, the Company will have authorized 5,000,000 shares of preferred stock,
$.01 par value ("Preferred Stock"). The Board of Directors has designated
550,000 shares of the authorized preferred stock as Series A Convertible
Preferred Stock (the "Series A Preferred") and 95,000 shares of authorized
preferred stock as Series B Convertible Preferred Stock (the "Series B
Preferred"). All of the Series B Preferred has been issued and converted in
September, 1996 into 95,000 shares of Common Stock. The remaining authorized
shares of Preferred Stock are undesignated and may be issued by the Board of
Directors on such terms, and with such rights, preferences and designations, as
the Board of Directors may determine without future shareholder action. In
addition, the Company is subject to certain provisions of the Minnesota Business
Corporation Act that limit the voting rights of shares acquired in certain
acquisitions and restrict certain business combinations. Some or all of the
foregoing factors could have the effect of discouraging certain attempts to
acquire the Company which could deprive the Company's stockholders of
opportunities to sell their shares of Common Stock at prices higher than
prevailing market prices and could make it more difficult for a third party to
acquire the Company. See "Description of Securities."
LIMITED MARKET FOR COMMON STOCK
Prior to this offering the Company's Common Stock was traded on the Nasdaq
Small-Cap Market. The Company believes there are only two active market-makers
in the Company's stock. Daily trading volume to date has been very limited and
frequently there have been no trades on a given day. The Company has applied for
listing of the Company's Common Stock on the Nasdaq National Market. No
assurances can be made that the Common Stock will be approved for listing on the
Nasdaq National Market and, even if the Company's Common Stock is listed, no
assurance can be made that there will be sufficient liquidity in the Common
Stock to effectuate large volume trades in the Company's Common Stock.
CUSTOMER ATTRITION
The Company believes that customer attrition is inherent in the long
distance telecommunications industry. Attrition in the long distance
telecommunications industry is generally attributable to a number of factors,
including (i) initiatives of existing and new competitors as they engage in,
among other things, national advertising campaigns, telemarketing programs, the
issuance of cash and other forms of customer "win back" incentives and other
customer acquisition programs prevalent in the residential long distance market,
and (ii) the termination of service for non-payment. Although the level of
attrition experienced by the Company has not had a material adverse effect on
its financial results, the Company only began operations in January, 1993 and,
accordingly, the level of customer attrition experienced to date may not be
indicative of future attrition levels. In addition, there can be no assurance
that any steps taken by the Company to counter increased customer attrition will
be successful. An increase in the Company's attrition rate or a decrease in the
customer minute-usage pattern could have a material adverse effect upon the
Company's business, financial condition and results of operations.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock may be significantly
affected by announcement of expanded services by the Company or its competitors,
acquisitions of related companies, changes in
9
<PAGE> 11
governmental regulations and variations in quarterly operating results, among
other factors. The stock market has recently experienced volatility which has
been unrelated to the operating results of such companies. Such volatility, as
well as general economic, political and market conditions, such as recessions
and military conflicts, may adversely affect the market price of the Common
Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock by existing stockholders under Rule 144 ("Rule
144") of the Securities Act through the exercise of outstanding registration
rights or otherwise, could have an adverse effect on the market price of the
Common Stock and the ability of the Company to raise capital in the future. The
shares of Common Stock sold in this offering will be eligible for immediate
resale, except to the extent acquired by affiliates of the Company.
Additionally, 486,429 shares of Common Stock which are "restricted securities,"
as that term is defined in Rule 144 which are owned by persons who are not
affiliates of the Company, are currently eligible for sale under Rule 144. In
accordance with the terms of certain registration rights agreements, the Company
intends to register with the Commission up to approximately 3,134,774 shares of
Common Stock (the "Registration Rights Shares") concurrently with this offering.
Approximately 2,900,000 of the Registration Rights Shares will be subject to
lock-up agreements with the Representative, whereby such shares may not be sold
for a 180-day period following the date of this Prospectus (or if later, with
respect to the Trust, the date the Merger is consummated) (the "Lock-up Period")
without the prior written consent of the Representative. Upon the expiration or
waiver of lock-up agreements with the Underwriters, the Registration Rights
Shares will be eligible for sale in the public market or pursuant to the
registration statement filed with respect to the Registration Rights Shares.
Pursuant to lock-up agreements with the Representative, directors, officers and
certain stockholders of the Company, have agreed not to offer, sell or contract
to sell, or otherwise dispose of, directly or indirectly, or announce the
offering of, any shares of Common Stock, including any such shares beneficially
or indirectly owned or controlled, or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock during the Lock-up
Period, without the prior written consent of the Representative. See
"Description of Securities," "Shares Eligible for Future Sale" and
"Underwriting."
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact included in this Prospectus,
including, without limitation, the statements under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Business"
regarding the anticipated benefits of the Merger, the competition resulting from
the new telecommunications legislation, the anticipated benefits from the
installation of the in-house billing system, and other matters are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable at this time, it can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from the
Company's expectations ("Cautionary Statements") are set forth in these "Risk
Factors," as well as elsewhere in this Prospectus. All subsequent written and
oral forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by the Cautionary
Statements.
10
<PAGE> 12
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,000,000 shares of Common
Stock, after deducting underwriting discounts and commissions and the offering
expenses payable by the Company are estimated to be approximately $10,045,180.
The Company will not receive any of the proceeds from the sale of Common Stock
by the Selling Stockholders. The Company intends to use approximately $6,272,275
from the net proceeds from the sale of the Common Stock to repay or reduce
existing indebtedness, approximately $300,000 to purchase computer hardware and
software and related services for an in-house billing system, approximately
$1,200,000 to purchase capital equipment for upgrading the Company's switches
and the balance for other general corporate purposes.
The debt to be paid or reduced consists of the following:
(i) $900,000 of $1,893,103 owed to Coast Business Credit under
revolving and equipment lines of credit as of October 18, 1996. The
revolving line accrues interest at a variable rate of interest equal to the
Bank of America Reference Rate plus 2% per annum (totaling 10.25% at
October 18, 1996). The equipment line accrues interest at a variable rate
of interest equal to the Bank of America Reference Rate plus 3.5% per annum
(totaling 11.5% at October 18, 1996). Of the aggregate of $2,700,000 owing
on these lines of credit, $2,300,000 was used for working capital and
$400,000 was used to purchase certain switching equipment from TYC, Inc., a
corporation wholly-owned by Barry Epling. See "Certain Transactions."
(ii) $88,000 owed to Kamel B. Nacif for a loan bearing interest of 12%
per annum due on the earlier of demand or March 1, 1998. This loan was used
for working capital purposes.
(iii) $1,248,000 owed to Jeflor, Inc. on a loan bearing interest at
the rate of 12% per annum, payable quarterly, interest only, commencing in
September, 1996, which is due in June, 1997. This loan was used for working
capital purposes.
(iv) $3,870,275 owed to WilTel, the Company's primary long distance
carrier, due the earlier of November 10, 1996 or the completion of this
offering. The debt is evidenced by a promissory note bearing interest at
the rate of 15% per annum. This amount was used to finance payables to
WilTel.
(v) $166,000 owing to Solomon, Ross, Grey & Company, a California
general partnership, which is affiliated with Andrew J. Grey, a director of
the Company. This sum is due upon the completion of this offering and bears
interest at 10% per annum. This debt is owing for consulting services
rendered to the Company.
Pending the application of the proceeds of this offering as set forth
above, the Company will invest such proceeds in short-term, interest bearing,
investment grade securities.
11
<PAGE> 13
CAPITALIZATION
The following table sets forth the total capitalization of the Company as
of June 30, 1996, (i) on a historical basis, (ii) as adjusted to reflect the
conversion of 275,000 shares of Series A Preferred into 275,000 shares of Common
Stock and the sale of 2,000,000 shares of Common Stock in this offering (at an
assumed offering price of $6.00 per share) and the application of net proceeds
to the Company therefrom to repay a portion of the Company's indebtedness and
(iii) as further adjusted on a pro forma basis to reflect the Merger. The table
should be read in conjunction with the Company's Financial Statements and Pro
Forma Condensed Financial Statements, including in each case the Notes thereto,
appearing elsewhere herein. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------------
AS PRO FORMA
ACTUAL ADJUSTED AS ADJUSTED(1)
---------- ----------- -----------
<S> <C> <C> <C>
Long-term debt:
12% Convertible Subordinated Debentures(2).......... $ 500,000 $ 500,000 $ 500,000
Other long-term debt................................ -- -- 37,381
---------- ----------- -----------
Total long-term debt.................................. $ 500,000 $ 500,000 $ 537,381
---------- ----------- -----------
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized and 645,000 Series A and B Convertible
Preferred Stock outstanding actual; 370,000
Series A and B Convertible Preferred Stock, as
adjusted and pro forma as adjusted............... 6,450 3,700 3,700
Common Shares, $0.01 par value per share:
40,000,000 shares authorized, 2,011,851 shares
issued and outstanding actual; 4,286,851 shares
issued and outstanding as adjusted; and 5,363,774
shares issued and outstanding pro forma as
adjusted......................................... 20,119 42,869 53,638
Additional paid-in capital.......................... 7,860,762 17,885,942 22,075,173
Accumulated deficit................................. (2,453,891) (2,453,891) (2,453,891)
---------- ----------- -----------
Total stockholders' equity............................ 5,433,440 15,478,620 19,678,620
---------- ----------- -----------
TOTAL CAPITALIZATION.................................. $5,943,131 $15,978,620 $20,216,001
========== =========== ===========
</TABLE>
- ---------------
(1) Gives effect to the Merger. See "Business -- Recent Developments."
(2) See Note 5 of Notes to Financial Statements.
12
<PAGE> 14
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded in the over-the-counter market since
June 22, 1994 and is included in the Nasdaq Small-Cap Market under the symbol
"USTL." The following table sets forth for the quarters indicated the high and
low closing sale prices per share of Common Stock as reported by the Nasdaq
Small-Cap Market. Prices represent inter-dealer quotations, without adjustment
for retail mark-ups, mark-downs or commissions and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
----- ------
<S> <C> <C>
1994
Fourth Quarter............................................. $7.50 $6.25
1995
First Quarter.............................................. $7.50 $6.00
Second Quarter............................................. 7.00 5.00
Third Quarter.............................................. 6.50 4.75
Fourth Quarter............................................. 6.25 4.75
1996
First Quarter.............................................. $6.50 $5.00
Second Quarter............................................. 7.00 5.75
Third Quarter.............................................. 6.75 6.00
Fourth Quarter (through October 18)........................ 6.00 5.50
</TABLE>
The 2,126,851 shares of Common Stock outstanding as of October 18, 1996
were held by approximately 125 record holders.
DIVIDEND POLICY
The Company has never paid any cash dividends on its capital stock and does
not anticipate paying any cash dividends in the foreseeable future. Instead the
Company intends to retain any earnings to provide funds for use in its business.
The Company's line of credit with Coast Business Credit restricts payment of
cash dividends. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
13
<PAGE> 15
SELECTED FINANCIAL DATA
The selected financial and balance sheet data for 1992 through 1995 set
forth below are derived from the audited Financial Statements of the Company.
The Financial Statements at December 31, 1993, 1994 and 1995 and for the years
ended December 31, 1993, 1994 and 1995 have been audited by BDO Seidman, LLP and
are included elsewhere herein. The selected financial data set forth below at
June 30, 1996 and for the six months ended June 30, 1995 and 1996 are derived
from the Company's unaudited Financial Statements and, in the opinion of
management, include all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation of these data. Operating
results for the six months ended June 30, 1996 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1996 or any
other interim period. The selected financial data are qualified in their
entirety by reference to, and should be read in conjunction with, the Financial
Statements and related Notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 11, 1992
(INCEPTION) TO SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED DECEMBER 31, JUNE 30,
-------------- ------------------------------------ -----------------------
1992 1993 1994 1995 1995 1996
-------------- ---------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA
Revenues............................ $ 5,740 $1,600,147 $6,118,480 $16,127,575 $6,996,751 $10,526,503
--------- ----------- ----------- ----------- ---------- -----------
Operating expenses:
Cost of services sold............. 3,563 1,248,463 4,696,106 11,542,374 5,159,835 7,241,355
General and administrative........ 199,821 637,263 1,412,649 3,071,788 1,165,074 1,830,340
Selling........................... 113,909 368,361 785,933 1,460,010 547,355 1,074,719
Depreciation and amortization..... 1,597 32,894 87,363 177,971 68,318 122,112
--------- ----------- ----------- ----------- ---------- -----------
Total operating expenses............ 318,890 2,286,981 6,982,051 16,252,143 6,940,582 10,268,526
--------- ----------- ----------- ----------- ---------- -----------
Income (loss) from operations....... (313,150) (686,834) (863,571) (124,568) 56,169 257,977
Income (loss) from rental
operations........................ -- (62,025) (101,705) -- -- --
Net gain on sale of property........ -- 24,993 7,614 -- -- --
Net interest income (expense)....... -- (41,686) (117,780) (136,377) (8,031) (186,013)
Relocation costs(1)................. -- -- -- (110,766) -- --
--------- ----------- ----------- ----------- ---------- -----------
Net income (loss)................... $ (313,150) $ (765,552) $(1,075,442) $ (371,711) $ 48,138 $ 71,964
========= =========== =========== =========== ========== ===========
Net income (loss) per share......... $ (0.33) $ (0.81) $ (0.83) $ (0.23) $ 0.03 $ 0.03
========= =========== =========== =========== ========== ===========
Weighted average common shares
outstanding....................... 950,000 950,000 1,291,913 1,600,000 1,600,000 2,735,195
========= =========== =========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
OTHER INFORMATION
Traffic volume (minutes).......................... 9,317,640 38,683,886 103,093,699 48,176,139 66,941,903
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------- AT JUNE 30,
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficit).......................... $ (338,102) $(1,186,289) $3,722,506 $2,200,440 $ 2,024,586
Total assets....................................... 130,314 2,696,601 7,318,627 11,978,031 14,801,610
Notes payable to banks............................. -- 375,000 770,000 2,900,000 4,025,691
Notes payable to others............................ 334,421 994,438 -- 1,500,000 1,484,000
Long-term debt, net of current portion............. -- 969,516 500,000 500,000 500,000
Total debt......................................... 334,421 2,338,954 1,270,000 4,900,000 6,009,691
Total stockholders' equity (deficit)............... (213,150) (498,594) 4,088,234 3,787,773 5,433,440
</TABLE>
- ---------------
(1) The Company incurred relocation costs resulting from the move of its
operations center from Los Angeles, California and Clearwater, Florida to
Las Vegas, Nevada.
14
<PAGE> 16
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
On August 14, 1996, UStel, Inc., Consortium Acquisition Corporation (a
wholly-owned subsidiary created by the Company) and Consortium 2000 entered into
a Merger Agreement and Plan of Reorganization ("Merger Agreement"). Under the
terms of the Merger Agreement, Consortium Acquisition Corporation will be merged
with Consortium 2000, with Consortium 2000 being the surviving corporation in
the Merger. The following unaudited Pro Forma Condensed Balance Sheet as of June
30, 1996 gives effect to the Merger and is based on the estimates and
assumptions set forth herein and in the notes to such statements. The Merger
will be accounted for as a purchase, with the assets acquired and liabilities
assumed at fair values, and the results of Consortium 2000's operations included
in UStel's financial statements from the date of acquisition. The Merger was
accounted for as a purchase since all of the criteria for a pooling of interest
were not met. This pro forma information has been prepared utilizing the
historical financial statements and notes thereto.
The unaudited Pro Forma Condensed Financial Statements do not purport to be
indicative of the results which actually would have been obtained had the Merger
been effected on the dates indicated or of the results which may be obtained in
the future.
The unaudited Pro Forma Condensed Financial Statements are based on the
purchase method of accounting for the aforementioned transaction. The unaudited
Pro Forma Condensed Balance Sheet and the unaudited Pro Forma Condensed
Statements of Operations and the related notes should be read in conjunction
with UStel's audited financial statements contained elsewhere in this
Prospectus. In management's opinion, all adjustments necessary to reflect the
acquisition have been made.
15
<PAGE> 17
USTEL, INC.
PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------- PRO FORMA
USTEL, INC. CONSORTIUM 2000, INC. ADJUSTMENTS PRO FORMA
----------- --------------------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash.............................. $ 650,309 $ 116,068 $ 766,377
Restricted cash................... 2,110,005 0 2,110,005
Accounts receivable............... 7,424,475 862,712 8,287,187
Prepaid expenses.................. 707,967 129,988 837,955
------------- ------------ -------------
10,892,756 1,108,768 12,001,524
Property & equipment.............. 2,465,670 101,434 2,567,104
Accumulated depreciation.......... (353,451) (54,844) (408,295)
------------- ------------ -------------
2,112,219 46,590 2,158,809
Other assets...................... 1,796,635 73,088 1,869,723
Goodwill.......................... 0 0 3,615,237(4a) 3,615,237
------------- ------------ --------- -------------
$14,801,610 $ 1,228,446 3,615,237 $19,645,293
============= ============ ========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable & accrued
expense......................... $ 3,127,054 $ 506,302 $ 3,633,356
Accrued revenue taxes............. 231,425 0 231,425
Notes payable..................... 5,509,691 100,000 5,609,691
------------- ------------ -------------
8,868,170 606,302 9,464,472
Long-term debt.................... 500,000 37,381 537,381
------------- ------------ -------------
500,000 37,381 537,381
Stockholder's equity.............. 5,433,440 584,763 3,615,237(4a) 9,633,440
------------- ------------ --------- -------------
$14,801,610 $ 1,228,446 3,615,237 $19,645,293
============= ============ ========= =============
</TABLE>
See accompanying notes to pro forma condensed financial statements.
16
<PAGE> 18
USTEL, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------- PRO FORMA
USTEL, INC. CONSORTIUM 2000, INC. ADJUSTMENTS PRO FORMA
----------- --------------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues....................... $16,127,575 $ 3,148,773 (1,398,706)(4b) $17,877,642
Cost of Services Sold.......... 11,542,374 1,149,972 (1,398,706)(4b) 11,293,640
----------- --------------------- ----------- -----------
Gross Profit......... 4,585,201 1,998,801 0 6,584,002
Selling........................ 1,460,010 0 1,460,010
General & Administrative....... 3,071,788 1,617,364 4,689,152
Depreciation & amortization.... 177,971 9,000 180,762(4b) 367,733
----------- --------------------- ----------- -----------
Income (loss) from
operations......... (124,568) 372,437 180,762 67,107
Interest expense............... 136,377 10,674 147,051
----------- --------------------- -----------
Relocation costs............... 110,766 -- 110,766
Income (loss) before
taxes.............. (371,711) 361,763 180,762 (190,710)
Income taxes................... 112,146 112,146
----------- --------------------- ----------- -----------
Net income (loss).... $ (371,711) $ 249,617 180,762 $ (302,856)
========== ================ ========= ==========
Pro Forma Information:
Net Loss per share... $ (0.23) $ (0.11)
========== ==========
Shares used in per
share
calculation........ 1,600,000 2,676,923
========== ==========
</TABLE>
See accompanying notes to pro forma condensed financial statements.
17
<PAGE> 19
USTEL, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------- PRO FORMA
USTEL, INC. CONSORTIUM 2000, INC. ADJUSTMENTS PRO FORMA
----------- --------------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues....................... $10,526,503 $ 1,814,642 (826,088)(4b) $11,515,057
Cost of Services Sold.......... 7,241,355 797,728 (826,088)(4b) 7,212,995
---------- ---------- ----------- -----------
Gross Profit......... 3,285,148 1,016,943 0 4,302,062
Selling........................ 1,074,719 0 1,074,719
General & Administrative....... 1,830,340 1,109,738 2,940,078
Depreciation & Amortization.... 122,112 6,000 90,381(4d) 218,493
---------- ---------- ----------- -----------
Income (loss) from
operations......... 257,977 (98,824) 90,381 68,772
Interest....................... 186,013 (2,411) 183,602
---------- ---------- ----------- -----------
Income (loss) before
taxes.............. 71,964 (96,413) 90,381 (114,830)
Income taxes................... 0 0 0
---------- ---------- ----------- -----------
Net income (loss).... $ 71,964 $ (98,413) 90,381 $ (114,830)
========== ========== =========== ===========
Pro forma Information:
Net Income (loss) per
share.............. $ .03 $ (.03)
========== ===========
Shares used in per
share
calculation........ 2,735,195 3,812,118
========== ==========
</TABLE>
See accompanying notes to pro forma condensed financial statements.
18
<PAGE> 20
USTEL, INC.
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. MERGER AGREEMENT AND PLAN OF REORGANIZATION
On August 14, 1996, UStel, Inc. ("UStel"), Consortium Acquisition
Corporation (a wholly-owned subsidiary created by UStel) and Consortium
2000, Inc. entered into a Merger Agreement and Plan of Reorganization
("Merger Agreement"). Under the terms of the Merger Agreement, (a)
Consortium Acquisition Corporation will be merged with Consortium 2000,
Inc., with Consortium 2000, Inc. being the surviving corporation in the
merger; and (b) all of the capital stock of Consortium 2000, Inc. will be
converted into an aggregate of 1,076,923 shares of the Common Stock of
UStel. As a result of the Merger, Consortium 2000, Inc. will become a
wholly-owned subsidiary of UStel.
2. EFFECT OF ACQUISITION
The adjustments to the Pro Forma Condensed Balance Sheet as of June 30,
1996 reflects the Merger as if it occurred on June 30, 1996. The Pro Forma
Condensed Statements of Operations for the year ended December 31, 1995 and
for the six month period ended June 30, 1996 reflect the acquisition as if
it occurred on the first day of each period.
3. HISTORICAL FINANCIAL STATEMENTS OF CONSORTIUM 2000, INC.
Consortium 2000, Inc. has a June 30 fiscal year end. In order to bring
Consortium 2000, Inc.'s statement of operations up to UStel's December 31
fiscal year end, the results of Consortium 2000, Inc.'s operations for the
six month period ended June 30, 1995 were combined with its results of
operations for the six month period ended December 31, 1995.
4. PRO FORMA ADJUSTMENTS
a. The pro forma adjustments to the condensed balance sheet are as follows:
(1) To reflect the acquisition of Consortium 2000, Inc. and the
allocation of the purchase price on the basis of the fair values of
the assets acquired and liabilities assumed. The components of the
purchase price and its allocation to the assets and liabilities of
Consortium 2000, Inc. are as follows:
<TABLE>
<S> <C>
Total purchase price (1,076,923 shares X $3.90).......... $4,200,000
Book value of Consortium 2000, Inc....................... (584,763)
----------
Goodwill................................................. $3,615,237
=========
</TABLE>
b. The pro forma adjustments to the condensed statements of operations are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
<S> <C> <C>
(1) Adjustment to revenue for elimination of
intercompany sales............................. $ 1,398,706 $826,088
(2) Adjustment to cost of services sold for
elimination of intercompany sales.............. (1,398,706) (826,088)
(3) Amortization of goodwill over 20 years.......... 180,762 90,381
---------- --------
$ 180,762 $ 90,381
========== ========
</TABLE>
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the preceding
Selected Financial Data and the Company's Financial Statements and the Notes
thereto and the other financial data included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
INTRODUCTION
The Company was formed in March, 1992, although the Company did not
commence significant operations until January, 1993. Since January, 1993, the
Company's monthly revenues have grown from $10,000 to approximately $2,000,000
in June, 1996. In addition, the number of subscribers to the Company's long
distance telephone service has grown to approximately 12,500 at June, 1996.
On August 14, 1996, UStel, Consortium 2000 and Consortium Acquisition
entered into the Merger Agreement pursuant to which 1,076,923 shares of UStel
are to be issued to the shareholders of Consortium 2000, in exchange for all of
the outstanding shares of Consortium 2000. Upon consummation of the Merger,
Consortium 2000 will become a wholly-owned subsidiary of UStel. The earnings of
Consortium 2000 will be included in the Company's results on a go forward basis,
as reflected in the unaudited Pro Forma Condensed Financial Statements.
The Company's primary cost is for local access services, which represents
the cost of originating and terminating calls through local networks owned and
operated by local telephone companies such as USWest and Pacific Telesis,
combined with the cost of utilizing usage-sensitive transmission facilities and
leasing long-haul bulk transmission lines from facilities-based carriers.
The Company's profit margin depends, among other things, on the volume of
its operations, on the type of services provided and on the mix between use of
usage-sensitive transmission facilities and long-haul bulk transmission lines.
Initial increases in volume may increase the use of usage-sensitive transmission
facilities relative to fixed rate bulk transmission facilities. The Company does
not expect this to have a significant impact on profit margin due to volume
discounts that are available on usage-sensitive transmission facilities and the
ability to shift to fixed rate long-haul bulk transmission facilities at
relatively low volumes of activity.
QUARTERLY FINANCIAL DATA
From inception through December 31, 1994, and during each quarter in that
period, the Company incurred losses from operations and experienced net losses.
Beginning in the first quarter of 1995, the Company's operations expanded to a
point where revenues have exceeded the combination of minimum underlying fixed
costs plus variable costs associated with the production of that revenue. The
following table sets forth certain quarterly financial information for 1995 and
the first two quarters of 1996. The selected quarterly financial information set
forth below is derived from the Company's unaudited financial statements and, in
the opinion of management, includes all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation of this
information. Results for the first and second quarters of 1996 are not
necessarily indicative of the results that may be expected for the third and
fourth quarters ending December 31, 1996 or for any future period.
<TABLE>
<CAPTION>
1996 - THREE MONTHS
1995 - THREE MONTHS ENDED ENDED
----------------------------------------------------- ------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
--------- --------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $3,142,512 $3,854,239 $4,313,267 $4,817,557 $4,903,267 $5,623,236
Total operating expenses............. 3,121,261 3,804,321 4,618,928 4,707,632 4,810,345 5,458,181
Income (loss) from operations........ 21,251 49,918 (305,651) 109,925 92,923 165,055
Net income (loss).................... 9,020 39,117 (469,429) 31,770 1,398 70,567
</TABLE>
20
<PAGE> 22
The following table sets forth certain items in the Company's statements of
earnings as a percentage of net sales for the periods shown:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues (loss) from operations................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services sold............................. 78.0 76.8 71.6 73.7 68.8
----- ----- ----- ----- -----
Gross profit...................................... 22.0 23.2 28.4 26.3 31.2
Selling, general and administrative expenses...... 64.9 37.4 29.2 25.5 28.7
----- ----- ----- ----- -----
Income (loss) from operations..................... (42.9) (14.1) (.8) 0.8 2.5
Other expenses.................................... 2.3 1.6 .7 -- --
Net interest (expense)............................ 2.6 2.5 1.6 0.1 1.8
----- ----- ----- ----- -----
Earnings before income taxes...................... (47.8) (17.6) (2.3) 0.7 0.7
Income tax expense................................ -- -- -- -- --
----- ----- ----- ----- -----
Net income (loss)................................. (47.8)% (17.6)% (2.3)% 0.7% 0.7%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1996 COMPARED
TO
SIX MONTHS ENDED JUNE 30, 1995
Revenues for the six months ended June 30, 1996 were $10,526,503 as
compared to $6,996,751 for the six months ended June 30, 1995. The increase in
revenues in 1996 was the result of expansion from a customer base of 3,400 at
June 30, 1995 to a customer base in excess of 12,500 at June 30, 1996.
Cost of services sold for the six months ended June 30, 1996 was $7,241,355
as compared to $5,159,835 for the six months ended June 30, 1995. The increase
in cost of services sold, similar to the increase between periods in revenue,
was the result of the expansion in the Company's customer base. Cost of services
sold for the six months ended June 30, 1996 was 68.8% of the revenues produced
in the first half of 1996. Cost of services sold for the six months ended June
30, 1995 was 73.7% of the revenues produced in the first half of 1995.
General and administrative expenses for the six months ended June 30, 1996
were $1,830,340 as compared to $1,165,074 for the six months ended June 30,
1995. The increase in general and administrative expenses was the result of
increased staff and related costs in support of increased revenues being
produced by the Company.
Selling expenses for the six months ended June 30, 1996 were $1,074,719 as
compared to $547,355 for the six months ended June 30, 1995. The increase in
selling expenses reflect the costs associated with the expansion and retention
of the Company's customer base from commencement through June 30, 1996.
Depreciation and amortization for the six months ended June 30, 1996 was
$122,112 as compared to $68,318 for the six months ended June 30, 1995.
Amortization of the Company's start-up cost asset was $9,836 for each of the
six-month periods ended June 30, 1996 and June 30, 1995, respectively.
Depreciation for the six months ended June 30, 1996 was $112,274 as compared to
$58,480 for the six months ended June 30, 1995.
The increase in depreciation was the result of the Company's increasing
investments in telephone switching equipment and facilities to handle increased
telephone traffic and increased investment in the computer hardware and software
that supports the operations of the telephone equipment and related billing
activities. The Company's investment in these fixed assets increased from
approximately $1,604,000 at June 30, 1995 to approximately $2,466,0000 at June
30, 1996.
During the six-month period ended June 30, 1996 the Company reported income
from operations of $257,977 versus income from operations of $56,169 for the
six-month period ended June 30, 1995. Interest expense for the six months ended
June 30, 1996 was $272,928 as compared to $64,722 for the six months
21
<PAGE> 23
ended June 30, 1995. The Company continues to utilize short-term bank lines of
credit to supplement its periodic needs for cash in operations. At June 30, 1996
the Company had outstanding borrowings on such lines of credit in the amount of
$2,100,000, after paydown of $1,000,000 in principal in March, 1996, at interest
rates that are tied to the prime rate of interest. In December, 1995, the
Company obtained a senior credit facility (the "Credit Facility") in the amount
of up to $5 million. This Credit Facility bears interest at the prime rate plus
2% per annum, with a minimum of $15,000 interest expense per month. Accordingly,
interest expense charged for the six months ended June 30, 1996 was $122,752,
including amortization of related loan fees over thirty-six months.
Interest income for the six months ended June 30, 1996 was $86,915,
principally from the Company's holdings of bank certificates of deposit and
accrual of interest on officers loans, as compared to $56,691 for the six months
ended June 30, 1995.
During the six-month period ended June 30, 1996 the Company reported net
income of $71,964 versus net income of $48,138 for the six-month period ended
June 30, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER, 1994
During the year ended December 31, 1995 the Company reported an operating
loss of $124,568 versus an operating loss of $863,571 for the year ended
December 31, 1994.
Revenues for the year ended December 31, 1995 were $16,127,575 as compared
to $6,118,480 for the year ended December 31, 1994. The increase in revenues in
1995 was the result of expansion from a customer base of 2,240 at December 31,
1994 to a customer base in excess of 9,000 at December 31, 1995.
Cost of services sold for the year ended December 31, 1995 was $11,542,374
as compared to $4,696,106 for the year ended December 31, 1994. The increase in
cost of services sold, similar to the increase in revenue, was the result of the
expansion in the Company's customer base. Cost of services sold for the year
ended December 31, 1995 was 71.6% of the revenues produced in that period of
1995. Cost of services sold for the year ended December 31, 1994 was 76.8% of
the revenues produced in that period of 1994.
Selling expenses for the year ended December 31, 1995 were $1,460,010 as
compared to $785,933 for the year ended December 31, 1994. The increase in
selling expenses reflected the costs associated with the expansion of the
Company's customer base from commencement through December 31, 1995. Because of
the increased revenues from the Company's expanding customer base, selling
expenses as percentage of revenues decreased from approximately 12.8% in the
year ended December 31, 1994 to approximately 9.1% in the year ended December
31, 1995.
General and administrative expenses for the year ended December 31, 1995
were $3,071,788 as compared to $1,412,649 for the year ended December 31, 1994.
The increase in general and administrative expenses includes $515,000 of
provisions for losses on receivables plus increased staff and related costs in
support of increased revenues produced by the Company. Depreciation for the year
ended December 31, 1995 was $158,297 as compared to $47,947 for the year ended
December 31, 1994. The increase in depreciation was the result of the Company's
investments in telephone switching equipment and facilities to handle increased
telephone traffic and investments in computer hardware and software that
supports the operations of the telephone equipment and related billing
activities. The Company's investment in these fixed assets increased from
$824,172 at December 31, 1994 to $1,604,357 at December 31, 1995.
Interest expense for the year ended December 31, 1995 was $260,437 as
compared to $152,063 for the year ended December 31, 1994. Interest income for
the year ended December 31, 1995 was $124,060 as compared to $34,283 for the
year ended December 31, 1994. In each period, interest income was earned from
the Company's holdings of bank certificates of deposit.
22
<PAGE> 24
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
During the years ended December 31, 1994 and 1993, the Company incurred
losses from operations of $863,571 and $686,834, respectively. During these
periods the Company's operations expanded but were not sufficient to cover fixed
and variable expenses.
Revenues for the year ended December 31, 1994 were $6,118,480 as compared
to $1,600,147 for the year ended December 31, 1993. The increase in revenue was
the result of expansion from the Company's customer base of 840 at December 31,
1993 to in excess of 2,200 at December 31, 1994.
Cost of services sold for the year ended December 31, 1994 was $4,696,106
as compared to $1,248,463 for the year ended December 31, 1993. The increase in
cost of services sold, similar to the increase in revenue, was the result of the
expansion in customer base. Cost of services sold for the year ended December
31, 1994 was 76.75% of revenue compared to 77.89% of revenue for the year ended
December 31, 1993.
Selling expenses for the year ended December 31, 1994 were $785,933 as
compared to $368,361 for the year ended December 31, 1993. The increase in
selling expenses reflected the costs associated with the expansion of the
Company's customer base.
General and administrative expenses for the year ended December 31, 1994
were $1,412,649 as compared to $637,263 for the year ended December 31, 1993.
The increase in general and administrative expenses was the result of increased
staff and related costs to support the Company's increased revenue.
Depreciation and amortization for the year ended December 31, 1994 was
$87,363 as compared to $32,894 for the year ended December 31, 1993.
Amortization of start-up costs accounted for $19,674 in each of the years ended
December 31, 1993 and December 31, 1994. Depreciation for the year ended
December 31, 1994 was $67,689 as compared to $13,220 for the year ended December
31, 1993.
The increase in depreciation resulted from the Company's increased
investment in telephone switching equipment and facilities to handle increased
telephone traffic as well as increased investment in computer hardware and
software to support expanded operations and related billing activities. The
Company's investment in these fixed assets increased to $824,172 at December 31,
1994 from $295,709 at December 31, 1993.
In June, 1993, the Company invested in real property which resulted in a
loss from rental operations of $62,025 (including depreciation of $20,114 and
interest expense of $78,902) and a gain of $24,993 from the sale of one unit. In
1994, loss from rental operations were $101,705 (including depreciation of
$37,908 and interest expense of $124,630) and a gain of $47,205 from a partial
sale. In December, 1994, the Company disposed of the property and the debt
related to the property, at a loss of $39,591.
Interest expense for the year ended December 31, 1994 was $152,063 as
compared to $41,686 for the year ended December 31, 1993. In January, 1994, the
Company, in a private placement, sold $500,000 of 12% Convertible Subordinated
Debentures to investors, resulting in $60,000 in interest expenses in 1994 with
no comparable expense in 1993. In addition, the Company continued to utilize
short-term bank lines of credit to supplement its periodic needs for operating
capital. At December 31, 1994, the Company had outstanding borrowings on such
lines of credit in the amount of $770,000, at interest rates higher than those
experienced in 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital position at June 30, 1996 was approximately
$2,575,000. Almost since its inception, the Company has experienced pressure on
its working capital position due to operating losses, the need to continually
invest in telecommunications equipment and a significant increase in accounts
receivable due to growth in operations.
During the first six months of 1996 the Company utilized net cash of
$1,691,072 for operating activities.
23
<PAGE> 25
The Company is required to pay the costs of providing communications
services to its customers, consisting primarily of local access charges for
obtaining usage-sensitive transmission capacity or leasing fixed-rate bulk
transmission facilities, before the Company receives payment from its customers
relating to those costs.
Because the Company does not yet have an in-house billing system, it is
dependent upon a third-party billing services provider to send out bills to the
Company's customers for usage of the services provided by the Company. Because
of the reliance on an outside billing service it is uneconomical for the Company
to render bills more frequently than once a month. Typically, this results in
bills for services being mailed out between 20 to 30 days after the end of the
month in which the services are rendered. The Company is required to pay for the
use of third-party long distance lines in advance of the receipt of payment by
the Company from its customers for the use of the services provided by the
Company. This strains the Company's working capital as it is required to seek
sources for financing the differences between the payables and receivables.
The Company intends to apply a portion of the proceeds of this offering to
install an in-house billing system which would enable the Company to render its
bills on a more frequent billing cycle and to receive payments from more of its
customers on or before the date the Company is required to pay for the usage of
the long distance lines leased by the Company from third parties.
At June 30, 1996, the Company's accounts receivable, net of allowance for
doubtful accounts, was approximately $7,134,686. In addition, through June 30,
1996, the Company had invested approximately $2,297,000 in switching and related
equipment and in computer hardware and software.
To raise funds to meet the periodic cash needs for operations and fixed
asset acquisition, the Company has relied in the past on bridge financing in
amounts ranging from $100,000 to $1,500,000 at any particular time. Funds from
the initial public offering of common stock and the private placement of Series
A Preferred in 1994 enabled the Company, generally, to avoid these short-term
bridge financings, other than arrangements with banks for short-term lines of
credit. At June 30, 1996, the Company had borrowings outstanding under bank
lines of credit in the amount of $4,025,691. These bank lines of credit were
fully drawn at June 30, 1996. The lines of credit were secured by $2,100,000 of
certificates of deposits. Subsequent to June 30, 1996, the Company applied the
certificates of deposit against the lines of credit, leaving a balance owing of
$1,925,691.
In October, 1995, the Company borrowed $1,500,000 pursuant to the terms of
a one-year term loan. Borrowing under the agreement bears interest at 10% per
annum on a daily principal balance outstanding during the three calendar months
prior to each interest payment date on the first day of each calendar quarter.
The agreement calls for the issuance of warrants for the purchase of up to one
hundred thousand shares of the Company's Common Stock at a price of $5.00 per
share, exercisable over the term of the loan. This loan was repaid in January,
1996 by the issuance of 160,000 common shares of the Company plus $725,000.
In December, 1995, the Company obtained the Credit Facility in the amount
of up to $5,000,000 with an asset-based lender. Amounts drawn under the Credit
Facility accrue interest at a variable rate equal to the Bank of America
Reference Rate plus 2% per annum. The Credit Facility is secured by accounts
receivable and all of the Company's other assets.
Under the Credit Facility, the Company can borrow up to an amount which is
the lesser of $5 million or 85% of the Company's eligible receivables. Subject
to the $5 million maximum borrowing, in addition to amounts supported by
receivables, the Company may borrow on a 36-month term loan basis up to the
lesser of $1.5 million or a formula amount based on the fair value of new
equipment and the liquidation value of existing equipment. The amount
outstanding under the Credit Facility at June 30, 1996 was $1,925,691.
In February, 1996, the Company borrowed $400,000 from a related party. This
loan matures in November 1996 and bears interest at the annual rate of 8%. In
June, 1996, $116,000 of this borrowing was repaid. Interest is payable at the
earlier of maturity of the loan or repayment of the full amount borrowed.
In June, 1996, the Company borrowed $1,200,000 from an unrelated party. The
one-year note bears interest at the annual rate of 12% and is unsecured.
Interest is payable at maturity. In conjunction with this loan the Company
agreed to issue warrants for acquisition of up to 540,000 of its common shares
at a price of
24
<PAGE> 26
$5.00 per share. Warrants for purchase of 120,000 common shares were issuable at
the time the loan was funded. Additional warrants become issuable in increments
for 60,000 common shares each at intervals of ninety days after funding of the
loan so long as the loan remains unpaid.
As of September 9, 1996, the Company was indebted to WilTel, the Company's
primary long distance carrier, in the amount of $5,595,963. This amount was
settled by the payment of $1,000,000 by the Company on that date and an
agreement by the Company to remit $735,688 by September 27, 1996, and to remit
payment of its October 1, 1996 invoice to WilTel no later than October 31, 1996,
and to provide WilTel with a second lien against all of its assets and customer
base. WilTel agreed to allow the Company to defer the balance owing in the
amount of $3,860,275 to the earlier of November 10, 1996 or the completion of
this offering. The deferred amount is evidenced by a promissory note that bears
interest at a rate of 15% per annum.
At December 31, 1995, the Company has available net operating loss
carryforwards of approximately $5,908,000 for income tax purposes, which expire
in varying amounts through 2010. Federal tax rules impose limitations on the use
of net operating losses following certain changes in ownership. As of June 30,
1996 the net operating loss carryover may be utilized at a rate of approximately
$402,000 per year (subject to the Company generating sufficient income from
operations). The amount of the net operating loss carryover that may be utilized
per year to off-set income may be further limited as a result of the
consummation of this offering.
The loss carryforward generated a deferred tax asset of approximately
$2,186,000. The deferred tax asset was not recognized due to uncertainties
regarding its realization, accordingly, a 100% valuation allowance was provided.
IMPACT OF NEW ACCOUNTING STANDARDS
Recent Pronouncements
During March, 1995, the Financial Accounting Standards Board issued
Statement No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," which requires the Company
to review for impairment of long-lived assets, certain identifiable intangibles,
and goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset might not be recoverable. In
certain situations, an impairment loss would be recognized. SFAS 121 will become
effective for the Company's fiscal year ending June 30, 1997. The Company has
studied the implications of SFAS 121 and, based on its initial evaluation, does
not expect it to have a material impact on the Company's financial condition or
results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which
establishes a fair value-based method of accounting for stock-based compensation
plans and requires additional disclosures for those companies that elect not to
adopt the new method of accounting. The Company will continue to account for
employee purchase rights and stock options under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." SFAS 123 disclosures will be effective for
fiscal years beginning after December 31, 1995.
25
<PAGE> 27
BUSINESS
GENERAL
The Company provides long distance telecommunications services, consisting
primarily of direct dial long distance telephone transmissions to commercial
customers throughout the United States. The Company's customers can call any
point in the United States or any foreign country accessible to customers of
AT&T at rates that are generally lower than those charged by AT&T, MCI and
Sprint. Since commencing operations in January, 1993, the Company's subscriber
base has grown to in excess of 12,500 customers in June, 1996, consisting
primarily of medium-sized businesses located predominantly in the State of
California. In addition, the Company's monthly revenues have increased from
approximately $10,000 in January, 1993 to approximately $2,000,000 in June,
1996.
The Company owns two switch centers located in Los Angeles and Beverly
Hills, California, and leases switch capacity in New York, New York from WilTel,
a national telecommunications service provider. The Company is seeking to
increase its customer base and usage of its switches in order to attain the
volume levels necessary to realize the economic advantages from routing such
traffic through its owned or leased switch capacity. The following table
provides certain information concerning the Company's switching centers:
<TABLE>
<CAPTION>
PERCENTAGE
PORTS UTILIZED
UTILIZED AT AT
AVAILABLE JUNE 30, JUNE 30,
LOCATION PORTS 1996 1996
- ------------------------------------------------------------- --------- ----------- ----------
<S> <C> <C> <C>
110 East Ninth Street, Los Angeles, CA....................... 15,000 788 5.3%
9560 Wilshire Boulevard, Beverly Hills, CA................... 15,000 1,364 9.1%
60 Hudson Street, New York, NY(1)............................ 38,400 648 1.7%
</TABLE>
- ---------------
(1) This switch is leased from and is shared with WilTel.
The Company is primarily a non-facilities based interexchange carrier that
routes its customers' calls over a transmission network consisting primarily of
dedicated long distance lines secured by the Company from a variety of other
carriers. This enables the Company to avoid the substantial capital requirements
of building and maintaining its own extensive transmission facilities. The terms
of these lease arrangements vary from month-to-month to longer term arrangements
and the lease costs may be priced on a usage sensitive basis or at a fixed
monthly rate. Because the amount the Company charges its customers for long
distance telephone calls is not based on the cost to transmit such calls, long
distance calls transmitted over facilities leased on a fixed-cost basis
generally are more profitable to the Company than long distance calls
transmitted over usage sensitive circuits, assuming a sufficient volume of calls
is routed over the fixed-cost route. Approximately 65% of the Company's call
volume is transmitted via dedicated lines. Accordingly, the Company's strategy
is to reduce overall transmission costs by entering into long-term agreements
with other carriers to lease dedicated lines at fixed monthly rates and to route
as many of its customers' calls as possible over such lines. The success of this
strategy depends on the Company's ability to generate a sufficient volume of its
customers' calls over such facilities to exceed the fixed costs of leasing such
facilities.
RECENT DEVELOPMENTS
A change of control of UStel occurred on August 14, 1996, as a result of a
stock purchase and the appointment of new Board members, both effective on that
date. On August 14, 1996, the Trust purchased an aggregate of 612,750 UStel
shares for an aggregate consideration of $4,381,163 from two family trusts of
which Noam Schwartz, the former President of UStel, was at one time a trustee.
Royce Diener, the Chairman of the Board of UStel, serves as trustee of the
Trust. The consideration for the shares consisted of cash and purchase money
notes. The notes are payable in installments over a two-year period and are
secured by the shares purchased. In addition to his voting power over the
612,750 UStel shares purchased on August 14, 1996, Royce Diener beneficially
owns an additional 136,333 UStel shares consisting of 53,000 shares of Common
Stock and immediately exercisable warrants to purchase an additional 83,333
shares of Common Stock. Messrs. Dackerman and van Biene, both founders of and
substantial shareholders in Consortium 2000,
26
<PAGE> 28
sit on the Consortium 2000 board of directors with Royce Diener. Coincident with
the acquisition of the shares, Messrs. Robert L.B. Diener, Jerry Dackerman and
Wouter van Biene were elected to the Board of Directors of the Company and
agreed to serve as President and Chief Executive Officer, Executive Vice
President and Chief Financial Officer, respectively, of UStel.
Concurrent with the purchase of the shares of Common Stock by the Trust,
the Company entered into the Merger Agreement. Pursuant to the Merger Agreement,
all of the capital stock of Consortium 2000 will be converted into an aggregate
of 1,076,923 shares of the Common Stock of UStel. As a result of the Merger,
Consortium 2000 will become a wholly-owned subsidiary of UStel. Consortium 2000
currently has a marketing agreement with UStel pursuant to which it markets
telephone services on behalf of UStel. Royce Diener, a director of UStel, is
also a director and a principal shareholder of Consortium 2000. The Merger will
be effected following approval of the Merger by the stockholders of UStel and
Consortium 2000. The Merger Agreement is subject to certain conditions,
including receipt of stockholder approval, and other conditions as are more
fully set forth in the Merger Agreement. The Merger is not expected to be
completed or approved by the Stockholders of the Company prior to the closing of
this offering. See "Risk Factors -- Consummation and Implementation of the
Merger."
The Company believes it can achieve significant benefits through the
Merger. The Company will realize immediate cost savings because a substantial
portion of the commissions historically paid by UStel to Consortium 2000 for
customer referrals will be eliminated. In addition, members of Consortium 2000's
management, who have recently joined the Company, plan to implement several
programs designed to increase the Company's customer base and profitability. For
example, management intends to implement a new in-house billing system in order
to reduce the amount of time between the provision of services by the Company
and the collection of payments from its customers.
CONSORTIUM 2000
Consortium 2000 is a telecommunications marketing and consulting services
provider which refers telecommunications customers to long distance carriers,
regional carriers, interexchange carriers, resellers and other aggregators. It
derives its revenues from sales agent commissions paid by the carriers to whom
it refers its customers. Consortium 2000 obtains customers by offering to
analyze the customer's long distance calling patterns, usage volume and the
specialized telecommunications needs of its individual customers. Utilizing
network analysis software and the expertise of its employees, Consortium 2000
provides its customers with recommendations as to which long distance carrier is
best suited to provide the particular and specialized telecommunication needs of
its individual clients at the lowest possible costs. Because Consortium 2000
represents 12,000 nationwide telecommunications users, it is able to negotiate
volume discounts on behalf of its clients.
Consortium 2000 has independent sales agent agreements with most of the
major long distance carriers and is able to recommend an array of carriers to
its customers or it can recommend a division of the customer's business among
several carriers in order to avoid excessive concentration with a single
carrier. Consortium 2000 also provides its customers with ongoing
telecommunications services and technical support by monitoring any changes in
client needs as well as developments in the telecommunications field which may
provide new opportunities for service to its clients. Consortium 2000 is not a
long distance carrier, reseller, rebiller or representative for any particular
long distance provider and does not operate a telecommunications network. It
does, however, utilize the purchasing power and economies-of-scale of its client
base in order to negotiate with a variety of long distance providers for special
pricing and enhanced services for its clients.
In mid-1995, UStel entered into a non-exclusive sales agent agreement with
Consortium 2000. At June 30, 1996, approximately 75% of UStel's customers were
referred to the Company by Consortium 2000. Conversely, approximately 70% of
Consortium 2000's revenues during the six months ended June 30, 1996 consisted
of sales commissions resulting from referrals of customers to UStel. After the
Merger with UStel, Consortium 2000 will continue to function as an independent
communication services management consultant with the ability to place members
with a broad range of carriers. Based upon its knowledge of comparative tariffs
among alternative carriers, Consortium 2000 believes that UStel frequently
represents the low-cost
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alternative and will accordingly continue, where appropriate to its clients'
needs, to refer its customers to UStel. However, where a customer's needs are
better served by another carrier, Consortium 2000 will refer such customer to
the appropriate carrier and UStel will earn a sales agent commission with
respect to such business. There can be no assurance as to how the Consortium
2000 customers who look to it for independent advice will perceive Consortium
2000 after it becomes a wholly-owned subsidiary of UStel. If, as a result of the
Merger, or for any other reason, Consortium 2000 is no longer able to
successfully market the Company's services, the Company's business would be
materially and adversely affected. See "Risk Factors -- Consummation and
Implementation of the Merger."
BUSINESS STRATEGY
The Company's strategy is to achieve continued growth and profitability by
focusing its marketing efforts on small- to mid-sized businesses and by reducing
its overall cost of delivering long distance telecommunications services. The
Company's specific objectives are as follows:
Continue to Market Long Distance Telecommunications Services through its
Agent Network. The Company believes that direct sales are the most effective
means of adding customers who will have long-term loyalty to the Company. In
this regard, primarily utilizing the Consortium 2000 agent network, the Company
believes that it can access new customers by continuing to market itself as a
low-cost alternative compared to other long distance carriers introduced to the
customer by Consortium 2000.
Increase Name Recognition. The Company believes that its name is
well-recognized in the industry as providing reliable, low-cost
telecommunications services together with excellent customer service. The
Company will seek to increase customer awareness by targeting its products to
affinity and such other groups which the Company believes will provide it access
to large customer bases.
Leverage Consortium 2000's Diverse Client Base and Relationships With
Affiliated Long Distance Carriers. The Company believes that through Consortium
2000, it can market to a diverse group of potential commercial customers, and
where appropriate, participate with larger carriers in providing services to
these customers. The Company believes that following consummation of the Merger,
the Company will be able to maintain client relationships and earn agent
commissions from other carriers, even where the Company is not selected as the
customer's primary long distance carrier.
Utilize Synergies of Consortium 2000 Merger. The Company believes that
significant cost efficiencies can be achieved through the integration of
Consortium 2000 upon consummation of the Merger and consolidation of certain key
functions within the combined companies.
Install In-house Billing System. The Company believes that it can achieve
significant cost-savings and reduce reliance on its working capital facility by
installing its own dedicated billing system. The Company believes that the
system will enable it to produce billings on a more timely basis and permit
multiple billing cycles per month. The Company also believes that the system
will also enhance customer service and reduce billing errors.
Increase Shared Tenant Services. The Company has installed its
telecommunications equipment in two buildings where there are large numbers of
commercial telecommunications users. By placing switching equipment in these
locations, the Company can essentially become the customer's local telephone
carrier and further decrease the cost of providing long distance services to
these customers. The Company intends to provide shared tenant services in the
future on an opportunistic basis in circumstances where the economics justify
the capital expenditures associated with providing such service.
Increase International Traffic. The Company has a number of contracts with
foreign telecommunications carriers who utilize the Company's facilities to
terminate traffic either in the United States or in other foreign countries. In
this manner, the Company provides "wholesale" services to the foreign carrier
and is directly compensated by the carrier. Several carriers in Israel direct a
portion of their international traffic to the Company's switching equipment in
New York City. The Company then transmits the call to its final destination. The
Company believes that the opportunity exists to provide such foreign call
termination services from a number of countries.
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Decrease Network Costs. As a result of its substantial growth in traffic
over the past two years, the Company has the opportunity to achieve reductions
in its cost of carrying traffic over its network. The Company expects that these
cost reductions will come from three principal initiatives -- (1) negotiation of
more favorable rates with its underlying long distance carriers through volume
guarantees and the ability to pay for services on a more timely basis, (2)
implementation of strategically placed switching and related equipment to route
more traffic through the Company's fixed-cost circuits and (3) conversion of
variable cost traffic to fixed cost circuits as warranted by call volume.
Make Strategic Acquisitions. The Company believes that opportunities exist
to acquire other small- to mid-sized long distance carriers. Typically, smaller
carriers face difficulty reaching a critical mass of business and accessing
capital for expansion. Many of these carriers have attractive regional customer
bases which can easily be routed through the Company's existing long distance
telephone network.
THE LONG DISTANCE INDUSTRY
On January 1, 1984, AT&T's divesture of the Bell System went into effect.
As a result of the divestiture decree (the "AT&T Divestiture Decree"), AT&T was
forced to divest its 22 Bell Operating Companies ("BOCs"), which were
reorganized under seven RBOCs, such as Pacific Telesis and US West. The RBOCs
own and are responsible for operations of the BOCs in each of their regions. The
BOCs, as well as other independent companies which provide local telephone
service, are characterized as LECs. The LECs are responsible for providing dial
tone, local lines and billing for local service as well as local access for long
distance traffic.
The AT&T Divestiture Decree also required the LECs to provide all
interexchange carriers, such as the Company, with access to the local telephone
exchange facilities that is "equal in type, quality and price" to that provided
to AT&T. In addition, the LECs were required to conduct a subscription process
allowing consumers to select their long distance carrier. This development,
known as "equal access," enabled consumers to complete calls using their
selected long distance carrier by simply dialing "1" plus the area code and
number. Prior to equal access, consumers using an interexchange carrier other
than AT&T had to dial a local number, then an access code, then the area code
and number of the call destination to complete a call. With equal access, all
interLATA calls are routed automatically to the consumer's long distance carrier
of choice, while all intraLATA traffic is carried by the LECs. The AT&T
Divestiture Decree and the implementation of equal access constitute the
fundamental regulatory developments that allow interexchange carriers other than
AT&T, such as the Company, to enter and compete in the long distance
telecommunications market.
All interexchange carriers, including AT&T and the Company, pay charges to
the LECs for access to local telephone lines at both the originating and
terminating ends of all long distance calls, unless the Company is able to
install a dedicated line providing direct access from the customer to one of the
Company's switch centers. As is the case with most interexchange carriers,
access charges represent the single largest component of the Company's cost of
revenues. One element of the Company's strategy is to focus on the development
of "shared tenant services" and "shared services providing," where the Company
can install dedicated lines from commercial customers concentrated in a single
location such as a high rise building to the Company's switch centers thereby
bypassing the local access cost.
Since the AT&T Divestiture Decree, the long distance industry has
experienced rapid technological development. Prior significant technological
change was the advent of digital transmission technology, which represented an
improvement over analog technology. Because the BOCs and many LECs converted
rapidly to digital switches, digital technology was necessary for interexchange
carriers to connect to the LECs for equal access. Accompanying the movement
toward digital switching was the rapid development and implementation of fiber
optic circuitry, which also requires digital technology. While AT&T had once
been the only source of high quality transmission facilities, several other
companies, including MCI and Sprint, entered the business of building
transmission facilities using primarily fiber optic circuits.
The construction of these additional transmission facilities created two
distinct groups in the long distance industry: facilities based carriers
(entities which own their own transmission network) and non-
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facilities based carriers (such as the Company). The surge in construction of
new long-haul facilities has created excess transmission capacity for long
distance calls. This excess capacity and the resultant decline in transmission
rates have both raised the break-even traffic volume for facilities based
carriers and increased the difficulty of obtaining that volume through their
internal customer bases. Accordingly facilities based carriers have become both
wholesalers and retailers, selling their transmission capacity to both
non-facilities based carriers and consumers. Non-facilities based carriers such
as the Company have benefited from the wider availability and the lower cost of
transmission services, as it has become possible for them to lease circuits on
attractive terms, particularly as their volume of business increases to
significant levels.
The AT&T Divestiture Decree prompted several hundred new entrants into the
long distance industry, including the Company. The industry, however, has
experienced rapid consolidation, primarily due to the technological changes
described above. Facilities based carriers, many of which were initially
unprofitable due to their sizable capital outlays, began acquiring other
carriers to increase traffic for their networks in an effort to cover fixed
costs. Similarly, larger non-facilities based carriers began buying smaller
carriers to build their traffic, improve their networking, and increase their
leverage in leasing transmission facilities from facilities based carriers.
As a result of the changes brought about by the AT&T Divestiture Decree,
interexchange carriers, including the Company, generally provide long distance
telephone services at a lower cost than the comparable services offered by AT&T,
MCI and Sprint. The Company's success will depend on its ability to provide
comparable or better services at prices equal to or lower than its competitors
in the future.
LONG DISTANCE SERVICES
The Company provides its customers with 24-hour long distance telephone
services to all points in the United States and to any foreign country
accessible to customers of AT&T. In providing long distance telephone services,
the Company offers a variety of service options, including "1 +" dialing (which
avoids the need to dial a separate access code to access the Company's long
distance service), inbound "800" service, "800" travel service, operator
services, private line networks and data transmission services. Under most of
its service options, the Company charges its customers on the basis of minutes
of usage at rates that vary with the distance, duration and time of day of a
call as well as local access for long distance traffic.
A subscriber may access the Company's telecommunications transmission
network in several ways. If a subscriber is located in a given service
origination area that has been converted to equal access and such subscriber has
selected the Company as its primary long distance carrier, then access is gained
by dialing "1" plus the area code and number desired. A second method of access
is through dedicated access lines, which are private leased lines dedicated to
one or more customers and which provide a direct connection between the
customer's premises and the Company's long distance transmission network.
Another method of access available in both equal access and non-equal access
areas requires a subscriber to dial a seven- or ten-digit access number to reach
the Company's switch. Following the switch's signal, the subscriber then enters
his authorization code, area code and the telephone number of the call
destination. If the switch determines that the subscriber's authorization code
is valid, the switch directs the call to the desired destination through the
most cost-effective intercity transmission circuits then available. The
installation of automatic dialers at a subscriber's location reduces the number
of digits a subscriber must dial to complete a long distance telephone call by
automatically dialing the local seven- to ten-digit access number and the
subscriber's authorization code. The use of dedicated access lines or dialers,
which are used for high-volume subscribers, also eliminates the need to enter an
authorization code. At December 31, 1995, approximately 59% of the Company's
revenues were derived from customers that utilize dedicated access lines and
approximately 40% of such revenues were derived from customers that utilize the
direct dial method of access. Less than 1% of such revenues were derived from
customers that were required to use access numbers and authorization codes.
OTHER SERVICES
The Company makes available to its customers a variety of other service
options. The inbound "800" service, for example, permits the customer to be
billed for long distance calls made to the customer by that
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customer's clients. The Company's "800" travel service permits customers to
utilize the Company's network from locations outside of their own service areas.
Operator assistance services provided through a third-party contractor permits
broad based usages of the Company's system from business establishments and
residences. The Company contracts with US Long Distance Inc., for operator
services where the call is answered in the name of the customer. The Company's
experience with third party service providers has been positive. Private line
networks offer specialized point-to-point services, including transmission of
data, on a fixed cost basis. The TELCard(TM) calling card offers international
calling capabilities in addition to convenient long distance usage. The Company
also offers its customers special access options for dedicated long distance
lines.
Each customer of the Company receives a detailed monthly call report and
invoice for services from the Company setting forth the date, number called,
duration of call and time and charges for each call. While billing services are
primarily provided through an outside contractor at present, the Company is in
the planning stages of bringing the billing system in-house to achieve greater
control, decreased collection periods and increased profitability. See "Use of
Proceeds." The Company presently bills certain wholesale accounts by an in-house
billing system and also offers specialized billing services, including account
coding which permits identification of long distance calls in a single account
by caller or project.
The Company's long distance telecommunications services are available 24
hours a day, seven days a week. To assist subscribers with questions regarding
services, billing and other matters, the Company maintains a customer service
department and staff which is accessible to subscribers by telephone 24 hours a
day, 365 days a year.
Consortium 2000 provides telecommunications consulting services to a
diversified client base. Consortium 2000 analyzes a customer's long distance
calling patterns, usage volume and specialized telecommunications needs and
recommends equipment requirements, calling plans and carriers to be utilized to
achieve the most effective result. Consortium 2000 also acts as a sales agent
for a broad base of long distance carriers, including the Company, and is
compensated in the form of commissions for business placed with each such
carrier.
TRANSMISSION NETWORK
The Company's transmission network provides the connections from the
subscriber to the call destination. A call may be completed by using either (a)
a fixed-cost, long-haul circuit, connecting the call at a switch center to the
destination city where the call is terminated by a LEC which directs it to the
called party or (b) when all fixed-cost circuits connected to the called city
are in use or if the called area is not served by existing fixed-cost circuits,
switched access services from other carriers. Switched access services are usage
sensitive and may cost more or less than that of a fixed-cost circuit, depending
on the volume of calls to a particular destination.
Switched access circuits are "usage sensitive" because the rates paid for
them may vary with the day, time, frequency and duration of telephone calls
transmitted through such circuits. In contrast, the rates paid by the Company to
lease dedicated line facilities are fixed and therefore do not vary with usage
or time of day. As a result, the Company's fixed-cost circuits are less
expensive to use for routes over which the Company carries high volumes of long
distance traffic. Because the amount the Company charges for long distance
telephone calls is not based on the cost to transmit such calls, long distance
calls transmitted over high-volume, fixed-cost routes generally are more
profitable to the Company than long distance calls transmitted over usage
sensitive circuits, assuming a sufficient volume of calls is routed over the
fixed-cost route. Consequently, to the extent possible, the Company attempts to
connect calls through transmission facilities which are not usage sensitive.
Profitability of the Company's operations depends largely on utilizing
transmission circuits on a cost effective basis. Accordingly, the Company's
strategy is to reduce overall transmission costs by entering into long-term
agreements with other carriers to lease bulk transmission facilities or other
dedicated lines at fixed monthly rates and to route as many of its customers'
calls as is possible over such lines.
Except for certain pricing agreements, the dedicated lines used by the
Company are generally leased on a month-to-month basis. While these
month-to-month arrangements may be terminated upon notice by the
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Company, they may not be terminated under current law by the carrier unless the
Company fails to comply with the terms of the lease or unless the service is
terminated for the Company and all other long distance telephone carriers.
Generally, rates charged under these leases may be increased or decreased by the
carriers upon notice after filing with the FCC for interstate circuits, or
applicable state public utilities commissions ("PUCs") for intrastate circuits,
provided the rates charged apply equally to all users of the services.
Subject to the foregoing, the Company's strategy is to continue to lease
bulk and/or flat rate circuit capacity and to resell that capacity at usage
sensitive rates to its subscribers. The Company continuously reviews traffic
study programs to analyze its volume of call traffic in light of its
then-existing circuit capacity. All circuits which the Company utilizes, with
the exception of local switched access circuits to a switch center, are
generally offered by several common carriers, and any decision concerning which
types of circuits to be used is typically based on individual route cost as well
as the transmission quality of the circuits provided. The continued availability
to the Company of transmission facilities leased at bulk rates is fundamental to
the economic and financial viability of its business.
CALL SWITCHING EQUIPMENT
The Company owns certain computerized network digital switching equipment
that routes certain of its customers' long distance calls. Other customers'
calls are routed through facilities leased by the Company from a variety of
other carriers. A switch is a computer controlled digital processor designed
primarily to route and track telephone calls. Switching equipment operates like
an electronic "toll booth," routing each call to its destination and tracking
the length of the call for billing purposes. A secondary function of a switch is
to determine and effect the least expensive route for each call among a variety
of routing options. Currently the Company owns two digital switching centers and
leases switch capacity from WilTel. Two of the switching centers are located in
Southern California and one is located in New York, New York. The Company's
subscribers can access this call switching equipment through equal access, which
only requires dialing "1", plus the area code and telephone number, by using a
dedicated line, or by dialing a seven- or ten-digit number, authorization code,
identification number (for billing), area code and telephone number. Once a
customer accesses the switching equipment, the equipment "answers" the telephone
call, verifies the caller's billing status, routes the call to the dialed
destination and monitors the call's duration for billing purposes. The Company
has programmed its switching equipment to select the most cost-effective
transmission circuit then available to the Company to complete a call as dialed.
In addition to networking, the Company's switching equipment verifies customers'
pre-assigned authorization codes, records billing data and monitors system
quality and performance. To satisfy increasing or anticipated usage of its long
distance network, the Company has added and will continue to add circuit
capacity at existing switching centers by increasing the number of ports on
existing switches.
RATES AND CHARGES
The Company charges customers on the basis of minutes or partial minutes of
usage at rates that vary with the distance, duration and time of day of the
call. The rates charged are not affected by the cost to the Company of the
particular transmission facilities selected by the Company's network switching
centers for transmission of the call. Discounts are available to customers that
generate higher volumes of monthly usage. The Company continually evaluates the
rates and fees charged for its services and, under appropriate circumstances,
may implement different pricing arrangements for existing or new services.
The Company endeavors to charge rates that are generally lower than those
charged by AT&T and competitive with those charged by other long distance
carriers. The rates offered by the Company may be adjusted in the future as AT&T
and other interexchange carriers continue to adjust their rates.
Once a customer has submitted the proper paperwork and is approved by the
Company's credit department, all pertinent information, i.e., telephone numbers,
calling card data, address, contact person, billing address, etc. is entered
into the Company's information system and the Company's computer network. The
Company's information system then generates the appropriate electronic
instructions which connect the customer to the Company's network.
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Data regarding calls made by the client come from several sources: the
Company's switches; its calling card system; or WilTel, AT&T, Sprint and/or MCI.
After receiving the records of the calls on magnetic media, the Company inputs
the data into the billing system for processing.
Processing by the Company's information system includes: checking for
duplicate call records, confirming that calls to and from numbers that are not
in the Company's system are flagged for further research, verifying that the
origination and termination of calls are from valid telephone numbers and
circuits, and verifying that valid rates exist for each call. Calls which fail
any initial processing checks are placed in a rejected call file for additional
analysis.
All approved calls are rated, taxed and a bill is generated for the
individual client. The Company's in-house personnel reviews printed bills for
accuracy and appearance before the Company mails them to customers.
Substantially all of the Company's billing services are currently provided
to the Company by a third party. The Company intends to acquire an in-house
billing system. See "Use of Proceeds" and "Management Discussion and Analysis of
Results of Operations and Financial Condition -- Liquidity and Capital
Resources."
MARKETING
The Company's marketing efforts have been and continue to be directed
principally at small-to-medium-sized business and larger residential users. The
Company derives the majority of its revenues from the sale of long distance
telecommunications services to commercial subscribers. Commercial subscribers
typically use higher volumes of telecommunications services than residential
customers and concentrate usage on weekdays and business hours when rates are
highest. Consequently, commercial customers, on average, generate higher
revenues per account than residential customers. While the Company's focus is on
commercial customers in major metropolitan areas, it can provide long distance
services to customers in any area of the United States. The largest
concentration of the Company's customers is in Southern California.
The Company principally markets long distance services through independent
sales agents. These agents are not restricted to specific territories and their
sales efforts are not directed, as to location, by the Company. Through the
Company's marketing agreement with Consortium 2000, a network of approximately
1000 agents have actively marketed the Company's services over the past two
years. The majority of the Company's new accounts over this period have been
procured by Consortium 2000-affiliated agents.
Consortium 2000 maintains agent relationships with various long distance
carriers. The Merger will provide marketing synergy in that the Company will
have the flexibility to place customers with carriers other than the Company who
might be in a better position to service that customer's particular needs, while
still benefiting from the customer relationship through receipt of agent fees
paid by the third-party carrier. From the customer's perspective, this
flexibility represents a value-added element of the client relationship. The
Company also has the ability to divide a customer's business between several
carriers, including the Company, thereby avoiding the problem of risk
concentration resulting from very large accounts. In the case of such large
accounts, as long as the Company is managing the customer's long distance
traffic, over time, additional traffic can be directed to the Company as the
situation warrants.
COMPETITION
As a result of the AT&T Divestiture Decree, numerous competitors, in
addition to AT&T, have entered the long distance telecommunications market,
resulting in profound changes in the competitive aspects of the industry. The
Company competes directly with a number of facilities based common carriers,
including AT&T, MCI and Sprint, all of which have substantially greater
financial, marketing and product development resources than the Company. In
addition, the Company competes with hundreds of smaller regional and local
non-facilities based carriers and resellers. AT&T remains the dominant company
providing domestic long distance telephone service, and its pricing and services
largely determine the prices and services offered by resellers and long distance
telephone carriers providing long distance telephone service. Because the
regulation
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and operations of AT&T and the BOCs are undergoing considerable change, it is
difficult to predict what effects the future operations and regulation of AT&T
will have on the Company's existing and prospective business operations.
In recent years, increased competition among long distance carriers has
resulted in an overall reduction in long distance telephone rates. The impact on
net income of these reductions has been offset somewhat by networking
efficiencies, declining costs in access charges and readily available
transmission facilities, largely due to the expansion of circuit capacity
through the installation of fiber optic transmission facilities. The advent of
fiber optic technology has resulted in another major impact on the long distance
market. Initially, long distance carriers competed with AT&T based strictly on
price. Discounts of 25% to 35% from AT&T rates were typical, because long
distance carriers were attempting to build market share and because their
transmission quality was generally inferior to that of AT&T. The introduction of
fiber optic facilities, however, effectively eliminated AT&T's transmission
quality advantage. Gradually, the industry and consumers begin to recognize the
importance of quality service as well as price, and the price differential has
decreased. Recognition that competition is not solely based on price has led to
a greater emphasis on customer service, with many companies adding product
variety, customized billing and other value-added services.
Unlike the Company's larger facilities based competitors which own their
own transmission facilities, the Company is vulnerable to changes in rates
charged by facilities based carriers for use of their facilities. The Company
has attempted to minimize its vulnerability to cost increases through the
long-term leasing of fiber-optic and other digital transmission circuits. While
cost or concessions paid to customers may, in certain cases, be the primary
consideration for a customer's selection of long distance telephone service, the
Company believes that other factors are significant, including ease of obtaining
access to the long distance network, quality of the telephone connection format
and management information presented in the specialized billing data generated
by the carrier, and enhanced services such as "800" service, repair service and
automated collect calling.
GOVERNMENT REGULATION
GENERAL
The Company competes in an industry that, to a large degree, continues to
be regulated by federal and state government agencies. At approximately the same
time as the required divestiture of the Bell telephone companies by AT&T in
1984, the FCC announced rules that were created to foster a self-regulating
interstate telecommunications industry, relying upon competitive forces to keep
rates and services in check.
The FCC has regulatory jurisdiction over interstate and international
telecommunications common carriers, including the Company. Under Section 214 of
the Federal Communications Act, the FCC must certify a communications common
carrier before it may provide international services. The Company has obtained
Section 214 authorization to provide international services by means of resale.
At August 31, 1996, the Company had obtained a certificate of public
convenience and necessity or equivalent documents from approximately 34 states
to provide long distances services within those states. Regulations within each
of these states, as they pertain to completing direct dial long distance calls
for the Company's customers within the state, are virtually static. As the
Company expands the geographic scope of its direct dial long distance business,
it will be required to obtain additional state regulatory approvals to provide
intrastate long distance service.
FEDERAL REGULATION
In 1981, the FCC substantially deregulated the interstate activities of
non-dominant inter-exchange carriers such as the Company. The FCC later extended
this deregulatory policy to resellers of satellite services, resellers
affiliated with independent telephone companies and facilities based carriers
(such as MCI and Sprint) which compete with AT&T. It retained its jurisdiction
over customer complaint procedures and basic statutory common carrier
obligations to provide nondiscriminatory services and rates. Interstate carriers
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subject to these deregulatory actions were no longer subject to certification by
the FCC or to tariff filing requirements under the Communications Act.
These changes in FCC policy have had the effect of lowering the rates of
AT&T, the dominant provider of long distance telephone service and pricing model
for the Company, and other providers and resellers of long distance services.
The potential continued deregulation of AT&T may have a material adverse effect
on the Company's ability to compete effectively with AT&T.
In connection with the 1984 divestiture by AT&T of the RBOCs, the RBOCs,
and subsequently General Telephone and Electric Company, were directed to
provide all long distance carriers and resellers the same high quality access
and technical interconnection that was previously provided solely to AT&T. The
FCC determined that the access charges to be paid by long distance carriers such
as the Company and other carriers not receiving access equal to that afforded
AT&T would be set initially at a rate offering a substantial discount from the
access charges paid by AT&T. Under equal access, the Company's subscribers enjoy
the convenience of a universal and simple dialing plan and the Company is
provided with equal access to the local exchange. Within the Company's primary
marketing areas, the equal access conversion process is virtually, complete;
therefore, the Company no longer receives the above mentioned discount and must
pay the same access charges as are paid by AT&T.
INTERSTATE ACCESS TRANSPORT PROCEEDING
In an effort to encourage competition in the provision of interstate access
services, the FCC granted increased pricing flexibility to LECs for "access
transport" services. Access transport refers to the connection provided by LECs
between long distance carriers' long distance facilities and the customer's
telephone. These rate structures previously were designed such that local
telephone companies assessed an equal charge per unit of access to all long
distance carriers, regardless of the volume of local access that these long
distance carriers independently generated. Under the new FCC pricing plan,
adopted in the fall of 1993, local telephone companies were allowed to offer
more cost effective access to those long distance carriers with very high access
volumes in a particular local market. Accordingly, long distance carriers with
lesser access requirements, such as the Company, could experience increases in
their overall average access cost relative to larger competitors.
The FCC pricing plan implemented in the fall of 1993 was set to expire in
November, 1995. In principle, the plan has been extended pending resolution of a
comprehensive telecommunications bill which was enacted into law in early 1996.
Under this process, the FCC could grant local telephone companies further
flexibility and could potentially impose a greater burden upon the operations of
the Company's direct dial long distance services. The FCC believes the
proliferation of competitive access providers and increased long distance
carrier network efficiencies should offset any inequities caused by volume
sensitive access pricing. The Company is unable to predict the course and effect
of the FCC's actions on this issue at this time.
FCC FORBEARANCE POLICY
In 1983, the FCC exempted "non-dominant" long distance carriers from being
required to publicly file rates with the FCC. As a result of the FCC's
"forbearance" policy, long distance carriers such as this Company were permitted
to enter into individual contracts with customers without disclosing the rates
charged to such customers to their competitors or its other customers. In
November, 1992, however, the U.S. Court of Appeals for the D.C. Circuit found
the FCC's "forbearance" policy to be unlawful, ruling that the forbearance
policy violated federal communications law governing the FCC. In response to the
ruling by the federal appeals court, MCI and the Justice Department, on behalf
of the FCC, filed separate appeals with the U.S. Supreme Court requesting that
the appeals court ruling be overturned. In June, 1994, the U.S. Supreme Court
upheld the ruling in the case. As a result, all long distance carriers,
including the Company, are required to publicly file with the FCC the rates
charged for their long distance services.
RECENT LEGISLATION
In February, 1996, the Telecommunications Act was signed into law. The
purpose of the Telecommunications Act is to promote competition in all aspects
of telecommunications. The Telecommunications Act
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<PAGE> 37
requires telecommunications carriers to interconnect with other carriers and to
provide for resale, number portability, dialing parity, access to rights-of-way
and compensation for reciprocal traffic. Additionally, incumbent local telephone
companies are required to provide nondiscriminatory unbundled access, resale at
wholesale rates and notice of changes that would affect interoperability of
facilities and networks. The FCC is to adopt mechanisms to ensure that essential
telecommunications services are affordable.
The Telecommunications Act also provides that RBOCs may provide long
distance service upon enactment that is out-of-region or incidental to: (1)
audio/video programming; (2) Internet for schools; (3) mobile services; (4)
information or alarm services; and (5) telecommunications signaling. In order
for a BOC to provide inregion long distance service, the Telecommunications Act
requires the BOC to comply with a comprehensive competitive checklist and
expands the role of the U.S. Department of Justice in the FCC's determination of
whether the entry of a BOC into the competitive long distance market is in the
public interest. Additionally, there must be a real facilities-based competitor
for residential and business local telephone service (or the failure of the
potential providers to request access) prior to a BOC providing in-region long
distance service. BOCs must provide long distance services through a separate
subsidiary of at least three years. Until the BOCs are allowed into long
distance or three years have passed, long distance carriers with more than 5
percent of the nation's access lines may not jointly market BOC resold local
telephone service, and states may not require BOCs to provide intraLATA dialing
parity.
Telecommunications companies may also provide video programming and cable
operators may provide telephone service in the same service area. The
Telecommunications Act prohibits telecommunications carriers and cable operators
from acquiring more than 10 percent of each other, except in rural and other
specified areas.
The impact of the Telecommunications Act on UStel is unknown because a
number of important implementation issues (such as the nature and extent of
continued subsidies for local rates) still need to be decided by state or
federal regulators. However, the Telecommunications Act offers opportunities as
well as risks. The new competitive environment should lead to a reduction in
local access fees, the largest single cost in providing long distance service
today. The removal of the long distance restrictions on the BOCs is not
anticipated to have an immediate significant impact on UStel because of the
substantial preconditions that must be met before the BOCs can provide most
in-region long distance services. However, the entry of these local telephone
companies into long distance telecommunications services could result in new
competition and there is a possibility that the local telephone companies will
be able to use local access to gain a competitive advantage over other long
distance providers such as the Company.
On August 1, 1996, the FCC announced the adoption of rules relating to the
manner in which and the price at which potential competitors in the local
services market will be able to obtain local facilities and services from the
incumbent telephone company. The FCC rules have yet to be published. It is
unclear how and when the rules will be implemented and when implemented how they
will affect the Company.
STATE REGULATION
In those states prohibiting intrastate resale, the Company may not engage
in intrastate operations. In those states where intrastate resale is permitted
(at least on an interLATA basis), the Company may be required to obtain state
regulatory certification prior to commencing operations. At August 31, 1996, the
Company had received authorization to provide telecommunications services to its
customers in approximately 34 states, and is applying for authorization to
provide telecommunications services to customers in other states. In addition,
the Company is required to maintain on file at the state regulatory commissions
in those states a tariff or schedule of its intrastate rates and charges.
Various state legislatures and public utility commissions are considering a
variety of regulatory policy questions which could adversely affect the Company.
At this time, however, it is impossible to determine what effect, if any, such
regulations, including the cost of compliance with such regulations, may have on
the operations of the Company.
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<PAGE> 38
EMPLOYEES
At October 18, 1996, the Company had 55 full-time employees, including five
executives, five sales and marketing personnel, five network, technical and
operations personnel, and 40 accounting, administrative and support personnel.
None of the Company's employees are represented by a union. The Company believes
that its employee relations are good. As of October 18, 1996, Consortium 2000
employed 15 persons full time, including three executives and 12 operations
personnel.
PROPERTIES
The Company leases from a third party approximately 5,000 square feet of
office space in Las Vegas, Nevada which it uses as its corporate headquarters
and operations center. The facilities are leased for a term expiring in July,
1998. Rental of approximately $7,500 per month is subject to adjustment based on
changes in various cost of living indices. Consortium 2000 subleases from a
third party approximately 4,900 square feet of office space in Culver City,
California, which it uses as its corporate headquarters and operations center.
The facilities are leased for a term expiring in June, 1998. The monthly rental
payment is approximately $5,000.
The Company also is subject to several operating leases relating to
properties in which its switching facilities are located expiring on various
dates through 1998. See Note 5 to Notes to Financial Statements.
LEGAL PROCEEDINGS
The Company is a party from time to time to litigation or proceedings
incident to its business. There is no pending legal proceeding to which the
Company is party that in the opinion of management is likely to have a material
adverse effect on the Company's business, financial condition or results of
operations.
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<PAGE> 39
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ ---- -----------------------------------------------------
<S> <C> <C>
Royce Diener.................. 78 Chairman of the Board
Robert L. B. Diener........... 48 President, Chief Executive Officer and Director
Barry K. Epling............... 44 Executive Vice President, Chief Operating Officer,
Assistant Secretary and Director
Wouter van Biene.............. 47 Executive Vice President, Chief Financial Officer,
Secretary and Director
Jerry Dackerman............... 46 Executive Vice President, Marketing and Sales and
Director
Noam Schwartz................. 45 Executive Vice President and Director
Abe M. Sher................... 35 Vice President and General Counsel
Andrew J. Grey................ 40 Director
</TABLE>
Royce Diener has served as an advisor to the Company since July, 1995 and
became a director of the Company in January, 1996 and Chairman on August 14,
1996. Mr. Diener served for over 18 years as President, then Chairman and Chief
Executive Officer of American Medical International, Inc.("AMI"), a
multinational hospital management company listed on the New York Stock Exchange
and included among the S&P 500. He serves on the Board of Directors of Acuson,
Inc. and American Health Properties, Inc., both listed on the New York Stock
Exchange. Among other private companies, Mr. Diener serves on the Board of
Directors of Harvard Medical International, an affiliate of Harvard University.
He recently completed a ten-year term as a director of Advanced Technology
Ventures, a registered investment firm located in Boston, Massachusetts and Palo
Alto, California. Mr. Diener is the father of Robert L. B. Diener.
Robert L. B. Diener has served the Company as a consultant since July,
1995, devoting a substantial portion of his time to the Company's business. He
became Executive Vice President in January 1996 and President and Chief
Executive Officer on August 14, 1996 and now devotes full time to the Company.
In January, 1996, he was appointed Executive Vice President. From its inception
in 1986 through 1993, Mr. Diener served as President and Chief Executive Officer
of American Health Properties, Inc., a New York Stock Exchange listed real
estate investment trust specializing in health care. From 1976 through 1986, Mr.
Diener held various positions with AMI, most recently Group Vice
President -- Corporate Development. For over seven years, he was a principal
business development officer in the international division of AMI, overseeing
projects worldwide. For four years prior to joining AMI, Mr. Diener was engaged
in the private practice of law with a law firm in Los Angeles, California,
concentrating in banking, real estate, corporate and securities law. Mr. Diener
is the son of Royce Diener.
Barry K. Epling has served as Vice-President and a director since March 1,
1993 and became Executive Vice President and Chief Operating Officer in
September, 1995. Prior to joining the Company, he served as a consultant to the
Company. Mr. Epling was employed by AT&T in network and telecommunications
equipment implementation and management, as well as in other managerial
capacities. Before joining AT&T, Mr. Epling worked in network and equipment
implementation and management for RCA Corporation. Subsequent to RCA and AT&T,
Mr. Epling was a principal of Alliance Card, where he developed the
telecommunications network, wrote all communications protocols and managed the
development of software to integrate UNIX, IBM AS 400 and DOS systems. Prior to
March 1, 1993 when he joined the Company, Mr. Epling served as a network and
systems consultant to several long distance carriers, including the Company.
Dr. Wouter van Biene has been the Senior Vice President, Chief Financial
Officer and Secretary of Consortium 2000, Inc. since 1991. On August 14, 1996 he
became Executive Vice President and Chief Financial Officer of UStel and will
continue to serve in his capacity as Senior Vice President and Chief Financial
Officer of Consortium 2000 after the consummation of the Merger. From 1986 to
1991 he was a
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<PAGE> 40
partner with Robin & Dackerman, Inc., a telecommunications consulting firm. From
1972 to 1986 he was employed by AMI where he achieved the level of Group Vice
President -- Information Systems and Chief Financial Officer for International
Operations. Dr. van Biene earned a doctorate in Economics and Business
Administration at the University of Amsterdam, the Netherlands.
Jerry Dackerman founded Consortium 2000 and has served as its President and
Chief Executive Officer since 1990. On August 14, 1996 he became Executive Vice
President Sales, for UStel and will continue to serve in the capacity as
President and Chief Executive Officer of Consortium 2000 after the Merger is
completed. From 1977 to 1991 Mr. Dackerman was President of Robin & Dackerman,
Inc. Prior to 1977 Mr. Dackerman led project teams in design and implementation
of telecommunications voice/data networks for TRW, Hughes Aircraft and Lockheed.
Mr. Dackerman is also a director of New USA Growth Fund.
Noam Schwartz founded the Company in July, 1991 and served as President,
Chief Executive Officer and a director since March 20, 1992 to August 14, 1996
when he became an Executive Vice President of the Company. Mr. Schwartz was a
principal of Homestead Management, Inc., a real estate management company, and
Homestead Group Associates, a real estate development and construction company
which constructed over 2,500 apartment units between 1988 and 1991. Mr. Schwartz
also serves as a director of Triangle Development, Inc. and Great American
Homes, Inc.
Abe M. Sher was appointed by the Company as its General Counsel in January,
1996. From June, 1995 to January, 1996, Mr. Sher was an advisor to the Company.
From 1993 through 1995, Mr. Sher served as General Counsel for SpaceWorks, Inc.,
an international service provider specializing in customized on-line
telecommunications applications for large corporations and associations. From
1994 through 1995, Mr. Sher served as a corporate finance consultant to Micro
Bell, Inc., a telecommunications/paging hardware manufacturer. From 1989 to
1991, Mr. Sher was also a principal and served as General Counsel of Atria
Corporation, a real estate development company based in Southern California.
From 1986 to mid-1995, Mr. Sher was also engaged in the private practice of law
in Los Angeles, California.
Andrew J. Grey served as Executive Vice President -- Finance, Chief
Financial Officer from January 1996 to August 14, 1996 and has been a director
of the Company since January 1996. From June, 1995 until January, 1996, Mr. Grey
was a consultant to the Company. Mr. Grey is certified public accountant. Mr.
Grey joined the accounting firm of Solomon Ross Grey & Company in 1987. Mr. Grey
began his accounting career with Ernst & Whinney in 1979, where he served as
both an audit supervisor and tax manager and later joined The Baldwin Company, a
real estate developer, where he was employed as Senior Vice President, Treasurer
and Controller and was responsible for accounting, computer systems and
financing.
BOARD OF DIRECTORS
Directors are elected annually to serve until the next annual meeting of
stockholders and until their successors are elected and qualified or until their
death, resignation or removal. The Company plans to pay its non-employee
directors a $12,000 annual retainer and to reimburse them for reasonable
expenses incurred in attending meetings. Upon completion of this offering, the
Company intends to grant annual options to purchase an aggregate of 12,000
shares of Common Stock at the then market price under its Stock Option Plan to
its non-employee directors. See "-- 1993 Stock Option Plan."
Upon the consummation of this offering, the Company's Board of Directors
will have an Audit Committee and Compensation Committee. The Audit Committee,
which will be comprised of Royce Diener and Andrew J. Grey, will be responsible
for making recommendations concerning the engagement of independent certified
public accountants, approving professional services provided by the independent
certified public accountants and reviewing the adequacy of the Company's
internal accounting controls. The Compensation Committee, which will be
comprised of Royce Diener and Andrew J. Grey, will be responsible for
recommending to the Board of Directors all officer salaries, management
incentive programs and bonus payments.
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<PAGE> 41
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this offering, the Company did not have a compensation committee.
Messrs. Schwartz and Epling participated in deliberations concerning
compensation of executive officers during 1995. None of the executive officers
of the Company have served on the board of directors or on the compensation
committee of any other related entity.
EXECUTIVE COMPENSATION
The following table sets forth all compensation received by the Company's
President and its other most highly compensated executive officers and key
employees whose total cash and cash equivalent compensation exceeded $100,000
for services rendered to the Company for the years ended December 31, 1993,
1994, and 1995.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
PAYOUTS
------------
ANNUAL SECURITIES
COMPENSATION UNDERLYING
------------ OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR SALARY #
- ------------------------------------------------------ ---- ------------ ------------
<S> <C> <C> <C>
Noam Schwartz,........................................ 1995 $100,000 --
President, Chief Executive Officer, Director 1994 $ 60,000 210,000
1993(1) $ 60,000 --
Barry K. Epling,...................................... 1995 $ 93,600 --
Executive Vice President, Chief Operating Officer, 1994 $ 93,600 --
Assistant Secretary, Director 1993 $ 93,600 --
$ 83,415(2) --
</TABLE>
- ---------------
(1) No compensation was paid to Mr. Schwartz for fiscal 1993. For accounting
purposes, however, the value of the services contributed to the Company by
Mr. Schwartz during this period was deemed to be $60,000. This amount was
recorded as an offset to contributed capital without the receipt or accrual
of payment or the issue of additional shares of Common Stock to Mr.
Schwartz. See Note 4c of the Notes to the Financial Statements.
(2) Paid as consulting fees.
The Company has entered into employment agreements with Noam Schwartz and
Barry Epling that provide for annual salaries of $120,000 (of which Mr. Schwartz
only drew $100,000 in 1995) and $93,600, respectively. Mr. Schwartz's employment
agreement provides for a three-year term ending March 1, 1997. Mr. Epling's
employment agreement provides for a five-year term commencing December 1, 1993,
although the salary provided for in such agreement did not commence until
February 1, 1994. Each of the employment agreements also provides for bonuses to
be paid at the discretion of the Company's Board of Directors.
The compensation of Robert L. B. Diener, in his capacity as the Company's
former Executive Vice President and Secretary, was payable by the Company as
consulting fees under a one-year consulting agreement effective November 1,
1995. Pursuant to this arrangement, the Company agreed to pay Mr. Diener $5,000
per month and to issue him five-year warrants to purchase up to 100,000 shares
of Common Stock at a price of $5.00 per share. On August 14, 1996, Mr. Diener
became President and Chief Executive Officer of the Company and effective
September 1, 1996, his salary was increased to $150,000 per year.
Jerry Dackerman and Wouter van Biene will continue to receive the same
compensation of $180,000 and $140,000, respectively per annum, as each is
currently receiving from Consortium 2000.
In September, 1996, the Company entered into a two-year employment
agreement with Abe M. Sher that provides for a monthly salary of $6,950. Mr.
Sher's employment commitment is for 50% of his working time. The Company
previously granted Mr. Sher five-year warrants to purchase up to 200,000 shares
of
40
<PAGE> 42
Common Stock at $5.00 per share and issued to him 32,000 shares of Common Stock.
All of such warrants are currently exercisable. The 32,000 shares of Common
Stock are restricted from transfer for two years and are forfeitable to the
Company if Mr. Sher elects to terminate his employment with the Company during
that two-year period.
1993 STOCK OPTION PLAN
The 1993 Stock Option Plan (the "Stock Option Plan") provides for the grant
of options to acquire the Company's Common Stock ("Options"), the direct grant
of shares of the Company's Common Stock ("Stock Awards"), the grant of stock
appreciation rights ("SARs"), or the grant of other cash awards ("Cash Awards")
(Stock Awards, SARs and Cash Awards collectively are referred to herein as
"Awards"). Options and Awards under Stock Option Plan may be issued to
executives, key employees and others providing valuable services to the Company
and its subsidiaries. The Options issued may be incentive stock options or
nonqualified stock options. A maximum of 450,000 shares of Common Stock of the
Company may be issued under the Stock Option Plan. Of this amount, 40,000
options are available for grant. The Company anticipates that it will seek
stockholder approval of a proposal to increase the number of shares that may be
issued under the Stock Option Plan to 350,000. If any change is made in the
stock subject to the Stock Option Plan, or subject to any Option or SAR granted
under the Stock Option Plan (through merger, consolidation, reorganization,
recapitalization, stock dividend, split-up, combination of shares, exchange of
shares, change in corporate structure or otherwise), the Stock Option Plan
provides that appropriate adjustments will be made as to the maximum number of
shares subject to the Stock Option Plan and the number of shares and exercise
price per share of stock subject to outstanding options.
The Stock Option Plan is administered by the Board of Directors of the
Company or a committee appointed by the Board. The exercise price of all options
granted under the Stock Option Plan must be at least equal to the fair market
value of such shares at the date of grant. The maximum term of options granted
under the Stock Option Plan is ten years. With respect to any participant who
owns stock representing more than ten percent of the voting rights of the
Company's outstanding capital stock, the exercise price of any option must be
equal at least to 110 percent of the fair market value of such shares on the
date of grant.
Options granted under the Stock Option Plan are nontransferable other than
by will or by the laws of descent and distribution upon the death of the option
holder and, during the lifetime of the option holder, are exercisable only by
such option holder. Termination of employment at any time for cause immediately
terminates all options held by the terminated employee.
No options were granted or exercised in the fiscal year ended December 31,
1995. At December 31, 1995, Mr. Schwartz had 138,600 exercisable options and
71,400 unexercisable options, none of which were "in-the-money."
At December 31, 1995, there were outstanding options to acquire 210,000
shares of the Company's Common Stock under the 1993 Stock Option Plan. These
options were granted in January, 1994 to Noam Schwartz, the Company's President,
at an exercise price of $7.50 per share, one-third of which will vest each year
following the date of grant. As of December 31, 1995, no options had been
granted to any other executive officers of the Company and no options had been
exercised. In January, 1996, the Company's Board of Directors approved the
reduction of the exercise price of Mr. Schwartz' outstanding options to $5.00
per share. In January, 1996, the Company also granted to each of Noam Schwartz
and Barry Epling from the 1993 Stock Option Plan options to purchase 100,000
shares of Common Stock at $5.00 per share. In June 1996, Mr. Epling exercised
such options in connection with the Company's acquisition of a switch owned by
Mr. Epling. See "Certain Transactions."
LIMITATION OF DIRECTOR'S LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation limit the liability of its
directors in their capacity as directors to the fullest extent permitted by the
Minnesota Business Corporation Act. Specifically, directors of the Company will
not be personally liable for monetary damages for breach of fiduciary duty as
directors except liability for (i) any breach of the duty of loyalty to the
Company or its stockholders, (ii) acts or omissions not
41
<PAGE> 43
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) dividends or other distributions of corporate assets that are in
contravention of certain statutory or contractual restrictions, (iv) violations
of certain Minnesota securities laws, or (v) any transaction from which the
director derives an improper personal benefit.
The Minnesota Business Corporation Act requires that the Company indemnify
any director, officer or employee made or threatened to be made a party to a
proceeding, by reason of the former or present official capacity of the person,
against judgments, penalties, fines, settlements and reasonable expenses
incurred in connection with the proceeding if certain statutory standards are
met. "Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including a derivative
action in the name of the Company. Reference is made to the detailed terms of
the Minnesota Indemnification Statute (Minn. Stat. sec. 302A.521) for a complete
statement of such indemnification rights. The Company's Bylaws also require the
Company to provide indemnification to the fullest extent of the Minnesota
Indemnification Statute.
Pursuant to the terms of the Underwriting Agreement, the directors and
officers of the Company also are indemnified against certain civil liabilities
that they may incur under the Securities Act in connection with this offering.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to officers, directors or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Commission such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of October 18, 1996 and as adjusted
to give effect to the sale of 2,000,000 shares by the Company and 500,000 shares
by the Selling Stockholders in the offering by (i) each person known by the
Company to be the beneficial owner of more than five percent of the Common
Stock, (ii) each director of the Company owning Common Stock, (iii) each
executive officer of the Company owning Common Stock and (iv) all executive
officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY SHARES SHARES BENEFICIALLY
OWNED PRIOR BEING OWNED AFTER
TO THE OFFERING(1) OFFERED OFFERING
-------------------- ------- -----------------------
NAME AND ADDRESS(1) NUMBER PERCENT NUMBER NUMBER PERCENT(1)
- ------------------------------------- -------- ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
Robert L.B. Diener(2)................ 210,000 9.0% -- 210,000 4.6%
Jerry Dackerman(3)................... -- * -- -- *
Wouter van Biene(3).................. -- * -- -- *
Abe M. Sher(4)....................... 232,000 10.0% -- 232,000 5.0%
Barry Epling(5)...................... 202,851 9.5% -- 202,851 4.6%
Royce Diener(3)(6)................... 749,083 33.9% 225,000 524,083 11.7%
Noam Schwartz(7)(8).................. 410,750 18.1% -- 410,750 9.0%
Andrew J. Grey(9).................... 95,000 4.5% -- 95,000 2.2%
Kamel B. Nacif(10)................... 550,000 20.5% 275,000 275,000 6.2%
Jeflor, Inc.(11)..................... 120,000 5.3% -- 120,000 2.7%
SAS, Ltd............................. 112,000 5.3% -- 112,000 2.5%
All directors and officers as a group
(eight persons)(3)(12)............. 1,811,334 65.7% 1,586,334 31.5%
</TABLE>
- ---------------
* Less than one percent.
(1) In calculating percentage ownership, all shares of Common Stock which the
named stockholder has the right to acquire upon exercise of stock options
or conversion of convertible securities exercisable or convertible within
60 days of October 18, 1996, are deemed to be outstanding for the purpose
of
42
<PAGE> 44
computing the percentage of Common Stock owned by such stockholder, but are
not deemed to be outstanding for the purpose of computing the percentage of
Common Stock owned by any other stockholder. Percentages may be rounded.
Each of such persons may be reached through the Company at 2775 South
Rainbow Boulevard, Suite 102, Las Vegas, Nevada 98102.
(2) Consists of 5,000 shares of Common Stock and warrants exercisable at
October 18, 1996 to purchase up to 100,000 shares of Common Stock owned by
the Diener Financial Group, and warrants to purchase up to an aggregate of
105,000 shares of Common Stock owned by Robert L.B. Diener, individually.
(3) Does not include 161,566, 170,961, 132,664 shares of Common Stock to be
issued in the Merger to Messrs. Dackerman, van Biene and Royce Diener,
respectively, in exchange for their shareholdings in Consortium 2000.
(4) Consists of 32,000 shares of Common Stock, 200,000 shares of Common Stock
issuable upon the exercise of warrants that were exercisable within 60 days
of October 18, 1996. Mr. Sher has executed a proxy giving Noam Schwartz the
right to vote the shares underlying the warrants upon their acquisition.
(5) Consists of 107,851 shares of Common Stock and 95,000 shares that Mr.
Epling has the right to acquire pursuant to the exercise of an option
granted by Noam Schwartz and his father, David Schwartz. The terms of the
options to acquire these shares are provided in separate Stock Option and
Repurchase Agreements between Mr. Epling and Noam and David Schwartz. The
Stock Option and Repurchase Agreements provide that the shares may be
purchased from such individuals at an exercise price of $1.00 per share.
The option is exercisable immediately and may be exercised at any time on
or before January 12, 1998, provided, however, that in the event Mr.
Epling's employment is terminated for reasons other than death or
disability, the option shall terminate immediately.
(6) Includes 612,750 shares owned by the Trust, a trust established by a group
of investors for which Royce Diener serves as trustee. As trustee, Mr.
Diener is vested with the authority to distribute any income and/or the
principal of the Trust to its beneficiaries in the future. Also consists of
53,000 shares of Common Stock and warrants exercisable at October 18, 1996
to purchase up to 83,333 shares of Common Stock.
(7) Includes 270,750 shares of Common Stock and 140,000 of 210,000 shares
issuable upon exercise of options granted under the Company's 1993 Stock
Option Plan, as options to purchase 140,000 shares of Common Stock that
were exercisable within 60 days of October 18, 1996.
(8) Does not give effect to the possible exercise of the option referred to in
footnote (5) above.
(9) Consists of 95,000 shares of Common Stock issued to Integrated Financial
Consultants, Inc., a company wholly owned by Mr. Grey.
(10) Consists of 550,000 shares of Common Stock underlying 550,000 shares of
Series A Convertible Preferred issued to Mr. Nacif and the sale of 275,000
shares of Common Stock to be issued upon the conversion of 275,000 shares
of Series A Preferred upon the effective date of this offering.
(11) Consists of warrants to purchase 120,000 shares of Common Stock.
(12) Includes 6,650 shares that Mr. Epling has right to acquire from David
Schwartz pursuant to the exercise of the option from him described in
footnote (5) above and an aggregate of 1,804,684 shares of Common Stock
owned by, or as to which the named directors and executive officers may
acquire, as described in footnotes (5), (6), (7), (8) and (9) above.
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<PAGE> 45
CERTAIN TRANSACTIONS
The Company has advanced funds to Mr. Noam Schwartz. At December 31, 1994
and September 30, 1995, Mr. Schwartz owed the Company approximately $80,000. The
funds advanced to Mr. Schwartz bear interest at a rate of 8%. The funds from Mr.
Schwartz are due on demand.
In mid-1995, the Company retained Consortium 2000 as a non-exclusive
independent sales representative on a commission basis. As part of the
consideration for its engagement, the Company agreed to issue Consortium 2000
warrants to purchase up to 300,000 shares of Common Stock. These warrants are
exercisable in increments of 50,000 shares upon the Company reaching certain
monthly revenue milestones for four years from the date of issuance. The minimum
exercise price of the warrants is $7.50 per share and increases depending on
when specified monthly revenue milestones are met. Royce Diener, a director of
the Company, is the Chairman of the Board of Consortium 2000. These warrants
will be canceled upon consummation of the Merger.
In June, 1995, the Company obtained a revolving line of credit from Bank
Leumi in the amount of $3,000,000, secured by certificates of deposit held by
the bank and guaranteed by Noam Schwartz. This line of credit was fully repaid
in July 1996.
In August, 1995, the Company agreed to engage the Diener Financial Group as
a financial consultant for a period of one year commencing September 1, 1995 and
agreed to grant to the Diener Financial Group five-year warrants to purchase up
to 100,000 shares of the Company's Common Stock at $5.00 per share. The sole
principal of the Diener Financial Group is Robert Diener, who later became the
Company's Executive Vice President and in August, 1996, President and Chief
Executive Officer. Effective September 1, 1996, his compensation will be solely
derived from his position as President and Chief Executive Officer. See
"Management -- Executive Compensation." Pursuant to the Diener Financial Group
engagement, the Company agreed to pay a consulting fee of $7,500 per month
($2,500 per month of which Diener agreed to defer until the Company receives at
least $3,000,000 of new investment capital). The Company also agreed to
additionally compensate the Diener Financial Group in an amount equal to 1%, 2%
and 3% of the senior debt, subordinated debt and equity proceeds, respectively,
raised by the Diener Financial Group for the Company.
In October, 1995, the Company obtained a $1,500,000 term loan from a group
of investors introduced to the Company by the Diener Financial Group. Of the
$1,500,000 loaned to the Company by the investor group, $500,000 came from Royce
Diener. The loan bore interest at 10% per annum payable quarterly and was due in
one year. The loan was secured by the Company's accounts receivable and
unrestricted deposit accounts of the Company to the fullest extent permitted by
law and was convertible at the lenders' option, in whole or in part, into shares
of the Company's Common Stock at the rate of $5.00 per share. The Company also
issued to the members of the investor group five-year warrants to purchase an
aggregate of up to 100,000 shares of Common Stock at $5.00 per share. The
warrants are allocable among the members of the investor group in proportion to
the amount loaned to the Company, which means that Royce Diener, who loaned
one-third of the total term loan, is entitled to one third of the warrants
(i.e., warrants to purchase 33,333 shares of Common Stock). In consideration for
arranging the term loan in 1995, the Company paid Robert Diener $15,000 (1% of
the proceeds raised). The $1,500,000 term loan was repaid by the Company in
January, 1996 from proceeds drawn under its new line of credit with Coast
Business Credit.
In January, 1996, the Company completed a private placement of 160,000
Units (consisting of 160,000 shares of Common Stock and 160,000 Redeemable
Common Stock Purchase Warrants) raising net proceeds of approximately $775,000.
For assisting the Company in connection with this private placement, the Company
paid Robert Diener the sum of $25,000. In November, 1995, the Company granted
Mr. Diener 100,000 Warrants exercisable at $5.00 per share, expiring October,
2000.
In June, 1996, the Company acquired title to a telecommunications switch
owned by Mr. Epling for aggregate consideration in the amount of $716,375.
Consideration was paid by crediting $500,000 as payment for the issuance of
100,000 shares of Common Stock to Mr. Epling pursuant to the exercise of
employee stock options, cancelling approximately $109,949 in interim advances
made by the Company to TYC, Inc., a corporation wholly-owned by Mr. Epling, and
a cancellation of interim advances of approximately $75,522
44
<PAGE> 46
made by the Company to Mr. Epling for upgrading the switch, and the issuance of
an additional 7,851 shares of Common Stock to Mr. Epling based on a $5.00 per
share market value. At the time the switching equipment was acquired, it was
appraised at approximately $716,000.
In consideration of services rendered and to be rendered to the Company and
$95,000 paid in the form of a promissory note due upon the earlier of conversion
or May 31, 2005, in November, 1995 the Company issued to Integrated Financial
Consultants, Inc., a company wholly owned by Andrew J. Grey, director, ("IFC")
95,000 shares of its Series B Convertible Preferred Stock ("Series B
Preferred"). In February, 1996, the Company agreed to cancel the $95,000 note.
In January, 1996, the Company entered into a supplemental consulting
agreement with IFC to provide the services of Mr. Grey as the chief financial
officer and as a director of the Company for up to 20 hours of service per week
for compensation of $12,500 per month. IFC agreed to defer payment of $7,500 per
month until such time as the Company obtained certain additional financing, or
experienced a change in control, as defined in the agreement, or IFC terminated
the services. The amount of deferred compensation is $166,000 and is represented
by a promissory note bearing interest at 10% per annum and is being paid from
the proceeds of this offering. See "Use of Proceeds."
In July, 1996, the Company's Board of Directors authorized the issuance of
20,000 shares of Common Stock to Consortium 2000 at $5.75 per share to reconcile
variances in commissions owed to Consortium 2000 for July, 1995 through March,
1996. Prior to the Merger, these shares will be distributed as a dividends to
the shareholders of Consortium 2000.
In August, 1996, the Company entered into a two-year consulting agreement
with Vanguard Consultants, Inc., a Nevada corporation owned by Ronnie Schwartz
to provide consulting services in the areas of marketing, finance and business
development. Pursuant to this agreement, Vanguard Consultants, Inc. will receive
$7,500 per month for such services.
Pursuant to the Merger Agreement, all of the outstanding shares of
Consortium 2000 will be converted into 1,076,923 shares of Common Stock and
Consortium 2000 will become a wholly owned subsidiary of the Company. See
"Business -- Recent Developments."
Noam Schwartz, an executive vice president and director of the Company, and
his brother, Ronnie Schwartz, personally guaranteed the Company's credit
facility with Jeflor, Inc. As of September 1, 1996, the amount outstanding under
this facility was $1,248,000. The Company intends to use the proceeds of this
offering to repay this loan. See "Use of Proceeds."
Under Minnesota law, officers and directors of the Company may enter into
transactions or contracts with the Company provided generally that (i) the
transaction is fair to the Company at the time it is authorized or approved;
(ii) the stockholders approve the transaction after disclosure of the
relationship or interest; or (iii) after disclosure to the Board of Directors, a
majority of the disinterested board members authorize the transaction. In
addition, any transaction involving a loan, guarantee or other financial
assistance by the Company to an officer or director requires approval of the
Board of Directors.
RELATED PARTY TRANSACTIONS
The Company has entered and anticipates that it will enter into business
transactions with certain of its principal stockholders and entities that are
owned or controlled by certain of its principal stockholders, including the
acquisition of Consortium 2000. Although the Company may continue to enter into
such transactions in the future, its policy is not to enter into transactions
with related persons unless the terms thereof are at least as favorable to the
Company as those that could be obtained for unaffiliated third parties and are
approved by a majority of disinterested directors.
45
<PAGE> 47
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 40,000,000 shares of
Common Stock, par value $0.01 per share (the "Common Stock") and 5,000,000
shares of Preferred Stock, par value $0.01 per share (the "Preferred Stock").
COMMON STOCK
At October 18, 1996, there were 2,126,851 shares of Common Stock
outstanding. The holders of Common Stock are entitled to one vote for each share
on all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, the holders of a majority of the stock entitled to
vote in any election of directors may elect all of the directors standing for
election. Subject to preferences that may be applicable to any then outstanding
Preferred Stock, the holders of Common Stock will be entitled to receive such
dividends, if any, as may be declared by the Board of Directors from time to
time out of legally available funds. Upon liquidation, dissolution or winding up
of the Company, the holders of Common Stock will be entitled to share ratably in
all assets of the Company that are legally available for distribution, after
payment of all debts and other liabilities and subject to the prior rights of
holders of any Preferred Stock then outstanding. The holders of Common Stock
have no preemptive, subscription, redemption or conversion rights. The rights,
preferences and privileges of holders of Common Stock will be subject to the
rights of the holders of shares of any series of Preferred Stock that the
Company may issue in the future.
PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of Preferred
Stock, par value $0.01 per share. The Board of Directors is authorized, subject
to any limitations prescribed by the laws of the State of Minnesota, but without
further action by the Company's stockholders, to provide for the issuance of
Preferred Stock in one or more series, to establish from time to time the number
of shares to be included in each such series, to fix the designations, powers,
preferences and rights of the shares of each such series and any qualifications,
limitations or restrictions thereof, and to increase or decrease the number of
shares of any such series (but not below the number of shares of such series
then outstanding) without any further vote or action by the stockholders.
The Board of Directors has designated 550,000 shares of Preferred Stock as
Series A Convertible Preferred Stock ("Series A Preferred") all of which were
outstanding as of October 18, 1996 and 95,000 shares of Series B, all of which
were converted into Common Stock in September 1996. Each share of Series A
Preferred entitles the holder to dividends at the same rate paid to holders of
Common Stock and is convertible at any time into one share of Common Stock,
subject to adjustment for stock splits, stock dividends and other similar
events. Holders of Series A Preferred are entitled to vote on all matters
submitted or required to be submitted to stockholders on an as if converted
basis and, except as required by law, vote together with the Common Stock and
not as a separate class. Upon the liquidation, dissolution or winding up of the
Company (including for such purposes certain mergers or consolidations and the
sale of all of the assets of the Company) holders of each outstanding share of
Series A Preferred shall be entitled to receive, prior to holders of Common
Stock, an amount equal to approximately $5.45 per share.
The unissued 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 the Company's stockholders, and may include voting
rights, preferences as to dividends and liquidation, conversion and redemption
rights and sinking fund provisions as determined by the Board of Directors.
Although the Company has no present plans to issue any new shares of Preferred
Stock, the issuance of Preferred Stock in the future could adversely affect the
rights of the holders of Common Stock, and therefore, reduce the value of the
Common Stock. In particular, specific rights granted to future holders of
Preferred Stock could be used to restrict the Company's ability to merge with or
sell its assets to a third party, thereby preserving control of the Company by
present owners.
The Board of Directors may authorize and issue additional Preferred Stock
with voting or conversion rights that could adversely affect the voting power or
other rights of the holders of Common Stock. In
46
<PAGE> 48
addition, the issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company. The Company has no
current plan to issue any additional shares of Preferred Stock.
CONVERTIBLE SUBORDINATED DEBENTURES
The Company also has outstanding Convertible Subordinated Debentures in the
aggregate principal amount of $500,000, which bear interest at the rate of 12%
per annum, payable quarterly on the first day of January, April, July and
September, commencing April 1, 1994, with all principal and accrued interest due
and payable on or before December 31, 1998. The principal amount of the
Debentures is convertible on any payment date into shares of the Company's
Common Stock at a price of $7.00 per share. If the aggregate principal amount of
the Convertible Subordinated Debentures were converted, an aggregate of 71,428
shares of Common Stock would be issued.
REGISTRATION RIGHTS
The Company has granted certain registration rights to the holder of the
Series A Preferred Stock, Integrated Financial Consultants, Inc., a company
wholly-owned by Andrew J. Grey, a director of the Company, the investors in the
December 29, 1995 $160,000 private placement, Noam Schwartz, David Schwartz, the
RGB 1993 Family Trust (the "RGB Trust"), the TAD 1993 Family Trust (the "TAD
Trust"), the Trust, the trustee of which is Royce Diener, chairman of the
Company, now owns the RGB Trust's and TAD Trust's shares along with the
registration rights), and to the holders of warrants issued in connection with
the October, 1995 $1,500,000 line of credit, the holder of the Representative's
Warrants, Jeflor, Inc., Abe Sher and Norcross Securities, Inc. for the shares
issuable pursuant to the exercise of their warrants or options, as the case may
be, and to certain other parties. The total number of shares as to which the
Company has granted registration rights is 2,217,851 (the "Registration Rights
Shares"). Concurrent with this offering, the Company intends to register all of
the above shares with the Commission. Also concurrent with this offering the
Company intends to register with the Commission under Form S-4 the 1,076,923
shares to be issued in the Merger. With the exception of Norcross Securities,
Inc., the Representative's Warrants and certain holders of small amounts of
shares to be held by the shareholders of Consortium 2000, all of the shares
being registered will be subject to lock-up agreements with the Representative,
whereby such shares may not be sold for a 180 day period following the date of
this Prospectus without the Representative's consent.
CONTROL SHARE ACQUISITION
The Minnesota Control Share Act ("CSAA") provides that, generally, a person
who becomes the beneficial owner of 20% or more of the voting power of the
shares of an "issuing public corporation" may exercise only an aggregate of 20%
of the voting power of the corporation's shares in the absence of special
stockholder approval. That approval can be obtained only by resolution adopted
by (1) the affirmative vote of the holders of a majority of the voting power of
all shares entitled to vote, including all shares held by the acquiring person,
and (2) the affirmative vote of the holders of a majority of the voting power of
all shares entitled to vote, excluding all "interested shares" (i.e., shares
held by the acquiring person, any officer of the issuing public corporation or
any director who is also an employee of the corporation).
The CSAA applies to a share acquisition only if (i) the person acquiring
the shares is an "acquiring person," (ii) the acquisition constitutes a "control
share acquisition," and (iii) the shares acquired are shares of an "issuing
public corporation." An "acquiring person" includes not only a single natural
person or entity but also two or more persons or entities who act as a
partnership, limited partnership, syndicate, or other group pursuant to any
written or oral agreement, arrangement, relationship, understanding, or
otherwise to acquire, own or vote an issuing public corporation's shares. A
"control share acquisition" generally occurs upon an acquisition of beneficial
ownership of shares which, together with all other shares beneficially owned by
the acquiring person, would increase the acquiring person's range of voting
power from less than 20% to 20% or more. An "issuing public corporation" is a
corporation incorporated in Minnesota which has at least 50 stockholders of
record.
47
<PAGE> 49
Under the CSAA the acquisition by the Trust of 612,750 shares on August 14,
1996 may constitute a control share acquisition. Accordingly that number of
shares acquired by the Trust which exceeds 20% of the voting power of the
Company may be subject to the voting disqualification imposed by the CSAA. Thus
only 404,101 shares of Common Stock owned by the Trust, or 19% of the voting
power would be entitled to full voting rights under the CSAA.
WARRANTS
The following table sets forth certain information as of October 18, 1996
with respect to the issuance or agreements to issue by the Company of warrants
to purchase Common Stock:
<TABLE>
<CAPTION>
NAME OF HOLDER/ MAX. SHARES
DATE OF DESCRIPTION OF ISSUABLE UPON EXERCISE DATE FIRST EXPIRATION
ISSUANCE GROUP EXERCISE (#) PRICE ($) EXERCISABLE DATE BACKGROUND OF WARRANTS
- ------------ ------------------ ------------- --------- ----------- ---------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
6/94 Registered 16,000 5.00 6/94 N/A In consideration of financial
Consulting Group markets investor relations services.
6/94 Norcross 65,000 6.25 6/95 6/99 Granted to the Underwriter upon
Securities, Inc. completion of the Company's initial
public offering.
8/95 Diener Financial 100,000 5.00 10/95 10/00 Issued in connection with engagement
Group as a financial consultant to the
Company.
10/95 $1,500,000 term 100,000 5.00 10/95 10/00 Issued to investors making
loan investors $1,500,000 term loan to the Company.
11/95 Robert L. B. 100,000 5.00 11/95 11/00 Issued in connection with Mr.
Diener Diener's engagement as a consultant
to the Company
1/96 Abe M. Sher 200,000 5.00 (1) 12/01 Issued in connection with Mr. Sher's
engagement as Vice President and
General Counsel.
12/95 Investors in 160,000 7.50 5/96 5/01 Issued as part of 160,000 Units
equity private (consisting of 160,000 shares of
placement. Common Stock and 160,000 Redeemable
Common Stock Purchase Warrants) in a
private placement completed in
December, 1995.
9/96 Dan Knoller 100,000 5.00 9/96 8/01 Issued in connection with Mr.
Knoller's engagement as Vice
President Business Affairs.
6/96 Jeflor, Inc. 180,000(2) 5.00 8/96 6/01 Issued in connection with a loan for
$1,200,000.
Total 1,021,000
===========
</TABLE>
- ---------------
(1) The warrants are fully vested.
(2) At the time the loan was made, Jeflor, Inc. received warrants to purchase
120,000 shares of Common Stock, exercisable any time after August 20, 1996;
thereafter, warrants accrue to Jeflor, Inc. in 60,000 increments every 90
days that the loan remains unpaid. If the loan is extended past June 19,
1997, Jeflor, Inc. will receive an additional 60,000 warrants for every 90
days the loan remains unpaid up to a maximum of 540,000 warrants. It is
anticipated that the Company will retire this debt in full with the proceeds
of this offering on or about 90 days from August 20, 1996. See "Use of
Proceeds."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American
Securities Transfer, Inc., Denver, Colorado.
48
<PAGE> 50
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market
could adversely affect market prices prevailing from time to time. Sales of
substantial amounts of Common Stock of the Company in the public market after
the restrictions lapse could adversely affect the prevailing market price and
the ability of the Company to raise equity capital in the future.
Upon the completion of this offering, the Company will have 4,401,851
shares of Common Stock outstanding, assuming no exercise of options after
October 18, 1996. Of these shares, the 2,500,000 shares sold in this offering
and the 650,000 shares sold in the Company's initial public offering will be
freely tradable without restriction under the Securities Act, unless held by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining shares of Common Stock held by existing
stockholders were issued and sold by the Company in reliance on exemptions from
the registration requirements of the Securities Act. These shares may be sold in
the public market only if registered, or pursuant to an exemption from
registration such as Rule 144, 144(k) or 701 under the Securities Act. The
Company intends to file a registration statement with the Commission with
respect to the Registration Rights Shares. Approximately 2,900,000 of the
Registration Rights Shares will be subject to lock-up agreements with the
Representative whereby such shares may not be sold during the Lock-up Period
without the prior written consent of the Representative. The Company's
directors, executive officers and substantially all other stockholders, of the
Company who own the Common Stock immediately prior to the completion of this
offering, have entered into lock-up agreements under which they have agreed not
to offer, sell, contract to sell, grant any option to purchase or otherwise
dispose of, or agree to dispose of, directly or indirectly, any shares of Common
Stock, options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into Common Stock owned by them during the
Lock-up Period, without the prior written consent of the Representative.
As of October 18, 1996, 1,021,000 shares of Common Stock were subject to
outstanding warrants, 275,000 shares of Common Stock are issuable upon
conversion of the remainder of the Series A Preferred, and 71,429 shares of
Common Stock are issuable upon conversion of the $500,000 convertible
debentures. See Notes 5 and 6 of Notes to the Company's Financial Statements.
All of these shares, exclusive of the shares issuable upon conversion of the
$500,000 convertible debentures, are subject to the lock-up agreements described
above. Upon expiration of the lock-up agreements, approximately 140,000 shares
subject to outstanding vested options will become eligible for immediate public
resale and the 275,000 shares of Common Stock issuable upon conversion of the
Series A Preferred and 71,429 shares of Common Stock issuable upon conversion of
the $500,000 convertible debentures, will be immediately eligible for sale under
Rule 144 subject in some cases to volume limitations pursuant to Rule 144.
Concurrently with this offering, 2,217,851 Registration Rights Shares and
1,076,923 shares to be issued in the Merger will be entitled to registration and
subject to lock-up agreements.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years (including the holding period of any prior owner, except an affiliate) is
entitled to sell in "broker's transactions" or to market makers within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks preceding the
required filing of a Form 144 with respect to such sale. Sales under Rule 144
are generally subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least three years, is
entitled to sell such shares without having to comply with the manner of sale,
public information, volume limitation or notice provisions of Rule 144. Under
Rule 701 under the Securities Act, persons who purchase shares upon exercise of
options granted prior to the effective date of this offering are entitled to
sell such shares 90 days after the effective date of this offering in reliance
on Rule 144, without having to comply with the holding period requirements of
Rule 144 and, in the case of non-affiliates, without having to comply with the
public information, volume limitation or notice provisions of Rule 144.
49
<PAGE> 51
The Securities and Exchange Commission has recently proposed reducing the
initial Rule 144 holding period to one year and the Rule 144(k) holding period
to two years. There can be no assurance as to when or whether such rule changes
will be enacted. If enacted, such modifications will have a material effect on
the times when shares of the Company's Common Stock become eligible for resale.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom Cruttenden Roth
Incorporated is acting as representative (the "Representative"), have severally
agreed to purchase from the Company, and the Company has agreed to sell to the
Underwriters, the respective number of shares of Common Stock set forth opposite
each Underwriter's name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------------------------------------------------------------------- ---------
<S> <C>
Cruttenden Roth Incorporated.............................................
---------
Total.................................................................. 2,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to certain conditions precedent, including
the absence of any material adverse change in the Company's business and the
receipt of certain certificates, opinions and letters from the Company. The
nature of the Underwriters' obligation is such that they are committed to
purchase and pay for all the shares of Common Stock if any are purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the shares of Common Stock directly to the public at the
initial public offering price set forth on the cover page of this Prospectus and
to certain securities dealers at such price less a concession not in excess of
$ per share. The Underwriters may allow, and such selected dealers may
reallow, a concession not in excess of $ per share to certain brokers
and dealers. After the offering, the price to the public, concession, allowance
and reallowance may be changed by the Representative.
The Company has granted the Underwriters an option, exercisable during the
45-day period after the date of this Prospectus, to purchase up to 375,000
shares of Common Stock at the public offering price set forth on the cover page
of this Prospectus, less the underwriting discounts and commissions. The
Underwriters may exercise this option to cover over-allotments, if any. To the
extent that the Underwriters exercise this option, each of the Underwriters will
be committed, subject to certain conditions, to purchase such additional shares
of Common Stock in approximately the same proportion as set forth in the above
table.
The Company has paid the Representative $15,000 on account of the
Underwriters' expenses in connection with this offering to be applied to a
non-accountable expense allowance equal to 3% of the aggregate offering price of
the shares of Common Stock to be sold in this offering.
The Company has agreed to issue to the Representative, for total
consideration of $160, warrants (the "Representative's Warrants") to purchase up
to 160,000 shares of Common Stock, at an exercise price
50
<PAGE> 52
per share equal to 136% of the initial public offering price per share. The
Representative's Warrants are exercisable for a period of four years commencing
one year from the date of this Prospectus, and are not transferrable for a
period of one year except to the officers of the Representative or successors to
the Representative. The Representative's Warrants include net exercise
provisions permitting the holders to pay the exercise price by cancellation of a
number of shares with a fair market value equal to the exercise price of the
Representative's Warrants. The holders of the Representative's Warrants will
have no voting, dividend or other stockholders rights until the Warrants
exercised. In addition, the Company has granted certain rights to holders of the
Representative's Warrants to register the Representative's Warrants and the
Common Stock underlying the Representative's Warrants.
The Company has agreed not to issue, and all of the Company's officers and
directors and certain stockholders have agreed not to sell, or otherwise dispose
of shares of Common Stock or other equity securities of the Company for 180 days
after the date of this Prospectus (or if later, with respect to the Trust, the
date the Merger is consummated) without the prior written consent of the
Representative.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters and their controlling persons
against certain liabilities under the Securities Act, or to contribute to
payments the Underwriters and their controlling persons may be required to make
in respect thereof.
The rules of the Commission generally prohibit the Underwriters and other
members of the selling group from making a market in the Company's Common Stock
during the "cooling off" period immediately preceding the commencement of sales
in the offering. The Commission has, however, adopted an exemption from these
rules that permits passive market making under certain conditions. These rules
permit an Underwriter or other member of the selling group to continue to make a
market in the Company's Common Stock subject to the conditions, among others,
that its bid not exceed the highest bid by a market maker not connected with the
offering and that its net purchases on any one trading day not exceed prescribed
limits. Pursuant to these exemptions, certain Underwriters and other members of
the selling group intend to engage in passive market making in the Company's
Common Stock during the cooling off period.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon the
Company by Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation,
Beverly Hills, California. Certain legal matters will be passed upon for the
Underwriters by Milbank, Tweed, Hadley & McCloy, Los Angeles, California.
EXPERTS
The financial statements of UStel, Inc. at December 31, 1994 and 1995, and
for each of the three years in the years ending December 31, 1995 and the
financial statements of Consortium 2000, Inc. at June 30, 1996 and for the year
ended June 30, 1996 appearing in this Prospectus and Registration Statement have
been audited by BDO Seidman, LLP, independent certified public accountants, to
the extent and for the periods set forth in their reports thereon appearing
elsewhere herein and in the Registration Statement, and are included in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
51
<PAGE> 53
USTEL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
HISTORICAL FINANCIAL STATEMENTS OF USTEL, INC.
Report of Independent Certified Public Accountants............................. F-2
Audited financial statements
Balance sheets at December 31, 1994 and 1995................................. F-3
Statements of operations for the years ended December 31, 1993, 1994 and
1995...................................................................... F-4
Statements of changes in stockholders' equity for the years ended December
31, 1993, 1994 and 1995................................................... F-5
Statements of cash flows for the years ended December 31, 1993, 1994 and
1995...................................................................... F-6
Summary of accounting policies................................................. F-7
Notes to financial statements.................................................. F-9
Unaudited financial statements
Condensed balance sheet at December 31, 1995 and June 30, 1996............... F-14
Condensed statement of operations for six months ended June 30, 1995 and
1996...................................................................... F-15
Condensed statement of changes in stockholders' equity for the six months
ended June 30, 1996....................................................... F-16
Condensed statement of cash flows for the six months ended June 30, 1995 and
1996...................................................................... F-17
Notes to condensed financial statements...................................... F-18
HISTORICAL FINANCIAL STATEMENTS OF CONSORTIUM 2000, INC.
Report of Independent Certified Public Accountants............................. F-21
Audited financial statements
Balance sheet at June 30, 1996............................................... F-22
Statement of operations for the year ended June 30, 1996..................... F-23
Statement of changes in stockholders' equity for the year ended June 30,
1996...................................................................... F-24
Statement of cash flows for the year ended June 30, 1996..................... F-25
Summary of accounting policies................................................. F-26
Notes to financial statements.................................................. F-28
</TABLE>
F-1
<PAGE> 54
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
UStel, Inc.
Los Angeles, California
We have audited the accompanying balance sheets of UStel, Inc. as of
December 31, 1994 and 1995, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. 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 audits 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, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of UStel,
Inc. at December 31, 1994 and 1995, and the results of its operations and cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
April 4, 1996
F-2
<PAGE> 55
USTEL, INC.
BALANCE SHEETS
ASSETS (Note 2)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
---------- -----------
<S> <C> <C>
Current
Cash............................................................. $2,207,034 $ 1,200
Restricted cash.................................................. 1,000,000 3,133,433
Accounts receivable, less allowance for doubtful accounts
of $188,000 and $652,000...................................... 2,618,358 5,900,722
Due from related parties (Note 3(a))............................. 444,366 348,519
Prepaid expenses................................................. 183,141 506,824
---------- -----------
Total current assets..................................... 6,452,899 9,890,698
---------- -----------
Property and equipment
Office furniture and equipment................................... 760,431 1,440,294
Leasehold improvements........................................... 63,741 164,063
---------- -----------
824,172 1,604,357
---------- -----------
Less accumulated depreciation.................................... (82,879) (241,176)
---------- -----------
Net property and equipment............................... 741,293 1,363,181
---------- -----------
Other assets
Start-up costs less accumulated amortization of $39,348 and
$59,022....................................................... 59,021 39,347
Deferred charges (Note 1)........................................ 65,414 684,805
---------- -----------
$7,318,627 $11,978,031
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Notes payable (Note 2)........................................... $ 770,000 $ 2,900,000
Payable to related party (Note 3(b))............................. -- 1,500,000
Accounts payable................................................. 1,113,590 2,078,954
Accrued expenses................................................. 102,218 113,525
Accrued revenue taxes............................................ 744,585 1,097,779
---------- -----------
Total current liabilities................................ 2,730,393 7,690,258
Convertible subordinated debentures (Note 5)....................... 500,000 500,000
---------- -----------
Total liabilities........................................ 3,230,393 8,190,258
---------- -----------
Commitments and contingencies (Note 4)
Stockholders' equity (deficit) (Notes 5, 6 and 7):
Series A Convertible Preferred Stock, $.01 par value,
5,000,000 shares authorized and 550,000 shares outstanding
(Liquidation Preference $3,000,000)........................... 5,500 5,500
Series B Convertible Preferred Stock, $.01 par value,
95,000 shares authorized and 95,000 outstanding in 1995....... -- 950
Common stock, $.01 par value, 40,000,000 shares authorized;
1,600,000 shares issued and outstanding....................... 16,000 16,000
Additional paid-in capital....................................... 6,220,878 6,386,178
Note receivable (Note 3(e))...................................... -- (95,000)
Accumulated deficit.............................................. (2,154,144) (2,525,855)
---------- -----------
Total stockholders' equity............................... 4,088,234 3,787,773
---------- -----------
$7,318,627 $11,978,031
========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-3
<PAGE> 56
USTEL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
Revenues............................................. $1,600,147 $ 6,118,480 $16,127,575
Operating expenses
Cost of services sold.............................. 1,248,463 4,696,106 11,542,374
General and administrative......................... 637,263 1,412,649 3,071,788
Selling............................................ 368,361 785,933 1,460,010
Depreciation and amortization...................... 32,894 87,363 177,971
---------- ----------- -----------
Total operating expenses................... 2,286,981 6,982,051 16,252,143
---------- ----------- -----------
Loss from operations................................. (686,834) (863,571) (124,568)
Loss from rental operations (Note 3(e)).............. (62,025) (101,705) --
Net gain on sale of property (Note 3(e))............. 24,993 7,614 --
Relocation costs..................................... -- -- (110,766)
Interest income...................................... -- 34,283 124,060
Interest expense..................................... (41,686) (152,063) (260,437)
---------- ----------- -----------
Net loss................................... $ (765,552) $(1,075,442) $ (371,711)
========== =========== ===========
Net loss per share................................... $ (0.81) $ (0.83) $ (0.23)
========== =========== ===========
Weighted average number of common shares
outstanding........................................ 950,000 1,291,913 1,600,000
========== =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-4
<PAGE> 57
USTEL, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- ------------------- PAID-IN ACCUMULATED NOTE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE TOTAL
------- ------ --------- ------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1993.......... -- $ -- 950,000 $ 9,500 $ 90,500 $ (313,150) $ -- $ (213,150)
Shareholder contributions
(Note 3(c))................... -- -- -- -- 480,108 -- -- 480,108
Net loss for period............. -- -- -- -- -- (765,552) -- (765,552)
------- ------ --------- ------- ---------- ----------- ---------- ----------
BALANCE, December 31, 1993........ -- -- 950,000 9,500 570,608 (1,078,702) -- (498,594)
Sale of shares to public........ -- -- 650,000 6,500 2,595,770 -- -- 2,602,270
Sale of preferred shares........ 550,000 5,500 -- -- 2,994,500 -- -- 3,000,000
Contribution to capital......... -- -- -- -- 60,000 -- -- 60,000
Net loss for period............. -- -- -- -- -- (1,075,442) -- (1,075,442)
------- ------ --------- ------- ---------- ----------- ---------- ----------
BALANCE, December 31, 1994........ 550,000 5,500 1,600,000 16,000 6,220,878 (2,154,144) -- 4,088,234
Sale of preferred shares........ 95,000 950 -- -- 165,300 -- (95,000) 71,250
Net loss for period............. -- -- -- -- -- (371,711) -- (371,711)
------- ------ --------- ------- ---------- ----------- ---------- ----------
BALANCE, December 31, 1995........ 645,000 $6,450 1,600,000 $16,000 $6,386,178 $(2,525,855) $(95,000) $3,787,773
======== ======= ========= ======== ========== ============ ========= ==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-5
<PAGE> 58
USTEL, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
--------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss........................................... $(765,552) $(1,075,442) $ (371,711)
Adjustments to reconcile net loss to net cash
used in operating activities:
Contributed services............................ 60,000 -- --
Depreciation and amortization................... 53,008 125,643 177,971
Provisions for losses on accounts receivable.... 30,000 158,000 516,000
Net gain on sale of property.................... (24,993) (7,614) --
Increase (decrease) from change in:
Checks issued against future deposits......... 32,668 (32,668) --
Accounts receivable........................... (980,612) (1,821,467) (3,746,364)
Prepaid expenses and other.................... 1,897 (108,466) (323,683)
Accounts payable and accrued expenses......... 814,530 1,136,820 1,329,865
Other items................................ (43,831) (21,583) (671,391)
--------- ----------- ---------
Net cash used in operating activities...... (822,885) (1,646,777) (3,089,313)
--------- ----------- ---------
Cash flows from investing activities
Proceeds from sale of property..................... 122,986 142,877 --
Purchase of equipment.............................. (267,429) (528,463) (780,185)
--------- ----------- ---------
Net cash used in investing activities................ (144,443) (385,586) (780,185)
--------- ----------- ---------
Cash flows from financing activities
Proceeds from notes payable........................ 785,000 395,000 4,030,000
Restricted cash.................................... -- (1,000,000) (2,133,433)
Proceeds from sale of common stock................. -- 2,602,270 --
Proceeds from sale of preferred stock.............. -- 3,000,000 71,250
Proceeds from issuance of convertible debenture.... -- 500,000 --
Related parties payable............................ (99,864) (665,395) 95,847
Payments on debt................................... (137,916) (592,678) (400,000)
Shareholder contributions.......................... 420,108 -- --
--------- ----------- ---------
Net cash provided by financing activities............ 967,328 4,239,197 1,663,664
--------- ----------- ---------
Net increase (decrease) in cash...................... -- 2,206,834 (2,205,834)
Cash, beginning of period............................ 200 200 2,207,034
--------- ----------- ---------
Cash, end of period.................................. $ 200 $ 2,207,034 $ 1,200
========= =========== =========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-6
<PAGE> 59
USTEL, INC.
SUMMARY OF ACCOUNTING POLICIES
THE COMPANY
UStel, Inc. (the "Company") was formed on March 11, 1992 as a long-distance
telephone service provider. The Company offers competitive discounted calling
plans which are available to customers in the United States, Puerto Rico, and
the Virgin Islands. On January 12, 1994, the Company effected a recapitalization
of its capital stock in connection with its re-incorporation in Minnesota. In
connection with the recapitalization, the Company exchanged all its outstanding
common shares (1,000 shares) for 950,000 shares of the reincorporated company's
common shares. Accordingly, the financial statements were retroactively
restated.
REVENUE RECOGNITION
Revenue is recognized upon completion of the telephone call.
PROPERTY AND EQUIPMENT
Equipment is stated at cost with depreciation provided over the estimated
useful lives of the respective assets on the straight-line basis ranging from
five to fifteen years.
DEFERRED CHARGES
Deferred charges consists of loan fees, offering costs and certain costs
incurred in connection with expanding the Company's market position. Loan fees
are amortized over the life of the related loan. Offering costs will be charged
against paid-in capital if the private offering is consummated. If the private
offering is not consummated, such costs will be charged to operations during the
period it becomes evident that the above mentioned transaction will not be
completed. Costs incurred to expand the Company's market position are amortized
over the period of benefit not to exceed twenty-four months. It is the Company's
policy to periodically review and evaluate that the benefits associated with
these costs are expected to be realized and therefore deferral and amortization
is justified.
INCOME TAXES
Income taxes are accounted for under Financial Accounting Standards Board,
FAS No. 109, "Accounting for Income Taxes." Under this standard, deferred tax
assets and liabilities represent the tax effects, calculated at currently
effective rates, of future deductible taxable amounts attributable to events
that have been recognized on a cumulative basis in the financial statements.
EARNINGS PER SHARE
Earnings per share are computed based upon the weighted average number of
common shares outstanding during the periods. Common stock equivalents relating
to stock options, warrants and convertible preferred stock are not included in
the computation since their effect is anti-dilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
SIGNIFICANT RISKS AND UNCERTAINTIES
The Company is primarily a non-facilities based inter-exchange carrier that
routes customers' call over a transmission network consisting primarily of
dedicated long distance lines secured by the Company from a variety of other
carriers. One of these carriers provides the call record information from which
the Company
F-7
<PAGE> 60
USTEL, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
bills approximately 75% of its customer base. Management believes other carriers
could provide the same services on comparable terms.
CONCENTRATIONS OF CREDIT RISKS
The Company maintains cash balances at one financial institution. Deposits
not to exceed $100,000 are insured by the Federal Deposit Insurance Corporation.
At December 31, 1995, the Company has uninsured cash in the amount of
approximately $3,035,000.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after December 15,
1995. The new standard establishes new guidelines regarding when impairment
losses on long-lived assets, which include plant and equipment, certain
identifiable intangible assets and goodwill, should be recognized and how
impairment losses should be measured. The Company does not expect adoption to
have a material effect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting
Standards Board (FASB) is effective for specific transactions entered into after
December 15, 1995, while the disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning no later than
December 15, 1995. The new standard establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from nonemployees in exchange for equity
instruments. At the present time, the Company has not determined if it will
change its accounting policy for stock based compensation or only provide the
required financial statement disclosures. As such, the impact on the Company's
financial position and results of operations is currently unknown.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND RESTRICTED CASH
The carrying amount approximates fair value due to the short maturity of
those instruments.
NOTES PAYABLE
The fair value of the Company's notes payable is based on quoted market
prices for similar issues of debt with similar remaining maturities.
CONVERTIBLE DEBENTURE
The fair value of the Company's convertible debentures is estimated based
upon current market borrowing rates for loans with similar terms and maturities.
RECLASSIFICATIONS
Certain financial statement items have been reclassified to conform to the
current year's presentation.
F-8
<PAGE> 61
USTEL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- DEFERRED CHARGES
Deferred charges consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
------- --------
<S> <C> <C>
Development costs....................................... $ -- $336,690
Offering costs.......................................... -- 164,792
Loan fees............................................... -- 35,000
Calling card program.................................... -- 118,157
Deposits and other...................................... 65,414 82,166
-------- ---------
65,414 736,805
Accumulated amortization................................ -- (52,000)
-------- ---------
$65,414 $684,805
======== =========
</TABLE>
NOTE 2 -- NOTES PAYABLE
In September 1994, the Company entered into revolving credit agreements
with two banks that provide for secured borrowings aggregating $1.4 million and
expiring in September 1995. Borrowings under the agreements bear interest at the
banks' prime lending rate. The credit agreements are collateralized by a
security interest in substantially all of the Company's assets plus a restricted
certificate of deposit for $1 million. Borrowing under the credit agreements
amounted to $770,000 at December 31, 1994.
During June 1995 and September 1995, the Company entered into revolving
credit agreements with a bank that provides for secured borrowings aggregating
$1 million and $2 million, respectively, expiring in May 1996. Borrowings under
the agreements bear interest at the bank's prime lending rate. The credit
agreements are collateralized by three certificates of deposits totalling $3.1
million. Borrowing under the credit agreements amounted to $2.9 million at
December 31, 1995.
In December 1995, the Company obtained a Senior Credit Facility ("Credit
Facility" and "Line") in the amount of up to $5 million with an asset-based
lender. Amounts drawn under the Credit Facility accrue interest at a variable
rate equal to the Bank of America Reference Rate plus 2% per annum. The Line is
secured by accounts receivable and all of the Company's other assets. Under the
Credit Facility, the Company can borrow up to an amount which is the lesser of
$5 million or 85% of the Company's eligible receivables. Subject to the $5
million maximum borrowing, in addition to amounts supported by receivables, the
Company may borrow on a 36-month term loan basis up to the lesser of $1.5
million or a formula amount based on the fair value of new equipment and the
liquidation value of existing equipment. No amounts were outstanding under the
Credit Facility as of December 31, 1995.
F-9
<PAGE> 62
USTEL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- RELATED PARTY TRANSACTIONS
(a) Related Parties Receivables
At December 31, 1994 and 1995, the Company has amounts due from various
related parties relating to telephone services and loans as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Due for telephone services:
Related entities..................................... $ 56,538 $ 20,505
Officers............................................. 51,949 144,567
Loans:
Related entities..................................... 132,822 --
Officers............................................. 164,247 181,658
Employees............................................ 65,000 1,789
-------- --------
$444,366 $348,519
======== ========
</TABLE>
(b) Related Parties Payable
In October 1995, the Company entered into a revolving credit agreement with
a related party that provides for secured borrowing aggregating $1.5 million and
expiring in October 1996. Borrowing under the agreement bears interest at 10%
per annum on a daily principal balance outstanding during the three calendar
months prior to each interest payment date. The credit agreement is
collateralized by a security interest in the Company's unrestricted deposit
accounts and accounts receivable. The agreement calls for the issuance of
warrants for the purchase of up to 100,000 shares of the Company's common stock
at $5.00 per share, exercisable over a period of five years. Borrowing under the
credit agreement amounted to $1.5 million at December 31, 1995. This loan was
repaid in January 1996 by the issuance of 160,000 common shares of the Company
plus $725,000.
(c) Shareholder Contributions
During 1993, the President and shareholder assumed and paid Company debts
which amounted to $420,108 in the aggregate. This amount was then contributed to
additional paid-in capital. In addition, the Company recorded $60,000 in salary
expense related to the value of services contributed by the President.
(d) Stock Note Payable
In consideration of services rendered and to be rendered to the Company and
$95,000 paid in the form of a promissory note due upon the earlier of conversion
or May 31, 2005, in November 1995 the Company issued to one of its officers,
95,000 shares of Series B Preferred Stock.
(e) Rental Property Held For Investment
During 1993, the Company acquired land and buildings, which consisted of
fourteen condominium units, from a company owned by a related party. The assets
acquired were recorded at predecessor cost of approximately $1,424,000. The
Company assumed first trust deeds of $1,097,501 and existing second trust deeds
of $359,812, which amounted to $1,457,313. The difference of $33,313 was
accounted for as a reduction of the amounts due to the related party. One of the
units was sold during 1993, resulting in a gain of $24,993, the remaining units
were sold during 1994 at a gain of $7,614.
F-10
<PAGE> 63
USTEL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Loss from rental operations included in the statements of operations
include rental operations for the years ended December 31, 1993 and 1994 as
follows:
<TABLE>
<CAPTION>
1993 1994
-------- ---------
<S> <C> <C>
Rental income......................................... $ 46,933 $ 68,054
Operating expenses.................................... (9,942) (7,221)
Interest expense...................................... (78,902) (124,630)
Depreciation expense.................................. (20,114) (37,908)
-------- ---------
Loss from rental operations........................... $(62,025) $(101,705)
======== =========
</TABLE>
(f) Sales Agent
In August 1995, the Company retained an independent sales representative on
a commission basis. As part of the consideration for its engagement, the Company
agreed to issue the sales agent warrants to purchase up to 300,000 shares of
common stock. These wares are exercisable in increments of 50,000 shares upon
the company reaching certain monthly revenue milestones for four years from the
date of issuance. The minimum exercise price of the warrants is $7.50 per share
and increases depending on when specified monthly revenue milestones are met. A
director of the Company is Chairman of the Board of the sales agent.
(g) Financial Consultant
In August 1995, the Company engaged a financial consultant for a period of
one year and agreed to grant five-year warrants to purchase up to 100,000 shares
of the Company's common stock at $5.00 per share. The Company also agreed to pay
the consultant $7,500 per month plus 1%, 2% and 3% of the senior debt,
subordinated debt and equity, respectively raised by the consultant for the
Company. The consultant is the son of a member of the Company's Board of
Directors.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company occupies certain office and switching facilities under
operating leases expiring on various dates through 1998 with options to renew on
switching facilities. Rent expense under these arrangements was $120,000;
$120,000; and $124,000 for the years ended December 31, 1993, 1994 and 1995.
Insurance and maintenance expenses covering these facilities are the Company's
obligations.
At December 31, 1995 future minimum lease commitments were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, OFFICE SPACE SWITCHING FACILITIES TOTAL AMOUNT
-------------------------------- ------------ -------------------- ------------
<S> <C> <C> <C>
1996............................ $ 59,928 $ 39,394 $ 99,322
1997............................ 59,928 4,060 63,988
1998............................ 59,928 -- 59,928
-------- ------- --------
$179,784 $ 43,454 $223,238
======== ======= ========
</TABLE>
Employment Agreements
The Company entered into employment agreements with two executive officers
of the Company. One agreement provides for an annual salary of $93,600 for a
term of five years commencing on December 1, 1993. The second agreement provides
for an annual salary of $120,000 for a term of three years commencing on March
1, 1994. Both agreements also provide for bonuses to be paid to the officers at
the discretion of the Company's Board of Directors.
In January 1996, the Company entered into a three-year employment agreement
with an officer that provides for annual salaries of $60,000 in the first year,
$96,000 in the second year and $132,000 in the third year. The Company also
granted the officer options to purchase up to 200,000 shares of common stock at
$5.00 per share and to issue to him 32,000 shares of common stock.
F-11
<PAGE> 64
USTEL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONVERTIBLE SUBORDINATED DEBENTURES
In January 1994, the Company issued 12% Convertible Subordinated Debentures
(Debentures) in the aggregate amount of approximately $500,000. The Debentures
bear interest at the rate of 12% per annum. Principal and accrued interest will
be due and payable on or before December 30, 1998. At any time prior to the
payment in full, the Debentures can be converted into shares of the Company's
common stock at the rate of $7.00 per share, subject to adjustment (as defined).
The proceeds were used to repay notes payable of $400,000 and the balance was
used for working capital purposes.
NOTE 6 -- PREFERRED STOCK
During September 1994, the Company issued 550,000 shares of $.01 par value
Series A Convertible Preferred Stock ("Preferred"). Each share of Preferred
entitles its holder to receive dividends at the same rate paid to common
stockholders. Unless the Company pays or declares dividends with respect to
common shares, the Company has no obligation to declare or pay dividends with
respect to the Preferred. Each share of Preferred is convertible into one share
of common stock, as adjusted, for such things as stock splits, stock dividends
and other similar dilutive occurrences. At any time subsequent to October 16,
1995, each holder of record of Preferred may, at his or her option, convert all
or part of the Preferred shares held into fully paid common shares.
In connection with the issuance of the Preferred shares described above,
the Company committed to pay a finders fee for the placement of the Preferred
shares. The Company will issue 112,000 common shares plus $46,000 in
satisfaction of the finders fee. This transaction has not been reflected in the
financial statements since the shares have not been issued and the effect on the
financial statements is not material. The Company anticipates that the common
shares will be issued during the second quarter of 1996.
During November 1995, the Company issued 95,000 shares of $.01 par value
Series B Convertible Preferred Stock ("Series B"). Each share of Series B
entitles its holder to receive dividends at the same rate paid to common
stockholders. Unless the Company pays or declares dividends with respect to
common shares, the Company has no obligation to declare or pay dividends with
respect to Series B. Each share of Series B is convertible into one share of
common stock, as adjusted, for such things as stock splits, stock dividends and
other similar dilutive occurrences. Each holder of record of Series B may, at
the option of the holder, convert all or part of the shares of Series B held by
that recordholder into fully paid nonassessable shares of common stock, if the
Company files a registration statement or there is a change in control of the
Company.
NOTE 7 -- COMMON STOCK
Public Offering
During 1994, the Company completed an initial public offering ("IPO"), of
650,000 shares of the Company's common stock. The Company received net proceeds
from the IPO amounting to $2,602,270 (after deducting offering costs of
$647,730).
In connection with the IPO described above, the Company granted to the
underwriter, warrants to acquire 65,000 shares of the Company's common stock.
The warrants are exercisable for a period of four years commencing one year
after the date of the prospectus (June 22, 1994) at an exercise price of $6.25
(125% of the public offering price). This warrant is outstanding as of December
31, 1995.
Stock Option Plan
The Company adopted a stock option plan to provide for the grant of options
to key employees to acquire up to 450,000 shares of the Company's common stock.
The option price per share may not be less than 100% of the fair market value of
a share on the date the option is granted, and the maximum term of an option may
not exceed ten years. There are currently 210,000 options granted and
outstanding under the 1993 stock option plan. These options were granted to the
President of the Company at an exercise price of $7.50 per share, one-third
which will vest each year. In January 1996, the Board of Directors passed a
resolution reducing the
F-12
<PAGE> 65
USTEL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
exercise price from $7.50 to $5.00 per share. In January 1996, the Company also
granted to each of two officers options to purchase 100,000 shares of common
stock at $5.00 per share.
NOTE 8 -- INCOME TAXES
At December 31, 1995, the Company has available net operating loss
carryforwards of approximately $5,908,000 for income tax purposes, which expire
in varying amounts through 2010. Federal tax rules impose limitations on the use
of net operating losses following certain changes in owner ship. Such a change
in control occurred during 1994. As a result $3,208,000 of the net operating
loss carryforwards are subject to limitation. The net operating loss carryover
may be utilized at a rate of approximately $402,000 per year.
The loss carryforward generated a deferred tax asset of approximately
$2,186,000. The deferred tax asset was not recognized due to uncertainties
regarding its realization, accordingly, a 100% valuation allowance was provided.
NOTE 9 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing activities for the year ended December 31, 1993 were as
follows:
The Company acquired fourteen condominiums from a related party in exchange
for assuming notes payable amounting to $1,457,313 collateralized by deeds of
trust.
The related party paid $82,186 to the mortgage holders on behalf of the
Company. The Company increased their notes payable related party and decreased
their long-term debt by that amount.
Cash paid for interest during the year ended December 31, 1993 amounted to
$28,600.
Non-cash investing and financing activities for the year ended December 31,
1994 were as follows:
Cash paid for interest during the year ended December 31, 1994 amounted to
$91,160.
During 1994, an officer/shareholder note payable amounting to $60,000 was
contributed to paid in capital.
Non-cash investing and financing activities for the year ended December
31, 1995 were as follows:
Cash paid for interest during the year ended December 31, 1995 amounted to
$260,437.
During 1995, the Company issued 95,000 shares of Series B Convertible
Preferred in payment of services plus a promissory note for $95,000.
NOTE 10 -- SUBSEQUENT EVENT
In January 1996, the Company completed a private placement of 160,000 Units
(consisting of 160,000 shares of common stock and 160,000 redeemable common
stock purchase warrants) raising net proceeds of approximately $775,000. For
assisting the company with the private placement, the Company paid Diener
Financial Group the sum of $25,000 and granted the director 100,000 warrants
exercisable at $5.00 per share, expiring November 2000.
F-13
<PAGE> 66
USTEL, INC.
CONDENSED BALANCE SHEETS (NOTE 1)
<TABLE>
<CAPTION>
JUNE 30,
1996
DECEMBER 31, -----------
1995 (UNAUDITED)
------------
(AUDITED)
<S> <C> <C>
ASSETS
Current
Cash............................................................ $ 1,200 $ 650,309
Restricted cash................................................. 3,133,433 2,110,005
Accounts receivable less allowance for doubtful accounts of
$652,000 and $564,000, respectively.......................... 5,144,502 7,134,686
Due from related parties........................................ 348,519 289,789
Prepaid expenses................................................ 506,824 707,967
Other current assets............................................ 756,220 -0-
------------ -----------
Total current assets.................................... 9,890,698 10,892,756
Property and equipment
Office furniture & equipment.................................... 1,440,294 2,296,771
Leasehold improvements.......................................... 164,063 168,899
------------ -----------
1,604,357 2,465,670
Less accumulated depreciation................................... (241,176) (353,451)
------------ -----------
Net property and equipment.............................. 1,363,181 2,112,219
Other assets
Other receivables, net.......................................... -- 576,992
Start-up costs, less accumulated amortization of $59,022 and
$68,859, respectively........................................ 39,347 29,511
Deferred charges (Note 2)....................................... 684,805 1,190,132
------------ -----------
$ 11,978,031 $14,801,610
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Notes payable (Note 3).......................................... $ 2,900,000 $ 4,025,691
Payable to related party (Notes 4, 5)........................... 1,500,000 1,484,000
Accounts payable and accrued expenses........................... 2,192,479 3,127,054
Accrued revenue taxes........................................... 1,097,779 231,425
------------ -----------
Total current liabilities............................... 7,690,258 8,868,170
Long-term liabilities
Convertible subordinate debentures................................ 500,000 500,000
------------ -----------
Total liabilities....................................... 8,190,258 9,368,170
------------ -----------
Stockholders' equity
Series A & B convertible preferred stock........................ 6,450 6,450
Common stock.................................................... 16,000 20,119
Additional paid-in capital...................................... 6,291,178 7,860,762
Accumulated deficit............................................. (2,525,855) (2,453,891)
------------ -----------
Total stockholders' equity.............................. 3,787,773 5,433,440
------------ -----------
Total liabilities and stockholders' equity.............. $ 11,978,031 $14,801,610
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-14
<PAGE> 67
USTEL, INC.
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1995 1996
---------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues........................................................... $6,996,751 $10,526,503
Operating expenses
Cost of services sold............................................ 5,159,835 7,241,355
Selling.......................................................... 547,355 1,074,719
General and administrative....................................... 1,165,074 1,830,340
Depreciation and amortization.................................... 68,318 122,112
---------- -----------
Total operating expenses................................. 6,940,582 10,268,526
---------- -----------
Income from operations............................................. 56,169 257,977
Interest expense, net of interest income........................... (8,031) (186,013)
---------- -----------
Net income............................................... $ 48,138 $ 71,964
========== ===========
Earnings per share amounts:
Primary.......................................................... 0.03 0.03
========== ===========
Fully diluted.................................................... 0.02 0.03
========== ===========
Weighted average common shares outstanding:
Primary.......................................................... 1,600,000 2,735,195
========== ===========
Fully diluted.................................................... 2,441,612 2,806,624
========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-15
<PAGE> 68
USTEL, INC.
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1996 THROUGH JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- -------------------- PAID-IN ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
-------- ------ --------- ------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995.................... 645,000 $6,450 1,600,000 $16,000 $6,291,178 $(2,525,855) $3,787,773
Conversion of debt...... -- -- 160,000 1,600 798,400 -- 800,000
Cost of preferred stock
placement issued in
prior period.......... -- -- 112,000 1,120 (47,120) -- (46,000)
Acquisition of switching
equipment............. -- -- 100,000 1,000 499,000 -- 500,000
Cost of raising
capital............... -- -- 39,851 399 79,304 -- 79,703
Issuance of warrants
related to debt....... -- -- -- -- 240,000 -- 240,000
Net income for period... -- -- -- -- -- 71,964 71,964
-------- ------ --------- ------- ---------- ----------- ----------
Balance, June 30, 1996.... 645,000 $6,450 2,011,851 $20,119 $7,860,762 $(2,453,891) $5,433,440
======== ======= ========= ======== ========== ============ ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-16
<PAGE> 69
USTEL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 48,138 $ 71,964
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization......................... 68,318 122,112
Provision for losses on accounts receivable........... 134,965 244,466
Change in operating assets and liabilities
Accounts receivable................................ (635,558) (2,234,650)
Other assets....................................... (756,220) 756,220
Due from related parties........................... (472,948) 58,730
Prepaid expenses................................... (126,620) (201,143)
Accounts payable and accrued expenses.............. 699,326 68,222
Other receivables.................................. (16,490) (576,992)
----------- -----------
Net cash used in operating activities......... (1,057,089) (1,691,072)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of equipment................................... (345,312) (861,313)
Increase in deferred charges............................ -- (505,327)
----------- -----------
Net cash used in investment activities........ (345,312) (1,366,640)
CASH FLOWS FROM FINANCING ACTIVITIES
Restricted cash......................................... (2,133,433) 1,023,428
Proceeds from notes payable............................. 1,450,000 11,642,635
Payment on debt......................................... (120,000) (8,959,242)
----------- -----------
Net cash provided by financing activities..... (803,433) 3,706,821
----------- -----------
Net decrease in cash.................................... (2,205,834) 649,109
Cash, beginning of period............................... 2,207,034 1,200
----------- -----------
Cash, end of period..................................... $ 1,200 $ 650,309
========== ==========
Supplemental information
Interest paid......................................... $ 50,222 $ 242,533
Income taxes paid..................................... 800 12,638
</TABLE>
See accompanying notes to condensed financial statements.
F-17
<PAGE> 70
USTEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JUNE 30, 1996
NOTE 1 -- INTERIM FINANCIAL INFORMATION
The interim financial statements for the six months ended June 30, 1996 and
June 30, 1995, respectively, are unaudited. In the opinion of management, such
statements reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair representation of the results of the interim
periods. The results of operations for the six-month periods ended June 30, 1996
are not necessarily indicative of the results for the entire year.
NOTE 2 -- DEFERRED CHARGES
Deferred charges consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
Development costs................................ $336,690 $ 210,287
Offering costs................................... 164,792 699,068
Loan fees........................................ 35,000 131,253
Calling card program............................. 118,157 138,109
Deposits and others.............................. 82,166 82,165
-------- ---------
736,805 1,260,882
Accumulated amortization......................... (52,000) (70,750)
-------- ---------
$684,805 $1,190,132
======== =========
</TABLE>
NOTE 3 -- NOTES PAYABLE
In June 1995 and September 1995, the Company entered into a revolving
credit agreements with a bank that provided for secured borrowings aggregating
$1.0 million and $2.1 million, respectively, expiring in July 1996. Borrowings
under the agreements bear interest at the bank's prime lending rate. The credit
agreements were collateralized by two certificates of deposit at that same bank
totalling $2.1 million. In July 1996, this outstanding credit line was paid off
by offsetting the outstanding balance against the certificates of deposit used
as collateral. Borrowings under the remaining credit agreement amounted to $2.1
million at June 30, 1996.
In December 1995, the Company obtained a Senior Credit Facility ("Credit
Facility" and "Line") in the amount of up to $5 million with an asset-based
lender. Amounts drawn under the Credit Facility accrue interest at a variable
rate equal to the Bank of America Reference Rate plus 2% per annum. The Line is
secured by accounts receivable and all of the Company's other assets. Under the
Credit Facility, the Company can borrow up to an amount which is the lesser of
$5 million or 85% of the Company's eligible receivables. Subject to the $5
million maximum borrowing, in addition to amounts supported by receivables, the
Company may borrow on a 36-month term loan basis up to the lesser of $1.5
million or a formula amount based on the fair value of new equipment and the
liquidation value of existing equipment. Amounts outstanding under the Credit
Facility at June 30, 1996 were $1,925,691.
NOTE 4 -- SHORT-TERM BORROWINGS
During March 1996 the Company borrowed $400,000 from a related party. The
notes mature in November 1996 and bear interest at the annual rate of 8%. In
June 1996 $116,000 of this borrowing was repaid. Interest is payable at the
earlier of maturity or repayment of the full amount borrowed.
F-18
<PAGE> 71
USTEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND JUNE 30, 1996
During June 1996 the Company borrowed $1,200,000 from an unrelated party.
The two-year note bears interest at the annual rate of 12% and is unsecured.
Interest is payable at maturity. In conjunction with this loan the Company
agreed to issue warrants for acquisition of up to 540,000 of its common shares
at a price of $5.00 per share. The value of the warrants were estimated at
$240,000 and the amount will be amortized to interest expense over the life of
the loan. Warrants for purchase of 120,000 common shares were issuable at the
time the loan was funded. Additional warrants become issuable in increments for
60,000 common shares each at intervals of ninety days after funding of the loan
so long as the loan remains unpaid.
NOTE 5 -- RELATED PARTIES PAYABLE
In October 1995 the Company borrowed $1,500,000 pursuant to the terms of a
one-year term loan. Borrowing under the agreement bears interest at 10% per
annum on a daily principal balance outstanding during the three calendar months
prior to each interest payment date on the first day of each calendar quarter.
The agreements calls for the issuance of warrants for the purchase of up to one
hundred thousand shares of the Company's common stock at a price of $5.00 per
share, exercisable over the term of the loan. The loan is secured by the
Company's trade accounts receivable and certain other assets. Borrowings under
the credit agreement amounted to $1,500,000 at December 31, 1995. This loan was
repaid in January 1996 by the issuance of 160,000 common shares of the Company
plus $725,000.
In June 1996 the Company acquired title to switching facilities in Beverly
Hills CA from an officer of the Company for $678,471. Consideration for the
switch was 100,000 shares of the Company's Common Stock and cancellation of
interim advances made by the Company in connection with the upgrading of the
switching equipment in the amount of $178,471. At the time the switching
equipment was acquired, it had been appraised for approximately $716,000.
In January, 1996, the Company completed a private placement of 160,000
Units (consisting of 160,000 shares of Common Stock and 160,000 Redeemable
Common Stock Purchase Warrants) raising net proceeds of approximately $775,000.
For assisting the Company in connection with this private placement, the Company
paid Diener Financial Group the sum of $25,000. In November, 1995, the Company
granted Mr. Diener 100,000 Warrants exercisable at $5.00 per share, expiring
November, 2000.
In June, 1996, the Company acquired title to a telecommunications switch
owned by Mr. Epling for aggregate consideration in the amount of $716,375.
Consideration was paid by crediting $500,000 as payment for the issuance of
100,000 shares of Common Stock to Mr. Epling pursuant to the exercise of
employee stock options, cancelling approximately $109,949 in interim advances
made by the Company to TYC, Inc., a corporation wholly-owned by Mr. Epling, and
a cancellation of interim advances of approximately $75,522 made by the Company
to Mr. Epling for upgrading the switch, and the issuance of an additional 7,851
shares of Common Stock to Mr. Epling based on a $5.00 per share market value. At
the time the switching equipment was acquired, it was appraised at approximately
$716,000.
In January, 1996, the Company entered into a supplemental consulting
agreement with IFC to provide the services of Mr. Grey as the chief financial
officer and as a director of the Company for up to 20 hours of service per week
for compensation of $12,500 per month. IFC agreed to defer payment of $7,500 per
month until such time as the Company obtained certain additional financing, or
underwent a change in control, as defined in the agreement, or IFC terminated
the services. In February, 1996, the Company agreed to cancel the $95,000 note
in consideration of services rendered and to be rendered by IFC and the payment
by IFC of $5,000 to the Company.
F-19
<PAGE> 72
USTEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND JUNE 30, 1996
NOTE 6 -- SUBSEQUENT EVENTS
On August 14, 1996, UStel, Inc. ("UStel"), Consortium Acquisition
Corporation (a wholly-owned subsidiary created by UStel, Inc.) and Consortium
2000, Inc. entered into a Merger Agreement and Plan of Reorganization ("Merger
Agreement"). Under the terms of the Merger Agreement, (a) Consortium Acquisition
Corporation will be merged with Consortium 2000, Inc., with Consortium 2000,
Inc. being the surviving corporation in the merger, and (b) all of the capital
stock of Consortium 2000, Inc. will be converted into an aggregate of 1,076,923
shares of the Common Stock of UStel, Inc. As a result of the Merger Agreement,
Consortium 2000, Inc. will become a wholly-owned subsidiary of UStel. The merger
is contingent upon the completion of the Company raising additional financing.
In July, 1996, the Company's Board of Directors authorized the issuance of
20,000 shares of Common Stock to Consortium 2000 at $5.75 per share to reconcile
variances in commissions owed to Consortium 2000 for July, 1995 through March,
1996. Prior to the Merger, these shares will be distributed as a dividend to the
shareholders of Consortium 2000.
In August, 1996, the Company entered into a two-year consulting agreement
with Vanguard Consultants, Inc., a Nevada corporation, to provide consulting
services in the areas of marketing, finance and business development. Pursuant
to this agreement, Vanguard Consultants, Inc. will receive $7,500 per month for
such services.
As of September 9, 1996, the Company was indebted to WilTel, the Company's
primary long distance carrier, in the amount of $5,595,963. This amount was
settled by the payment of $1,000,000 by the Company on that date and an
agreement by the Company to remit $735,688 by September 27, 1996, and to remit
payment of its October 1, 1996 invoice to WilTel no later than October 31, 1996,
and to provide WilTel with a second lien against all of its assets and customer
base. WilTel agreed to allow the Company to defer the balance owing in the
amount of $3,860,275 to the earlier of November 10, 1996 or the completion of an
offering.
F-20
<PAGE> 73
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Consortium 2000, Inc.
Culver City, California
We have audited the accompanying balance sheet of Consortium 2000, Inc. as
of June 30, 1996, and the related statements of operations, shareholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, the financial statements referred to
above present fairly, in all material respects, the financial position of
Consortium 2000, Inc. at June 30, 1996, and the results of its operations and
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
September 20, 1996
F-21
<PAGE> 74
CONSORTIUM 2000, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
1996
----------
<S> <C>
Current
Cash........................................................................... $ 116,068
Accounts receivable, less allowance for doubtful accounts of $115,000.......... 810,470
Due from related parties (Note 1, a)........................................... 52,242
Employee advances.............................................................. 18,642
Prepaid expenses............................................................... 103,092
Loans to officers (Note 1, b).................................................. 8,254
----------
Total current assets................................................... 1,108,768
----------
Furniture and equipment..........................................................
Furniture and fixtures......................................................... 22,107
Professional equipment......................................................... 79,327
----------
101,434
Less accumulated depreciation.................................................. (54,844)
----------
Net furniture and equipment............................................ 46,950
----------
Other assets
Deposits....................................................................... 5,000
Intangible assets, less accumulated amortization of $74,510 (Note 2)........... 68,088
----------
Total assets........................................................... $1,228,446
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Bank loan (Note 3)............................................................. $ 100,000
Accounts payable............................................................... 6,026
Accrued agent fee.............................................................. 405,347
Accrued expenses............................................................... 84,170
Deferred salaries.............................................................. 37,381
Dividends payable.............................................................. 10,764
----------
Total current liabilities.............................................. 643,683
----------
Commitments and contingencies (Note 4)
Stockholders' equity
Common stock, no par value, with a stated value of $0.01 each, 30,000,000
shares authorized; 6,753,009 shares issued and 6,750,009 shares
outstanding................................................................. 67,530
Additional paid-in capital..................................................... 1,036,166
Accumulated deficit............................................................ (518,933)
----------
Total shareholders' equity............................................. 584,763
----------
Total liabilities and shareholders equity.............................. $1,228,446
=========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-22
<PAGE> 75
CONSORTIUM 2000, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
JUNE 30, 1996
------------------
<S> <C>
Revenues.................................................................. $3,416,851
Cost of service provided.................................................. 1,500,187
----------
Gross profit......................................................... 1,916,664
----------
Operating expenses
Depreciation and amortization........................................... 9,000
General and administrative.............................................. 2,071,656
----------
Loss from operations...................................................... (163,992)
----------
Other income (expense)
Other income............................................................ 71,541
Interest income......................................................... 4,301
Interest expense........................................................ (3,717)
----------
Net loss before income tax................................................ (91,867)
Income tax provision...................................................... 800
----------
Net income...................................................... $ (92,667)
==========
Net loss per share........................................................ $ (.01)
==========
Weighted average number of shares outstanding............................. 6,751,676
==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-23
<PAGE> 76
CONSORTIUM 2000, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1995......................... 6,753,009 $67,530 $1,036,166 $(351,528) $946,168
Dividend paid................................ -- -- -- (61,866) (61,866)
Treasury stock purchased (Note 5)............ (3,000) -- -- (2,871) (2,871)
Net loss for period.......................... -- -- -- (92,667) (92,667)
--------- ------- ---------- --------- --------
Balance, June 30, 1996......................... 6,750,009 $67,530 $1,036,166 $(518,933) $584,763
========= ======== ========== ========== =========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-24
<PAGE> 77
CONSORTIUM 2000, INC.
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
JUNE 30, 1996
------------------
<S> <C>
Cash flows from operating activities
Net Loss................................................ $(92,667)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization........................ 15,600
Change in operating assets and liabilities
Accounts receivable................................ 208,098
Prepaid expenses and other......................... (50,569)
Accounts payable and accrued expenses.............. 1,262
Payments for deferred salaries..................... (57,585)
Other items........................................ 2,811
------------------
Net cash provided by operating activities....... 26,950
------------------
Cash flows from investing activities
Purchase of equipment................................... (26,673)
------------------
Net cash used in investing activities........... (26,673)
------------------
Cash flows from financing activities
Dividends paid.......................................... (61,866)
Treasury stock purchased................................ (2,871)
Proceeds from bank loans................................ 100,000
------------------
Net cash provided by financing activities....... 35,263
------------------
Net increase in cash...................................... 35,540
Cash, beginning of period................................. 80,528
------------------
Cash, end of period....................................... $116,068
==============
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-25
<PAGE> 78
CONSORTIUM 2000, INC.
SUMMARY OF ACCOUNTING POLICIES
NATURE OF OPERATIONS
Consortium 2000, Inc. (the "Company") was formed in December 1988 under the
laws of the State of California. The major business of the Company is to conduct
consultative marketing service for designing, developing, operating and managing
a telecommunication users group to produce savings for its member clients. The
Company provides services to various clients who are connecting with long
distance carriers throughout the nation.
REVENUE RECOGNITION
Revenue is recognized upon completion of the telephone call.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
SIGNIFICANT UNCERTAINTIES
The Company's commission revenue is based upon its clients' usage of
telephone services with various long distance carriers. A majority of its
commission revenue comes from the Company's business clients. Generally, any
economic fluctuation in business client's operations will have significant
impact on their telephone usage. Accordingly, the fluctuation in the usage of
the Company's clients will have affected the commission revenue of the Company.
CASH AND CASH EQUIVALENTS
For purposes of cash flows, the Company considers all short-term debt
securities purchased with an original maturity of three months or less to be
cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company provides an allowance for all doubtful accounts. The balance of
the allowance is based on review of the current status of accounts receivable.
The allowance for doubtful accounts was $115,000 as of June 30, 1996.
EQUIPMENT AND FURNITURE
Equipment is stated at cost with depreciation provided over the estimated
useful lives of the respective assets on the straight-line basis as follows:
<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Professional Equipment...................................... 5 years
Furniture and fixtures...................................... 5 years
</TABLE>
Expenditures for major renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.
F-26
<PAGE> 79
CONSORTIUM 2000, INC.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets consists of start-up costs which are stated at cost.
Amortization is computed using the straight-line method over twenty years.
INCOME TAX
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 109, which requires the Company to recognize deferred tax assets
and liabilities for the expected future tax consequences of events that have
been recognized in the Company's financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement carrying amounts and tax basis of
assets using enacted rates in effect in the years in which the differences are
expected to reverse.
At June 30, 1996, the Company has available net operating loss
carryforwards of approximately $500,000 for income tax purposes, which expire in
varying amounts through 2010. Federal tax rules impose limitations on the use of
net operating losses following certain changes in ownership.
The loss carryforward generated a deferred tax asset of approximately
$185,000. The deferred tax asset was not recognized due to uncertainties
regarding its realization, accordingly, a 100% valuation allowance was provided.
During fiscal year 1996, the Company incurred a loss. As a result, the tax
provision of $800 represents the minimum payment required for State income tax
purposes.
EARNINGS PER SHARE
Earnings per share was computed by dividing net loss for the year ended
June 30, 1996 by the weighted average number of shares for the year ended June
30, 1996.
NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after December 15,
1995. The new standard establishes new guidelines regarding when impairment
losses on long-lived assets, which include plant and equipment, certain
identifiable intangible assets and goodwill, should be recognized and how
impairment losses should be measured. The Company does not expect adoption to
have a material effect on its financial position or results of operations.
F-27
<PAGE> 80
CONSORTIUM 2000, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- RELATED PARTY TRANSACTIONS
(a) Due from Related Party
R & R Ventures, Inc. (R&R) is an agent which markets residential services
and is engaged by the Company. A board member and shareholder of the Company
owns 50% of R&R. In November, 1995, the Company and R&R agreed that R&R would
allow the Company to deduct R&R's commission from the Company to offset the
$75,422 that R&R owes to the Company. As a result of deducting commissions
earned by R&R from the Related Receivables, the remaining balance due from R&R
as of June 30, 1996 was $52,242.
(b) Officer Loan Receivables
The balance due to the company from an officer is $8,254. Interest accrues
monthly at seven percent per annum.
NOTE 2 -- INTANGIBLE ASSETS
Intangible assets as of June 30, 1996 consist of the following:
<TABLE>
<S> <C>
Start-up cost..................................................... $142,598
Less accumulated amortization..................................... 74,510
--------
$ 68,088
========
</TABLE>
NOTE 3 -- BANK LOAN
In May of 1996, the Company obtained a revolving line of credit of $200,000
from a commercial bank for working capital purposes. The loan matures at March
1, 1997 and has a variable interest rate (1% over the bank's prime rate). The
revolving line of credit is subject to certain restrictive covenants and is
collateralized by substantially all of the Company's assets. At June 30, 1996,
the Company was in violation of all of the financial ratio requirements due to
the write-off of $775,943 which was due from UStel, Inc. The Company obtained a
waiver of default from the lender which temporarily waives the specific events
of default for a period not to exceed sixty days.
NOTE 4 -- OPERATING LEASES
The Company conducts its operations from facilities that are leased under a
56 month noncancelable operating lease expiring in June 1998.
The following is a schedule of future minimum rental payments required
under the above operating lease as of June 30, 1996.
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
-----------
<S> <C> <C> <C>
1997 ....................................................... $60,000
1998 ....................................................... 60,000
</TABLE>
NOTE 5 -- SHAREHOLDERS' EQUITY
In October of 1995, the Company repurchased 3,000 shares of common stock
from one of its shareholders for $3,750 and agreed to sell these shares to a key
employee. Per the employee stock purchase agreement, the employee will make
installment payment each payroll period, and has made 15 installment payments.
When the employee fulfills his performance, the Company will make a contribution
for the difference between the employee's installment payments and the stock
price of $3,750. As of June 30, 1996, the treasury stock balance was $2,871.
F-28
<PAGE> 81
CONSORTIUM 2000, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- SUBSEQUENT EVENT
On August 14, 1996, UStel, Inc. ("UStel"), Consortium Acquisition
Corporation (a wholly-owned subsidiary created by UStel, Inc.) and Consortium
2000, Inc. entered into a Merger Agreement and Plan of Reorganization ("Merger
Agreement"). Under the terms of the Merger Agreement, (a) Consortium Acquisition
Corporation will be merged with Consortium 2000, Inc., with Consortium 2000,
Inc. being the surviving corporation in the merger; and (b) all of the capital
stock of Consortium 2000, Inc. will be converted into an aggregate of 1,076,923
shares of the Common Stock of UStel, Inc. As a result of the Merger Agreement,
Consortium 2000, Inc. will become a wholly-owned subsidiary of UStel.
As a result of entering into the Merger Agreement, the Company agreed to
write off a one time difference of $775,943 between UStel, Inc.'s commission
expenses to the Company and the Company's commission revenue from UStel, Inc.
during the fiscal year ended June 30, 1996. This difference was included in
general and administrative expenses. The management of the Company agreed not to
pursue collection of bad debt from UStel, Inc.
F-29
<PAGE> 82
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Available Information.................. 2
Prospectus Summary..................... 3
Risk Factors........................... 6
Use of Proceeds........................ 11
Capitalization......................... 12
Price Range of Common Stock............ 13
Dividend Policy........................ 13
Selected Financial Data................ 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 20
Business............................... 26
Management............................. 38
Principal and Selling Stockholders..... 42
Certain Transactions................... 44
Description of Securities.............. 46
Shares Eligible for Future Sale........ 49
Underwriting........................... 50
Legal Matters.......................... 51
Experts................................ 51
Index to Financial Statements.......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
LOGO
2,500,000 SHARES
USTEL, INC.
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
CRUTTENDEN ROTH
INCORPORATED
, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 83
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation limit the liability of its
directors in their capacity as directors to the fullest extent permitted by the
Minnesota Business Corporation Act. Specifically, directors of the Company will
not be personally liable for monetary damages for breach of fiduciary duty as
directors except liability for (i) any breach of the duty of loyalty to the
Company or its shareholders, (ii) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) dividends or
other distributions of corporate assets that are in contravention of certain
statutory or contractual restrictions, (iv) violations of certain Minnesota
securities laws, or (v) any transaction from which the director derives an
improper personal benefit.
The Minnesota Business Corporation Act requires that the Company indemnify
any director, officer or employee made or threatened to be made a party to a
proceeding, by reason of the former or present official capacity of the person,
against judgments, penalties, fines, settlements and reasonable expenses
incurred in connection with the proceeding if certain statutory standards are
met. "Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including a derivative
action in the name of the Company. Reference is made to the detailed terms of
the Minnesota indemnification statute (Minn. Stat. sec. 302A.521) for a complete
statement of such indemnification to the fullest extent of the Minnesota
indemnification statute.
Pursuant to the terms of the Underwriting Agreement, the directors and
officers of the Company also are indemnified against certain civil liabilities
that they may incur under the Securities Act of 1933, as amended, in connection
with this offering, Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended may be permitted to officers, directors or
persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933, as amended, and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below are the expenses estimated in connection with the issuance
and distribution of the Company's securities, other than underwriting discounts
and the Representative's nonaccountable expense allowance. Except for the SEC
registration fee and NASD filing fee, all expenses are estimated.
<TABLE>
<S> <C>
SEC registration fee........................................... $ 6,345
NASD filing fee................................................ 2,225
Nasdaq Stock Market listing fee................................ 25,000
Representative's non-accountable expense allowance............. 450,000
Printing and engraving expenses................................ 110,000
Accounting fees and expenses................................... 110,000
Legal fees and expenses........................................ 220,000
Blue Sky filing fees and expenses.............................. 55,000
Transfer Agent's fees and expenses............................. 5,000
Director's and Officer's Liability Insurance................... 80,000
Miscellaneous expenses......................................... 51,250
------
Total........................................................ $1,114,820
======
</TABLE>
II-1
<PAGE> 84
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In connection with its incorporation and initial organization in 1992, the
Company issued and sold an aggregate of 1,000 shares of Common Stock to Noam
Schwartz for a total of $100,000 in cash, without registration under the
Securities Act of 1933, as amended (the "Act"), in reliance upon the exemptions
provided from such registration by Sections 3(a)(11) and/or 4(2) of the Act.
Since the issuance of the stock to Noam Schwartz, Mr. Schwartz has assumed debts
of the Company equal to $420,098 in the aggregate, which amount has been added
to additional paid-in capital.
In October and December, 1993, the Company issued and sold $200,000 in
principal amount of 12% notes to Sherwood Capitol, Inc. and $200,000 in
principal amount of 12% notes to Oxford Investments, Ltd., respectively, without
registration under the Act in reliance upon exemptions provided from
registration by Sections 3(a)(3) and/or 4(2) of the Act. The notes were repaid
in January, 1994 from the proceeds of the sale of the 12% Convertible
Subordinated Debentures described below. A loan fee of $5,000 was paid to the
lender with respect to each of the loans.
In January, 1994, the Company issued and sold $500,000 in principal amount
of 12% Convertible Subordinated Debentures to a limited group of accredited
investors without registration under the Act in reliance upon the exemptions
provided from such registration by Sections 4(2) and/or 4(6) of the Act. The 12%
Convertible Subordinated Debentures were issued and sold to Raquel Grunwald,
Robert Sachs, Stephen C. Ksieski, Peter G. Kaltman, David L. Schwartz,
Dynamation Research Corp., Gal Lipkin, President and Yoel Iny. The 12%
Convertible Subordinated Debentures are due and payable on or before December
31, 1998 and are convertible into 71,428 shares of Common Stock at a conversion
price of $7.00 per share.
In April, 1994, the Company issued and sold $250,000 in principal amount of
10% notes to Sherwood Capitol, Inc. without registration under the Act in
reliance upon exemptions provided from registration by Sections 3(a)(3) and/or
4(2) of the Act. The notes were due and payable in the amount of $150,000 on
April 11, 1994 and $100,000 on April 30, 1994. The maturity date of these
notices was extended to June 15, 1994. The notes were repaid in the third
quarter of 1994.
In September, 1994, the Company issued 550,000 shares of Series A
Convertible Preferred Stock (the "Series A Preferred") to Kamel B. Nacif for
$3,000,000 in cash, and the Company issued 112,000 shares of Common Stock to
SAS, Ltd. as a finder's fee in connection with the issuance of the Series A
Preferred to Mr. Nacif. The Company did not register these shares in reliance
upon the exemption from registration provided by Section 4(2) of the Act.
In November, 1995, the Company issued 95,000 shares of Series B Convertible
Preferred Stock (the "Series B Preferred") to Integrated Financial Consultants,
Inc. in consideration of services rendered and to be rendered to the Company and
$95,000 paid in the form of a promissory note due upon the earlier of conversion
on May 31, 2005. In February, 1996, the Company cancelled the note in
consideration of services rendered and to be rendered to the Company and $5,000
in cash. The Company did not register these shares in reliance upon the
exemption from registration provided by Section 4(2) of the Act.
In October, 1995 the Company issued to Joseph LaBonte, Frederic Rheinstein,
Amnon Barness, Caren Barness, James B. Jacobson, trustee of the Jacobson Family
Trust U/D/T 8/25/76, Marianna Smith, U.S. Rentals, Inc., and Royce Diener an
aggregate of 100,000 five-year common stock purchase warrants to purchase up to
100,000 shares of Common Stock at a price of $5.00 per share in consideration of
a $1,500,000 term loan provided to the Company by such persons. The Company did
not register these warrants in reliance upon the exemption from registration
provided by Section 4(2) of the Act.
In December, 1995, the Company issued and sold 160,000 units, consisting of
160,000 shares of Common Stock and 160,000 Redeemable Common Stock Purchase
Warrants (the "Units") to a limited group of investors without registration
under the Act in reliance upon the exemption provided from such registration by
Section 4(2) of the Act. The Units were issued and sold to Frederic Rheinstein,
Amnon Barness, Caren Barness, James B. Jacobson, trustee of the Jacobson Family
Trust U/D/T 8/25/76, Marianna Smith, U.S. Rentals, Inc., Robert L.B. Diener and
Royce Diener.
II-2
<PAGE> 85
In January, 1996, the Company issued 32,000 shares of Common Stock to Abe
M. Sher for consideration of $0.01 per share as a finder's fee in connection
with obtaining financial sources for the Company. The Company did not register
these shares in reliance upon the exemption from registration provided by
Section 4(2) of the Act.
In June, 1996, the Company issued 7,851 shares of Common Stock to Barry
Epling at $5.00 per share in connection with the sale and assignment by Mr.
Epling, individually, and d/b/a TYC Corporation, and TYC, Inc., a corporation
wholly-owned by Mr. Epling, to the Company of certain switching equipment,
rights and leases for aggregate consideration of $716,375. The Company did not
register these shares in reliance upon the exemption from registration provided
by Section 4(2) of the Act.
In August, 1996, the Company issued 20,000 shares of Common Stock to
Consortium 2000, Inc. ("Consortium 2000") at $5.75 per share to reconcile
variances in commissions owed to Consortium 2000 for July, 1995 through March
31, 1996. The Company did not register these shares in reliance upon the
exemption from registration provided by Section 4(2) of the Act.
Pursuant to the Merger Agreement and Plan of Reorganization, dated August
14, 1996, by and among the Company, Consortium Acquisition Corporation, and
Consortium 2000, and subject to the approval of the Company's stockholders, the
Company has agreed to issue 1,076,923 shares of Common Stock to the shareholders
of Consortium 2000 in return for 5,298,031 shares of Consortium 2000. Class A
Common Stock, no par value, and 1,454,978 shares of Consortium 2000 Class B
Common Stock. The shares will be issued to Royce Diener, Jim Jacobson, C. Joseph
LaBonte, MSM, Inc., Jerry Dackerman, Bruce Robin, Wouter van Biene, Jennifer
Flinton Diener, Richard Colburn, Stanley Beyer, Amnon Barness, Wilhelmina
Diener, Rich Hirsch, Robert Robin, Annette Levey, Steve Krammer, Richard Fritch,
Peter Rosenblum, Don Burgess, Raymond Parks, Burt Vaupen, Laura Delgado, Dave
Delgado, Art Rosenberg, Jeff Good, Mark Kelly, Chuck Di Pietro, William Kasoff,
Stella Powell, Jay Helfert, Larry Kimball, Richard Franz, Sally Hanes and Warren
Reid. These shares will be issued in reliance upon an exemption from
registration under Section 4(2) of the Act.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBITS
- -------------- --------------------------------------------------------------------------------
<C> <S>
1.4 Form of Underwriting Agreement with Cruttenden Roth Incorporated
2 Merger Agreement and Plan of Reorganization by and among UStel, Inc., Consortium
Acquisition Corporation and Consortium 2000, Inc. dated August 13, 1996(5)
3.1 Articles of Incorporation(1)
3.1-a Statement of Designations, Preferences and Rights of Series A Convertible
Preferred Stock(2)
3.2 Bylaws(1)
4.1 Form of Certificate evidencing shares of Common Stock(1)
4.2 Form of 12% Convertible Subordinated Debenture(1)
4.3 Form of Representative's Warrant by and between the Company and Cruttenden Roth
Incorporated
5.1* Opinion of Freshman, Marantz, Orlanski, Cooper & Klein on legality of securities
10.1 Federal Communications Commission Order, Authorization and Certificate dated
October 20, 1992(1)
10.3 Carrier Switched Services Agreement between the Company and WilTel, Inc. dated
March 10, 1993(1)
10.3.1 Collocate Agreement with WilTel, Inc., January 9, 1995(3)
10.5 Lease Agreement between the Company and CaliforniaMart, dated June 11, 1993(1)
10.12-a,b,c (a) Leases for 3400 square feet in Las Vegas, Rainbow Interim Partners, June 19,
1995;
(b) NY Lease Forty-Seventh-Fifth Company, July, 1994; (c) PacTel Meridian
Systems, Equipment Agreement, April 15, 1994(3)
</TABLE>
II-3
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBITS
- -------------- --------------------------------------------------------------------------------
<C> <S>
10.18 Employment Agreement between the Company and Noam Schwartz dated February 1,
1994(1)
10.19 Employment Agreement between the Company and Barry Epling dated December 1,
1993(1)
10.20 1993 Stock Option Plan(1)
10.21 Form of 1993 Option Agreement(1)
10.22 Stock Option Agreement between Noam Schwartz and Barry Epling dated December 1,
1993(1)
10.23 Stock Option Agreement between David Schwartz and Barry Epling dated December 1,
1993(1)
10.24 Employment Agreement with Abe Sher, January 4, 1996
10.24-a+ Modification to Employment Agreement with Abe Sher.
10.25 Consulting Agreement, Integrated Financial Consultants, November 10, 1995, and
Supplement and Cancellation of Indebtedness, January 10, 1996(3)
10.26 Coast Business Credit Agreement, December 21, 1995(3)
10.28 Consortium 2000 Agreement, August 5, 1994(3)
10.29 Subscription Documents, 160 Units, January 15, 1996, Form of(3)
10.30 Registered Consulting Group Agreement, June 20, 1994(3)
10.33 Robert L. Diener Consulting Agreements dated November 1, 1995, August 15,
1995(3)
10.34 Service Agreement with Cardservice International, December 21, 1993(3)
10.35 Interconnect Agreement, Euronet International, December 17, 1994(3)
10.37 Service Agreement, Digital Communications of America, Inc., October 14, 1992(3)
10.38 Carrier Transport and Switched Services Agreement, December 15, 1993(4)
10.39 Telecommunication Services Agreement, WilTel, Inc., July 25, 1994, Confidential
Redacted Version(4)
10.40 Registration Rights Agreement dated August 14, 1996 between UStel, Inc. and
Consortium 2000 Shareholders (exhibit 10.1 to the Company's report on Form 8-K
filed with the SEC on August 27, 1996)(5)
10.41 Registration Rights Agreement dated August 14, 1996 between UStel, Inc. and Noam
Schwartz, David Schwartz, the RGB 1993 Family Trust and the TAD 1993 Family
Trust (exhibit 10.2 to the Company's report on Form 8-K filed with the SEC on
August 27, 1996)(5)
10.42+ Promissory Note, and ancillary agreement, by and between the Registrant and
Kamel B. Nacif, February 29, 1996
10.43+ Beverly Hills Switching Equipment Letter Agreement, by and among the Registrant,
Barry Epling individually and d/b/a TYC and TYC, Inc., June 5, 1996
10.44 Form of Employment and Non-Disclosure Agreement by and between the Registrant
and Danny Knoller, September 1, 1996
10.45+ Consulting Agreement by and between the Registrant and Vanguard Consultants,
Inc., August 1, 1996
10.46+ Indemnification Agreement by and between the Registrant and Noam Schwartz,
August 2, 1996
10.47+ Letter Agreement by and between the Registrant and Consortium 2000, Inc., August
7, 1996
10.48+ Amendment Number One to Loan and Security Agreement, Secured Promissory Note and
Amended and Restated Secured Promissory Note by and between the Registrant and
Coast Business Credit, September, 1996
10.50+ Letter Agreement by and between the Registrant and WorldCom, September 10, 1996
10.51+ Sublease by and between Consortium 2000, Inc., and Primdex Corporation,
September 25, 1993
</TABLE>
II-4
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBITS
- -------------- --------------------------------------------------------------------------------
<C> <S>
10.52+ Sales Agency Agreement by and between Consortium 2000, Inc., and WorldCom, Inc.,
d/b/a/ LDDS WorldCom, June 1, 1995 Confidential Redacted Version
10.53+ Hertz Technologies, Inc., Marketing Agreement and Amendments No. 1 and 2
thereto, by and between Consortium 2000, Inc., and Hertz Technologies, Inc.,
July 7, 1995 Confidential Redacted Version
10.54+ Distributor Program Agreement and Amendment No. 1 and 2 thereto, by and between
Consortium 2000, Inc., and LCI International Telecom Corp., November 3, 1994,
January 31, 1996 and March 26, 1996, respectively, Confidential Redacted
Versions
10.55+ Marketing Services Agreement by and between Consortium 2000, Inc., and New
Enterprise Wholesale Telephone Services, Limited Partnership, August 15, 1994
Confidential Redacted Version
10.56+ Consortium 2000 and Call Points, Inc., Agreement by and between Consortium 2000
and Call Points, Inc., September 7, 1995 Confidential Redacted Version
10.57+ Client Contract by and among Consortium 2000, Inc., Verifications Plus, Advanced
Data-Com, Inc., January 24, 1996 Confidential Redacted Version
10.58+ Promissory Note, Commercial Security Agreement and Letter Agreement by and
between Consortium 2000, Inc., and City National Bank, May 28, 1996, May 28,
1996 and May 30, 1996, respectively
10.59+ a,b,c,d (a) Letter Agreement by and between the Registrant and Jeflor, Inc., June 10,
1996
(b) Subordinated Convertible Debenture, June 19, 1996
(c) Warrant, June 21, 1996
(d) Guaranty of Loan by Noam Schwartz, Ronnie Schwartz and Haskel Iny, June 17,
1996
11+ Computation of Earnings per Share
23.1 Consent of BDO Seidman, LLP, dated October 21, 1996
23.2 Consent of Freshman, Marantz, Orlanski Cooper & Klein (included in Opinion,
Exhibit 5.1)
24+ Power of Attorney, included in signature page on II-7
</TABLE>
- ---------------
* To be filed by amendment.
+ Previously filed.
(1) Incorporated by reference to the Company's Registration Statement and
Amendments No. 1 through No. 2 on Form SB-2 (Registration No. 33-75210-LA)
declared effective June 21, 1994.
(2) Incorporated by reference to the Company's 10-KSB for the year ended
December 31, 1995, filed with the SEC on April 16, 1996 commission file
0-24098; same exhibit number
(3) Incorporated by reference to the Company's Amendment No. 1 to 10-KSB for the
year ended December 31, 1995 filed with the SEC on August 27, 1996
commission file 0-24098.
(4) Incorporated by reference to the Company's report on Form 8-K, filed with
the SEC on August 27, 1996
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10 (a) (3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement; and
II-5
<PAGE> 88
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it is declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
<PAGE> 89
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amendment No. 1
to the Registration Statement on Form SB-2 to be signed on its behalf by the
undersigned, in the City of Los Angeles, State of California on October 21,
1996.
USTEL, INC.
By: /s/ ROBERT L. B. DIENER
------------------------------------
Robert L. B. Diener
President/Chief Executive Officer
In accordance with the requirement of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement on Form SB-2 has been signed by
the following persons in the capacities and on the dates stated.
<TABLE>
<C> <S> <C>
/s/ ROBERT L. B. DIENER Dated: October 21, 1996 President, Chief Executive
- ----------------------------------- Officer, and Director
Robert L. B. Diener (Principal Executive Officer)
* Dated: October 21, 1996 Executive Vice President,
- ----------------------------------- Chief Financial Officer and
Wouter van Biene Director (Principal Financial
Officer)
* Dated: October 21, 1996 Executive Vice President,
- ----------------------------------- Assistant Secretary and
Barry K. Epling Director
* Dated: October 21, 1996 Chairman of the Board
- -----------------------------------
Royce Diener
* Dated: October 21, 1996 Executive Vice President,
- ----------------------------------- Sales and Director
Jerry Dackerman
* Dated: October 21, 1996 Vice President and Director
- -----------------------------------
Noam Schwartz
Dated: October , 1996 Director
- -----------------------------------
Andrew J. Grey
*By: /s/ ROBERT L. B. DIENER
- -----------------------------------
Robert L. B. Diener
Attorney in fact
</TABLE>
II-7
<PAGE> 90
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER
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<C> <S>
1.4 Form of Underwriting Agreement with Cruttenden Roth Incorporated
2 Merger Agreement and Plan of Reorganization by and among UStel, Inc.,
Consortium Acquisition Corporation and Consortium 2000, Inc. dated August 13,
1996(5)
3.1 Articles of Incorporation(1)
3.1-a Statement of Designations, Preferences and Rights of Series A Convertible
Preferred Stock(2)
3.2 Bylaws(1)
4.1 Form of Certificate evidencing shares of Common Stock(1)
4.2 Form of 12% Convertible Subordinated Debenture(1)
4.3 Form of Representative's Warrant Agreement by and between the Company and
Cruttenden Roth Incorporated
5.1* Opinion of Freshman, Marantz, Orlanski, Cooper & Klein on legality of
securities
10.1 Federal Communications Commission Order, Authorization and Certificate dated
October 20, 1992(1)
10.3 Carrier Switched Services Agreement between the Company and WilTel, Inc. dated
March 10, 1993(1)
10.3.1 Collocate Agreement with WilTel, Inc., January 9, 1995(3)
10.5 Lease Agreement between the Company and CaliforniaMart, dated June 11, 1993(1)
10.12-a,b,c (a) Leases for 3400 square feet in Las Vegas, Rainbow Interim Partners, June
19, 1995;
(b) NY Lease Forty-Seventh-Fifth Company, July, 1994; (c) PacTel Meridian
Systems, Equipment Agreement, April 15, 1994(3)
10.18 Employment Agreement between the Company and Noam Schwartz dated February 1,
1994(1)
10.19 Employment Agreement between the Company and Barry Epling dated December 1,
1993(1)
10.20 1993 Stock Option Plan(1)
10.21 Form of 1993 Option Agreement(1)
10.22 Stock Option Agreement between Noam Schwartz and Barry Epling dated December 1,
1993(1)
10.23 Stock Option Agreement between David Schwartz and Barry Epling dated December
1, 1993(1)
10.24 Employment Agreement with Abe Sher, January 4, 1996
10.24-a+ Modification to Employment Agreement with Abe Sher
10.25 Consulting Agreement, Integrated Financial Consultants, November 10, 1995, and
Supplement and Cancellation of Indebtedness, January 10, 1996(3)
10.26 Coast Business Credit Agreement, December 21, 1995(3)
10.28 Consortium 2000 Agreement, August 5, 1994(3)
10.29 Subscription Documents, 160 Units, January 15, 1996, Form of(3)
10.30 Registered Consulting Group Agreement, June 20, 1994(3)
10.33 Robert L. Diener Consulting Agreements dated November 1, 1995, August 15,
1995(3)
10.34 Service Agreement with Cardservice International, December 21, 1993(3)
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NUMBER
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<C> <S>
10.35 Interconnect Agreement, Euronet International, December 17, 1994(3)
10.37 Service Agreement, Digital Communications of America, Inc., October 14, 1992(3)
10.38 Carrier Transport and Switched Services Agreement, December 15, 1993(4)
10.39 Telecommunication Services Agreement, WilTel, Inc., July 25, 1994, Confidential
Redacted Version(4)
10.40 Registration Rights Agreement dated August 14, 1996 between UStel, Inc. and
Consortium 2000 Shareholders (exhibit 10.1 to the Company's report on Form 8-K
filed with the SEC on August 27, 1996)(5)
10.41 Registration Rights Agreement dated August 14, 1996 between UStel, Inc. and
Noam Schwartz, David Schwartz, the RGB 1993 Family Trust and the TAD 1993
Family Trust (exhibit 10.2 to the Company's report on Form 8-K filed with the
SEC on August 27, 1996)(5)
10.42+ Promissory Note, and ancillary agreement, by and between the Registrant and
Kamel B. Nacif, February 29, 1996
10.43+ Beverly Hills Switching Equipment Letter Agreement, by and among the
Registrant, Barry Epling individually and d/b/a TYC and TYC, Inc., June 5, 1996
10.44 Form of Employment and Non-Disclosure Agreement by and between the Registrant
and Dan Knoller, September 1, 1996
10.45+ Consulting Agreement by and between the Registrant and Vanguard Consultants,
Inc., August 1, 1996
10.46+ Indemnification Agreement by and between the Registrant and Noam Schwartz,
August 2, 1996
10.47+ Letter Agreement by and between the Registrant and Consortium 2000, Inc.,
August 7, 1996
10.48+ Amendment Number One to Loan and Security Agreement, Secured Promissory Note
and Amended and Restated Secured Promissory Note by and between the Registrant
and Coast Business Credit, September, 1996
10.50+ Letter Agreement by and between the Registrant and WorldCom, September 10, 1996
10.51+ Sublease by and between Consortium 2000, Inc., and Primdex Corporation,
September 25, 1993
10.52+ Sales Agency Agreement by and between Consortium 2000, Inc., and WorldCom,
Inc., d/b/a/ LDDS WorldCom, June 1, 1995 Confidential Redacted Version
10.53+ Hertz Technologies, Inc., Marketing Agreement and Amendments No. 1 and 2
thereto, by and between Consortium 2000, Inc., and Hertz Technologies, Inc.,
July 7, 1995 Confidential Redacted Version
10.54+ Distributor Program Agreement and Amendment No. 1 and 2 thereto, by and between
Consortium 2000, Inc., and LCI International Telecom Corp., November 3, 1994,
January 31, 1996 and March 26, 1996, respectively, Confidential Redacted
Versions
10.55+ Marketing Services Agreement by and between Consortium 2000, Inc., and New
Enterprise Wholesale Telephone Services, Limited Partnership, August 15, 1994
Confidential Redacted Version
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NUMBER
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<C> <S>
10.56+ Consortium 2000 and Call Points, Inc., Agreement by and between Consortium 2000
and Call Points, Inc., September 7, 1995 Confidential Redacted Version
10.57+ Client Contract by and among Consortium 2000, Inc., Verifications Plus,
Advanced Data-Com, Inc., January 24, 1996 Confidential Redacted Version
10.58+ Promissory Note, Commercial Security Agreement and Letter Agreement by and
between Consortium 2000, Inc., and City National Bank, May 28, 1996, May 28,
1996 and May 30, 1996, respectively
10.59+- (a) Letter Agreement by and between the Registrant and Jeflor, Inc., June 10,
a,b,c,d 1996,
(b) Subordinated Convertible Debenture, June 19, 1996
(c) Warrant, June 21, 1996
(d) Guaranty of Loan by Noam Schwartz, Ronnie Schwartz and Haskel Iny, June 17,
1996
11+ Computation of Earnings per Share
23.1 Consent of BDO Seidman, LLP, dated October 21, 1996
23.2 Consent of Freshman, Marantz, Orlanski, Cooper & Klein (included in Opinion,
Exhibit 5.1)
24+ Power of Attorney, included in signature page on II-7
</TABLE>
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* To be filed by amendment.
+ Previously filed.
(1) Incorporated by reference to the Company's Registration Statement and
Amendments No. 1 through No. 2 on Form SB-2 (Registration No. 33-75210-LA)
declared effective June 21, 1994.
(2) Incorporated by reference to the Company's 10-KSB for the year ended
December 31, 1995, filed with the SEC on April 16, 1996 commission file
0-24098; same exhibit number.
(3) Incorporated by reference to the Company's Amendment No. 1 to 10-KSB for the
year ended December 31, 1995 filed with the SEC on August 27, 1996
commission file 0-24098.
(4) Incorporated by reference to the Company's report on Form 8-K, filed with
the SEC on August 27, 1996.
<PAGE> 1
EXHIBIT 1.4
2,500,000 SHARES
USTEL, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
November __, 1996
Cruttenden Roth Incorporated
As Representative of the Several Underwriters
Named in Schedule II Attached Hereto
18301 Von Karman
Irvine, California 92715-1009
Ladies and Gentlemen:
UStel, Inc., a Minnesota corporation (the "Company"), and the
stockholders of the Company located on Schedule I attached hereto (the "Selling
Stockholders") severally propose to issue and sell an aggregate of 2,500,000
shares (the "Offered Shares") of the Company's common stock, $0.01 par value
(the "Common Stock"), to Cruttenden Roth Incorporated (the "Representative") and
the several underwriters named in Schedule II hereto (collectively with the
Representative, the "Underwriters" and individually, an "Underwriter," which
terms shall also include any Underwriter substituted as hereinafter provided in
Section 12). The Offered Shares consist of 2,000,000 shares of Common Stock to
be issued and sold by the Company and 500,000 outstanding shares of Common Stock
to be sold by the Selling Stockholders. The Offered Shares shall be offered to
the public at an initial offering price of $_____ per Offered Share (the
"Offering Price").
In addition, the several Underwriters, in order to cover
over-allotments in the sale of the Offered Shares, may purchase from the Company
and the Selling Stockholders within 45 days after the Effective Date (as
hereinafter defined), for their own account for offering to the public at the
Offering Price, up to _______ and ______, respectively, additional shares of
Common Stock (the "Optional Shares"), upon the terms and conditions set forth in
Section 5 hereof. The Offered Shares and the Optional Shares are hereinafter
collectively referred to as
<PAGE> 2
the "Shares." The Company, intending to be legally bound hereby, confirms its
agreement with each of the Underwriters as follows:
The Company and Consortium Acquisition Corporation, a
California corporation that is wholly-owned by the Company ("Acquisition
Corp."), have entered into a merger agreement and plan of reorganization (the
"Merger Agreement") with Consortium 2000, Inc., a California corporation
("Consortium 2000"), dated August 14, 1996 pursuant to which Acquisition Corp.
will merge into Consortium 2000 and Consortium 2000 will become a wholly-owned
subsidiary of the Company (the "Merger").
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, the several Underwriters that:
(a) The Company has prepared in conformity with the
requirements of the Securities Act of 1933, as amended (the
"Act"), and the rules, regulations, releases and instructions
(the "Regulations") of the Securities and Exchange Commission
(the "SEC") under the Act in effect at all applicable times
and has filed with the SEC a registration statement on Form
SB-2 (File No. 333-____) and one or more amendments thereto
registering the Shares under the Act. Any preliminary
prospectus included in such registration statement or filed
with the SEC pursuant to Rule 424(a) of the Regulations is
hereinafter called a "Preliminary Prospectus." The various
parts of such registration statement, including all exhibits
thereto and the information contained in any form of final
prospectus filed with the SEC pursuant to Rule 424(b) of the
Regulations in accordance with Section 6(a) of this Agreement
and deemed by virtue of Rule 430A of the Regulations to be
part of such registration statement at the time it was
declared effective, each as amended at the time such
registration statement became effective, and each registration
statement, if any, filed pursuant to Rule 462(b) under the Act
increasing the size of the offering registered under the Act,
are hereinafter collectively referred to as the "Registration
Statement." The final prospectus in the form included in the
Registration Statement or first filed with the SEC pursuant to
Rule 424(b) of the Regulations and any amendments or
supplements thereto is hereinafter referred to as the
"Prospectus."
(b) The Registration Statement has or will become
effective under the Act as of the Effective Date, and the SEC
has not issued any stop order suspending the
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<PAGE> 3
effectiveness of the Registration Statement or preventing or
suspending the use of any Preliminary Prospectus nor has the
SEC instituted, threatened to institute or, to the Company's
knowledge, contemplated proceedings with respect to such an
order. The Company has not received any stop order suspending
the sale of the Shares in any jurisdiction designated by the
Representative pursuant to Section 6(f) hereof, and no
proceedings for that purpose have been instituted or, to the
Company's knowledge, are threatened or contemplated. The
Company has complied with all requests of the SEC and any
state securities commission in a state designated by the
Representative pursuant to Section 6(f) hereof, for additional
information to be included in the Registration Statement or
Prospectus or otherwise. Each Preliminary Prospectus conformed
to the requirements of the Act and the Regulations as of its
date and did not as of its date contain an untrue statement of
material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading, except the foregoing shall not apply to statements
in or omissions from any Preliminary Prospectus in reliance
upon and in conformity with information furnished to the
Company in writing by or on behalf of any Underwriter through
the Representative expressly for use therein. The Registration
Statement on the date on which it was declared effective by
the SEC (the "Effective Date") conformed, and any
post-effective amendment thereof on the date it shall become
effective, and the Prospectus at the time it is filed with the
SEC pursuant to Rule 424(b) of the Regulations and on the
Closing Date (as defined in Section 4 hereof) and any Option
Closing Date (as defined in Section 5(b) hereof) will conform,
to the requirements of the Act and the Regulations, and none
of the Registration Statement, any post-effective amendment
thereof and the Prospectus will, on any of such respective
dates, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or
necessary to make the statements therein not misleading,
except that this representation and warranty does not apply to
statements in or omissions from the Registration Statement or
the Prospectus made in reliance upon and in conformity with
information furnished to the Company in writing by or on
behalf of any Underwriter through the Representative expressly
for use therein. It is understood that the written information
described in Section 13 constitutes the only information
furnished
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<PAGE> 4
in writing by or on behalf of any Underwriter for
inclusion in any Preliminary Prospectus, the Prospectus
or the Registration Statement.
(c) The consolidated financial statements (including
the notes thereto) filed as part of any Preliminary
Prospectus, the Prospectus and the Registration Statement
present fairly the consolidated financial position of the
Company, each corporation or other entity of which the Company
owns or will own fifty percent or more of the outstanding
equity securities as of the Closing Date (individually a
"Subsidiary") and collectively the "Subsidiaries") and
Consortium 2000 as of the respective dates thereof, and the
results of operations and cash flows of the Company, its
Subsidiaries and Consortium 2000, for the periods indicated
therein, all in conformity with generally accepted accounting
principles consistently applied through the periods involved,
except as may be otherwise stated therein. The supporting
schedules included in the Registration Statement fairly state
the information required to be stated therein in relation to
the basic financial statements taken as a whole. The other
financial and statistical information included in the
Prospectus, including without limitation the data under the
captions "Prospectus Summary" and "Selected Financial Data,"
presents fairly the information shown therein and has been
compiled on a basis consistent with that of the audited
financial statements included in the Registration Statement
and the books and records of the Company, its Subsidiaries and
Consortium 2000.
(d) The unaudited pro forma consolidated financial
statements included in the Registration Statement and the
Prospectus comply as to form in all material respects with the
applicable accounting requirements of the Act and (i)
management of the Company believes that the assumptions
underlying the pro forma adjustments are reasonable, (ii) the
pro forma adjustments have been properly applied to the
historical amounts in the compilation of such statements, and
(iii) such statements fairly present, with respect to the
Company, its Subsidiaries and Consortium 2000, the
consolidated pro forma financial position and results of
operations and other information purported to be shown therein
at the respective dates or for the respective periods therein
specified.
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<PAGE> 5
(e) The Company does not have any Subsidiaries other
than Acquisition Corp. and Celmart Communications, Inc., a
Nevada corporation, and the Company does not own any stock or
other equity interest in, or control, directly or indirectly,
any other corporation, partnership or other entity.
(f) Each of the Company, the Subsidiaries and
Consortium 2000 is a corporation duly incorporated, validly
existing and in good standing under the laws of its
jurisdiction of incorporation with all necessary corporate
power and authority, and all required licenses, permits,
certifications, registrations, approvals, consents and
franchises to own or lease and operate its properties and to
conduct its business as described in the Prospectus and to
execute, deliver and perform this Agreement. Each of the
Company, the Subsidiaries and Consortium 2000 is duly
qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which the nature of its
business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified
would not have a material adverse effect on the Company and
its Subsidiaries or Consortium 2000.
(g) The Company has all necessary corporate power and
authority to execute and deliver this Agreement and the
Warrant to purchase the shares of Common Stock to be issued
and sold to the Representative under the terms of the Warrant
Agreement (as hereinafter defined) in accordance with Section
6(p) of this Agreement (the "Representative's Warrant").
(h) This Agreement, the Warrant Agreement and the
Representative's Warrant have been duly authorized, executed
and delivered by the Company and constitute its valid and
binding obligations, enforceable against the Company in
accordance with their respective terms, except as rights to
indemnity and contribution hereunder or thereunder may be
limited by federal or state securities laws or principles of
public policy, and except as enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors'
rights generally or by general equitable principles. The
Merger Agreement has been duly authorized, executed and
delivered by the Company, Acquisition Corp. and Consortium
2000 and constitutes the valid and binding agreement of the
Company, Acquisition Corp. and
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<PAGE> 6
Consortium 2000 enforceable against each of them in accordance
with its terms, except as enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors'
rights generally. This Agreement, the Warrant Agreement, the
Representative's Warrant and the Merger Agreement conform to
the description thereof in the Prospectus.
(i) The execution, delivery and performance of this
Agreement, the Warrant Agreement and the Representative's
Warrant by the Company and the consummation of the Merger does
not and will not, with or without the giving of notice or the
lapse of time, or both, (A) conflict with any terms or
provisions of the Certificate of Incorporation or Bylaws of
the Company, its Subsidiaries or Consortium 2000, as amended
to the date hereof and the Closing Date or Option Closing
Date, as the case may be; (B) result in a breach of,
constitute a default under, result in the termination or
modification of or result in the creation or imposition of any
lien, security interest, charge or encumbrance upon any of the
properties of the Company, its Subsidiaries or Consortium 2000
pursuant to any indenture, mortgage, deed of trust, contract,
commitment or other agreement or instrument to which the
Company, its Subsidiaries or Consortium 2000 is a party or by
which any of their respective properties or assets are bound
or affected, the effect of which would have a material adverse
effect on the business or properties of the Company, its
Subsidiaries or Consortium 2000; (C) violate any law, rule,
regulation, judgment, order or decree of any government or
governmental agency, instrumentality or court, domestic or
foreign, having jurisdiction over the Company, its
Subsidiaries or Consortium 2000 or any of their respective
properties or businesses; or (D) result in a breach,
termination or lapse of the power and authority of the
Company, its Subsidiaries or Consortium 2000 to own or lease
and operate their respective properties and conduct its
business as described in the Prospectus, the effect of which
would have a material adverse effect on the business or
properties of the Company, its Subsidiaries or Consortium
2000.
(j) The Company has authorized and outstanding
capital stock and, as of the date or dates indicated the
Company had the capitalization, set forth under the caption
"Capitalization" in the Prospectus and will have the
as-adjusted capitalization set forth under the
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<PAGE> 7
caption "Capitalization" in the Prospectus. On the Effective
Date, the Closing Date and any Option Closing Date, there will
be no options or warrants for the purchase of, other
outstanding rights to purchase, agreements or obligations to
issue or agreements or other rights to convert or exchange any
obligation or security into, capital stock of the Company or
securities convertible into or exchangeable for capital stock
of the Company, except as described in the Prospectus.
(k) The authorized capital stock of the Company,
including, without limitation, the outstanding shares of
Common Stock and the Shares being issued on the Closing Date
and Option Closing Date (if any and to the extent applicable),
conforms to the descriptions thereof in the Prospectus, and
such descriptions conform to the descriptions thereof set
forth in the instruments defining the same. The information in
the Prospectus insofar as it relates to outstanding options
that have been granted to employees, consultants and directors
and the Representative's Warrant, in each case as of the
Effective Date, the Closing Date and any Option Closing Date,
is true, correct and complete in all material respects. As of
the Closing Date, all of the outstanding capital stock or
other securities evidencing equity ownership of the
Subsidiaries will have been duly and validly authorized and
issued and will be fully paid and nonassessable and will be
owned, directly or indirectly, by the Company, free and clear
of any security interest, claim, lien or encumbrance; there
are no outstanding rights, warrants or options to acquire, or
instruments convertible into or exchangeable for, any shares
of capital stock or other equity interest in any Subsidiary.
(l) The outstanding shares of Common Stock (including
the Shares to be sold by the Selling Stockholders) have been
duly authorized and are validly issued, fully paid and
non-assessable. The Warrant Agreement and the Representative's
Warrant, as of the Closing Date, will have been duly
authorized and validly issued. The shares of Common Stock
issuable pursuant to the Representative's Warrant, when issued
in accordance with the respective terms thereof, will be duly
authorized, validly issued, fully paid and non-assessable.
None of such outstanding shares of Common Stock were, and none
of the Representative's Warrant or the shares of Common Stock
issuable upon exercise of the Representative's Warrant will
be, issued in violation of any preemptive rights of any
security
- 7 -
<PAGE> 8
holder of the Company. The Company has reserved a sufficient
number of shares of Common Stock for issuance pursuant to the
Representative's Warrant. The holders of the outstanding
shares of Common Stock are not, and will not be, subject to
personal liability solely by reason of being such holders, and
the holders of shares of Common Stock issuable pursuant to the
Representative's Warrant will not be subject to personal
liability solely by reason of being such holders. The offers
and sales of the outstanding shares of Common Stock were, and
the issuance of Common Stock upon exercise of the
Representative's Warrant will be, made in conformity with
applicable registration requirements or exemptions therefrom
under federal and applicable state securities laws.
(m) The issuance and sale of the Shares by the
Company have been duly authorized and, when the Shares have
been duly delivered against payment therefor as contemplated
by this Agreement, the Shares will be validly issued, fully
paid and non-assessable, and the holders thereof will not be
subject to personal liability solely by reason of being such
holders. None of the Shares will be issued in violation of any
preemptive rights of any security holder of the Company. The
certificates representing the Shares are in proper legal form
under, and conform to the requirements of the Minnesota
Business Corporation Act, as amended (the "MBCA"). Neither the
filing of the Registration Statement nor the offering or sale
of the Shares as contemplated by this Agreement gives any
security holder of the Company any rights, other than those
which have been waived, for or relating to the registration of
any shares of Common Stock or other security of the Company.
(n) No consent, approval, authorization, order,
registration, license or permit of any court, government,
governmental agency, instrumentality or other regulatory body
or official is required for the valid authorization, issuance,
sale and delivery by the Company of any of the Shares
(including the anticipated use of proceeds therefrom), or for
the execution, delivery or performance by the Company of this
Agreement or the Merger Agreement, except such as may be
required for the registration of the Shares under the Act, the
Regulations and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which consent, approval and
authorization have been obtained, and for compliance with the
applicable state securities
- 8 -
<PAGE> 9
or Blue Sky laws, or the Bylaws, rules and other
pronouncements of the National Association of Securities
Dealers, Inc. (the "NASD"). The Common Stock is registered
under Section 12(g) of the Exchange Act and all necessary
filings have been made to include the Shares in such
registration. Upon the effectiveness of the Registration
Statement, the Shares will be listed on the Nasdaq National
Market. The Company has taken no action designed, or likely,
to have the effect of terminating the registration of the
Common Stock under Section 12(g) of the Exchange Act, nor has
the Company received any notification that the SEC is
contemplating terminating such registration.
(o) The statements in the Registration Statement and
Prospectus, insofar as they are descriptions of or references
to contracts, agreements or other documents, are accurate in
all material respects and present or summarize fairly, the
information required to be disclosed under the Act and the
Regulations, and there are no contracts, agreements or other
documents required to be described or referred to in the
Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement under the Act or the
Regulations that have not been so described, referred to or
filed, as required.
(p) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, except as otherwise stated therein, there has not
been (A) any material adverse change (including, whether or
not insured against, any material loss or damage to any
assets), or development involving a prospective material
adverse change, in the general affairs, properties, assets,
management, condition (financial or otherwise), results of
operations, stockholders' equity, business or prospects of the
Company and the Subsidiaries or Consortium 2000, (B) any
transaction entered into by the Company or any Subsidiary that
is material to the Company and the Subsidiaries and not in the
ordinary course of business, (C) any dividend or distribution
of any kind declared, paid or made by the Company on its
capital stock, (D) any liabilities or obligations, direct or
indirect, incurred by the Company, any Subsidiary or
Consortium 2000 that are material to the Company and the
Subsidiaries or Consortium 2000, or (E) any material change in
the short-term debt or long-term debt of the Company, any
Subsidiary or Consortium 2000. The Company, the Subsidiaries
and Consortium 2000 do
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<PAGE> 10
not have any contingent liabilities or obligations that
are material and that are not disclosed in the
Prospectus.
(q) The Company has not distributed and, prior to the
later to occur of the Closing Date, the Option Closing Date or
the completion of the distribution of the Shares, will not
distribute any offering material in connection with the
offering or sale of the Shares other than the Registration
Statement, each Preliminary Prospectus and the Prospectus, in
any such case only as permitted by the Act and the
Regulations.
(r) Each of the Company, the Subsidiaries and
Consortium 2000 has filed with the appropriate federal, state
and local governmental agencies, and all foreign countries and
political subdivisions thereof, all tax returns that are
required to be filed, or has duly obtained extensions of time
for the filing thereof and has paid all taxes shown on such
returns and all assessments received by it to the extent that
the same have become due. None of the Company, the
Subsidiaries or Consortium 2000 has executed or filed with any
taxing authority, foreign or domestic, any agreement extending
the period for assessment or collection of any income taxes or
is a party to any pending action or proceeding by any foreign
or domestic governmental agencies for the assessment or
collection of taxes, and no claims for assessment or
collection of taxes have been asserted against the Company,
the Subsidiaries or Consortium 2000 that might materially
adversely affect the general affairs, properties, assets,
condition (financial or otherwise), results of operations,
stockholders' equity, business or prospects of the Company and
the Subsidiaries or Consortium 2000.
(s) BDO Seidman, LLP, which is certifying the
financial statements and supporting schedules included in the
Prospectus and forming a part of the Registration Statement,
is a firm of independent public accountants as required by the
Act and the Regulations.
(t) None of the Company, the Subsidiaries or
Consortium 2000 is in violation of, or in default under, any
of the terms or provisions, of (A) its Certificate of
Incorporation or Bylaws, each as amended to the date hereof,
the Closing Date or the Option Closing Date, as the case may
be, (B) any indenture, mortgage, deed of trust, contract, loan
or credit agreement, commitment or other agreement or
instrument
- 10 -
<PAGE> 11
to which the Company, the Subsidiaries or Consortium 2000 is a
party or by which any of them or any of their properties are
bound or affected, (C) any law, rule, regulation, judgment,
order or decree of any government or governmental agency,
instrumentality or court, domestic or foreign, having
jurisdiction over the Company, the Subsidiaries or Consortium
2000 or any of their properties or businesses, including
without limitation any federal, state or foreign law relating
to the telecommunications business or (D) any license, permit,
certification, registration, approval, consent or franchise
referred to in subsections (f) or (n) of this Section 1,
except where such violation or default would not have a
material adverse effect on the business or properties of the
Company and the Subsidiaries or Consortium 2000.
(u) There are no claims, actions, suits, proceedings,
arbitrations, investigations or inquiries pending before or,
to the Company's knowledge, threatened or contemplated by, any
governmental agency, instrumentality, court or tribunal,
domestic or foreign, or before any private arbitrational
tribunal, relating to or affecting the Company, the
Subsidiaries or Consortium 2000 or their properties or
businesses that might affect the issuance or validity of any
of the Shares or the validity of any of the outstanding shares
of Common Stock, or that, if determined adversely to the
Company, the Subsidiaries or Consortium 2000, respectively,
would, individually or in the aggregate, result in any
material adverse change in the general affairs, properties,
assets, condition (financial or otherwise), results of
operations, stockholders' equity, business or prospects, of
the Company and the Subsidiaries or Consortium 2000; nor, to
the Company's knowledge, is there any reasonable basis for any
such claim, action, suit, proceeding, arbitration,
investigation or inquiry; all pending legal or governmental
proceedings to which the Company, any Subsidiary or Consortium
2000 is a party or of which any of their property is the
subject which are not described in the Registration Statement
and the Prospectus, including ordinary routine litigation
incidental to the business, are, considered in the aggregate,
not material. There are no outstanding orders, judgments or
decrees of any court, governmental agency, instrumentality or
other tribunal enjoining the Company, the Subsidiaries or
Consortium 2000 from, or requiring the Company, the
Subsidiaries or Consortium 2000 to take or refrain from taking
any action, or to
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<PAGE> 12
which the Company, the Subsidiaries or Consortium 2000, or any
of their properties, assets or businesses is bound or subject.
(v) Except as otherwise stated in the Prospectus, the
Company, the Subsidiaries and Consortium 2000 own, or possess
adequate rights to use all patents, patent applications,
trademarks, trademark registrations, applications for
trademark registration, trade names, service marks, licenses,
inventions, copyrights, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or
confidential technology, information, systems, design
methodologies and devices or procedures developed or derived
from the Company's, the Subsidiaries' or Consortium 2000's
businesses), trade secrets, confidential information,
processes and formulations necessary for, used in or proposed
to be used in the conduct of their businesses as described in
the Prospectus (collectively, the "Intellectual Property")
that, if not so owned or possessed, would materially adversely
affect the general affairs, properties, condition (financial
or otherwise), results of operations, stockholders' equity,
business or prospects of the Company and the Subsidiaries or
Consortium 2000. None of the Company, the Subsidiaries or
Consortium 2000 has infringed, is infringing or has received
any notice of conflict with the asserted rights of others with
respect to the Intellectual Property, and, to the Company's
knowledge, no others have infringed upon or are in conflict
with the Intellectual Property.
(w) The Company, the Subsidiaries and Consortium 2000
have obtained all permits, licenses and other authorizations
that are required under all environmental laws (collectively,
the "Environmental Laws"), other than any permits, licenses or
other authorizations which, if not obtained, would not have a
material adverse effect on the business or properties of the
Company and the Subsidiaries or Consortium 2000. Each of the
Company, the Subsidiaries and Consortium 2000 is in compliance
with all terms and conditions of any required permits,
licenses and authorizations, and is in compliance with all
other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and
timetables contained in the Environmental Laws, except where
the failure to so comply would not have a material adverse
effect on the Company and the Subsidiaries or Consortium 2000.
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<PAGE> 13
(x) There are no present or past events, conditions,
circumstances, activities, practices, incidents, actions or
plans relating to the business as currently being conducted by
the Company, the Subsidiaries and Consortium 2000 that
interfere with or prevent compliance with or continued
compliance with the Environmental Laws, the non-compliance
with which would have a material adverse effect on the Company
and the Subsidiaries or Consortium 2000, or which would be
reasonably likely to give rise to any material legal liability
(whether statutory or common law) or otherwise would be
reasonably likely to form the basis of any claim, action,
demand, suit, proceeding, hearing, notice of violation, study,
investigation, remediation, or clean up based on or related to
the generation, manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling, or the
emission, discharge, release into the workplace, community or
environment of any pollutant, contaminant, chemical or
industrial, toxic, or hazardous substance or waste, which
claim, action, demand, suit, proceeding, hearing, notice of
violation, study, investigation, remediation, or clean up
would have a material adverse effect on the Company and the
Subsidiaries or Consortium 2000.
(y) Each of the Company, the Subsidiaries and
Consortium 2000 has good and marketable title in fee simple to
all real property, interests in real property and personal
property (tangible and intangible) described in the Prospectus
as being owned by it, in each case, free and clear of all
liens, security interests, charges or encumbrances, except
such as are described in the Prospectus or which do not
materially affect the aggregate value of such property and
interests taken as a whole and do not interfere with the use
made and proposed to be made of such property and interests by
the Company, any of its Subsidiaries or Consortium 2000. Each
of the Company, the Subsidiaries and Consortium 2000 has
adequately insured the property of the Company, the
Subsidiaries and Consortium 2000, respectively, against loss
or damage by fire or other casualty and maintains, in adequate
amounts, insurance against such other risks as management of
the Company deems appropriate. Except as described in the
Prospectus, none of the Company, the Subsidiaries or
Consortium 2000 owns any real property, and all real property
used or leased by the Company, the Subsidiaries and Consortium
2000, as described in the Prospectus (collectively, the
"Premises"), is held
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<PAGE> 14
by the Company, the Subsidiaries or Consortium 2000, as
applicable, under a valid, subsisting and enforceable lease,
and except as enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights
generally or by general equitable principles. The Premises,
and all operations conducted thereon, are now and, since the
Company, the Subsidiaries or Consortium 2000, as applicable,
began to use such Premises, always have been and, to the
Company's knowledge, prior to when the Company, the
Subsidiaries or Consortium 2000, as applicable, began to use
such Premises, always had been, in compliance with the
Environmental Laws. There is no, and the Company, the
Subsidiaries and Consortium 2000 have not received notice of
any, claim, demand, investigation, regulatory action, suit or
other action instituted or threatened against any of them or
the Premises relating to any of the Environmental Laws. None
of the Company, the Subsidiaries or Consortium 2000 has
received any notice of material violation, citation,
complaint, order, directive, request for information or
response thereto, notice letter, demand letter or compliance
schedule to or from any governmental or regulatory agency
arising out of or in connection with hazardous substances (as
defined by applicable Environmental Laws) on, about, beneath,
arising from, or generated at the Premises.
(z) The Company, the Subsidiaries and Consortium 2000
each maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (A)
transactions are executed in accordance with management's
general or specific authorization, (B) transactions are
recorded as necessary in order to permit preparation of
financial statements in accordance with generally accepted
accounting principles and to maintain accountability for
assets, (C) access to assets is permitted only in accordance
with management's general or specific authorization and (D)
the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(aa) No unregistered securities of the Company have
been sold by the Company or on behalf of the Company by any
person or persons controlling, controlled by or under common
control with the Company within the three years prior to the
date hereof, except as disclosed in the Registration
Statement.
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<PAGE> 15
(ab) Each contract or other instrument (however
characterized or described) to which the Company, the
Subsidiaries or Consortium 2000 is a party or by which any of
the properties or business of it or them is bound or affected
and to which reference has been made in the Prospectus or
which has been filed as an exhibit to the Registration
Statement has been duly and validly executed by the Company,
the Subsidiaries or Consortium 2000, as applicable, and by the
other parties thereto. Except as described in the Prospectus,
each such contract or other instrument is in full force and
effect and is enforceable against the parties thereto in
accordance with its terms, and except as enforcement may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable
principles, and none of the Company, the Subsidiaries,
Consortium 2000 or any other party is in default thereunder
and no event has occurred that, with the lapse of time or the
giving of notice, or both, would constitute a default
thereunder.
(ac) Except as disclosed in the prospectus, and
except for the Company's 401(k) plan, none of the Company, the
Subsidiaries or Consortium 2000 has any employee benefit plan,
profit sharing plan, employee pension benefit plan or employee
welfare benefit plan or deferred compensation arrangements
(collectively, "Plans") that is subject to the provisions of
the Employee Retirement Income Security Act of 1974, as
amended, or the rules and regulations thereunder ("ERISA"). To
the Company's knowledge, all Plans that are subject to ERISA
are, and have been at all times since their establishment, in
compliance with ERISA and, to the extent required by the
Internal Revenue Code of 1986, as amended (the "Code"), in
compliance with the Code. To the Company's knowledge, none of
the Company, the Subsidiaries or Consortium 2000 has had any
employee pension benefit plan that is subject to Part 3 of
Subtitle B of Title 1 of ERISA or any defined benefit plan or
multiemployer plan. To the Company's knowledge, none of the
Company, the Subsidiaries or Consortium 2000 has maintained
retiree life and retiree life and retiree health insurance
plans that are employee welfare benefit plans providing for
continuing benefit or coverage for any employee or any
beneficiary of any employee after such employee's termination
of employment, except as required by Section 4980B of the
Code. To the Company's knowledge, no fiduciary or other party
in interest with respect to any of the
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<PAGE> 16
Plans has caused any of such Plans to engage in a "prohibited
action" as defined in Section 406 of ERISA. As used in this
subsection, the terms "defined benefit plan," "employee
benefit plan," "employee pension benefit plan," "employee
welfare benefit plan," "fiduciary" and "multiemployer plan"
shall have the respective meanings assigned to such terms in
Section 3 of ERISA.
(ad) To the best knowledge of the Company, none of
the Company, the Subsidiaries or Consortium 2000 is engaged in
any unfair labor practice which would have a material adverse
effect on the Company and its Subsidiaries considered as one
enterprise or Consortium 2000. Except for matters which are
not material in the aggregate to the Company and its
Subsidiaries or Consortium 2000, (A) there is (x) no unfair
labor practice complaint pending or, to the best of their
knowledge, threatened against the Company, any of its
Subsidiaries or Consortium 2000, respectively, before the
National Labor Relations Board, and no grievance or
arbitration proceeding arising out of or under collective
bargaining agreements is pending or, to the best of their
knowledge, threatened, (y) no strike, labor dispute, slowdown
or stoppage pending or, to the best knowledge of the Company
after due inquiry, threatened against the Company, any of its
Subsidiaries or Consortium 2000, respectively, and (z) no
union representation question existing with respect to the
employees of the Company, any of its Subsidiaries or
Consortium 2000, respectively, and, to the best knowledge of
the management of the Company, no union organizing activities
are taking place and (B) there has been no violation of any
federal, state or local law relating to discrimination in the
hiring, promotion or pay of employees, of any applicable wage
or hour laws, nor any provisions of ERISA or the rules and
regulations promulgated thereunder.
(ae) Except for certain compensation to be paid to
the Representative, the Company has not incurred any liability
for any finder's fees or similar payments in connection with
the transactions contemplated herein.
(af) Except as disclosed in the Prospectus, there are
no business relationships or related party transactions
required to be disclosed therein by Item 404 of Regulation S-B
of the Regulations.
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<PAGE> 17
(ag) The Company is familiar with the Investment
Company Act of 1940, as amended (the "1940 Act"), and the
rules and regulations thereunder, and has in the past
conducted, and intends in the future to continue to conduct,
its affairs in such a manner to ensure that it will not become
an "investment company" within the meaning of the 1940 Act and
such rules and regulations.
(ah) None of the Company, the Subsidiaries or
Consortium 2000 or any director, officer, agent, employee or
other person associated with or acting on behalf of the
Company, the Subsidiaries or Consortium 2000 has, directly or
indirectly, (A) used any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses
relating to any political activity, (B) made any unlawful
payment to foreign or domestic governments or governmental
officials or employees or to foreign or domestic political
parties or campaigns from corporate funds, (C) violated any
provision of the Foreign Corrupt Practices Act of 1977, as
amended, or (D) made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment.
(ai) The Company, its Subsidiaries and Consortium
2000 have all governmental licenses, certificates, permits,
authorizations, approvals, franchises or other rights
necessary to carry on their business as such business is
presently conducted by them. The Company does not have any
reason to believe that any governmental body or agency is
considering limiting, suspending or revoking any such license,
certificate, permit, authorization, approval, franchise or
right in any material respect. The Company does not have any
reason to believe that any such license, permit or approval
necessary in the future to conduct the business of the
Company, its Subsidiaries and Consortium 2000 as described in
the Prospectus will not be granted upon application, or that
any governmental agencies are investigating the Company, any
of its Subsidiaries and Consortium 2000 other than in ordinary
course administrative reviews or an ordinary course review of
the transactions contemplated hereby.
(aj) The Directors' and Officers' Questionnaires
delivered by the Company to the Representatives on or prior to
the Execution Time are true and correct in all material
respects.
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<PAGE> 18
(ak) There are no outstanding loans, advances (except
normal advances for business expenses in the ordinary course
of business) or guarantees of indebtedness by the Company to
or for the benefit of any of the officers or directors of the
Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the
Prospectus.
(al) Except as set forth in the Registration
Statement and Prospectus, the Company has not consummated the
acquisition or disposition of any business or property which
is "significant" to the Company within the meaning of
Regulation S-X under the Act, and no such acquisition or
disposition is probable.
(am) Each of the Company and the Subsidiaries has
filed with the applicable foreign and domestic regulatory
authorities each and every statement, report, information or
form required by any applicable law, regulation or order and
all such filings or admissions were in compliance with
applicable laws when filed, and no deficiencies have been
asserted by any regulatory commission, agency or authority
with respect to such filings or submissions. Except as
disclosed in the Registration Statement and the Prospectus,
there is not pending any change under any federal, state or
foreign law, regulation, license or permit that would have a
material adverse effect on the business, properties, business
prospects, financial condition or results of operations of the
Company and its Subsidiaries, taken as a whole. None of the
Company or the Subsidiaries has received any notice of, or, to
the knowledge of the Company, been threatened with or is under
investigation with respect to, a violation or a possible
violation of any provision of any federal, state or foreign
law, regulation or order.
(an) To the extent necessary to comply with the
regulation of telecommunications carriers, the Company and the
Subsidiaries have all necessary material consents,
authorizations, approvals, orders, certificates and permits of
and from, and have made all declarations and filings with, all
United States federal and state and foreign authorities to
own, lease, license and use its properties and assets and to
conduct its business in the manner described in the
Prospectus, except as described in the Prospectus, and all
material agreements or arrangements of the Company
- 18 -
<PAGE> 19
comply with all applicable United States federal and
state and foreign laws.
(ao) Solely with respect to matters specifically
relating to the regulation of telecommunications carriers
administered by United States federal or state or foreign
governmental authorities, including, and limited to, the
Federal Communications Commission (the "FCC") and state public
utility commissions or similar state authorities
(collectively, "PUCs" and, individually, a "PUC"), the
execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement and
the Merger Agreement will not contravene any provision of
applicable law or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over
the Company or any subsidiary, and no consent, approval,
authorization or order of, or qualification with, any
governmental body or agency is required for the performance by
the Company of its obligations under this Agreement.
Any certificate signed by any officer of the Company in such
capacity and delivered to the Representative or to counsel for the Underwriters
pursuant to this Agreement shall be deemed a representation and warranty by the
Company to the several Underwriters as to the matters covered thereby.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. The
Selling Stockholders severally represent and warrant to each Underwriter that:
(a) Such Selling Stockholder is the lawful owner of
the Shares to be sold by such Selling Stockholder pursuant to
this Agreement and has, and on the Closing Date (and Option
Closing Date, if applicable) will have, good and clear title
to such Shares, free of all restrictions on transfer, liens,
encumbrances, security interests and claims whatsoever.
(b) Upon delivery of and payment for such Shares
pursuant to this Agreement, good and clear title to such
Shares will pass to the Underwriters, free of all restrictions
on transfer, liens, encumbrances, security interests and
claims whatsoever.
(c) Certificates in negotiable form for such Selling
Stockholder's Shares have been placed in custody for delivery
pursuant to the terms of this Agreement, under a Custody
Agreement duly authorized,
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<PAGE> 20
executed and delivered by such Selling Stockholder in the form
heretofore furnished to you (the "Custody Agreement") with ,
as Custodian (the "Custodian"); the Shares represented by the
certificates so held in custody for such Selling Stockholder
are subject to the interests hereunder of the Underwriters,
the Company and the other Selling Stockholder; the
arrangements for custody and delivery of such certificates
made by such Selling Stockholder hereunder and under the
Custody Agreement, are not subject to termination by any acts
of such Selling Stockholder, or by operation of law, whether
by the death or incapacity of such Selling Stockholder or the
occurrence of any other event; and if any such death,
incapacity or any other such event shall occur before the
delivery of such Shares hereunder, certificates for the Shares
will be delivered by the Custodian in accordance with the
terms and conditions of this Agreement and the Custody
Agreement as if such death, incapacity or other event had not
occurred, regardless of whether or not the Custodian shall
have received notice of such death, incapacity or other event.
(d) Such Selling Stockholder has, and on the Closing
Date will have, full legal right, power and authority to enter
into this Agreement and the Custody Agreement and to sell,
assign, transfer and deliver such Shares in the manner
provided herein and therein, and this Agreement and the
Custody Agreement have been duly authorized, executed and
delivered by or on behalf of such Selling Stockholder and each
of this Agreement and the Custody Agreement is a valid and
binding agreement of such Selling Stockholder enforceable in
accordance with its terms, except as rights to indemnity and
contribution hereunder may be limited by applicable law.
(e) Such Selling Stockholder has not taken, and will
not take, directly or indirectly, any action designed to, or
which might reasonably be expected to, cause or result in
stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares
pursuant to the distribution contemplated by this Agreement,
and other than as permitted by the Act, such Selling
Stockholder has not distributed and will not distribute any
prospectus or other offering material in connection with the
offering and sale of the Shares.
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<PAGE> 21
(f) The execution, delivery and performance of this
Agreement by such Selling Stockholder, compliance by such
Selling Stockholder with all the provisions hereof and the
consummation of the transactions contemplated hereby will not
require any consent, approval, authorization or other order of
any court, regulatory body, administrative agency or other
governmental body (except as such may be under the Act, state
securities laws or Blue Sky laws) and will not conflict with
or constitute a breach of any of the terms or provisions of
agreement, indenture or other instrument to which such Selling
Stockholder is a party or by which such Selling Stockholder or
property of such Selling Stockholder is bound, or violate or
conflict with any laws, administrative regulation or ruling or
court decree applicable to such Selling Stockholder or
property of such Selling Stockholder.
(g) Such parts of the Registration Statement under
the caption "Principal and Selling Stockholders" which
specifically relate to such Selling Stockholder do not, and
will not on the Closing Date (and any Option Closing Date, if
applicable), contain any untrue statement of a material fact
or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light
of circumstances under which they were made, not misleading.
(h) At any time during the period described in
paragraph 6(b) hereof, if there is any change in the
information referred to in paragraph 2(g) above, such Selling
Stockholder will immediately notify you of such change.
(i) Such Selling Stockholder is not aware, and has no
reason to believe, that any representation or warranty of the
Company set forth in Section 1 above is untrue or inaccurate
in any material respect.
3. PURCHASE AND SALE OF OFFERED SHARES. On the basis of the
representations, warranties, covenants and agreements herein contained, but
subject to the terms and conditions herein set forth, (i) the Company shall sell
2,000,000 Offered Shares; and (ii) the Selling Stockholders agree to sell
500,000 Offered Shares to the several Underwriters at the Offering Price less
the underwriting discount shown on the cover page of the Prospectus (the
"Underwriting Discount"), and the Underwriters, severally and not jointly, shall
purchase from the Company and the Selling Stockholders, on a firm commitment
basis, at the Offering Price
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<PAGE> 22
less the Underwriting Discount, the respective Offered Shares set forth opposite
their names on Schedule II hereto. In making this Agreement, each Underwriter is
contracting severally, and not jointly, and, except as provided in Sections 5
and 12 hereof, the agreement of each Underwriter is to purchase only that number
of Offered Shares specified with respect to that Underwriter in Schedule II
hereto. The Underwriters shall offer the Offered Shares to the public as set
forth in the Prospectus.
4. PAYMENT AND DELIVERY. Payment for the Offered Shares shall be made
to the Company and the Selling Stockholders by certified or official bank check
payable to the order of the Company and the Selling Stockholders in next day
funds, at the offices of Freshman, Marantz, Orlanski, Cooper & Klein, Beverly
Hills, California, or at such other location as shall be agreed upon by the
Company and the Representative, or in immediately available funds wired to such
account or accounts as the Company and the Selling Stockholders may specify
(with all costs and expenses incurred by the Underwriters in connection with
such settlement (including, but not limited to, interest or cost of funds
expenses) to be borne by the Company and the Selling Stockholders), against
delivery of the Offered Shares to the Representative at such place as you shall
designate, for the respective accounts of the Underwriters. Such payments and
delivery will be made at 7:00 a.m., Pacific time, on the fourth business day
after the date of this Agreement or at such other time and date thereafter as
the Representative and the Company shall agree upon. Such time and date are
referred to herein as the "Closing Date." The certificates representing the
Offered Shares to be sold and delivered will be in such denominations and
registered in such names as the Representative requests not less than two full
business days prior to the Closing Date, and will be made available to the
Representative for inspection, checking and packaging at the office of the
Company's Transfer Agent, on the business day prior to the Closing Date. The
Representative has advised the Company that each Underwriter has authorized the
Representative to accept delivery of the Offered Shares and to make payment and
receipt therefor.
5. OPTION TO PURCHASE OPTIONAL SHARES.
(a) For the purposes of covering any over-allotments in
connection with the distribution and sale of the Offered Shares as
contemplated by the Prospectus, subject to the terms and conditions
herein set forth, the several Underwriters are hereby granted an option
by the Company to purchase all or any part of the Optional Shares from
the Company and the Selling Stockholders (the "Over-allotment Option").
The purchase price per share to be paid for the Optional Shares shall
be the Offering Price less the
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<PAGE> 23
Underwriting Discount. The Over-allotment Option granted hereby may be
exercised by the Representative on behalf of the several Underwriters
as to all or any part of the Optional Shares at any time (but not more
than once) within 45 days after the Effective Date. No Underwriter
shall be under any obligation to purchase any Optional Shares prior to
an exercise of the Over-allotment Option.
(b) The Over-allotment Option granted hereby may be exercised
by the Representative on behalf of the several Underwriters by giving
notice to the Company by a letter sent by registered or certified mail,
postage prepaid, telex, telegraph, telegram or facsimile (such notice
to be effective when sent), addressed as provided in Section 14 hereof,
setting forth the number of Optional Shares to be purchased, the date
and time for delivery of and payment for the Optional Shares and
stating that the Optional Shares referred to therein are to be used for
the purpose of covering over-allotments in connection with the
distribution and sale of the Offered Shares. If such notice is given
prior to the Closing Date, the date set forth therein for such delivery
and payment shall not be earlier than either two full business days
thereafter or the Closing Date, whichever occurs later. If such notice
is given on or after the Closing Date, the date set forth therein for
such delivery and payment shall be a date selected by the
Representative that is not later than three full business days after
the exercise of the Over-allotment Option. The date and time set forth
in such a notice is referred to herein as the "Option Closing Date,"
and a closing held pursuant to such a notice is referred to herein as
the "Option Closing." The number of Optional Shares to be sold to each
Underwriter pursuant to the exercise of the Over- allotment Option
shall be the number that bears the same ratio to the aggregate number
of Optional Shares being purchased through such Over-allotment Option
exercise as the number of Offered Shares opposite the name of such
Underwriter in Schedule II hereto bears to the total number of all
Offered Shares; subject, however, to such adjustment as the
Representative may approve to eliminate fractional shares and subject
to the provisions for the allocation of Optional Shares purchased for
the purpose of covering over-allotments set forth in Section 10 of the
Agreement Among Underwriters. Upon the exercise of the Over-allotment
Option, the Company shall become obligated to sell to the
Representative for the respective accounts of the Underwriters, and on
the basis of the representations, warranties, covenants and agreements
herein contained, but subject to the terms and conditions herein set
forth, and the several Underwriters shall become severally, but not
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<PAGE> 24
jointly, obligated to purchase from the Company, the number of Optional
Shares specified in each notice of exercise of the Over-allotment
Option.
(c) Payment for the Optional Shares shall be made to the
Company and the Selling Stockholders by certified or official bank
check payable to the order of the Company in next day funds, at the
office of Freshman, Marantz, Orlanski, Cooper & Klein, Beverly Hills,
California, or such other location as shall be agreed upon by the
Company and the Representative, or in immediately available funds wired
to such accounts as the Company and the Selling Stockholders may
specify (with all costs and expenses incurred by the Underwriters in
connection with such settlement in immediately available funds
(including, but not limited to, interest or cost of funds expenses) to
be borne by the Company and the Selling Stockholders), against delivery
of the Optional Shares to the Representative at such place as you shall
designate, for the respective accounts of the Underwriters. The
certificates representing the Optional Shares to be issued and
delivered will be in such denominations and registered in such names as
the Representative requests not less than two full business days prior
to the Option Closing Date, and will be made available to the
Representative for inspection, checking and packaging at the office of
the Company's Transfer Agent on the business day prior to the Option
Closing Date.
6. CERTAIN COVENANTS AND AGREEMENTS OF THE COMPANY. The Company
covenants and agrees with the several Underwriters as follows:
(a) If Rule 430A of the Regulations is employed, the Company
will timely file the Prospectus pursuant to and in compliance with Rule
424(b) of the Regulations and will advise the Representative of the
time and manner of such filing.
(b) The Company will not at any time, whether before or after
the Registration Statement shall have become effective, during such
period as, in the opinion of counsel for the Underwriters, the
Prospectus is required by law to be delivered in connection with sales
by the Underwriters or a dealer, file or publish any amendment or
supplement to the Registration Statement or Prospectus of which the
Representative have not been previously advised and furnished a copy,
or which is not in compliance with the Regulations, or, during the
period before the distribution of the Offered Shares and the Optional
Shares is completed, file or publish any amendment or supplement to the
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<PAGE> 25
Registration Statement or Prospectus to which the Representative
reasonably objects in writing.
(c) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time and date that this
Agreement is executed and delivered by the parties hereto, to become
effective and will advise the Representative immediately, and confirm
such advice in writing, (i) when the Registration Statement, or any
post-effective amendment to the Registration Statement, is filed with
the SEC, (ii) of the receipt of any comments from the SEC, (iii) when
the Registration Statement has become effective and when any
post-effective amendment thereto becomes effective, or when any
supplement to the Prospectus or any amended Prospectus has been filed,
(iv) of any request of the SEC for amendment or supplementation of the
Registration Statement or Prospectus or for additional information, (v)
during the period when the Prospectus is required to be delivered under
the Act and Regulations, of the happening of any event which in the
Company's judgment makes any material statement in the Registration
Statement or the Prospectus untrue or which requires any changes to be
made in the Registration Statement or Prospectus in order to make any
material statements therein not misleading and (vi) of the issuance by
the SEC of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use
of any Preliminary Prospectus or the Prospectus, the suspension of the
qualification of any of the Shares for offering or sale in any
jurisdiction in which the Underwriters intend to make such offers or
sales, or of the initiation or threatening of any proceedings for any
such purposes. The Company will use its best efforts to prevent the
issuance of any such stop order or of any order preventing or
suspending such use and, if any such order is issued, to obtain as soon
as possible the lifting thereof.
(d) The Company has delivered to the Representative, without
charge, and will continue to deliver from time to time until the
Effective Date, as many copies of each Preliminary Prospectus as the
Representative may reasonably request. The Company will deliver to the
Representative, without charge, as soon as possible after the Effective
Date, and thereafter from time to time during the period when delivery
of the Prospectus is required under the Act, such number of copies of
the Prospectus (as supplemented or amended, if the Company makes any
supplements or amendments to the Prospectus) as the Representative may
reasonably request. The Company hereby consents to the use of such
copies of each Preliminary Prospectus and the Prospectus for
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<PAGE> 26
purposes permitted by the Act, the Regulations and the securities or
Blue Sky laws of the jurisdictions in which the Shares are offered or
sold by the several Underwriters and by all dealers to whom Shares may
be offered or sold, both in connection with the offering and sale of
the Shares and for such period of time thereafter as the Prospectus is
required by the Act to be delivered in connection with sales by any
Underwriter or dealer. The Company has furnished or will furnish to the
Representative two signed copies of the Registration Statement as
originally filed and of all amendments thereto, whether filed before or
after the Effective Date, two copies of all exhibits filed therewith
and two signed copies of all consents and certificates of experts, and
will deliver to the Representative such number of conformed copies of
the Registration Statement, including financial statements and
exhibits, and all amendments thereto, as the Representative may
reasonably request.
(e) The Company will comply with the Act, the Regulations, the
Exchange Act and the rules and regulations thereunder so as to permit
the continuance of offers and sales of, and dealings in, the Shares for
as long as may be necessary to complete the distribution of the Shares
as contemplated hereby.
(f) The Company will furnish such information as may be
required and otherwise cooperate in the registration or qualification
of the Shares, or exemption therefrom, for offering and sale by the
several Underwriters and by dealers under the securities or Blue Sky
laws of such jurisdictions in which the Representative determines to
offer the Shares, after consultation with the Company, and will file
such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification;
provided, however, that no such qualification shall be required in any
jurisdiction where, solely as a result thereof, the Company would be
subject to taxation or qualification as a foreign corporation doing
business in such jurisdiction where it is not now so qualified or to
take any action which would subject it to service of process in suits,
other than those arising out of the offering or sale of the Shares, in
any jurisdiction where it is not now so subject. The Company will, from
time to time, prepare and file such statements and reports as are or
may be required to continue such qualification in effect for so long a
period as is required under the laws of such jurisdiction for such
offering and sale.
(g) Subject to subsection (b) of this Section 6, in case of
any event, at any time within the period during
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<PAGE> 27
which, in the opinion of counsel for the Underwriters, a prospectus is
required to be delivered under the Act and Regulations, as a result of
which event any Preliminary Prospectus or the Prospectus, as then
amended or supplemented, would contain, in the judgment of the Company
or in the opinion of counsel for the Underwriters, an untrue statement
of a material fact, or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances
under which they were made, not misleading, or, if it is necessary at
any time to amend any Preliminary Prospectus or the Prospectus to
comply with the Act and Regulations or any applicable securities or
Blue Sky laws, the Company promptly will prepare and file with the SEC,
and any applicable state securities commission, an amendment or
supplement that will correct such statement or omission or an amendment
that will effect such compliance and will furnish to the Representative
such number of copies of such amendment or amendments or supplement or
supplements to such Preliminary Prospectus or the Prospectus (in form
and substance satisfactory to the Representative and counsel for
Underwriters) as the Representative may reasonably request. For
purposes of this subsection, the Company will furnish such information
to the Representative, the Underwriters' counsel and counsel for the
Company as shall be necessary to enable such persons to consult with
the Company with respect to the need to amend or supplement any
Preliminary Prospectus or the Prospectus, and shall furnish to the
Representative and the Underwriters' counsel such further information
as each may from time to time reasonably request. If the Company and
the Representative agree that any Preliminary Prospectus or the
Prospectus should be amended or supplemented, the Company, if requested
by the Representative, will, if and to the extent required by law,
promptly issue a press release announcing or disclosing the matters to
be covered by the proposed amendment or supplement.
(h) The Company will make generally available to its security
holders as soon as practicable and in any event not later than 45 days
after the end of the period covered thereby, an earnings statement of
the Company (which need not be audited unless required by the Act, the
Regulations, the Exchange Act or the rules or regulations thereunder)
that shall comply with Section 11(a) of the Act and cover a period of
at least 12 consecutive months beginning not later than the first day
of the Company's fiscal quarter next following the Effective Date.
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<PAGE> 28
(i) For a period of five years from the Effective Date, the
Company will deliver to the Representative: (A) a copy of each report
or document, including, without limitation, reports on Forms 8-K, 10-C,
10-K and 10-Q (or such similar forms as may be designated by the SEC),
registration statements and any exhibits thereto, filed with or
furnished to the SEC or any securities exchange or the NASD, as soon as
practicable after the date each such report or document is so filed or
furnished, (B) as soon as practicable, copies of any reports or
communications (financial or other) of the Company mailed to its
security holders and (C) every material press release in respect of the
Company or the Subsidiaries or their affairs that was released or
prepared by the Company or the Subsidiaries.
(j) During the course of the distribution of the Shares, the
Company has not taken, nor will it take, directly or indirectly, any
action designed to or that might, in the future, reasonably be expected
to cause or result in stabilization or manipulation of the price of the
Common Stock.
(k) The Company will cause each person listed on Schedule III
hereto to execute a legally binding and enforceable agreement (a
"lockup agreement") to, for the period commencing on the Effective Date
and ending 180 days after the Effective Date, not sell, offer to sell,
contract to sell, grant any option for the sale of or otherwise
transfer or dispose of any shares of Common Stock (except for the sale
of the Shares as contemplated by this Agreement), any options to
purchase Common Stock or any securities convertible into or
exchangeable for Common Stock without the prior written consent of the
Representative, which lockup agreement shall be in form and substance
satisfactory to the Representative and the Underwriters' counsel, and
deliver such lockup agreement to the Representative prior to the
Effective Date. Appropriate stop transfer instructions will be issued
by the Company to the transfer agent for the securities affected by the
lockup agreements.
(l) The Company will not sell, issue, contract to sell, offer
to sell or otherwise dispose of any Common Stock, options to purchase
Common Stock or any other security convertible into or exchangeable for
Common Stock, from the date of the Effective Date through 180 days
after the Effective Date, without the prior written consent of the
Representative, except for the sale of the Shares as contemplated by
this Agreement, the granting of options, and the issuance of Common
Stock upon their exercise, under the
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<PAGE> 29
Company's stock option plans described in the Prospectus and the
issuance of the Representative's Warrant.
(m) The Company will use all reasonable efforts to maintain
the inclusion of the Common Stock on the Nasdaq National Market (or on
the a national securities exchange) for a period of five years after
the date hereof.
(n) The Company shall, at its sole cost and expense, supply
and deliver to the Representative and the Underwriters' counsel, within
a reasonable period after the Closing Date, six transaction binders,
each of which shall include the Registration Statement, as amended or
supplemented, all exhibits to the Registration Statement, each
Preliminary Prospectus, the Prospectus, the Preliminary Blue Sky
Memorandum and any supplement thereto and all underwriting and other
closing documents.
(o) The Company will use the net proceeds from the sale of the
Shares to be sold by it hereunder substantially in accordance with the
description thereof set forth in the Prospectus and shall file such
reports with the SEC with respect to the sale of such Shares and the
application of the proceeds therefrom as may be required in accordance
with Rule 463 under the Act.
(p) On the Closing Date, the Company shall sell to the
Representative, at a purchase price of $0.001 per warrant, a
Representative's Warrant to purchase 160,000 shares of Common Stock.
Such Representative's Warrant shall be issued pursuant to the terms of
the Warrant Agreement and shall have an exercise price per share equal
to $_____, shall be exercisable during the period beginning on the
first anniversary of the Effective Date and ending on the fifth
anniversary of the Effective Date, and shall contain customary
anti-dilution and registration rights provisions.
(q) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, An Act Relating to Disclosure of Doing Business with Cuba, and
the Company further agrees that if it commences engaging in business
with the government of Cuba or with any person or affiliate located in
Cuba after the date the Registration Statement becomes or has become
effective with the Securities and Exchange Commission or with the
Florida Department of Banking and Finance (the "Department"), whichever
date is later, or if the information reported in the Prospectus, if
any, concerning the Company's business with Cuba or with any person or
affiliate located in Cuba changes in any material
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<PAGE> 30
way, the Company will provide the Department notice of such business or
change, as appropriate, in a form acceptable to the Department.
(r) The Company will use its best efforts to do and perform
all things required to be done and performed by it prior to or after
the Closing Date and to satisfy all conditions precedent on its part to
the delivery of the Shares.
7. PAYMENT OF EXPENSES.
(a) Whether or not the transactions contemplated by this
Agreement are consummated and regardless of the reason this Agreement
is terminated, the Company will pay or cause to be paid, and bear or
cause to be borne, all costs and expenses incident to the performance
of the obligations of the Company under this Agreement, including: (i)
the fees and expenses of the accountants and counsel for the Company
incurred in the preparation of the Registration Statement and any
post-effective amendments thereto (including financial statements and
exhibits), each Preliminary Prospectus and the Prospectus and any
amendments or supplements thereto; (ii) printing and mailing expenses
associated with the Registration Statement and any post-effective
amendments thereto, each Preliminary Prospectus, the Prospectus
(including any supplement thereto), this Agreement, the Agreement Among
Underwriters, the Underwriters' Questionnaire, the Selected Dealer
Agreement and related documents and the Preliminary Blue Sky Memorandum
and any supplement thereto; (iii) the costs incident to the
authentication, issuance, delivery and transfer of the Shares to the
Underwriters; (iv) all taxes, if any, on the issuance, delivery and
transfer of the Shares to be sold by the Company; (v) the fees,
expenses and all other costs of qualifying the Shares for the sale
under the securities or Blue Sky laws of those jurisdictions in which
the Shares are to be offered or sold including the fees and
disbursements of Underwriters' counsel and such local counsel as may
have been reasonably required and retained for such purpose; (vi) the
fees, expenses and other costs of, or incident to, securing any review
or approvals by or from the NASD exclusive of fees of the Underwriters'
counsel; (vii) the filing fees of the SEC; (viii) the cost of
furnishing to the Underwriters copies of the Registration Statement,
each Preliminary Prospectus and the Prospectus (including any
supplement or amendment thereto) as herein provided; (ix) the Company's
travel expenses in connection with meetings with the brokerage
community and institutional investors and expenses associated with
hosting such
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<PAGE> 31
meetings, including meeting rooms, meals, facilities and ground
transportation expenses; (x) the costs and expenses associated with
settlement in same day funds (including, but not limited to, interest
or cost of funds expenses), if desired by the Company; (xi) the fees
for inclusion of the Shares on the Nasdaq National Market; (xii) the
cost of printing and engraving certificates for the Shares; (xiii) the
cost and charges of any transfer agent; and (xiv) all other costs and
expenses reasonably incident to the performance of its obligations
hereunder that are not otherwise specifically provided for in this
Section 7.
(b) The Company shall pay as due any registration,
qualification and filing fees and any accountable out-of-pocket
disbursements in connection with such registration, qualification or
filing in the jurisdictions in which the Representative determines,
after consultation with the Company, to offer or sell the Shares.
(c) In addition to the foregoing expenses, the Company shall
at the Closing Date pay to the Representative a non-accountable expense
allowance equal to three percent (3%) of the gross proceeds received
from the sale of the Offered Shares. In the event the Over-allotment
Option is exercised, the Company shall pay to the Representative at the
Option Closing Date an additional amount equal to three percent (3%) of
the gross proceeds received upon exercise of the Over-allotment Option.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligation of each
Underwriter to purchase and pay for the Offered Shares that it has agreed to
purchase hereunder on the Closing Date, and to purchase and pay for any Optional
Shares as to which its right to purchase under Section 5 has been exercised on
an Option Closing Date, is subject at the date hereof, the Closing Date and any
Option Closing Date to the continuing accuracy of the representations and
warranties of the Company and the Selling Stockholders set forth herein, to the
performance by the Company and the Selling Stockholders of its covenants,
agreements and obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 1:00 p.m., Pacific time, on the date of this Agreement, or
at such later time or on such later date as the Representative may
agree to in writing; if required by the Regulations, the Prospectus
shall have been filed with the SEC pursuant to Rule 424(b) of the
Regulations within the applicable time period prescribed for such
filing by the Regulations and in accordance with
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<PAGE> 32
subsection (a) of Section 6 hereof; on or prior to the Closing Date or
any Option Closing Date, as the case may be, no stop order or other
order preventing or suspending the effectiveness of the Registration
Statement or the sale of any of the Shares shall have been issued under
the act or any state securities law and no proceedings for that purpose
shall have been initiated or shall be pending or, to the
Representatives' knowledge or the knowledge of the Company, shall be
contemplated by the SEC or any authority in any jurisdiction designated
by the Representative pursuant to subsection (f) of Section 6 hereof
and any request on the part of the SEC for additional information shall
have been complied with to the reasonable satisfaction of counsel for
the Underwriters.
(b) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of Company,
dated the Closing Date, to the effect that the signers of such
certificate have carefully examined the Registration Statement, the
Prospectus, any supplement to the Prospectus and this Agreement and
that:
(i) the representations and warranties of the Company
in this Agreement are true and correct in all material
respects on and as of the Closing Date and the Option Closing
Date, if any, with the same effect as if made on the Closing
Date and the Option Closing Date, if any, and the Company has
complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or
prior to the Closing Date and the Option Closing Date, if any;
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings
for that purpose have been instituted or, to the Company's
knowledge, threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectus (exclusive of any
supplement thereto), there has been no material adverse change
in the condition (financial or other), earnings, business or
properties of the Company and its subsidiaries, whether or not
arising from transactions in the ordinary course of business,
except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
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<PAGE> 33
(c) The Selling Stockholders shall have furnished to the
Representatives a certificate, signed by the Selling Stockholders,
dated the Closing Date and the Option Closing Date, if any, to the
effect that the signer of such certificate has carefully examined the
Registration Statement, the Prospectus, any supplement to the
Prospectus and this Agreement and that the representations and
warranties of such Selling Stockholders in this Agreement are true and
correct in all material respects on and as of the Closing Date to the
same effect as if made on the Closing Date.
(d) All corporate proceedings and other matters incident to
the authorization, form and validity of this Agreement, the Warrant
Agreement, the Representative's Warrant and the Shares and the form of
the Registration Statement, each Preliminary Prospectus and the
Prospectus, and all other legal matters relating to this Agreement and
the transactions contemplated hereby, shall be satisfactory in all
respects to counsel to the Underwriters; the Company shall have
furnished to such counsel all documents and information that they may
reasonably request to enable them to pass upon such matters; and the
Representative shall have received from the Underwriters' counsel,
Milbank, Tweed, Hadley & McCloy, a customary opinion, dated as of the
Closing Date and any Option Closing Date, as the case may be, and
addressed to the Representative individually and as the Representative
of the several Underwriters.
(e) The NASD shall have indicated that it has no objection to
the underwriting arrangements pertaining to the sale of any of the
Shares.
(f) The Representative shall have received copies of the
lockup agreements described in subsection (k) of Section 6 signed by
those persons set forth on Schedule III hereto.
(g) The Representative shall have received at or prior to the
Closing Date from the Underwriters' counsel a memorandum or summary, in
form and substance satisfactory to the Representative, with respect to
the qualification for offering and sale by the Underwriters of the
Shares under the securities or Blue Sky laws of such jurisdictions
designated by the Representative pursuant to subsection (f) of Section
6 hereof.
(h) You shall have received on the Closing Date and on the
Option Closing Date, if any, an opinion from (i) Freshman, Marantz,
Orlanski, Cooper & Klein, counsel for the Company and the Selling
Stockholders, as to federal tax and
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<PAGE> 34
securities law and California law and (ii) Gray, Plant, Mooty, Mooty &
Bennett, counsel for the Company, as to Minnesota law, each dated the
Closing Date and the Option Closing Date, if any, and addressed to the
Underwriters and with reproduced copies or signed counterparts thereof
for each of the Underwriters, substantially in the form attached hereto
as "Exhibit A."
(i) You shall have received on the Closing Date and on the
Option Closing Date, if any, an opinion from communications regulatory
counsel for the Company, dated the Closing Date and the Option Closing
Date, if any, and addressed to Underwriters and with reproduced copies
or signed counterparts thereof for each of the Underwriters,
substantially in the form attached hereto as "Exhibit B."
(j) At the Closing Date and any Option Closing Date: (A) the
Registration Statement and any post-effective amendment thereto and the
Prospectus and any amendments or supplements thereto shall contain all
statements that are required to be stated therein in accordance with
the Act and the Regulations and shall conform, in all material
respects, to the requirements of the Act and the Regulations, and
neither the Registration Statement nor any post-effective amendment
thereto nor the Prospectus and any amendments or supplements thereto
shall contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they
were made, not misleading, (B) since the respective dates as of which
information is given in the Registration Statement and any
post-effective amendment thereto and the Prospectus and any amendments
or supplements thereto, except as otherwise stated therein, there shall
have been no material adverse change in the properties, condition
(financial or otherwise), results of operations, stockholders' equity,
business or management of the Company, from that set forth therein,
whether or not arising in the ordinary course of business, other than
as referred to in the Registration Statement or Prospectus; (C) since
the respective dates as of which information is given in the
Registration Statement and any post-effective amendment thereto and the
Prospectus or any amendment or supplement thereto, there shall have
been no transaction, contract or agreement entered into by the Company
or the Subsidiaries, other than in the ordinary course of business and
as set forth in the Registration Statement or Prospectus, that has not
been, but would be required to be, set forth in the Registration
Statement or Prospectus; (D) no action, suit or proceeding at law or in
equity shall be pending or, to the knowledge of the Company
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<PAGE> 35
or the Subsidiaries, threatened against the Company that would be
required to be set forth in Prospectus, other than as set forth
therein, and no proceedings shall be pending or, to the knowledge of
the Company, threatened against the Company or the Subsidiaries before
or by any federal, state or other commission, board or administrative
agency wherein an unfavorable decision, ruling or finding would
materially adversely affect the properties, condition (financial or
otherwise), results of operations, stockholders' equity or business of
the Company or the Subsidiaries, other than as set forth in the
Prospectus. The Representative shall have received at the Closing Date
and any Option Closing Date certificates of each of the Chief Executive
Officer and the Chief Financial Officer of the Company dated as of the
date of the Closing Date or Option Closing Date, as the case may be,
and addressed to the Representative to the effect that the conditions
set forth in this subsection have been satisfied and as to the accuracy
and performance, as of the Closing Date or the Option Closing Date, as
the case may be, of the agreements, representations and warranties of
the Company set forth herein.
(k) At the time this Agreement is executed and at the Closing
Date and any Option Closing Date, the Representative shall have
received a letter addressed to the Representative, individually and as
the Representative of the several Underwriters, and in form and
substance satisfactory to the Representative in all respects from BDO
Seidman, LLP, dated as of the date of this Agreement, the Closing Date
or Option Closing Date, as the case may be.
(l) The Company shall have executed and delivered an agreement
memorializing the Representative's Warrant in a form satisfactory to
the Representative (the "Warrant Agreement") and there shall have been
tendered to the Representative certificates representing all of the
Representative's Warrant described in subsection (p) of Section 6, to
be purchased by the Representative on the Closing Date.
(m) At the Closing Date and any Option Closing Date, the
Representative shall have been furnished such additional documents,
opinions and certificates, including documents, opinions and
certificates relating to the consummation of the Merger and the Merger
Agreement, as they shall reasonably request.
(n) No action shall have been taken by the NASD, the effect of
which is to make it improper, at any time prior to the Closing Date or
any Option Closing Date, for members of
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<PAGE> 36
the NASD to execute transactions as principal or as agent in the Shares
or to trade or deal in the Shares, and no proceedings for the purpose
of taking such action shall have been instituted or shall be pending
or, to the Company's or the Representatives' knowledge, shall be
contemplated by the NASD.
If any conditions to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date, shall not have been fulfilled, the
Representative may on behalf of the several Underwriters terminate this
Agreement or, if they so elect, waive any such conditions which have not been
fulfilled or extend the time for their fulfillment.
9. INDEMNIFICATION.
(a) The Company and the Selling Stockholders, jointly and
severally, agree to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), from and against any and all
losses, claims, damages, liabilities and judgments caused by any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto) or any preliminary prospectus, or caused by any
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages, liabilities
or judgments are caused by any such untrue statement or omission or
alleged untrue statement or omission which is based upon information
relating to any Underwriter furnished in writing to the Company by or
on behalf of any Underwriter through the Representative expressly for
use therein. Notwithstanding the foregoing, the liability of the
Selling Stockholders under this paragraph shall be limited to an amount
equal to the net proceeds of the Shares sold by the Selling
Stockholders to the Underwriters.
(b) In case any action shall be brought against any
Underwriter or any person controlling such Underwriter, based upon any
preliminary prospectus, the Registration Statement or the Prospectus or
any amendment or supplement thereto and with respect to which indemnity
may be sought against the Company and the Selling Stockholders, such
Underwriter shall promptly notify the parties against whom
indemnification is being sought (the "Indemnifying Parties")
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<PAGE> 37
in writing and the Indemnifying Parties shall assume the defense
thereof, including the employment of counsel reasonably satisfactory to
such indemnified party and payment of all fees and expenses. Any
Underwriter or any such controlling person shall have the right to
employ separate counsel in any such action and participate in the
defense thereof, but the fees and expenses of such counsel shall be at
the expense of such Underwriter or such controlling person unless (i)
the employment of such counsel has been specifically authorized in
writing by the Indemnifying Parties, (ii) the Indemnifying Parties
shall have failed to assume the defense and employ counsel or (iii) the
named parties to any such action (including any impleaded parties)
include both such Underwriter or such controlling person and the
Indemnifying Parties and such Underwriter or such controlling person
shall have been advised by such counsel that there may be one or more
legal defenses available to it which are different from or additional
to those available to the Indemnifying Parties (in which case the
Indemnifying Parties shall not have the right to assume the defense of
such action on behalf of such Underwriter or such controlling person,
it being understood, however, that the Indemnifying Parties shall not,
in connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the
same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (in addition to
any local counsel) for all such Underwriters and controlling persons,
which firm shall be designated in writing by the Representative and
that all such fees and expenses shall be reimbursed as they are
incurred). The Indemnifying Parties shall not be liable for any
settlement of any such action effected without their written consent.
If settled with such written consent, the Indemnifying Parties agree to
indemnify and hold harmless any Underwriter and any such controlling
person from and against any loss or liability by reason of such
settlement. Notwithstanding the immediately preceding sentence, if in
any case where the fees and expenses of counsel are at the expense of
the Indemnifying Parties and an indemnified party shall have requested
the Indemnifying Parties to reimburse the indemnified party for such
fees and expenses of counsel as incurred, the Indemnifying Parties
agree that they shall be liable for any settlement of any action
effected without its written consent if (i) such settlement is entered
into more than ten business days after the receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall
have failed to reimburse the indemnified party in accordance with such
request for reimbursement prior to the date of such settlement. No
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<PAGE> 38
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional
release of such indemnified party from all liability on claims that are
the subject matter of such proceeding.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers
who sign the Registration Statement, any person controlling the Company
within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, the Selling Stockholders and each person, if any,
controlling such Selling Stockholders within the meaning of Section 15
of the Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company and the Selling Stockholders to
each Underwriter but only with reference to information relating to
such Underwriter furnished in writing by or on behalf of such
Underwriter through you expressly for use in the Registration
Statement, the Prospectus or any preliminary prospectus. In case any
action shall be brought against the Company, any of its directors, any
such officer or any person controlling the Company or the Selling
Stockholders or any person controlling the Selling Stockholders based
on the Registration Statement, the Prospectus or any preliminary
prospectus and in respect of which indemnity may be sought against any
Underwriter, the Underwriter shall have the rights and duties given to
the Company and the Selling Stockholders by paragraph (b) above (except
that if any Seller shall have assumed the defense thereof, such
Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof but the fees and
expenses of such counsel shall be at the expense of such Underwriter),
and the Company, its directors, any such officers and any person
controlling the Company and the Selling Stockholders and any person
controlling the Selling Stockholders shall have the rights and duties
given to the Underwriter by Section 9(b) hereof.
(d) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party in respect of any losses, claims,
damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages, liabilities and
- 38 -
<PAGE> 39
judgments (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Stockholders
on the one hand and the Underwriters on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company and the
Selling Stockholders and the Underwriters in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or judgments, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the
Selling Stockholders and the Underwriters shall be deemed to be in the
same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling
Stockholders, and the total underwriting discounts and commissions
received by the Underwriters, bear to the total price to the public of
the Shares, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault of the Company and the Selling
Stockholders and the Underwriters shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission to state a material fact relates to
information supplied by the Company, the Selling Stockholders or the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
The Company and the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contribution pursuant
to this Section 9(d) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to
the limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of
this Section 9, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the
Shares underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages which such Underwriter has
otherwise been
- 39 -
<PAGE> 40
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 9(d) are several in proportion to
the respective number of Shares purchased by each of the Underwriters
hereunder and not joint.
10. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. Except as the
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements at the Closing Date and any Option Closing Date; and such
representations, warranties and agreements of the Underwriters and the Company,
including without limitation the indemnity and contribution agreements contained
in Section 9 hereof and the agreements contained in Sections 7, 10, 11 and 13
hereof, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any controlling person,
and shall survive delivery of the Shares and termination of this Agreement,
whether before or after the Closing Date or any Option Closing Date.
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF.
(a) This Agreement shall become effective immediately as to
Sections 7, 9, 10, 11 and 13 and, as to all other provisions, (i) if at
the time of execution and delivery of this Agreement the Registration
Statement has not become effective, at 6:30 a.m., Pacific time, on the
first business day following the Effective Date, or (ii) if at the time
of execution and delivery of this Agreement the Registration Statement
has been declared effective, at 6:30 a.m., Pacific time, on the date of
execution of this Agreement; but this Agreement shall nevertheless
become effective at such earlier time after the Registration Statement
becomes effective as the Representative may determine by notice to the
Company or by release of any of the Shares for sale to the public. For
the purposes of this Section 11, the Shares shall be deemed to have
been so released upon the release for publication of any newspaper
advertisement relating to the Shares or upon the release by the
Representative of telegrams (i) advising the Underwriters that the
shares are released for public offering or (ii) offering the Shares for
sale to securities dealers, whichever may occur first. The
Representative may prevent the provisions of this Agreement (other than
those contained in Sections 7, 9, 10, 11 and 13)
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<PAGE> 41
hereof from becoming effective without liability of any party to any
other party, except as noted below, by giving the notice indicated in
subsection (c) of this Section 10 before the time the other provisions
of this Agreement become effective.
(b) The Representative shall have the right to terminate this
Agreement at any time prior to the Closing Date as provided in Sections
8 and 12 hereof or if any of the following have occurred: (i) since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or
affecting the condition, financial or otherwise, of the Company, or the
earnings, business affairs, management or business prospects of the
Company, whether or not arising in the ordinary course of business;
(ii) any outbreak of hostilities or other national or international
calamity or crisis or change in economic, political or financial market
conditions if such outbreak, calamity, crisis or change would, in the
Representative's reasonable judgment, make it impractical or
inadvisable to commence or continue the offering of the Shares; (iii)
suspension of trading generally in securities on the New York Stock
Exchange or the over-the-counter market or limitation on prices (other
than limitations on hours or numbers of days of trading) for securities
or the promulgation of any federal or state statute, regulation, rule
or order of any court or other governmental authority which in the
Representative's reasonable opinion materially and adversely affects
trading on either such Exchange or the over-the-counter market; (iv)
the enactment, publication, decree or other promulgation of any federal
or state statute, regulation, rule or order of any court or other
governmental authority which in the Representative's reasonable opinion
materially and adversely affects or will materially and adversely
affect the business or operations of the Company; (v) declaration of a
banking moratorium by either federal or state authorities; (vi) the
taking of any action by any federal, state or local government or
agency in respect of its monetary or fiscal affairs which in the
Representative's reasonable opinion has a material adverse effect on
the securities markets in the United States; (vii) declaration of a
moratorium in foreign exchange trading by major international banks or
other institutions or (viii) trading in any securities of the Company
shall have been suspended or halted by the NASD or the SEC.
(c) If the Representatives elect to prevent this Agreement
from becoming effective or to terminate this
- 41 -
<PAGE> 42
Agreement as provided in this Section 11, the Representative shall
notify the Company thereof promptly by telephone, telex, telegraph or
facsimile, confirmed by letter.
12. DEFAULT BY AN UNDERWRITER.
(a) If any Underwriter or Underwriters shall default in its or
their obligation to purchase Offered Shares or Optional Shares
hereunder, and if the Offered Shares or Optional Shares with respect to
which such default relates do not exceed the aggregate of ten percent
(10%) of the number of Offered Shares or Optional Shares, as the case
may be, that all Underwriters have agreed to purchase hereunder, then
such Offered Shares or Optional Shares to which the default relates
shall be purchased severally by the non-defaulting Underwriters in
proportion to their respective commitments hereunder.
(b) If such default relates to more than ten percent (10%) of
the Offered Shares or Optional Shares, as the case may be, the
Representative may in its discretion arrange for another party or
parties (including a non-defaulting Underwriter) to purchase such
Offered Shares or Optional Shares to which such default relates, on the
terms contained herein. In the event that the Representative does not
arrange for the purchase of the Offered Shares or Optional Shares to
which a default relates as provided in this Section 12 within 36 hours
after such default, this Agreement may be terminated by the
Representative or by the Company without liability on the part of the
nondefaulting Underwriters (except as provided in Section 9 hereof) or
the Company (except as provided in Sections 7 and 9 hereof), but
nothing herein shall relieve a defaulting Underwriter of its liability,
if any, to the other several Underwriters and to the Company for
damages occasioned by its default hereunder.
(c) If the Offered Shares or Optional Shares to which the
default relates are to be purchased by the non-defaulting Underwriters,
or are to be purchased by another party or parties as aforesaid, the
Representative or the Company shall have the right to postpone the
Closing Date or any Option Closing Date, as the case may be, for a
reasonable period but not in any event exceeding seven days, in order
to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment to
the Registration Statement or supplement to the Prospectus which in the
opinion of counsel for the Underwriters may thereby be made
- 42 -
<PAGE> 43
necessary. The terms "Underwriters" and "Underwriter" as used in this
Agreement shall include any party substituted under this Section 12
with like effects as if it had originally been a party to this
Agreement with respect to such Offered Shares or Optional Shares.
13. INFORMATION FURNISHED BY UNDERWRITERS. The Representative, on
behalf of the Underwriters, represents and warrants to the Company that the
information appearing in any preliminary prospectus, the Prospectus or the
Registration Statement (a) on the cover page of the Prospectus with respect to
price, underwriting discounts and commissions and terms of offering, (b) on the
inside front cover page with respect to stabilization, (c) in the section
entitled "Underwriting," and (d) in the section entitled "Legal Matters" with
respect to the identity of counsel for the Underwriters was furnished to the
Company by and on behalf of the Underwriters for use in connection with the
preparation of the Registration Statement and the Prospectus and is correct in
all material respects. The parties acknowledge that this information constitutes
the only information furnished in writing by or on behalf of any Underwriter for
inclusion in any preliminary prospectus, the Prospectus or the Registration
Statement referred to in subsection (b) of Section 1 hereof and subsection (a)
of Section 9 hereof.
14. NOTICES. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and, if sent to any Underwriter,
shall be mailed, delivered, telexed, telegrammed, telegraphed or telecopied and
confirmed to such Underwriter, c/o Cruttenden Roth Incorporated, 18301 Von
Karman, Irvine, California 97215-1009, Attention: President, with a copy to
Milbank, Tweed, Hadley & McCloy, 601 South Figueroa Street, 30th Floor, Los
Angeles, California 90017, Attention: Kenneth J. Baronsky, Esq.; if sent to the
Company shall be mailed, delivered, telexed, telegrammed, telegraphed or
telecopied and confirmed to UStel, Inc., 2775 South Rainbow Boulevard #102, Las
Vegas, Nevada 89102, Attention: President and Chief Executive Officer, with a
copy to Freshman, Marantz, Orlanski, Cooper & Klein, 9100 Wilshire Boulevard,
8th Floor East, Beverly Hills, California 90212, Attention: Lieb Orlanski, Esq.
15. PARTIES. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the several Underwriters, the Company, and the
controlling persons, directors and officers referred to in Section 9 hereof, and
their respective successors, assigns, heirs and legal representatives, and no
other person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this
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<PAGE> 44
Agreement or any provision herein contained. The term "successors" and "assigns"
shall not include any purchaser of the Shares merely because of such purchase.
16. DEFINITION OF BUSINESS DAY. For purposes of this Agreement,
"business day" means any day on which the New York Stock Exchange, Inc. is open
for trading.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts and all such counterparts will constitute one and the same
instrument.
18. CONSTRUCTION. This Agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to agreements
made and performed entirely within such State.
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<PAGE> 45
If the foregoing correctly sets forth the understanding among the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement by and
among the Underwriters and the Company.
Very truly yours,
USTEL, INC.
By:_____________________________
Its:_______________________
THE SELLING STOCKHOLDERS NAMED IN
SCHEDULE I HERETO
By: ____________________________
Attorney-in-fact
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
CRUTTENDEN ROTH INCORPORATED
By:___________________________
Its:_____________________
Acting severally on behalf of itself and the several Underwriters named
in Schedule II hereto
- 45 -
<PAGE> 1
EXHIBIT 4.3
USTEL, INC.
COMMON STOCK WARRANT
THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS THERE IS
AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
This certifies that, for good and valuable consideration,
receipt of which is hereby acknowledged, Cruttenden Roth Incorporated ("Holder")
is entitled to purchase, subject to the terms and conditions of this Warrant,
from UStel, Inc., a Minnesota corporation (the "Company"), up to 160,000 fully
paid and nonassessable shares of the Common Stock, par value $.01 per share
("Common Stock"), of the Company, in accordance with Section 2 below during the
period commencing one year after the date hereof and ending at 5:00 p.m.
California time, , 2001 (the "Expiration Date"), at which time this Warrant will
expire and become void unless earlier terminated as provided herein. The shares
of Common Stock of the Company for which this Warrant is exercisable as adjusted
from time to time pursuant to the terms hereof, are hereinafter referred to as
the "Shares."
1. Exercise Price. The initial purchase price for the Shares
shall be $_______________ per share. Such price shall be subject to adjustment
pursuant to the terms hereof (such price, as adjusted from time to time, is
hereinafter referred to as the "Exercise Price").
2. Exercise and Payment.
(a) Cash Exercise. At any time after , 1997, this
Warrant may be exercised, in whole or in part, from time to time by the Holder,
during the term hereof, by surrender of this Warrant and the Notice of Exercise
annexed hereto duly completed and executed by the Holder to the Company at the
principal executive offices of the Company, together with payment in the amount
obtained by multiplying the Exercise Price then in effect by the number of
Shares thereby purchased, as designated in the Notice of Exercise. Payment may
be in cash or by check payable to the order of the Company.
(b) Net Issuance. In lieu of payment of the Exercise
Price described in Section 2(a), the Holder may elect to receive, without the
payment by the Holder of any additional consideration, shares equal to the value
of this Warrant or any portion hereof by the surrender of this Warrant or such
portion to the Company, with the net issue election
<PAGE> 2
notice annexed hereto duly executed, at the office of the Company. Thereupon,
the Company shall issue to the Holder such number of fully paid and
nonassessable shares of Common Stock as is computed using the following formula:
where: X = Y (A-B)
------
A
X = the number of shares to be issued to the Holder pursuant
to this Section 2.
Y = the number of shares covered by this Warrant in respect of
which the net issuance election is made pursuant to this
Section 2.
A = the fair market value of one share of Common Stock, as
determined in accordance with the provisions of this Section
2.
B = the Exercise Price in effect under this Warrant at the time
the net issuance election is made pursuant to this Section 2.
For purposes of this Section 2, the "fair market value" per share of the
Company's Common Stock shall mean:
i. If the Common Stock is traded on a national
securities exchange or admitted to unlisted trading privileges on such
an exchange, or is listed on the Nasdaq SmallCap Market or the Nasdaq
National Market of the Nasdaq Stock Market (the "Nasdaq Market") or
other over-the-counter quotation system, the fair market value shall be
the last reported sale price of the Common Stock on such exchange or on
the Nasdaq Market on the last business day before the effective date of
exercise of the net issuance election or if no such sale is made on
such day, the mean of the closing bid and asked prices such day on such
exchange, the Nasdaq Market or over-the-counter quotation system; and
ii. If the Common Stock is not so listed or admitted
to unlisted trading privileges and bid and ask prices are not reported,
the fair market value shall be the price per share which the Company
could obtain from a willing buyer for shares sold by the Company from
authorized but unissued shares, as such price shall be determined by
mutual agreement of the Company and the Holder of this Warrant.
In the event that immediately prior to the Expiration Date the
Holder hereof has not exercised any portion of this Warrant and the fair market
value of the Company's Common Stock at such time exceeds the Exercise Price then
in effect, such remaining portion of this Warrant shall be automatically
exercised and the Exercise Price shall be paid to the Company pursuant to the
provisions of this Section 2(b).
<PAGE> 3
3. Delivery of Stock Certificates. Within a reasonable time
after exercise, in whole or in part, of this Warrant, the Company shall issue in
the name of and deliver to the Holder, a certificate or certificates for the
number of fully paid and nonassessable shares of Common Stock which the Holder
shall have requested in the Notice of Exercise. If this Warrant is exercised in
part, the Company shall deliver to the Holder a new Warrant for the unexercised
portion of this Warrant at the time of delivery of such stock certificate or
certificates.
4. No Fractional Shares. No fractional shares or scrip
representing fractional shares will be issued upon exercise of this Warrant. If
upon any exercise of this Warrant a fraction of a share results, the Company
will pay the Holder the difference between the cash value of the fractional
share and the portion of the Exercise Price allocable to the fractional share.
5. Charges, Taxes and Expenses. The Holder shall pay all
transfer taxes or other incidental charges, if any, in connection with the
transfer of the Shares purchased pursuant to the exercise hereof from the
Company to the Holder.
6. Loss, Theft, Destruction or Mutilation of Warrant. Upon
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to the Company,
and upon reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Warrant, if mutilated, the
Company will make and deliver a new Warrant of like tenor and dated as of such
cancellation, in lieu of this Warrant. The Company agrees that the agreement of
the Holder to so indemnify the Company shall be satisfactory to the Company and
no further security shall be required.
7. Saturdays, Sundays, Holidays, Etc. If the last or appointed
day for the taking of any action or the expiration of any right required or
granted herein shall be a Saturday or a Sunday or shall be a legal holiday, then
such action may be taken or such right may be exercised on the next succeeding
weekday which is not a legal holiday.
8. Adjustment of Exercise Price and Number of Shares. The
number of and kind of securities purchasable upon exercise of this Warrant and
the Exercise Price shall be subject to adjustment from time to time as follows:
(a) Subdivisions, Combinations and Other Issuances.
If the Company shall at any time after the date hereof but prior to the
expiration of this Warrant subdivide its outstanding securities as to which
purchase rights under this Warrant exist, by split-up or otherwise, or combine
its outstanding securities as to which purchase rights under this Warrant exist,
the number of Shares as to which this Warrant is exercisable as of the date of
such subdivision, split-up or combination shall forthwith be proportionately
increased
<PAGE> 4
in the case of a subdivision, or proportionately decreased in the case of a
combination. Appropriate adjustments shall also be made to the purchase price
payable per share, but the aggregate purchase price payable for the total number
of Shares purchasable under this Warrant as of such date shall remain the same.
(b) Stock Dividend. If at any time after the date
hereof the Company declares a dividend or other distribution on Common Stock
payable in Common Stock or other securities or rights convertible into Common
Stock ("Common Stock Equivalents") without payment of any consideration by such
holder for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon exercise or
conversion thereof), then the number of shares of Common Stock for which this
Warrant may be exercised shall be increased as of the record date (or the date
of such dividend distribution if no record date is set) for determining which
holders of Common Stock shall be entitled to receive such dividend, in
proportion to the increase in the number of outstanding shares (and shares of
Common Stock issuable upon conversion of all such securities convertible into
Common Stock) of Common Stock as a result of such dividend, and the Exercise
Price shall be adjusted so that the aggregate amount payable for the purchase of
all the Shares issuable hereunder immediately after the record date (or on the
date of such distribution, if applicable), for such dividend shall equal the
aggregate amount so payable immediately before such record date (or on the date
of such distribution, if applicable).
(c) Other Distributions. If at any time after the
date hereof the Company distributes to holders of its Common Stock, other than
as part of its dissolution or liquidation or the winding up of its affairs, any
shares of its capital stock, any rights to purchase shares of its capital stock,
any evidence of indebtedness or any of its assets (other than cash, Common Stock
or securities convertible into Common Stock), then the Company may, at its
option, either (i) decrease the per share Exercise Price of this Warrant by an
appropriate amount based upon the value distributed on each share of Common
Stock as determined in good faith by the Company's Board of Directors or (ii)
provide by resolution of the Company's Board of Directors that on exercise of
this Warrant, the Holder hereof shall thereafter be entitled to receive, in
addition to the shares of Common Stock otherwise receivable on exercise hereof,
the number of shares or other securities or property which would have been
received had this Warrant at the time been exercised.
(d) Merger. If at any time after the date hereof
there shall be a merger or consolidation of the Company with or into another
corporation when the Company is not the surviving corporation then the Holder
shall thereafter be entitled to receive upon exercise of this Warrant, during
the period specified herein and upon payment of the aggregate Exercise Price
then in effect, the number of shares or other securities or property of the
successor corporation resulting from such merger or consolidation, which would
have been received by Holder for the shares of stock subject to this Warrant had
this Warrant at such time been exercised.
<PAGE> 5
(e) Reclassification, Etc. If at any time after the
date hereof there shall be a change or reclassification of the securities as to
which purchase rights under this Warrant exist into the same or a different
number of securities of any other class or classes, then the Holder shall
thereafter be entitled to receive upon exercise of this Warrant, during the
period specified herein and upon payment of the Exercise Price then in effect,
the number of shares or other securities or property resulting from such change
or reclassification, which would have been received by Holder for the shares of
stock subject to this Warrant had this Warrant at such time been exercised.
9. Notice of Adjustments; Notices. Whenever the Exercise Price
or number of Shares purchasable hereunder shall be adjusted pursuant to Section
8 hereof, the Company shall execute and deliver to the Holder a certificate
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated and
the Exercise Price and number of shares purchasable hereunder after giving
effect to such adjustment, and shall cause a copy of such certificate to be
mailed (by first class mail, postage prepaid) to the Holder.
10. Rights As Shareholder. Prior to exercise of this Warrant,
the Holder shall not be entitled to any rights as a shareholder of the Company
with respect to the Shares, including (without limitation) the right to vote
such Shares, receive dividends or other distributions thereon, or be notified of
shareholder meetings, and the Holder shall not be entitled to any notice or
other communication concerning the business or affairs of the Company. However,
in the event of any taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend (other than a cash dividend) or other
distribution, any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right, the Company shall mail to each Holder of this Warrant, at least
10 days prior to the date specified therein, a notice specifying the date on
which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
11. Restricted Securities. The Holder understands that this
Warrant and the Shares purchasable hereunder constitute "restricted securities"
under the federal securities laws inasmuch as they are, or will be, acquired
from the Company in transactions not involving a public offering and accordingly
may not, under such laws and applicable regulations, be resold or transferred
without registration under the Securities Act of 1933, as amended (the "1933
Act"), or an applicable exemption from such registration. In this connection,
the Holder acknowledges that Rule 144 of the Commission is not now, and may not
in the future be, available for resales of the Warrant and the Shares
purchasable hereunder. Unless the Shares are subsequently registered pursuant to
Section 14, the Holder further acknowledges that the securities legend on
Exhibit A to the Notice of Exercise attached hereto shall be placed on any
Shares issued to the Holder upon exercise of this Warrant.
<PAGE> 6
12. Certification of Investment Purpose. Unless a current
registration statement under the 1933 Act shall be in effect with respect to the
securities to be issued upon exercise of this Warrant, the Holder covenants and
agrees that, at the time of exercise hereof, it will deliver to the Company a
written certification executed by the Holder that the securities acquired by him
upon exercise hereof are for the account of such Holder and acquired for
investment purposes only and that such securities are not acquired with a view
to, or for sale in connection with, any distribution thereof in violation of
applicable securities law.
13. Disposition of Shares. Holder hereby agrees not to make
any disposition of any Shares purchased hereunder unless and until:
(a) Holder shall have notified the Company of the
proposed disposition and provided a written summary of the terms and conditions
of the proposed disposition;
(b) Holder shall have complied with all requirements
of this Warrant applicable to the disposition of the Shares; and
(c) Holder shall have provided the Company with
written assurances, in form and substance satisfactory to legal counsel of the
Company, that (i) the proposed disposition does not require registration of the
Shares under the 1933 Act or (ii) all appropriate action necessary for
compliance with the registration requirements of the 1933 Act or of any
exemption from registration available under the 1933 Act has been taken.
The Company shall not be required (i) to transfer on its books
any Shares which have been sold or transferred in violation of the provisions of
this Section 13 or (ii) to treat as the owner of the Shares, or otherwise to
accord voting or dividend rights to, any transferee to whom the Shares have been
transferred in contravention of the terms of this Warrant.
14. Registration Rights.
(a) Piggyback Registration. If at any time within
five (5) years after the effective date of the Company's Registration Statement
on Form SB-2 (File No. 333-8061), the Company shall determine to register for
its own account or the account of others under the 1933 Act any of its equity
securities, other than on Form S-4 or Form S-8 or their then equivalents
relating to equity securities to be issued solely in connection with any
acquisition of any entity or business, or equity securities issuable in
connection with stock option or other employee benefit plans, the Company shall
send to each Holder of Warrants or Shares, who is entitled to registration
rights under this Section 14(a) written notice of such determination and, if
within twenty (20) days after receipt of such notice, such Holder shall so
request in writing (hereafter a "Selling Holder"), the Company shall include in
such registration statement all or any part of the Shares issuable upon exercise
of the Warrants
<PAGE> 7
(the "Registrable Securities") such Selling Holder requests to be registered.
The obligations of the Company under this Section 14(a) may be waived by Holders
holding a majority in interest of the Registrable Securities. In the event that
the managing underwriter for said offering advises the Company in writing that
the inclusion of such securities in the offering would be materially detrimental
to the offering, such securities shall nevertheless be included in the
registration statement, provided that the Holder and each holder of Shares
desiring to have their Shares included in the registration statement agree in
writing, for a period of 90 days following such offering, not to sell or
otherwise dispose of such Shares pursuant to such registration statement, which
registration statement the Company shall keep effective for a period of at least
nine months following the expiration of such 90-day period.
(b) Demand Registration. In addition to any
registration statement pursuant to subparagraph (a) above, during the four-year
period beginning on , 1997 and ending on , 2001, the Company will, as promptly
as practicable (but in any event within 60 days), after written request (the
"Request") by the Holder, or by a person or persons holding (or having the right
to acquire by virtue of holding the Warrants) at least 50% of the shares of
Common Stock which have been (or may be) issued upon exercise of the Warrants
(such Holder or Holders to be included in the definition of "Selling Holder" for
the purposes of Section 14(c) hereof), prepare and file at its own expense a
registration statement with the Commission and appropriate "blue sky"
authorities sufficient to permit the public offering of the Registrable
Securities and will use its best efforts at its own expense through its
officers, directors, auditors and counsel, in all matters necessary or
advisable, to cause such registration statement to become effective as promptly
as practicable and to maintain such effectiveness so as to permit resale of the
Shares covered by the Request until the earlier of the time that all such Shares
have been sold or the expiration of 90 days from the effective date of the
registration statement, provided, however, that the Company shall only be
obligated to file one such registration statement under this Section 14(b).
(c) Obligations of the Holders. In connection with
the registration of the Registrable Securities pursuant to either Sections 14(a)
or (b), the Selling Holders shall have the following obligations:
i. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
respect to each Selling Holder that such Selling Holder shall furnish to the
Company such information regarding itself, the Registrable Securities held by it
and the intended method of disposition of the Registrable Securities held by it
as shall be reasonably required to effect the registration of the Registrable
Securities and shall execute such documents in connection with such registration
as the Company may reasonably request. At least fifteen (15) days prior to the
first anticipated filing date of the registration statement, the Company shall
notify each Selling Holder of the information the Company requires from each
such Selling Holder (the "Requested Information") in the case of a registration
statement being prepared pursuant to Section 14(b) or if such Selling Holder
elects to have any of such Selling Holder's
<PAGE> 8
Registrable Securities included in the registration statement in the case of a
registration statement being prepared pursuant to Section 14(a).
ii. Each Selling Holder by such Selling
Holder's acceptance of the Registrable Securities agrees to cooperate with the
Company as reasonably requested by the Company in connection with the
preparation and filing of the registration statement hereunder, unless such
Selling Holder has notified the Company in writing of such Selling Holder's
election to exclude all of such Selling Holder's Registrable Securities from the
registration statement; and
iii. No Selling Holder may participate in
any underwritten registration hereunder unless such Selling Holder (i) agrees to
sell such Selling Holder's Registrable Securities on the basis provided in any
underwriting arrangements approved by the Selling Holders entitled hereunder to
approve such arrangements, (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
reasonably required under the terms of such underwriting arrangements, and (iii)
agrees to pay its pro rata share of all underwriting discounts and commissions
and other fees and expenses of investment bankers and any manager or managers of
such underwriting, except as provided in Section 14(d) below.
(d) Expenses of Registration. All expenses, other
than underwriting discounts and commissions and other fees and expenses of
investment bankers and other than brokerage commissions, incurred in connection
with registrations, filings or qualifications pursuant to Section 14(a) or
14(b), including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees and the fees and disbursements
of counsel for the Company and the Selling Holders, shall be borne by the
Company; provided, however, that the Company shall only be required to bear the
fees and out-of-pocket expenses of one law firm selected by the Selling Holders
in connection with such registration.
(e) Indemnification. In the event any Registrable
Securities are included in a registration statement under this Agreement:
i. To the extent permitted by law, the
Company will indemnify and hold harmless each Selling Holder who holds such
Registrable Securities, the directors, if any, of such Selling Holder, the
officers, if any, of such Selling Holder, each person, if any, who controls any
Selling Holder within the meaning of the 1933 Act, any underwriter (as defined
in the 1933 Act) for the Selling Holders, the directors, if any, of such
underwriter and the officers, if any, of such underwriter, and each person, if
any, who controls any such underwriter within the meaning of the 1933 Act (each,
an "Indemnified Person"), against any losses, claims, damages, expenses or
liabilities (joint or several) (collectively, "Claims") to which any of them may
become subject under the 1933 Act or otherwise, insofar as such Claims (or
actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon any untrue statement or
<PAGE> 9
alleged untrue statement of a material fact contained in the registration
statement when it first became effective, or any related final prospectus,
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which the statements
therein were made, not misleading (a "Violation"). The Company shall reimburse
the Selling Holders and each such underwriter or controlling person, promptly as
such expenses are incurred and are due and payable, for any legal fees or other
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 14(e)(i) shall
not apply in such case to the extent any such Claim arising out of or based upon
a Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by any Indemnified Person or underwriter for
such Indemnified Person expressly for use in connection with the preparation of
the registration statement or any such amendment thereof or supplement thereto,
and shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld.
ii. In connection with any registration
statement in which a Selling Holder is participating, each such Selling Holder
agrees to indemnify and hold harmless, to the same extent and in the same manner
set forth in Section 14(e)(i), the Company, each of its directors, each of its
officers who signs the registration statement, each person, if any, who controls
the Company within the meaning of the 1933 Act, any underwriter and any other
shareholder selling securities pursuant to the registration statement or any of
its directors or officers or any person who controls such shareholder or
underwriter within the meaning of the 1933 Act (collectively and together with
an Indemnified Person, an "Indemnified Party"), against any Claim to which any
of them may become subject, under the 1933 Act or otherwise, insofar as such
Claim arises out of or is based upon any Violation, in each case to the extent
(and only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by such Selling
Holder expressly for use in connection with such registration statement, and
such Selling Holder will reimburse any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such Claim;
provided, however, that the indemnity agreement contained in this Section
14(e)(ii) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of such Selling Holder,
which consent shall not be unreasonably withheld. The indemnification by each
Selling Holder shall be limited in amount to the net amount of proceeds received
by such Selling Holder from the sale of Registrable Securities.
iii. The Company shall be entitled to
receive indemnities from underwriters, selling brokers, dealer, managers and
similar securities industry professionals participating in any distribution, to
the same extent as provided above, with respect to information furnished in
writing by such persons expressly for inclusion in the registration statement.
<PAGE> 10
iv. Promptly after receipt by an Indemnified
Person or Indemnified Party under this Section 14(e) of notice of the
commencement of any action (including any governmental action), such Indemnified
Person or Indemnified Party shall, if a Claim in respect thereof is made against
any indemnifying party under this Section 14(e), deliver to the indemnifying
party a written notice of the commencement thereof and the indemnifying party
shall have the right to participate in, and, to the extent the indemnifying
party so desires, jointly with any other indemnifying party similarly noticed,
to assume control of the defense thereof with counsel mutually satisfactory to
the indemnifying parties; provided, however, that an Indemnified Person or
Indemnified Party shall have the right to retain its own counsel, with the fees
and expenses to be paid by the indemnifying party, if, in the reasonable opinion
of counsel retained by the indemnifying party, the representation by such
counsel of the Indemnified Person or Indemnified Party and the indemnifying
party would be inappropriate due to actual or potential differing interests
between such Indemnified Person or Indemnified Party and any other party
represented by such counsel in such proceeding. The Indemnifying Party shall pay
for only one separate law firm for the Indemnified Parties; such law firm shall
be selected by the Indemnified Parties holding a majority in interest of the
Registrable Securities. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 14(e), except to the
extent that the indemnifying party is prejudiced in its ability to defend such
action. The indemnification required by this Section 14(e) shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as such expense, loss, damage or liability is incurred and is due
and payable.
v. Notwithstanding any of the foregoing, if,
in connection with an underwritten public offering of Registrable Securities,
the Company, the Selling Holders and the underwriter(s) enter into an
underwriting or purchase agreement relating to such offering which contains
provisions covering indemnification and contribution among the parties, the
indemnification and contribution provisions of this Section 14(e) shall be
deemed inoperative for purposes of such offering.
(f) Contribution. To the extent any indemnification
by an indemnifying party is prohibited or limited by law, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which it
would otherwise be liable under Section 14(e) to the fullest extent permitted by
law; provided, however, that (i) no contribution shall be made under
circumstances where the maker would not have been liable for indemnification
under the fault standards set forth in Section 14(e), (ii) no seller of
Registrable Securities guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any seller of Registrable Securities who was not guilty of such fraudulent
misrepresentation, and (iii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received by
such seller from the sale of such Registrable Securities.
<PAGE> 11
(g) Reports Under Exchange Act. With a view to making
available to the Holders the benefits of Rule 144 promulgated under the 1933 Act
or any other similar rule or regulation of the SEC that may at any time permit
the Holders to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
i. make and keep public information
available, as those terms are understood and defined in Rule 144; and
ii. file with the SEC in a timely manner all
reports and other documents required of the Company under the 1933 Act and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); and
iii. furnish to each Holder so long as such
Holder owns Registrable Securities, promptly upon request, (i) a written
statement by the Company that it has complied with the reporting requirements of
Rule 144, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested to permit the Holders to
sell such securities without registration pursuant to Rule 144.
(h) Assignment of the Registration Rights. The rights
to have the Company register Registrable Securities pursuant to this Agreement
shall be automatically assigned by the Holders to transferees or assignees of
all or any portion of such securities only if: (i) the Holder agrees in writing
with the transferee or assignee to assign such rights, (ii) the Company is,
within a reasonable time after such transfer or assignment, furnished with
written notice of the name and address of such transferee or assignee (iii) such
assignment is in accordance with and permitted by law and all other agreements
between the transferor or assignor and the Company, including without
limitation, shareholder's agreements, warrants and subscription agreements, and
the transferor or assignor otherwise is not in material default of any
obligation to the Company under any such other agreement, and (iv) at or before
the time the Company received the written notice contemplated by clause (ii) of
this sentence the transferee or assignee agrees in writing with the Company to
be bound by all of the provisions contained herein.
(i) Termination of Registration Rights. No Holder of
Warrants or Shares shall be entitled to exercise any right provided for in this
Section 14 at such time as such Holder would be able to dispose of all of its
Registrable Securities in any three (3) month period under SEC Rule 144.
15. Transferability.
(a) General. This Warrant shall be transferable only
on the books of the Company maintained at its principal office in Irvine,
California or wherever its principal office may then be located, upon delivery
thereof duly endorsed by the Holder or by its duly authorized attorney or
representative, accompanied by proper evidence of
<PAGE> 12
succession, assignment or authority to transfer. Upon any registration of
transfer, the Company shall execute and deliver new Warrants to the person
entitled thereto.
(b) Limitations on Transfer. This Warrant shall not
be sold, transferred, assigned or hypothecated by the Holder except to (i) one
or more persons, each of whom on the date of transfer is an officer or employee
of the Holder; (ii) a general partnership or general partnerships, the general
partners of which are the Holder and one or more persons, each of whom on the
date of transfer is an officer or employee of the Holder; (iii) a successor to
the Holder in any merger or consolidation; (iv) a purchaser of all or
substantially all of the Holder's assets; or (v) any person receiving this
Warrant from one or more of the persons listed in this Section 15(b) at such
person's or persons' death pursuant to will, trust or the laws of intestate
succession. This Warrant may be divided or combined, upon request to the Company
by the Holder, into a certificate or certificates representing the right to
purchase the same aggregate number of Shares.
16. Miscellaneous.
(a) Construction. Unless the context indicates
otherwise, the term "Holder" shall include any transferee or transferees of this
Warrant pursuant to Section 15(b), and the term "Warrant" shall include any and
all warrants outstanding pursuant to this Agreement, including those evidenced
by a certificate or certificates issued upon division, exchange, substitution or
transfer pursuant to Section 15(b).
(b) Restrictions. By receipt of this Warrant, the
Holder makes the same representations with respect to the acquisition of this
Warrant as the Holder is required to make upon the exercise of this Warrant and
acquisition of the Shares purchasable hereunder as set forth in the Form of
Investment Letter attached as Exhibit A to the Notice of Exercise attached
hereto.
(c) Notices. Unless otherwise provided, any notice
required or permitted under this Warrant shall be given in writing and shall be
deemed effectively given upon personal delivery to the party to be notified or
three (3) days following deposit with the United States Post Office, by
registered or certified mail, postage prepaid and addressed to the party to be
notified (or one (1) day following timely deposit with a reputable overnight
courier with next day delivery instructions), or upon confirmation of receipt by
the sender of any notice by facsimile transmission, at the address indicated
below or at such other address as such party may designate by ten (10) days'
advance written notice to the other parties.
To Holder: Cruttenden Roth Incorporated
18301 Von Karman, Suite 100
Irvine, California 92715
Attention:
<PAGE> 13
To the Company: UStel, Inc.
2775 South Rainbow Boulevard, #102
Las Vegas, Nevada 89102
Attention: President and Chief
Executive Officer
(d) Governing Law. This Warrant shall be governed by
and construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
(e) Entire Agreement. This Warrant, the exhibits and
schedules hereto, and the documents referred to herein, constitute the entire
agreement and understanding of the parties hereto with respect to the subject
matter hereof, and supersede all prior and contemporaneous agreements and
understandings, whether oral or written, between the parties hereto with respect
to the subject matter hereof.
(f) Binding Effect. This Warrant and the various
rights and obligations arising hereunder shall inure to the benefit of and be
binding upon the Company and its successors and assigns, and Holder and its
successors and assigns.
(g) Waiver; Consent. This Warrant may not be changed,
amended, terminated, augmented, rescinded or discharged (other than by
performance), in whole or in part, except by a writing executed by the parties
hereto, and no waiver of any of the provisions or conditions of this Warrant or
any of the rights of a party hereto shall be effective or binding unless such
waiver shall be in writing and signed by the party claimed to have given or
consented thereto.
(h) Severability. If one or more provisions of this
Warrant are held to be unenforceable under applicable law, such provision shall
be excluded from this Warrant and the balance of the Warrant shall be
interpreted as if such provision were so excluded and the balance shall be
enforceable in accordance with its terms.
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have executed this
Common Stock Warrant effective as of the date hereof.
DATED: , 1996 THE COMPANY:
UStel, Inc.
By:_____________________________________
Its:____________________________________
HOLDER:
Cruttenden Roth Incorporated
By:_____________________________________
Its:____________________________________
<PAGE> 15
NOTICE OF EXERCISE
To: USTEL, INC.
1. The undersigned hereby elects to purchase _____________
shares of Common Stock ("Stock") of UStel, Inc., a Minnesota corporation (the
"Company") pursuant to the terms of the attached Warrant, and tenders herewith
payment of the purchase price pursuant to the terms of the Warrant.
2. Attached as Exhibit A is an investment representation
letter addressed to the Company and executed by the undersigned as required by
Section 12 of the Warrant.
3. Please issue certificates representing the shares of Stock
purchased hereunder in the names and in the denominations indicated on Exhibit A
attached hereto.
4. Please issue a new Warrant for the unexercised portion of
the attached Warrant, if any, in the name of the undersigned.
Dated: _______________ ________________________________________
<PAGE> 16
NET ISSUANCE ELECTION NOTICE
To: USTEL, INC. Date:___________________
The undersigned hereby elects under Section 2 of the attached Warrant
to surrender the right to purchase ___________ shares of Common Stock pursuant
to the attached Warrant. The Certificate(s) for the shares issuable upon such
net issuance election shall be issued in the name of the undersigned or as
otherwise indicated below.
---------------------------
Signature
---------------------------
Name for Registration
---------------------------
Mailing Address
<PAGE> 17
EXHIBIT A
To: USTEL, INC.
In connection with the purchase by the undersigned of
___________ shares of the Common Stock (the "Stock") of UStel, Inc., a Minnesota
corporation (the "Company"), upon exercise of that certain Common Stock Warrant
dated as of , 1996, the undersigned hereby represents and warrants as follows:
1. The shares of Stock to be received by the undersigned upon
exercise of the Warrant are being acquired for its own account, not as a nominee
or agent, and not with a view to resale or distribution of any part thereof, and
the undersigned has no present intention of selling, granting any participation
in, or otherwise distributing the same in violation of applicable securities
laws. The undersigned further represents that it does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participation to such person or to any third person, with respect to the Stock.
The undersigned believes it has received all the information it considers
necessary or appropriate for deciding whether to purchase the Stock.
2. The undersigned understands that the shares of Stock are
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in transactions not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the Securities Act of
1933, as amended (the "Act"), only in certain limited circumstances. In this
connection, the undersigned represents that it is familiar with SEC Rule 144, as
presently in effect, and understands the resale limitations imposed thereby and
by the Act.
3. Without in any way limiting the representations set forth
above, the undersigned agrees not to make any disposition of all or any portion
of the Stock unless and until:
(a) There is then in effect a registration statement
under the Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) (i) The undersigned shall have notified the
Company of the proposed disposition and shall have furnished the Company with a
statement of the circumstances surrounding the proposed disposition, and (ii) if
requested, the undersigned shall have furnished the Company with an opinion of
counsel, reasonably satisfactory to the Company that such disposition will not
require registration of such shares under the Act. The Company will not require
an opinion of counsel for sales made pursuant to Rule 144.
A-1
<PAGE> 18
4. The undersigned understands the instruments evidencing the
Stock may bear the following legend:
THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED AND MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS
THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR THE COMPANY
RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH SALE OR
TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF
SUCH ACT.
Dated: _______________ ________________________________________
A-2
<PAGE> 1
EXHIBIT 10.24
EMPLOYMENT AND NON-DISCLOSURE AGREEMENT
THIS EMPLOYMENT AND NON-DISCLOSURE AGREEMENT ("Agreement") is made as of
this 4th day of January, 1996, by and between UStel, Inc., ("Employer"), and Abe
M. Sher, an individual ("Employee"), with reference to the following facts:
R E C I T A L S
WHEREAS Employee has been employed under an informal employment agreement
with Employer since June, 1995;
WHEREAS the parties hereto wish to formalize the employment relationship as
more fully set forth herein;
WHEREAS, as a result of Employee's employment with Employer, Employee has
acquired knowledge of Employer's trade secrets, including confidential
information concerning product and service marketing plans and strategy, pricing
policies, customer needs and peculiarities and customer lists and detailed
information regarding Employee's technology incorporated in Employer's products
and services (the "Trade Secrets");
WHEREAS, Employer desires that Employee be employed as set forth herein,
such employment to become effective on the date first set forth above; and
WHEREAS, Employee is willing to be employed by Employer as described under
the terms and conditions herein stated.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, and for other good and valuable consideration, it is
hereby agreed by and between the parties hereto as follows:
1. Employment, Services, and Duties
1.1 Employer hereby employs Employee and Employee hereby agrees to
perform the services of General Counsel with the duties consistent therewith.
Employee agrees to devote 75% of his working time to rendering the services for
which Employee has been hired. Employee may provide services in relation to his
outside personal business, including, but not limited to Micro Bell. Employee
shall render his services to Employer by and subject to the instructions and
directions of Employer's Chief Executive Officer to whom Employee shall directly
report.
1.2 Employee shall be entitled to perform his services at Employer's
Los Angeles office and Employer shall provide an
1
<PAGE> 2
appropriate office, secretarial staff and equipment in Los Angeles to enable
Employee to adequately perform his duties therein during the term of this
Agreement.
2. Term and Termination
2.1 Unless sooner terminated pursuant to Paragraph 2.2 hereof,
Employee's employment shall commence on the date first set forth above and shall
continue for a period of three (3) years unless extended by the mutual agreement
of Employer and Employee (the "Term").
2.2 Employee's employment shall terminate prior to the expiration of
the Term upon the happening of any of the following events:
(a) Upon the death of Employee;
(b) For cause by the Employer, that is to say only:
(i) if Employee is convicted of (or pleads nolo contenders
to) or at any time prior to employment by Employer has been convicted of (or
pled nolo contenders to) a crime of dishonesty or breach of trust or crime
leading to incarceration of more than ninety (90) days (including, without
limitation, embezzlement or theft from Employer) or the payment of a penalty or
fine of $10,000, or more;
(ii) upon a determination by Employer that Employee has
engaged in willful misconduct in the performance of his duties under this
Agreement or has refused to perform the services which he has been hired to
perform, or has committed an act of fraud, theft or dishonesty against Employer;
(iii) if Employee has materially breached any of the terms
of this Agreement or any other material legal obligation to Employer including,
without limitation, a breach of trust or fiduciary duty involving Employer or a
material violation of policies or procedures of Employer and has not cured any
such breach within thirty (30) days after having been given written notice
thereof by Employer; or
(iv) Any determination of "cause" as used in this Section
2.2(c) shall be made only in good faith by an affirmative majority vote of the
Board of Directors of the Employer;
(d) By mutual agreement between Employer and Employee; or
2
<PAGE> 3
(e) Without cause, by Employer or at Employee's option upon a
change in control of Employer (e.g. there is a change in the beneficial
ownership of the controlling equity of Employer sufficient to elect a majority
of the Board of Directors.)
2.3 Except for the remaining obligations set forth in Sections 7, 8,
9 and 10 herein, in the event that Employee's employment is terminated pursuant
to Sections 2.2(a), (b), (c), or (d) herein, neither Employer nor Employee shall
have any remaining duties or obligations hereunder, except that Employer shall
pay to Employee, or his representatives, on the date of termination of
employment ("Termination Date"),
(i) such compensation as is due pursuant to Section 3.1(a)
herein, prorated through the Termination Date; and
(ii) expense reimbursements and car allowances due and owing
to Employee as of the Termination Date.
2.4 Except for the remaining obligations set forth in Sections 7, 8,
9 and 10 herein, in the event that Employee's employment is terminated pursuant
to Section 2.2(e) (without cause or pursuant to Employee's option upon a change
in control), neither Employer nor Employee shall have any remaining duties or
obligations hereunder, except that Employer shall pay to Employee, or his
representatives, on the Termination Date,
(i) in one lump sum, all such compensation as is due
pursuant Section 3.1(a)(1),(2) and (3) through the Term;
(ii) whatever non-discretionary bonus or incentive
compensation is provided by any plan for the year of termination, prorated
through the Termination Date; and
(iii) expense reimbursements, if any, due and owning to
Employee as of the Termination Date.
2.5 There is no Section 2.5.
2.6 There is no Section 2.6.
2.7 This Agreement shall not be terminated by any:
(a) Merger, whether the Employer is or is not the surviving
corporation; or
(b) Transfer of all or substantially all of the assets or
capital stock of the Employer.
3
<PAGE> 4
2.8 In the event of any merger, transfer of assets or capital stock,
dissolution, liquidation, or consolidation, the surviving corporation or
transferee, as the case may be, shall be bound by and shall have the benefits
of this Agreement, and the Employer shall take all action to ensure that such
corporation or transferee is bound by the provisions of this Agreement,
provided however, that upon a change of control Employee may terminate his
employment pursuant to Section 2.2(e) above.
3. Compensation
3.1 As the total consideration for the services which Employee
agrees to render hereunder, Employee is entitled to the following:
(a) A salary ("Salary") of
(1) Sixty Thousand Dollars ($60,000) in year one of the
Agreement, payable in equal installments monthly on those days when Employer
normally pays its employees, said Salary to be subject to annual review;
(2) Ninety-six Thousand Dollars ($96,000) in year two of
the Agreement commencing August 15, 1996 through August 15, 1997, payable in
equal installments monthly on those days when Employer normally pays its
employees, said Salary to be subject to annual review; and
(3) One Hundred Thirty-two Thousand Dollars ($132,000)
from August 15, 1997 through October 31, 1998, payable in equal installments
monthly on those days when Employer normally pays its employees, said Salary
to be subject to annual review.
(b) Employee shall be entitled to standard vacations based on
number of years of employment with Employer. Employee's vacation shall be under
Employer's usual policies applicable to all employees and Employee shall
further be entitled paid vacation for the Jewish Holidays;
(c) Employer agrees to provide Employee with insurance
coverages and other benefits available to all employees of Employer under its
group plans; and
(d) Such other benefits as the Board of Directors of Employer,
in its sole discretion, may from time to time provide.
(e) This Agreement will automatically renew for successive one
year periods unless terminated in writing 90 days prior to any expiration date
of this Agreement.
4
<PAGE> 5
3.2 Employer shall have the right to deduct from the compensation
due to Employee hereunder any and all sums required for social security
and withholding taxes and for any other federal, state, or local tax or charge
which may be in effect or hereafter enacted or required as a charge on the
compensation of Employee.
4 Options and Stock Grant
4.1 Employee shall be entitled to participate in either Employer's
1993 Stock Option Plan or a separate plan consistent herewith (in which case
this Section 4 shall constitute such separate plan), pursuant to which Employee
shall receive the following incentive stock options in year one of the
Agreement:
(a) As a finder's fee for introducing Employer to Cruttenden
Roth, Inc., M.J. Segal & Company and Coast Business Credit, 50,000 shares of
Employer's common stock, at an exercise price of Five Dollars ($5.00) per
share, vested on October 1, 1995;
(b) As a finder's fee for introducing Employer to Cruttenden
Roth, Inc., M.J. Segal & Company and Coast Business Credit, 50,000 shares of
Employer's common stock at an exercise price of Five Dollars ($5.00) per
share, to vest as of August 15, 1996;
(c) 100,000 shares of Employer's common stock at an exercise
price of Five Dollars ($5.00) per share, to vest as of the date of the closing
of the Coast Business Credit funding or any other financing introduced by
Employee (collectively, "Financing Sources");
(d) In addition, Employer hereby grants to Employee as a
finders fee for introducing Employer to the Financing Sources, Thirty Two
Thousand (32,000) shares of common stock for a consideration of $.01 per share.
Provided however, if Employee quits his employment prior to the expiration
of the restrictions on the stock set forth in paragraph (f) below, he shall
resell such shares to Employer for $.01 per share.
(e) Employee shall grant an irrevocable proxy for three (3)
years in favor of Noam Schwartz on any shares derived from the exercise of
the options granted pursuant to this Section 4.1 of this Agreement;
(f) Employee shall not sell, transfer or hypothecate any shares
derived from the exercise of the options and stock grants granted pursuant to
this Section 4.1 unless and until Employer files a registration statement
under the
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appropriate SEC form (S-1 or S-3) in which case shares shall be included in
such registration, such Form shall be filed on the sooner of when management
options are registered with the SEC or two (2) years from the date hereof;
(g) All shares derived from the exercise of options and stock
grants granted pursuant to this Section 4.1 will be restricted and subject to
Rule 144. The options granted hereunder shall be non-transferable except by will
or descent to the estate of Employee.
(h) The aggregate number of shares subject to the options and
stock grants granted pursuant to this Section 4.1 shall be proportionately
adjusted for any increase or decrease in the number of outstanding shares of
Stock of Employer resulting from a subdivision or consolidation of shares or any
other capital adjustment or the payment of a stock dividend or any other
increase or decrease in the number of such shares effected without the
Employer's receipt of consideration therefor in money, services or property, in
the case of options for so long as the options remain outstanding, and in the
case of the stock grants, for so long as the grant is subject to forfeiture as
set forth in paragraph 4(d). Employee may utilize "net exercise" benefits, i.e.
paying for the exercise of his options by cancelling an aggregate number of
options having a "spread value" equal to the aggregate exercise price of the
shares as to which Employee chooses to exercise his options. "Spread value"
shall mean the difference between the option exercise price and the NASDAQ
closing price of the Company's shares on the date before the exercise. Employee,
at his choice, may pay the exercise price of the shares subject to the herein
options, via a two year promissory note, bearing interest at the prime rate,
with interest to accrue and be payable at maturity. All of the options granted
to Employee shall be for a period of five years.
(i) Shares derived from the exercise of the options and stock
grants granted pursuant to this Section 4.1 will have piggyback registration
rights.
(j) All options granted hereunder and all restrictions thereon
and on the stock granted hereunder as set forth in Section 4.1(d)(e) and (f)
above shall vest and all restrictions as set forth in Section 4.1(d)(e) and (f)
above shall terminate upon a change of control or upon the occurrence of any
event described in Section 2.8 above or the event Employee is terminated without
cause pursuant to Section 2(e) above.
4.2 Notwithstanding Sections 3.1(b)(1), Employee shall be entitled to
participate in Employee incentive stock options, such options to be determined
by the Board of Directors in their discretion.
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5. Expenses
5.1 Employer shall reimburse Employee for all travel, lodging,
entertainment and other miscellaneous out-of-pocket expenses reasonably incurred
by him in connection with the performance of the services to be rendered
hereunder. Such reimbursement shall be promptly made upon presentation to
Employer, provided that:
(a) Each such expenditure is of a nature qualifying it as a
proper deduction of the Federal and State Income Tax Return of Employer; and
(b) Employee furnishes to Employer adequate records and other
documentary evidence required by Federal and State statutes and regulations
issued by the appropriate taxing authorities for the substantiation of each
such expenditure as an income tax deduction.
5.2 Employee shall be entitled to expense reimbursement in the
amount of Three Hundred Fifty Dollars ($350) per month for car expenses plus car
insurance and reasonable cellular phone expenses. Such reimbursement shall be
promptly made upon presentation to Employer.
6. Additional Finder's Fee
(a) For services rendered in connection with obtaining the
Financing Sources, Employee shall receive a finder's fee in the amount of two
percent (2%) of the aggregate amount raised by the Financing Sources in notes or
equity or both. Such finder's fee to be paid in cash at the closing of each
financing.
(b) Notwithstanding Section 5.1, Employee may at Employer's
sole discretion receive a bonus at the end of each year during the term of this
Agreement.
7. Non-competition
(a) With the exception of Micro Bell's products or services,
during the term of this Agreement, Employee shall not, directly or indirectly,
engage or participate in, prepare or set up, assist or have any interest in any
person, partnership, corporation, firm, association, or other business
organization, entity or enterprise (whether as an employee, officer, director,
agent, security holder, creditor, consultant or otherwise) that engages in any
activity, which is the same as, similar to, or competitive with any activity
now engaged in by Employer or in any way relating to the business currently
conducted by Employer in those geographic areas where Employer conducts its
business.
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(b) Nothing contained in this Agreement shall be
deemed to preclude Employee from purchasing or owning, directly or
beneficially, as a passive investment, one percent (1%) or less of
any class of a publicly traded security of any entity, if he does not
actively participate in or control, directly or indirectly, any
investment or other decisions with respect to such entity.
8. Confidentiality
Employee shall keep all Trade Secrets confidential; use
Trade Secrets only in the course of his duties hereunder; maintain in
trust, as Employer's property, all documents concerning Employer's
business, including his own work papers of any kind including
telephone directories and notes, and any and all copies thereof in
his possession or under his control; and transfer to Employer all
documents that belong to Employer and any and all copies that are in
his possession or under his control when his Employment terminates,
or at any other time upon request by Employer.
9. Injunctive Relief
Employee hereby acknowledges and agrees that it would
be difficult to fully compensate Employer for damages resulting from
the breach or threatened breach of Sections 4 and 5 herein and,
accordingly, that Employer shall be entitled to temporary and
injunctive relief, including temporary restraining orders,
preliminary injunctions and permanent injunctions, to enforce such
Sections without the necessity of proving actual damages therewith.
This provision with respect to injunctive relief shall not, however,
diminish Employer's right to claim and recover damages or enforce any
other of its legal and/or equitable rights or defenses.
10. Severable Provisions
The provisions of this Agreement are severable and if
any one or more provisions may be determined to be illegal or
otherwise unenforceable, in whole or in part, the remaining
provisions, and any partially unenforceable provisions to the extent
enforceable, shall nevertheless be binding and enforceable.
11. Binding Agreement
This Agreement shall inure to the benefit of and shall
be binding upon Employer, its successors and assigns.
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<PAGE> 9
12. Captions
The Section captions are inserted only as a matter of convenience and
reference and in no way define, limit or describe the scope of this Agreement
or the intent of any provisions hereof.
13. Entire Agreement
This Agreement contains the entire agreement of the parties relating
to the subject matter hereof, and the parties hereto have made no agreements,
representations or warranties relating to the subject matter of this Agreement
that are not set forth otherwise herein. This Agreement supersedes any and all
prior agreements, written or oral, between Employee and Employer and its
affiliates. No modification of this Agreement shall be valid unless made in
writing and signed by the parties hereto and unless such writing is made by an
executive officer of Employer. The parties hereto agree that in no event
shall an oral modification of this Agreement be enforceable or valid.
14. Governing Law
This Agreement shall be governed and construed in accordance with the
laws of the State of California.
15. Notices.
All notices and other communications under this Agreement shall be in
writing (including, without limitation, telegraphic, telex, telecopy or cable
communication) and mailed, telegraphed, telexed, telecopied, cabled or
delivered by hand or by a nationally recognized courier service guaranteeing
overnight delivery to a party at the following address (or to such other
address as such party may have specified by notice given to the other party
pursuant to this provision):
If to the Employer, to:
Noam Schwartz, President
UStel, Inc.
2775 South Rainbow Blvd.
Las Vegas, Nevada 89102
Telephone: (702) 247-7400
Facsimile: (702) 247-7447
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<PAGE> 10
If to the Employee, to:
Abe Sher
337 South Wetherly Drive
Beverly Hills, California 90211
Telephone: (310) 275-6762
All such notices and communications shall, when mailed, telegraphed,
telexed, telecopied, cabled or delivered, be effective three days
after deposit in the mails, delivered to the telegraph company,
confirmed by telex answerback, telecopied with confirmation of
receipt, delivered to the cable company, delivered by hand to the
addressee or one day after delivery to the courier service.
16. Attorney's Fees.
In the event that any party shall bring an action or
proceeding in connection with the performance, breach or
interpretation hereof, then the prevailing party in such action as
determined by the court or other body having jurisdiction shall be
entitled to recover from the losing party in such action, as
determined by the court or other body having jurisdiction, all
reasonable costs and expense of litigation or arbitration, including
reasonable attorney's fees, court costs, costs of investigation and
other costs reasonably related to such proceeding.
IN WITNESS WHEREOF, this Employment Agreement is executed as
of the day and year first above written.
"EMPLOYER"
USTEL, INC.
By: _________________________
Name: Noam Schwartz
Title: President
"EMPLOYEE"
_____________________________
Abe Sher
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<PAGE> 1
Exhibit 10.44
EMPLOYMENT AND NON-DISCLOSURE AGREEMENT
THIS EMPLOYMENT AND NON-DISCLOSURE AGREEMENT ("Agreement") is made,
entered into and effective as of this 1st day of September, 1996, by and
between UStel, Inc., ("Employer"), and Dan Knoller, an individual ("Employee"),
with reference to the following facts:
R E C I T A L S
WHEREAS Employee previously was engaged by Employer as an independent
contractor from January 1, 1994 through December 31, 1995 (the "Independent
Agent Relationship");
WHEREAS, pursuant to the Independent Agent Relationship, Employee was to
receive, through December 31, 1995, commissions as his primary compensation from
Company for the independent contractor services he had been providing;
WHEREAS, the parties have agreed to terminate the Independent Agent
Relationship, (and any and all agreements for payment of commissions) effective
as of December 31, 1995 and to employ Employee as of January 1, 1996;
WHEREAS the parties hereto wish to formalize the employment
relationship as more fully set forth herein;
WHEREAS, as a result of both Employee's employment with Employer, and
the Independent Agent Relationship, Employee has acquired knowledge of
Employer's trade secrets, including confidential information concerning product
and service marketing plans and strategy, pricing policies, customer needs and
peculiarities, and customer lists and detailed information regarding Employer's
technology incorporated in Employer's products and services (the "Trade
Secrets");
WHEREAS, Employer desires that Employee be employed as set forth
herein, such employment to become effective on the date first set forth above;
and
WHEREAS, Employee is willing to be employed by Employer as described
under the terms and conditions herein stated.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, it is hereby agreed by
and between the parties hereto as follows:
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1. Employment, Services, and Duties
1.1 Employer hereby employs Employee and Employee hereby agrees to
perform the services of Director of International Business Development, with
the duties consistent therewith. Employee agrees to devote all of his efforts,
and shall devote a minimum of forty hours (40) per week (during regular
business hours) to rendering the services for which Employee has been hired.
Employee shall not engage in any other activity which conflicts with or
otherwise might be deemed a business opportunity of Employer during the term of
this Agreement. Employee shall not engage in any other activity which conflicts
with or otherwise might be deemed a business opportunity of Employer during the
term of this Agreement. Employee shall render his services to Employer by and
subject to the instructions and directions of Employer's Chief Executive
Officer to whom Employee shall directly report.
2. Term and Termination
2.1 Unless sooner terminated pursuant to Paragraph 2.2 hereof,
Employee's employment shall commence on the date first set forth above and
shall continue through December 31, 1997 unless extended by the mutual written
agreement of Employer and Employee (the "Term").
2.2 Employee's employment shall terminate prior to the expiration
of the Term upon the happening of any of the following events:
(a) Upon the death of Employee;
(b) For cause by the Employer, that is to say only:
(i) if Employee is convicted of (or pleads nolo
contendere to) or at any time prior to employment by Employer, has been
convicted of (or pled nolo contendere to) a crime of dishonesty or breach of
trust or crime leading to incarceration of more than ninety (90) days
(including, without limitation, embezzlement or theft from Employer) or the
payment of a penalty or fine of $10,000 or more;
(ii) upon a determination by Employer that Employee
has engaged in willful misconduct in the performance of his duties under this
Agreement or has refused to perform the services which he has been hired to
perform, or has committed an act of fraud, theft or dishonesty against Employer;
(iii) if Employee engages or participates, in any
manner, in any business which competes with or would otherwise be deemed a
business opportunity of Employer;
(iv) if Employee has materially breached any of the
terms of this Agreement or any other material legal obligation to Employer
including, without limitation, a breach of trust or fiduciary duty involving
Employer or a material violation of policies or procedures of Employer and has
not cured any such breach within thirty (30) days after having
2
<PAGE> 3
been given written notice thereof by Employer; or
(v) any determination of "cause" as used in this
Section 2.2(b) shall be made only in good faith by an affirmative majority vote
of the Board of Directors of the Employer;
(d) By mutual agreement between Employer and Employee;
2.3 Except for the remaining obligations set forth in Sections 7,
8, 9 and 10 herein, in the event that Employee's employment is terminated
pursuant to Sections 2.2(a), (b), (c) or (d) herein, neither Employer or
Employee shall have any remaining duties or obligations hereunder, except that
Employer shall pay to Employee, or his representatives, on the date of
termination of employment ("Termination Date"),
(a) such compensation as is due pursuant to Section 3.1(a)
herein, prorated through the Termination Date; and
(b) expense reimbursements due and owing to Employee as of
the Termination Date.
2.4 There is no Section 2.4.
2.5 There is no Section 2.5.
2.6 There is no Section 2.6.
2.7 This Agreement shall not be terminated by any:
(a) Merger, whether the Employer is or is not the surviving
corporation; or
(b) Transfer of all or substantially all of the assets or
capital stock of the Employer.
2.8 In the event of any merger, transfer of assets or capital
stock, dissolution, liquidation, or consolidation, the surviving corporation or
transferee, as the case may be, shall be bound by and shall have the benefits
of this Agreement, and the Employer shall take all action to ensure that such
corporation or transferee is bound by the provisions of this Agreement.
3. Compensation
3.1 As the total consideration for the services which Employee
agrees to render hereunder, Employee is entitled to the following:
(a) A monthly salary ("Salary") of Eight Thousand Dollars
($8,000)
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payable on a monthly basis in arrears not later than five (5) days after the
end of each month subsequent to the first month of this Agreement;
(b) Employee shall be entitled to standard vacations
based on number of years of employment with Employer. Employee's vacations
shall be under Employer's usual policies applicable to all employees.
(c) Such other benefits as the Board of Directors of
Employer, in its sole discretion, may from time to time provide.
3.2 Employer shall have the right to deduct from the
compensation due to Employee hereunder any and all sums required for social
security and withholding taxes and for any other federal, state, or local tax
or charge which may be in effect or hereafter enacted or required as a charge
on the compensation of Employee. At Employee's option, all compensation and
expense advances shall be sent by wire transfer to Employee's bank account in
Israel.
3.3 The commission agreement previously entered into between
the parties shall be deemed terminated as of December 31, 1995.
3.4 The parties agree that as of August 31, 1996, Employee was
owed, in total, the sum of $23,250.00 for services rendered both under the
Independent Agent Relationship and as an employee, which amount remains due and
owing (the "Past Due Compensation"), together with compensation pursuant to
this Agreement for September and October 1996, in three (3) equal monthly
installments of $13,083.00 each, on September 20, 1996, October 20, 1996 and
November 20, 1996.
4. Options
4.1 Employee shall be entitled to participate in either
Employer's 1993 Stock Option Plan or a separate plan consistent herewith (in
which case this Section 4 shall constitute such separate plan), pursuant to
which Employee shall receive the following incentive stock options in year one
of the Agreement:
(a) An option to purchase up to 100,000 shares of
Employer's common stock, at an exercise price of Five Dollars ($5.00) per
share, which shall be deemed to have vested on October 1, 1996. Such option
shall have a five year term notwithstanding any earlier termination;
(b) All shares derived from the exercise of options
granted pursuant to this Section 4.1 will be restricted and subject to Rule
144. The options granted hereunder shall be non-transferable except by will or
descent to the estate of Employee.
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<PAGE> 5
(c) The aggregate number of shares subject to the options
granted pursuant to this Section 4.1 shall be proportionately adjusted for any
increase or decrease in the number of outstanding shares of Stock of Employer
resulting from a subdivision or consolidation of shares or any other capital
adjustment or the payment of a stock dividend or any other increase or decrease
in the number of such shares effected without the Employer's receipt of
consideration therefor in money, services or property.
5. Expenses
5.1 Subject to the limitations set forth in Paragraph 5.2 above,
Employer shall reimburse Employee for all travel, lodging, office,
entertainment and other miscellaneous out-of-pocket expenses reasonably
incurred by him in connection with the performance of the services to be
rendered hereunder. Employee shall be required to obtain Employer's prior
written consent for any expense or aggregate expenses exceeding $500.00 in any
given month. Such reimbursement shall be promptly made upon presentation to
Employer, provided that:
(a) Each such expenditure is of a nature qualifying it as a
proper deduction of the Federal and State Income Tax Return of Employer; and
(b) Employee furnishes to Employer adequate records and other
documentary evidence required by Federal and State statutes and regulations
issued by the appropriate taxing authorities for the substantiation of each
such expenditure as an income tax deduction.
5.2 Employer shall provide Employee with office and related support
in an amount not to proceed $2,500.00 per month.
6. Section 6 Intentionally Omitted.
7. Non-Competition
(a) During the term of this Agreement, Employee shall not, directly
or indirectly, engage or participate in, prepare or set up, assist or have any
interest in any person, partnership, corporation, firm, association, or other
business organization, entity or enterprise (whether as an employee, officer,
director, agent, security holder, creditor, consultant or otherwise) that
engages in any activity, which is the same as, similar to, or competitive with
any activity now engaged in by Employer or in any way relating to the business
currently conducted by Employer in those geographic areas where Employer
conducts its business.
(b) Nothing contained in this Agreement shall be deemed to preclude
Employee from purchasing or owning, directly or beneficially, as a passive
investment, one percent (1%)
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<PAGE> 6
or less of any class of a publicly traded security of any entity, if he does not
actively participate in or control, directly or indirectly, any investment or
other decisions with respect to such entity.
8. Confidentiality
Employee shall keep all Trade Secrets confidential; use Trade Secrets only
in the course of his duties hereunder; maintain in trust, as Employer's
property, all documents concerning Employer's business, including his own work
papers of any kind including telephone directories and notes, and any and all
copies thereof in his possession or under his control; and transfer to Employer
all documents that belong to Employer and any and all copies that are in his
possession or under his control when his Employment terminates, or at any other
time upon request by Employer.
9. Injunctive Relief
Employee hereby acknowledges and agrees that it would be difficult to fully
compensate Employer for damages resulting from the breach or threatened breach
of Sections 5 and 7 herein and, accordingly, that Employer shall be entitled to
temporary and injunctive relief, including temporary restraining orders,
preliminary injunctions and permanent injunctions to enforce such Sections
without the necessity of proving actual damages therewith. This provision with
respect to injunctive relief shall not, however, diminish Employer's right to
claim and recover damages or enforce any other of its legal and/or equitable
rights or defenses.
10. Severable Provisions
The provisions of this Agreement are severable and if any one or more
provisions may be determined to be illegal or otherwise unenforceable, in whole
or in part, the remaining provisions, and any partially unenforceable provisions
to the extent enforceable, shall nevertheless be binding and enforceable.
11. Binding Agreement
This Agreement shall inure to the benefit of and shall be binding upon
Employer, its successors and assigns.
12. Captions
The Section captions are inserted only as a matter or convenience and
reference and in no way define, limit or describe the scope of this Agreement or
the intent of any provisions hereof.
6
<PAGE> 7
13. Entire Agreement
This Agreement contains the entire agreement of the parties
relating to the subject matter hereof, and the parties hereto have made no
agreements, representations or warranties relating to the subject matter of
this Agreement that are not set forth otherwise herein. This Agreement
supersedes any and all prior agreements, written or oral, between Employee and
Employer and its affiliates. No modification of this Agreement shall be valid
unless made in writing and signed by the parties hereto and unless such writing
is made by an executive officer of Employer. The parties hereto agree that in
no event shall an oral modification of this Agreement be enforceable or valid.
14. Governing Law
This Agreement shall be governed and construed in accordance with
the laws of the State of California. Any action arising hereunder shall be
brought in the appropriate court with venue in Los Angeles, California.
15. Notices
All notices and other communications under this Agreement shall be
in writing (including, without limitation, telegraphic, telex, telecopy or
cable communication) and mailed, telegraphed, telexed, telecopied, cabled or
delivered by hand or by a nationally recognized courier service guaranteeing
overnight delivery to a party at the following address (or to such other
address as such party may have specified by notice given to the other party
pursuant to this provision):
If to the Employer to:
Robert L.B. Diener, President
UStel, Inc.
2775 South Rainbow Blvd., Ste 102
Las Vegas, NV 89102
Telephone: (702) 247-7400
Facsimile: (702) 247-7447
If to the Employee, to:
Dan Knoller
18 Leah Street, Unit 7
Tel Aviv, Israel
Telephone: 011-972-3-649-6969
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<PAGE> 8
All such notices and communications shall, when mailed, telegraphed, telexed,
telecopied, cabled or delivered, be effective three days after deposit in the
mails, delivered to the telegraph company, confirmed by telex answerback,
telecopied with confirmation of receipt, delivered to the cable company,
delivered by hand to the addressee or one day after delivery to the courier
service.
16. Attorney's Fees
In the event that any party shall bring an action or proceeding
in connection with the performance, breach and interpretation hereof, then the
prevailing party in such action as determined by the court or other body having
jurisdiction shall be entitled to recover from the losing party in such
action, as determined by the court or other body having jurisdiction, all
reasonable costs and expense of litigation or arbitration, including reasonable
attorney's fees, court costs, costs of investigation and other costs reasonably
related to such proceeding.
IN WITNESS WHEREOF, this Employment Agreement is executed as of the day
and year first above written.
"EMPLOYER"
USTEL, INC.
By: ______________________________
Robert L.B. Diener
ITS: President/CEO
"EMPLOYEE"
__________________________________
Danny Knoller
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EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Shareholders of
UStel, Inc.
We hereby consent to the use in the Prospectus constituting a part of
this Amendment No. 1 to the Registration Statement on Form SB-2 of our report
dated April 4, 1996, relating to the financial statements of UStel, Inc. and
to our report dated September 20, 1996, relating to the financial statements
of Consortium 2000, Inc. which are contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
BDO SEIDMAN, LLP
Los Angeles, California
October 21, 1996
