<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 1997
REGISTRATION NO. 333-12981
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
USTEL, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MINNESOTA 4813 95-4362330
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER IDENTIFICATION
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) NUMBER)
ORGANIZATION)
</TABLE>
2775 SOUTH RAINBOW BOULEVARD, #102
LAS VEGAS, NEVADA 89102
(702) 247-7400
(ADDRESS, AND TELEPHONE NUMBER, OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT L. B. DIENER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2775 SOUTH RAINBOW BOULEVARD, #102
LAS VEGAS, NEVADA 89102
(702) 247-7400
(NAME, ADDRESS, AND TELEPHONE NUMBER, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
LEIB ORLANSKI, ESQ. DALE S. BERGMAN, P.A.
SUSAN B. KALMAN, ESQ. BROAD AND CASSEL
FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN 201 SOUTH BISCAYNE BOULEVARD
9100 WILSHIRE BOULEVARD, 8TH FLOOR EAST SUITE 3000
BEVERLY HILLS, CALIFORNIA 90212 MIAMI, FLORIDA 33131
TELEPHONE (310) 273-1870 TELEPHONE (305) 373-9400
FACSIMILE (310) 274-8357 FACSIMILE (305) 373-9443
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this registration statement.
------------------------
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE MAXIMUM PRICE PROPOSED MAXIMUM REGISTRATION
REGISTERED REGISTERED PER SECURITY(1) OFFERING PRICE(1) FEE
- ------------------------------------------------------------------------------------------------------------------
Units(2)................................... 1,552,500 $6.00 $9,315,000 $3,212.06
- ------------------------------------------------------------------------------------------------------------------
Common Stock(3)............................ 3,105,000 -- -- --
- ------------------------------------------------------------------------------------------------------------------
Warrants included in the Units sold to
public................................... 1,552,500 $4.00 $6,210,000 $2,141.37
- ------------------------------------------------------------------------------------------------------------------
Representative's Warrants(4)............... 125,000 -- -- --
- ------------------------------------------------------------------------------------------------------------------
Units(5)................................... 125,000 $7.20 $900,000 $310.34
- ------------------------------------------------------------------------------------------------------------------
Common Stock(6)............................ 250,000 -- -- --
- ------------------------------------------------------------------------------------------------------------------
Warrants included in Representative's
Units(5)................................. 125,000 $4.00 $500,000 $172.41
- ------------------------------------------------------------------------------------------------------------------
Total(7)........................... ................... ................ ................... $5,836.18
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457.
(2) An aggregate of 3,105,000 shares of common stock ("Common Stock") and
1,552,500 Common Stock purchase warrants ("Warrants") will be offered to the
public in the form of 1,552,500 Units, each Unit consisting of two shares of
Common Stock and one Warrant, including 202,500 Units (composed of 405,000
shares of Common Stock and 202,500 Warrants) which may be purchased to cover
over-allotments, if any.
(3) Consists of shares issuable upon exercise of the Warrants included in the
Units to be sold to the public. Upon exercise of each Warrant, the holder
will receive one share of Common Stock.
(4) To be sold to the Representative of the Underwriters. Pursuant to Rule
457(g), no separate registration fee is required for the Representative's
Warrants.
(5) Consists of Units issuable upon exercise of the Representative's Warrants
and incudes 250,000 shares of Common Stock and 125,000 Warrants.
(6) Consists of shares issuable upon exercise of the Warrants included in the
Units underlying the Representative's Warrants.
(7) The Registrant previously submitted $6,345.58 for the registration fee.
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 THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
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. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY
SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR
SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 10, 1997
PROSPECTUS
1,350,000 UNITS
LOGO
------------------------
EACH UNIT CONSISTING OF TWO SHARES OF COMMON STOCK
AND ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT
Each unit ("Unit") consists of two shares of Common Stock, par value $.01
per share ("Common Stock"), and one redeemable Common Stock purchase warrant
("Warrant") of UStel, Inc., a Minnesota corporation ("UStel" or the "Company").
Of the 1,350,000 Units being offered, 1,250,000 Units are being sold by UStel
and 100,000 Units by the Palisades USTL Trust (the "Trust" or the "Selling
Stockholder"). See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of the Units by the Selling
Stockholder. The Selling Stockholder will reimburse the Company for the value of
the 100,000 Warrants included in the Units being sold by the Selling Stockholder
at the rate of $0.01 per Warrant. The Common Stock and Warrants included in the
Units will not be immediately detachable and will not be immediately separately
transferable until 60 days from the date of this Prospectus or earlier in the
discretion of Barber & Bronson Incorporated (the "Representative"). Each Warrant
entitles the registered holder thereof to purchase, at any time until
, 2002 (five years from the date of this Prospectus), one share of
Common Stock at a price of $4.00 per share. The Warrants are subject to
redemption by the Company at $0.01 per Warrant on 30 days' prior written notice
to the warrantholders if the closing bid price of the Common Stock as reported
on the Nasdaq SmallCap Market averages or exceeds $6.00 for a period of 20
consecutive trading days ending within 30 days prior to the date notice of
redemption is given. The Common Stock is traded on the Nasdaq SmallCap Market.
The Company may, as an alternative to the lsiting on the Nasdaq SmallCap Market,
seek to list its Common Stock, Units and Warrants on the American Stock Exchange
("AMEX").
Prior to this offering (the "Offering"), there has been no public market for
the Units or the Warrants and there can be no assurance that such a market will
develop or be sustained after the Offering. The Company intends to apply for
listing of the Units and Warrants on the Nasdaq SmallCap Market under the
proposed symbols of "USTLU" and "USTLW," respectively. The Company's Nasdaq
SmallCap Market symbol for the Common Stock is "USTL." The last sale price for
the Common Stock on the Nasdaq SmallCap Market on January 22, 1997 was $4.25 per
share. See "Price Range of Common Stock."
SEE "RISK FACTORS" BEGINNING AT PAGE 7 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.
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER(3)
- ----------------------------------------------------------------------------------------------------------
Per Unit..................................... $6.00 $0.48 $5.52 $5.52
- ----------------------------------------------------------------------------------------------------------
Total(4)........................... $8,100,000 $648,000 $6,900,000 $552,000
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes the value of warrants to be issued to the Representative (the
"Representative's Warrants") to purchase up to 125,000 Units. The Company
agreed to indemnify the Underwriters against certain civil liabilities
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting estimated offering expenses payable by the Company of
$817,492, including $243,000 for the Representative's non-accountable
expense allowance.
(3) Before deducting estimated offering expenses payable by the Selling
Stockholder of $65,328.
(4) The Company has granted the Underwriters a 45-day option to purchase up to
202,500 additional Units from the Company, 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
Units 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 $9,315,000, $745,200 and $8,017,800,
respectively. See "Underwriting."
The Units 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 Units will be made against payment therefor
at the offices of Barber & Bronson Incorporated, Miami, Florida, or through the
facilities of the Depository Trust Company on or about , 1997.
------------------------
LOGO
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 3
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information filed by the Company with the Commission 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 500 West Madison Street, Suite 1400, 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 Commission also maintains a World Wide
Web site (http://www.sec.gov) that contains reports, proxy and other information
regarding registrants that file electronically with the Commission.
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 Units 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
Units 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-4 covering 1,076,923 shares of Common
Stock to be issued in the Merger (as hereinafter defined).
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK,
WARRANTS AND UNITS 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 SMALLCAP MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE ACT. SEE "UNDERWRITING."
2
<PAGE> 4
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 1,081,000 warrants
outstanding are not exercised; (iii) does not give effect to the issuance of
1,076,923 shares of Common Stock pursuant to the Merger (as defined below), and
(iv) does not give effect to the conversion of $500,000 in convertible
debentures into 71,429 shares of Common Stock, or the conversion of the 550,000
shares of Series A Convertible Preferred Stock into 750,000 shares of Common
Stock, and (v) does not give effect to the exercise of the 1,350,000 Warrants
issued in this Offering. 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 in excess of 18,000 customers at December 31, 1996. The Company's
monthly revenues have increased from approximately $10,000 in January, 1993 to
approximately $2,000,000 in December, 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.
On August 14, 1996, a change of control of UStel occurred as a result of
the purchase of a substantial portion of the shares owned by the founders of the
Company at a price of $5.00 per share, by the Trust, an investment group
comprising shareholders of Consortium 2000, Inc. ("Consortium 2000"), the
Company's sales agent. Coincident with this transaction, a new and experienced
management team was appointed. Since its appointment, the new management team
has undertaken to restructure the Company's relationship with its primary long
distance carrier, refocus marketing activities, implement a new network
development strategy which will convert the majority of the Company's traffic
from switched access to dedicated access, improve billing and collections and
customer service, reduce cost of operations and develop a viable strategy for
the future.
The new management team undertook a comprehensive review of all of the
Company's assets. This review included evaluating the net realizable value of
various assets and the appropriateness of certain reserves. As a result of this
review, the Company recorded an additional expense for the period ended
September 30, 1996 in the amount of $2,860,869. This expense was primarily
attributable to an increase in the reserve for bad debts, the write-down of
certain deferred offering costs, the reduction of the accrual for unbilled
revenues and a change in the accrual for claims against other carriers.
Management believes this is an unusual and one-time charge related to
management's revaluation. With the addition of the Consortium 2000 marketing
organization, the Company believes that it is well-positioned to continue to
grow in the future.
3
<PAGE> 5
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."
The Company believes it can achieve significant benefits through the Merger
in that the Company will realize immediate cost savings because a portion of the
commissions historically paid by UStel to Consortium 2000 for customer referrals
will be eliminated.
Prior to the agreement to merge, UStel had a non-exclusive sales agency
agreement with Consortium 2000 which commenced in mid-1994. 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 December 31, 1996, approximately 75%
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 December 31, 1996, approximately 90% of UStel's
customers were referred to the Company by Consortium 2000, representing
approximately 75% of UStel's revenues.
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 merger to reincorporate in Minnesota prior to its initial
public offering of Common Stock. The Company intends to reincorporate in
California after this Offering. Its corporate headquarters are located at 2775
South Rainbow Boulevard, Suite 102, Las Vegas, Nevada 89102 and its telephone
number is (702) 247-7400.
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Securities Offered by the Company............. 1,250,000 Units, each consisting of two shares of
Common Stock and one redeemable Warrant to purchase
one share of Common Stock.
Securities Offered by Selling Stockholder..... 100,000 Units, each consisting of two shares of
Common Stock and one redeemable Warrant to purchase
one share of Common Stock.
Exercise Price of Warrants.................... Each Warrant entitles the registered holder thereof
to purchase at any time until , 2002,
one share of Common Stock at a price of $4.00 per
share. The Warrant exercise price is subject to
adjustment under certain circumstances. See
"Description of Securities."
Redemption of Warrants........................ The Warrants are subject to redemption by the
Company at $0.01 per Warrant on 30 days' prior
written notice to the warrantholders if the closing
bid price of the Common Stock as reported on the
Nasdaq SmallCap Market averages or exceeds $6.00
over a period of 20 consecutive trading days.
Common Stock Outstanding prior to the
Offering.................................... 2,126,851 Shares.
Common Stock Outstanding after the Offering... 4,626,851 Shares.
Use of Proceeds............................... The net proceeds to the Company will be used for
repayment of debt, purchase or lease of computer
hardware and software, installation of an in-house
billing system and working capital. See "Use of
Proceeds."
Nasdaq SmallCap Symbols
Common Stock................................ "USTL"
Warrants (proposed)......................... "USTLW"
Units (proposed)............................ "USTLU"
Risk Factors.................................. Prospective investors should consider carefully the
factors set forth under "Risk Factors."
</TABLE>
5
<PAGE> 7
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
nine months ended September 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.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 11, NINE MONTHS ENDED
1992 YEARS ENDED DECEMBER 31, SEPTEMBER 30,
(INCEPTION) TO ------------------------------------------------------- ------------------------------------------
OPERATIONS DECEMBER 31, PRO FORMA PRO FORMA
DATA: 1992 1993 1994 1995 1995(1) 1995 1996(3) 1996(1)(2)(3)
-------------- ----------- ----------- ------------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues... $ 5,740 $ 1,600,147 $ 6,118,480 $ 16,127,575 $ 17,877,642 $ 11,310,018 $16,166,344 $ 17,121,990
Total
operating
expenses... 318,890 2,286,981 6,982,051 16,252,143 17,810,535 11,544,511 18,630,125 19,951,079
Income
(loss)
from
operations... (313,150) (686,834) (863,571) (124,568) 67,107 (234,493) (2,463,781) (2,829,089)
Net
interest
expense... -- (41,686) (117,780) (136,377) (147,051) (64,576) (313,928) (315,113)
Net
loss.... (313,150) (765,552) (1,075,442) (371,711) (302,856) (403,481) (2,777,709) (3,131,646)
Net loss
per
share... (0.33) (0.81) (0.83) (0.23) (0.11) (0.25) (1.37) (1.01)
Weighted
average
common
shares
outstanding... 950,000 950,000 1,291,913 1,600,000 2,676,923 1,600,000 2,025,740 3,102,663
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- --------------------------
OTHER INFORMATION: 1993 1994 1995 1995 1996
--------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Traffic volume (minutes).......................... 9,317,640 38,683,886 103,093,699 72,297,996 103,341,525
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996(3)
----------------------------------------------------
PRO FORMA AS
BALANCE SHEET DATA: ACTUAL AS ADJUSTED(4) ADJUSTED(1)(2)(4)
----------- -------------- -----------------
<S> <C> <C> <C>
Working capital (deficit).................................................. $ (239,944) $ 5,542,564 $ 6,365,914
Total assets............................................................... 11,360,319 12,293,386 17,058,314
Notes payable to banks..................................................... 2,437,931 2,437,931 2,637,931
Notes payable to others.................................................... 5,144,275 84,000 84,000
Total long-term debt....................................................... 500,000 500,000 500,000
Total stockholders' equity................................................. 2,433,767 8,516,275 12,716,275
</TABLE>
- ---------------
(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 a result of entering into the Merger Agreement, Consortium 2000 agreed,
effective as of June 30, 1996, to write off a difference of $775,943 between
the Company's commission expenses to Consortium 2000 and Consortium 2000's
commission revenue from the Company. This difference was included in general
and administrative expenses.
(3) Includes an expense of $2,860,869 which was primarily attributable to an
increase in the reserve for bad debts, the write down of certain deferred
offering costs, the reduction of the accrual for unbilled revenues and a
change in the accrual for claims against other carriers.
(4) As adjusted to reflect the sale of 1,250,000 Units by the Company at an
assumed price of $6.00 per Unit and the application of the net proceeds
therefrom. See "Use of Proceeds."
6
<PAGE> 8
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 in connection with an
investment in the securities offered hereby. This Prospectus contains certain
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from the results discussed in the
forwardlooking statements as a result of certain of the risk factors set forth
below and elsewhere in this Prospectus.
LACK OF IN-HOUSE BILLING SYSTEM; PRESSURE ON WORKING CAPITAL
Because the Company has not yet installed 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 Company's 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 15 to 25 days after the
end of the month in which the services are rendered. In most cases, therefore,
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 December, 1996, the Company entered into an agreement with
WilTel, Inc., the Company's primary long distance carrier ("WilTel"), to finance
a portion of its approximately $6,448,501 outstanding payable due to WilTel.
Pursuant to this agreement, WilTel agreed to defer payment on $3,956,782 owed by
the Company to WilTel. Such amount bears interest at 18% per annum and will be
paid out of the proceeds of this Offering and, in any event, no later than
February 28, 1997. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--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. However, there can be no assurance that the billing
system will achieve these results. The Company anticipates that it may need to
arrange for additional cash resources within the next 12 months through debt or
equity financings. The Company has no commitments for additional debt or equity
financings and there can be no assurance that the Company will be successful in
consummating any such financing transaction in the future on terms that the
Company would consider favorable, if at all. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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
7
<PAGE> 9
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 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; ACCUMULATED LOSSES FOR 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 the Units. 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, $371,711 and
$2,777,709 for the years ended December 31, 1993, 1994 and 1995 and for the nine
months ended September 30, 1996, respectively. Losses incurred through December
31, 1995 were attributable primarily to 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. Losses incurred through
September 30, 1996 are primarily attributable to a decision by new management to
increase the reserve for bad debts, write-down certain deferred offering costs,
reduce the accrual for unbilled revenues and change the accrual for claims
against other carriers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Recent Developments."
Although management believes this is an unusual and one-time charge related to
management's revaluation, there can be no assurance that the Company will attain
profitability or positive cash flows from operating activities in the future. If
the Company is unable to attain 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 "Risk
Factors-Restatement of Third Quarter Financials" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
Financial Statements and the Notes thereto contained elsewhere in this
Prospectus.
RESTATEMENT OF THIRD QUARTER FINANCIALS
The Company recently restated its unaudited financial statements for the
third quarter included in the financial statements for the nine months ended
September 30, 1996 to reflect a loss of $2,777,709 from a profit of $83,160, as
previously reported. This amendment was the result of the new management team
undertaking a comprehensive review of all of the Company's assets. This review
included evaluating the net realizable value of various assets and the adequacy
of current reserves. This review and evaluation was not completed until after
November 15, 1996, the Commission's deadline for filing third quarter financial
statements, and therefore the change was filed by an amendment to the Company's
10-QSB for the period ended September 30, 1996. As a result of this review the
Company recorded an additional expense for the period ended September 30, 1996
in the amount of $2,860,869. This expense was primarily attributable to an
increase in the reserve for bad debts, the write-down of certain deferred
offering costs, the reduction of the accrual for unbilled revenues and change in
the accrual for claims against other carriers. Management believes this is an
unusual and one-time charge related to management's revaluation.
8
<PAGE> 10
NASDAQ INQUIRY
The Nasdaq Stock Market has requested that the Company provide information
relative to the Company's compliance with regulations governing the Nasdaq
SmallCap Market. While the Company believes that it has complied with this
request and continues to be qualified to trade on the Nasdaq SmallCap Market,
failure to do so may among other things result in the securities of the Company
trading on the OTC Bulletin Board and not on the Nasdaq SmallCap Market and may
otherwise materially adversely affect the Company. The Company may, as an
alternative to the listing on the Nasdaq SmallCap Market, seek to list its
Common Stock, Units and Warrants on the AMEX. There can be no assurance that
such listing will be obtained.
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
transmission facilities 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; REINCORPORATION IN CALIFORNIA
The Merger is subject to the approval of a majority of the Company's
outstanding shares of Common Stock, as well as certain other closing conditions.
Following this Offering, the Company intends to reincorporate in California.
Only stockholders of record before the effective date of this Prospectus will be
entitled to vote on the Merger and the reincorporation into California. The
Company expects to schedule a special meeting of stockholders, to be held
approximately 60 days after the effective date of this Offering, for the purpose
of voting on the Merger and the reincorporation in California. Consequently, the
Merger and the reincorporation in California 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 after it becomes a
wholly-owned subsidiary of UStel. Consortium 2000's clients accounted for
approximately 90% of the Company's customer base at December 31, 1996. 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 Merger,
will place additional demands upon
9
<PAGE> 11
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 Units, Common
Stock and Warrants. 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 Units, Common Stock and Warrants. 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 Units. See "Business -- Government Regulation."
EQUIPMENT FAILURES; NATURAL DISASTER
The Company does not carry "business interruption" insurance. 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 33.9% 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"). There is currently outstanding 550,000
shares of Series A Convertible Preferred Stock (the "Series A Preferred"). The
remaining authorized shares of Preferred Stock are unissued 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 stockholder
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
10
<PAGE> 12
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, UNITS AND WARRANTS
The Company's Common Stock is traded on the Nasdaq SmallCap Market. The
Company believes there are currently four market makers in the Company's Common
Stock, three of which are active market makers. Daily trading volume to date has
been very limited and frequently there have been no trades on a given day.
Although the Company believes that this Offering will increase the float, or the
number of shares in the hands of the public, and hence liquidity in the Common
Stock, no assurance can be made that there will be sufficient liquidity in the
Common Stock to effectuate large volume trades in the Company's securities.
Prior to the date of this Prospectus there has been no public market for the
Units or the Warrants and, although the Company intends to apply for listing of
the Units and Warrants on the Nasdaq SmallCap Market, there can be no assurance
that such application will be approved, or if approved that a liquid market will
develop for the Units and Warrants.
The Company's Common Stock is listed on the Nasdaq SmallCap Market, and the
Company intends to apply for inclusion of the Units and Warrants on the Nasdaq
SmallCap Market and as an alternative, on the AMEX. Under the current
maintenance listing criteria for the Nasdaq SmallCap Market, in order for the
Company to maintain its listing, the Company must maintain $2,000,000 in total
assets, a $200,000 market value of the public float and $1,000,000 in total
capital and surplus. In addition, under the current listing criteria, continued
inclusion requires two market makers and a minimum bid price of $1.00 per share;
provided, however, that if the Company falls below such minimum bid price, it
will remain eligible for continued inclusion if the market value of the public
float is at least $1,000,000 and the Company has $2,000,000 in capital and
surplus. The Nasdaq SmallCap Market has recently proposed new maintenance
criteria which, if implemented, would eliminate the exception to the $1.00 per
share minimum bid price and require, among other things, $2,000,000 in net
tangible assets, $1,000,000 market value of the public float and adherence to
certain corporate governance provisions. The failure to meet these maintenance
criteria in the future may result in the delisting of the Units, Common Stock
and the Warrants, if so listed, and trading, if any, in the Units, Common Stock
and Warrants, if so listed, would thereafter be more difficult to dispose of, or
to obtain accurate quotations as to the market value of, the Units, Common Stock
and Warrants. In addition, if the Common Stock was to become delisted from
trading and the trading price of the Common Stock were to fall below $5.00 per
share, trading in the Common Stock would also be subject to the requirements of
certain rules promulgated under the Exchange Act, which require additional
disclosure by broker-dealers in connection with any trades involving a stock
defined as a penny stock (generally, any non-Nasdaq equity security that has a
market price of less than $5.00 per share, subject to certain exceptions). Such
rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith, and impose various sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors (generally institutions). For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. The additional burdens imposed upon broker-dealers by such requirements
may discourage broker-dealers from effecting transactions in the Units, Common
Stock and Warrants, which could severely limit the market liquidity of the
Units, Common Stock and Warrants and the ability of purchasers in this Offering
to sell the Units, Common Stock and Warrants in the secondary market. See "Price
Range of 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
11
<PAGE> 13
"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 securities may be significantly affected
by announcements of expanded services by the Company or its competitors,
acquisitions of related companies, changes in 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 Company's securities.
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
Company's securities and the ability of the Company to raise capital in the
future. The Units sold in this Offering will be eligible for immediate resale,
except to the extent acquired by affiliates of the Company. Additionally,
337,250 shares of Common Stock which are "restricted securities," as that term
is defined in Rule 144 which are owned by persons who are affiliates of the
Company, are currently eligible for sale under Rule 144. 2,443,000 shares of the
Common Stock, and securities convertible into shares of the Company's Common
Stock, are subject to certain registration rights agreements. Although the
Company intends to obtain waivers from the parties entitled to such registration
rights, no assurances can be made that such shares will not be registered in
accordance with the terms of the applicable registration rights agreements.
Shares of Common Stock held by officers, directors and certain principal
stockholders will be subject to lock-up agreements with the Representative,
whereby such shares may not be sold for a 24 month period following the date of
this Prospectus (the "Lock-up Period") without the prior written consent of the
Representative. 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. The Representative has agreed to release from the lock-up
agreement the number of shares of Common Stock held by the Trust necessary for
it to make the following payments: $1,000,000 in August 1997; $450,000 in
February 1998; and $450,000 in April 1998. In addition, the Representative will
allow the holder of the Series A Preferred, which is convertible into 750,000
shares of Common Stock, to sell up to 20,000 shares of Common Stock per month,
non-cumulatively, commencing 90 days after the date of this Prospectus. 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, that the Company believes it is
well positioned to grow in the future and other matters are forward-looking
statements. Moreover, words such as "may", "will", "expect", "believe",
"anticipate", "intend", "could", "estimate", or "continue" or the negative other
variations thereof
12
<PAGE> 14
or comparable terminology are intended to identify 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.
STOCK ISSUABLE PURSUANT TO WARRANTS AND REPRESENTATIVE'S WARRANTS
At the completion of this Offering, the Representative will receive the
Representative's Warrants to purchase 125,000 Units at a price of $7.20 (120% of
the initial public offering price per Unit). The Company has outstanding
warrants to purchase 1,081,000 shares of Common Stock at prices ranging from
$5.00 to $7.50 per share and options under its 1993 Stock Option Plan to
purchase 310,000 shares of Common Stock at $5.00 per share. See "Underwriting",
"Description of Securities -- Outstanding Warrants" and "Management -- 1993
Stock Option Plan." During the terms of outstanding options, warrants and
Representative's Warrants, the holders are given the opportunity to profit from
a rise in the market price of the Common Stock, and their exercise may dilute
the book value per share of Common Stock. The existence of outstanding options,
warrants and the Representative's Warrants may affect adversely the terms on
which the Company may obtain additional equity financing. Moreover, the holders
are likely to exercise their rights to acquire Common Stock at a time when the
Company would otherwise be able to obtain capital on terms more favorable than
could be obtained through the exercise or conversion of such securities.
LEGAL AND BLUE-SKY RESTRICTIONS ON SALES OF SHARES UNDERLYING THE WARRANTS
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified
or deemed to be exempt under the securities laws of the state of residence of
the exercising holder of the Warrants. Although the Company will use its best
efforts to have all the shares of the Common Stock issuable upon exercise of the
Warrants registered or qualified on or before the exercise date and to maintain
a current prospectus relating thereto until the expiration of the Warrants,
there can be no assurance that it will be able to do so.
The Warrants will be detachable and separately transferable starting 60
days from the date of this Prospectus or earlier in the discretion of the
Representative. Although the Units will not knowingly be sold to purchasers in
jurisdictions in which the Units are not registered or otherwise qualified for
sale, purchasers may buy Warrants in the after market in, or may move to,
jurisdictions in which the shares underlying the Warrants are not so registered
or qualified during the period that the Warrants are exercisable. In this event,
the Company would be unable to issue shares to those persons desiring to
exercise their Warrants, and holders of Warrants would have to attempt to sell
the Warrants in a jurisdiction where such sale is permissible or allow them to
expire unexercised. Further, although the Company intends to seek to qualify the
securities underlying the Warrants for sale in those states in which such
securities are to be offered, no assurance can be given that such qualification
will be achieved. The Warrants may be deprived of any value if a current
prospectus covering the securities issuable upon the exercise thereof is not
filed and kept effective or if such underlying securities are not, or cannot be,
registered in the applicable states.
ASSETS PLEDGED TO LENDER
Substantially all of the assets of the Company are pledged as collateral
under the Company's credit facility with its lender and under an agreement with
its primary long distance carrier, Wiltel. In addition, the assets of Consortium
2000 have also been pledged as collateral to Wiltel. See Note 4 to Unaudited
Financial Statements. As of December 31, 1996 an aggregate of $2,197,394 was
outstanding under the credit facility and approximately $3,956,782 was
outstanding under its agreement with Wiltel. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." Should
13
<PAGE> 15
the Company default on its secured obligations it would be at risk that its
assets could be foreclosed upon. Should such event occur the Company would be
unable to conduct its business.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,250,000 Units, after
deducting underwriting discounts and commissions and expenses of the Offering
payable by the Company, are estimated to be $6,082,508. The Company will not
receive any of the proceeds from the sale of Units by the Selling Stockholder.
The Company intends to use $5,514,500 from the net proceeds from the sale of the
Units to repay existing indebtedness, approximately $300,000 to purchase or
lease computer hardware and software and related services and to install an
in-house billing system, and the balance for working capital and general
corporate purposes. The debt to be paid or reduced consists of the following:
(i) $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 and
is guaranteed by Noam Schwartz, a founder and the former President of the
Company); (ii) $4,177,334 owed to WilTel, the Company's primary long distance
carrier, due February 28, 1997 (the debt, which includes interest of $220,552,
is evidenced by a promissory note bearing interest at the rate of 18% per annum
and was used to finance payables to WilTel); and (iii) $89,166 owing to Solomon,
Ross, Grey & Company, a California general partnership, which is affiliated with
Andrew J. Grey, a director of the Company (this debt is owing for consulting
services, is due upon the completion of this Offering and bears interest at 10%
per annum). In the event the over-allotment option is exercised in full, the
Company will realize additional net proceeds of approximately $1,081,350 which
it will allocate towards working capital and general corporate purposes. 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.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the total capitalization of the Company as
of September 30, 1996, (i) on a historical basis, (ii) as adjusted to reflect
the sale of 1,250,000 Units in this Offering by the Company (at an assumed
offering price of $6.00 per Unit) 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 "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 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
---------- ---------- -----------
Total long-term debt..................................... 500,000 500,000 500,000
---------- ---------- -----------
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized and 550,000 Series A Convertible
Preferred Stock outstanding actual: 550,000 Series A
Convertible Preferred Stock, as adjusted and pro
forma as adjusted................................... 5,500 5,500 5,500
Common Shares, $0.01 par value per share: 40,000,000
shares authorized, 2,126,851 shares issued and
outstanding, actual; 4,626,851 shares issued and
outstanding as adjusted; and 5,703,774 issued and
outstanding, pro forma as adjusted.................. 21,269 46,269 57,038
Additional paid-in capital............................. 7,710,562 13,768,070 17,957,301
Accumulated deficit.................................... (5,303,564) (5,303,564) (5,303,564)
---------- ---------- -----------
Total stockholders' equity............................... 2,433,767 8,516,275 12,716,275
---------- ---------- -----------
TOTAL CAPITALIZATION..................................... $2,933,767 $9,016,275 $ 13,216,275
========== ========== ===========
</TABLE>
- ------------------------
(1) Gives effect to the Merger and the issuance of 1,076,923 shares of Common
Stock in connection therewith. See "Business -- Recent Developments."
(2) See Note 5 of Notes to Financial Statements for the year ended December 31,
1995.
15
<PAGE> 17
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 SmallCap 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
SmallCap Market. Prices represent inter-dealer quotations, without adjustment
for retail mark-ups, markdowns or commissions and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1995
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......................................... 6.00 3.13
1997
First Quarter (through January 22)..................... $4.38 $2.75
</TABLE>
The 2,126,851 shares of Common Stock outstanding as of December 31, 1996
were held by approximately 124 record holders, who the Company believes held for
in excess of 300 beneficial holders. There has been no trading market for the
Warrants or Units.
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."
16
<PAGE> 18
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
September 30, 1996 and for the nine months ended September 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 nine months ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ended 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 31,
1992 NINE MONTHS ENDED
(INCEPTION) TO YEARS ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ---------------------------------------------------- ---------------------------------------
-------------- PRO FORMA PRO FORMA
1992 1993 1994 1995 1995 1995 1996(1) 1996(1)(2)
-------------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Revenues........ $ 5,740 $1,600,147 $ 6,118,480 $16,127,575 $17,877,642 $11,310,018 $16,166,344 $17,121,990
Operating
expenses:
Cost of
services
sold........ 3,563 1,248,463 4,696,106 11,542,374 11,293,640 8,240,409 12,006,378 11,679,809
General and
administrative... 199,821 637,263 1,412,649 3,071,788 4,689,152 2,282,329 4,762,971 6,259,715
Selling....... 113,909 368,361 785,933 1,460,010 1,460,010 900,960 1,676,705 1,676,705
Depreciation
and
amortization.. 1,597 32,894 87,363 177,971 358,696 120,813 184,071 334,850
--------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses...... 318,890 2,286,981 6,982,051 16,252,143 17,810,535 11,544,511 18,630,125 19,951,079
--------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Income (loss)
from
operations.... (313,150) (686,834) (863,571) (124,568) 67,107 (234,493) (2,463,781) (2,829,089)
Loss from rental
operations.... -- (62,025) (101,705) -- -- -- -- --
Net gain on sale
of property... -- 24,993 7,614 -- -- -- -- 12,556
Net interest
income
(expense)..... -- (41,686) (117,780) (136,377) (147,051) (64,576) (313,928) (315,113)
Relocation
costs(2)...... -- -- -- (110,766) (110,766) (104,412) --
Income taxes.... -- -- -- -- (112,146) -- -- --
--------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Net loss........ $ (313,150) $ (765,552) $(1,075,442) $ (371,711) $ (302,856) $ (403,481) $(2,777,709) $(3,131,646)
========= ========== ========== =========== =========== =========== =========== ===========
Net loss per
share......... $ (0.33) $ (0.81) $ (0.83) $ (0.23) $ (0.11) $ (0.25) $ (1.37) $ (1.01)
========= ========== ========== =========== =========== =========== =========== ===========
Weighted average
common shares
outstanding... 950,000 950,000 1,291,913 1,600,000 2,676,923 1,600,000 2,025,740 3,102,663
========= ========== ========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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 72,297,996 103,341,525
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996(1)
AT DECEMBER 31, --------------------------
-------------------------------------------------- PRO FORMA
1992 1993 1994 1995 ACTUAL AS ADJUSTED
--------- ----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)....................... $(338,102) $(1,186,289) $3,722,506 $ 2,200,440 $ (239,944) $ 6,365,914
Total assets.................................... 130,314 2,696,601 7,318,627 11,978,031 11,360,319 17,058,314
Notes payable to banks.......................... -- 375,000 770,000 2,900,000 2,437,931 2,637,931
Notes payable to others......................... 334,421 994,438 -- 1,500,000 5,144,275 84,000
Total long-term debt............................ -- 969,516 500,000 500,000 500,000 500,000
Total debt...................................... 334,421 2,338,954 1,270,000 4,900,000 8,082,206 3,221,931
Total stockholders' equity (deficit)............ (213,150) (498,594) 4,088,234 3,787,773 2,433,767 12,716,275
</TABLE>
- ---------------
(1) Includes an expense of $2,860,869 which was primarily attributable to an
increase in the reserve for bad debts, the write-down of certain deferred
offering costs, the reduction of the accrual for unbilled revenues and a
change in the accrual for claims against other carriers.
(2) The Company incurred relocation costs resulting from the move of its
operations center from Los Angeles, California and Clearwater, Florida to
Las Vegas, Nevada.
17
<PAGE> 19
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
On August 14, 1996, UStel, Consortium Acquisition Corporation (a
wholly-owned subsidiary created by the Company) and Consortium 2000 entered into
a Merger Agreement and Plan of Reorganization (the "Merger Agreement" and
"Merger"). 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
Financial Statements give effect to the Merger and are 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 interests
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
Statement of Operations and the related notes should be read in conjunction with
UStel's Audited Financial Statements and Unaudited Financial Statements
contained elsewhere in this Prospectus. In management's opinion, all adjustments
necessary to reflect the acquisition have been made.
18
<PAGE> 20
USTEL, INC.
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------- PRO FORMA
USTEL, INC. CONSORTIUM 2000, INC. ADJUSTMENTS PRO FORMA
----------- --------------------- ---------- -----------
<S> <C> <C> <C> <C>
Cash........................... $ 394,126 $ 68,671 $ -- $ 462,797
Accounts receivable............ 7,241,162 854,124 (293,175)(4a(2)) 7,802,111
Prepaid expenses and other..... 551,320 172,308 -- 723,628
----------- ---------- ---------- -----------
8,186,608 1,095,103 (293,175) 8,988,536
Property & equipment........... 2,573,941 101,774 -- 2,675,715
Accumulated depreciation....... (410,491) (57,844) -- (468,335)
----------- ---------- ---------- -----------
2,163,450 43,930 -- 2,207,380
Other assets................... 1,010,261 186,288 (115,000)(4a(3)) 1,081,549
Goodwill....................... -- -- 3,732,782(4a(1)) 3,732,782
----------- ---------- ---------- -----------
$11,360,319 $ 1,325,321 $3,324,607 $16,010,247
=========== ========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable & accrued
expense...................... $ 594,117 $ 620,722 $ (293,175)(4a(2)) $ 921,664
Accrued revenue taxes.......... 250,229 -- -- 250,229
Deferred salaries.............. -- 37,381 -- 37,381
Notes payable.................. 7,582,206 200,000 -- 7,782,206
----------- ---------- ---------- -----------
8,426,552 858,103 (293,175) 8,991,480
Long-term debt................. 500,000 -- -- 500,000
Stockholders' equity........... 2,433,767 467,218 3,617,782(4a) 6,518,767
----------- ---------- ---------- -----------
$11,360,319 $ 1,325,321 $3,324,607 $16,010,247
=========== ========== ========== ===========
</TABLE>
See accompanying notes to pro forma condensed financial statements.
19
<PAGE> 21
USTEL, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
USTEL, CONSORTIUM PRO FORMA
INC. 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 -- 6,584,002
Selling........................... 1,460,010 -- -- 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.
20
<PAGE> 22
USTEL, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------- PRO FORMA
USTEL, INC. CONSORTIUM 2000, INC. ADJUSTMENTS PRO FORMA
----------- --------------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues, net.............. $16,166,344 $ 2,563,596 $(1,607,950)(4b) $17,121,990
Cost of services sold...... 12,006,378 1,281,381 (1,607,950)(4b) 11,679,809
----------- ---------- ---------- -----------
Gross profit..... 4,159,966 1,282,215 -- 5,442,181
Selling.................... 1,676,705 -- -- 1,676,705
General & administrative... 4,762,971 1,496,744 -- 6,259,715
Depreciation &
amortization............. 184,071 10,800 139,979(4b) 334,850
----------- ---------- ---------- -----------
Loss from
operations..... (2,463,781) (225,329) (139,979) (2,829,089)
Other income............... -- 12,556 -- 12,556
Interest................... (313,928) (1,185) -- (315,113)
----------- ---------- ---------- -----------
Loss before
taxes.......... (2,777,709) (213,958) (139,979) (3,131,646)
Income taxes............... -- -- -- --
----------- ---------- ---------- -----------
Net loss......... $(2,777,709) $ (213,958) $ (139,979) $(3,131,646)
=========== ========== ========== ===========
Pro forma information:
Net loss per share....... $ (1.37) $ (1.01)
=========== ===========
Shares used in
per share
calculation.... 2,025,740 3,102,663
=========== ===========
</TABLE>
See accompanying notes to pro forma condensed financial statements.
21
<PAGE> 23
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 of UStel) and Consortium 2000, Inc.
("Consortium 2000") entered into a Merger Agreement and Plan of Reorganization
("Merger Agreement" and "Merger"). Under the terms of the Merger Agreement, (a)
Consortium Acquisition Corporation will be merged with Consortium 2000, with
Consortium 2000 being the surviving corporation in the Merger; and (b) 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.
2. EFFECT OF ACQUISITION
The adjustments to the Pro Forma Condensed Balance Sheet as of September
30, 1996 reflect the Merger as if it occurred on September 30, 1996. The Pro
Forma Condensed Statements of Operations for the year ended December 31, 1995
and for the nine month period ended September 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 has a June 30 fiscal year end. In order to bring Consortium
2000's statement of operations up to UStel's December 31 fiscal year end, the
results of Consortium 2000'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. In order to bring Consortium 2000's statement of operations
up to UStel's nine months ended September 30, 1996, the results of Consortium
2000's operations for the six month period ended June 30, 1996 were combined
with its results of operations for the three month period ended September 30,
1996.
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 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 are as follows:
<TABLE>
<S> <C>
Total purchase price (1,076,923 shares X $3.90)....................... $4,200,000
Book value of Consortium 2000......................................... (467,218)
----------
Goodwill.............................................................. $3,732,782
==========
</TABLE>
(2) To eliminate intercompany receivable on Consortium 2000's books
against intercompany payable on UStel's books.
(3) To reclassify shares held by Consortium 2000 as treasury shares.
22
<PAGE> 24
b. The pro forma adjustments to the condensed statements of operations are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
(1) Adjustment to revenue for elimination of
intercompany sales................................ $ 1,398,706 $ 1,607,950
(2) Adjustment to cost of services sold for
elimination of intercompany sales................. (1,398,706) (1,607,950)
(3) Amortization of goodwill over 20 years............ 180,762 139,979
----------- -----------
$ 180,762 $ 139,979
=========== ===========
</TABLE>
23
<PAGE> 25
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. This
Prospectus contains forward-looking statements 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 risk
factors, including those set forth in the following section and elsewhere in
this Prospectus. The following discussion should be read in conjunction with the
Financial Statements and related Notes thereto appearing elsewhere in this
Prospectus.
GENERAL
On August 14, 1996, a change of control of UStel occurred as a result of
the purchase of a substantial portion of the shares owned by the founders of the
Company at a price of $7.15 per share by the Trust, an investment group
comprising shareholders of Consortium 2000. Coincident with this transaction, a
new and experienced management team was appointed. Since its appointment, the
new management team has undertaken to restructure the Company's relationship
with its underlying long distance carrier, refocus marketing activities,
implement a new network development strategy which will convert the majority of
the Company's traffic from switched access to dedicated access, improve billing
and collections and customer service, reduce cost of operations and develop a
viable strategy for the future.
The new management team undertook a comprehensive review of all of the
Company's assets. This review included evaluating the net realizable value of
various assets and the appropriateness of certain reserves. As a result of this
review, the Company recorded an additional expense for the period ended
September 30, 1996 in the amount of $2,860,869. This expense was primarily
attributable to an increase in the reserve for bad debts, the write-down of
certain deferred offering costs, the reduction of the accrual for unbilled
revenues and a change in the accrual for claims against other carriers.
Management believes that this is an unusual and one-time charge related to
management's revaluation. With the addition of the Consortium 2000 marketing
organization, the Company believes that it is well-positioned to continue to
grow in the future.
RESULTS OF OPERATIONS
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 December, 1996. In addition, the number of subscribers to the Company's long
distance telephone service has grown to in excess of 18,000 at December 31,
1996.
On August 14, 1996, UStel, Consortium 2000 and Consortium Acquisition
Corporation 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 going
forward basis.
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.
24
<PAGE> 26
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.
The following table sets forth certain quarterly financial information for 1995
and the first three 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 three quarters of 1996
are not necessarily indicative of the results that may be expected for the
fourth quarter ended December 31, 1996 or for any future period.
<TABLE>
<CAPTION>
1996-THREE MONTHS ENDED
1995-THREE MONTHS ENDED ------------------------------------
---------------------------------------------------- SEPT.
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 30(1)
---------- ---------- ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue............. $3,142,512 $3,854,239 $4,313,267 $4,817,557 $4,903,267 $5,623,236 $5,639,841
Total operating
expenses.......... 3,121,261 3,804,321 4,618,928 4,707,632 4,810,345 5,458,181 8,361,599
Income (loss) from
operations........ 21,251 49,918 (305,661) 109,925 92,922 165,055 (2,721,758)
Net income (loss)... 9,020 39,117 (469,429) 31,770 1,398 70,567 (2,849,674)
</TABLE>
- ---------------
(1) Includes an expense of $2,860,869 which was primarily attributable to an
increase in the reserve for bad debts, the write down of certain deferred
offering costs, the reduction of the accrual for unbilled revenues and a
change in the accrual for claims against other carriers.
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>
NINE MONTHS ENDED
YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- -----------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services sold.............................. 78.0 76.8 71.6 72.9 74.3
------ ------ ------ ------ ------
Gross profit....................................... 22.0 23.2 28.4 27.1 25.7
Selling, general and administrative expenses....... 64.9 37.4 29.2 29.2 41.0
------ ------ ------ ------ ------
Loss from operations............................... (42.9) (14.1) (0.8) (2.1) (15.2)
Other expenses..................................... 2.3 1.6 0.7 0.9 --
Net interest (expense)............................. 2.6 2.5 1.6 (0.6) (1.9)
------ ------ ------ ------ ------
Loss before income taxes........................... (47.8) (17.6) (2.3) (3.6) (17.1)
Income tax expense................................. -- -- -- -- --
Net loss........................................... (47.8)% (17.6)% (2.3)% (3.6)% (17.1)%
====== ====== ====== ====== ======
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1995.
Revenues for the nine months ended September 30, 1996 were $16,166,344 as
compared to $11,310,018 for the nine months ended September 30, 1995. The
increase in revenues in 1996 was the result of expansion from a customer base of
6,000 at September 30, 1995 to a customer base in excess of 16,500 at September
30, 1996.
Cost of services sold for the nine months ended September 30, 1996 was
$12,006,378 as compared to $8,240,409 for the nine months ended September 30,
1995. The increase in the cost of services expense was partially caused by the
change in the accrual for claims against other carriers which resulted in an
additional expense of $652,665. Prior to this adjustment the cost of services
expense for the nine months through September 30, 1996 amounted to $11,353,713.
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 nine months ended September 30, 1996 was 74.3% of the
revenues produced in the first nine months of 1996. Cost of services sold for
the nine months ended September 30, 1995 was 72.9% of the revenues produced in
that period of 1995.
25
<PAGE> 27
General and administrative expenses for the nine months ended September 30,
1996 were $4,762,971 as compared to $2,282,329 for the nine months ended
September 30, 1995. The increase in general and administrative expenses is due
to an increase in the reserve for bad debts of $1,269,704 and the write-down of
certain deferred offering costs of $424,000. The additional increase of $786,938
was the result of increased staff and related costs in support of the increased
revenues being produced by the Company.
Selling expenses for the nine months ended September 30, 1996 were
$1,676,705 as compared to $900,960 for the nine months ended September 30, 1995.
The increase in selling expenses reflects the costs associated with the
expansion and retention of the Company's customer base from commencement through
September 30, 1996.
Depreciation and amortization for the nine months ended September 30, 1996
was $184,071 as compared to $120,813 for the nine months ended September 30,
1995. Amortization of the Company's start-up cost asset was $14,755 and $14,749
for the nine-month periods ended September 30, 1996 and September 30, 1995,
respectively. Depreciation for the nine months ended September 30, 1996 was
$169,315 as compared to $106,057 for the nine months ended September 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 $1,475,000 at September 30, 1995 to approximately $2,574,000 at
September 30, 1996.
During the nine months ended September 30, 1996 the Company reported a loss
from operations of $2,463,781 versus a loss from operations of $234,493 for the
nine months ended September 30, 1995. This loss includes additional general and
administrative expenses of $2,860,869 as discussed above.
Interest expense for the nine months ended September 30, 1996 was $409,205
as compared to $151,349 for the nine months ended September 30, 1995. The
Company continues to utilize short-term bank lines of credit to supplement its
periodic needs for cash in operations. In July, 1996 those lines of credit were
repaid from the application of proceeds from certificates of deposit which
secured these obligations. In December, 1995, the Company obtained a senior
credit facility (the "Credit Facility") in the amount of up to $5,000,000. This
Credit Facility bears interest at the Bank of America Reference Rate plus 2% per
annum, with a minimum of $15,000 interest expense per month. Accordingly,
interest expense charged for the nine months ended September 30, 1996 was
$183,573 including amortization of related loan fees over thirty-six months.
Interest income for the nine months ended September 30, 1996 was $95,278
principally from the Company's holdings of bank certificates of deposit and
accrual of interest on officers loans, as compared to $86,773 for the nine
months ended September 30, 1995.
During the nine months ended September 30, 1996, the Company reported a net
loss of $2,777,709 versus a net loss of $403,481 for the nine months ended
September 30, 1995. The Company's new management, which took control on August
15, 1996, conducted a thorough review of the Company's assets and as a result,
the Company incurred a non-cash charge of $2,860,869 for the three-month period
ended September 30, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 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 revenues, was the result of
the expansion in the Company's customer base. Cost of services sold for the year
26
<PAGE> 28
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.
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.
27
<PAGE> 29
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 was $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 September 30, 1996 was
approximately $85,000. 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, lack of an in-house billing system and a
significant increase in accounts receivable due to growth in operations.
During the first nine months of 1996, the Company utilized net cash of
$2,355,317 for operating activities.
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 has not yet commenced installation of 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 15 to 25
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 the installation of an in-house billing system which would
enable the Company to render its bills on a more frequent billing cycle.
At September 30, 1996, the Company's accounts receivable, net of allowance
for doubtful accounts, was $6,947,345. In addition, through September 30, 1996,
the Company had invested $1,879,643 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 Stock in 1994 enabled the Company to partially alleviate, on a
temporary basis, the need for these short-term bridge financings, other than
arrangements with banks for short-term lines of credit. At September 30, 1996,
the Company had borrowings outstanding under bank lines of credit in the amount
of $2,437,931. These bank lines of credit were fully drawn at September 30,
1996. The lines of credit were secured by the Company's cash, accounts
receivable and certain other assets.
In October, 1995, the Company borrowed $1,500,000 pursuant to the terms of
a one-year term loan. Amounts borrowed under the agreement bear 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 100,000 shares of
28
<PAGE> 30
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 shares of the Company's Common Stock and a cash payment of $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 $5,000,000 or 85% of the Company's eligible receivables. Subject
to the $5,000,000 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 $1,500,000 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 September 30, 1996 was $2,437,931.
In February, 1996, the Company borrowed $400,000 from Kamel B. Nacif, the
holder of the Company's Series A Preferred Stock. This loan is payable on demand
and bears interest at the annual rate of 12%. At December 31, 1996, the unpaid
balance was $84,000. Interest is payable quarterly. In addition, an 8% loan fee
is payable at maturity.
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 the acquisition of up to 540,000 shares of its
Common Stock at a price of $5.00 per share. Warrants for the purchase of 120,000
shares of Common Stock were issuable at the time the loan was funded. As of
December 19, 1996, the lender was entitled to warrants to purchase 240,000
shares of the Company's Common Stock. If the loan is not paid by March 19, 1997,
the lender will become entitled to a warrant to purchase an additional 60,000
shares; if the loan is not repaid by June 19, 1997, the lender will be entitled
to a warrant to purchase 60,000 shares for each ninety day period thereafter
that the loan remains unpaid, or warrants to purchase up to 240,000 additional
shares, for a total of warrants to purchase up to 540,000 shares.
As of December 27, 1996, the Company was indebted to WilTel, the Company's
primary long distance carrier, in the amount of $6,448,501. This amount was
settled by the payment of $2,491,720 by the Company. WilTel agreed to allow the
Company to defer the balance owing in the amount of $3,956,782 to February 28,
1997. The deferred amount is evidenced by a promissory note that bears interest
at a rate of 18% per annum and is secured by a second lien on all the Company's
and Consortium 2000's assets and is guaranteed by Consortium 2000. The balance
due on the note, including interest, will be $4,177,334, on February 28, 1997.
At December 31, 1995, the Company had 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 September
30, 1996 the net operating loss carryforward 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 carryforwards 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.
The Company anticipates that it may need to arrange for additional cash
resources within the next 12 months through debt or equity financings. The
Company has no commitments for additional debt or equity financings and there
can be no assurance that the Company will be successful in consummating any such
financing transaction in the future on terms that the Company would consider
favorable, if at all.
IMPACT OF NEW ACCOUNTING STANDARDS
During March, 1995, the Financial Accounting Standards Board ("FASB")
issued Statement No. 121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be
29
<PAGE> 31
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 fiscal years beginning
after December 15, 1995. 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 FASB 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 15, 1995.
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
issued by the FASB is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive applications are not permitted.
The new standard provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. The Company
does not expect adoption to have a material effect on its financial position or
results of operations.
30
<PAGE> 32
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 18,000 customers in December, 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 December,
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
AVAILABLE PORTS UTILIZED AT UTILIZED AT
LOCATION PORTS SEPT. 30, 1996 SEPT. 30, 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
On August 14, 1996, a change of control of UStel occurred as a result of
the purchase of a substantial portion of the shares owned by the founders of the
Company by the Trust, an investment group comprised of shareholders of
Consortium 2000, at a price of $5.00 per share. Coincident with this
transaction, a new and experienced management team was appointed. Since its
appointment, the new management team has undertaken to restructure the Company's
relationship with its underlying long distance carrier, refocus marketing
activities, implement a new network development strategy which will convert the
majority of the Company's traffic from switched access to dedicated access,
improve billing and collections and customer service, reduce cost of operations
and develop a viable strategy for the future.
The new management team undertook a comprehensive review of all of the
Company's assets. This review included evaluating the net realizable value of
various assets and the appropriateness of certain reserves. As a result of this
review Company recorded an additional expense for the period ended
31
<PAGE> 33
September 30, 1996 in the amount of $2,860,869. This expense was primarily
attributable to an increase in the reserve for bad debts, the write-down of
certain deferred offering costs, the reduction of the accrual for unbilled
revenues and a change in the accrual for claims against other carriers.
Management believes this is an unusual and one-time charge related to
management's revaluation. With the addition of the Consortium 2000 marketing
organization, the Company believes that it is well-positioned to continue to
grow in the future.
The change of control was effected through the purchase by the Trust of an
aggregate of 883,500 UStel shares for an aggregate consideration of $4,417,500
from the RGB/TAD Investment Partnership (the "Partnership"). The Partnership is
composed of two family trusts of which Noam Schwartz, the former President of
UStel, was at one time a trustee. The 883,500 shares include 270,750 shares to
be purchased by the Trust pursuant to an amendment dated February 4, 1997 to an
agreement dated August 14, 1996. The amendment, among other things, effected a
reduction in the purchase price from $7.15 to $5.00 per share. The amendment
also gives the Partnership an option to buy back 150,000 shares at $6.00 per
share. Royce Diener, the former 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 through September
30, 1997 and are secured by the shares purchased and other collateral, including
an assignment of the Trust's participation rights in the secured position of the
lender providing the Credit Facility. The Trust will be acquiring these
participation rights as a result of depositing $500,000 as cash collateral with
the lender. In addition to his voting power over the 883,500 UStel shares
purchased, Royce Diener beneficially owns an additional 136,333 shares of Common
Stock consisting of 53,000 shares of Common Stock owned of record 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, 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. On December 23, 1996, Robert L.B. Diener was elected Chairman of the
Board of Directors, and Jerry Dackerman was elected President and Chief
Operating Officer.
Concurrent with the purchase of the shares of Common Stock by the Trust,
the Company entered into the Merger Agreement with Consortium 2000. 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. Only stockholders of record prior to the
effective date of this Prospectus will be entitled to vote on the Merger. See
"Risk Factors -- Consummation and Implementation of the Merger; Reincorporation
in California."
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.
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.
32
<PAGE> 34
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 industry 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-1994, UStel entered into a non-exclusive sales agent agreement with
Consortium 2000. As of December 31, 1996, approximately 90% of UStel's customers
base had been referred to the Company by Consortium 2000. Conversely,
approximately 70% of Consortium 2000's revenues during the nine months ended
September 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 a wholly-owned subsidiary of UStel and 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 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; Reincorporation in
California."
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 purchasers 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
the 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.
Installation of In-house Billing System. The Company believes that it
can achieve significant cost-savings and reduce reliance on its working
capital facility by the installation of its own dedicated billing system.
The Company believes that the system will enable it to improve cashflow by
producing billings on
33
<PAGE> 35
a more timely basis and permitting multiple billing cycles per month. The
Company also believes that the system will 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 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.
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
inter Local Access and Transport Area ("LATA") calls are routed automatically to
the consumer's long distance carrier of choice. 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
34
<PAGE> 36
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-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 foreign countries. In
providing long distance telephone services, the Company offers a variety of
service options, including "l+" 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
35
<PAGE> 37
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, 1996, approximately 51% of the Company's revenues were derived from
customers that utilize dedicated access lines and approximately 48% 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 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 permit 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 plans
to install an in-house billing system 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.
36
<PAGE> 38
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 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. Since the FCC has
required the detariffing of most interstate service offerings no later than
September 1997, revisions to such rates by carriers will no longer be required
to be pre-filed with the FCC, but will be governed by contracts between the
Company and the carriers.
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 which are 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
37
<PAGE> 39
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, e.g., 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.
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 review 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 use a portion of the
proceeds of this Offering for the installation of 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 mid-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
1,000 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
38
<PAGE> 40
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 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 fiberoptic 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.
39
<PAGE> 41
At December 31, 1996, the Company had obtained a certificate of public
convenience and necessity or equivalent documents from 35 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
terrestrial non-dominant inter-exchange resale 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. The FCC
ruled that interstate carriers 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, as well as substantial deregulation of AT&T
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 Proceeding
In an effort to encourage competition in the provision of interstate access
service, in 1993 the FCC developed interim rules for the pricing of "access
transport" service. Access transport service refers to the connection provided
by LECs between long distance carriers' long distance facilities and the
customer's telephone. These interim rules were designed to: 1) align the
transport charges more closely to the way costs are incurred by reflecting both
flat rate elements and usage sensitive elements; and 2) remain in effect through
October 31, 1995.
The FCC extended the interim rules indefinitely, in part, in anticipation
of the Telecommunications Act of 1996. Several carriers appealed the interim
rules to the US Circuit Court of Appeals for the District of Columbia which
found that the FCC failed to justify important elements of the interim rules.
The Court remanded the matter back to the FCC.
In response to the Court and the Telecommunications Act of 1996, the FCC
has developed a new interim formulation of access pricing which is set to expire
no later than June 30, 1997. On December 23, 1996 the FCC instituted a
rulemaking proceeding designed to comprehensively reform access charges and
increase competition. In this proceeding the FCC is considering how best to
regulate access and associated transport rate structures, so that prices for
access and various access elements will become, by competition or other means,
more reflective of economic costs. While the Company cannot now predict the
outcome of the proceeding, the charges assessed to both the Company and its
competitors are likely to be affected. The rulemaking is expected to be resolved
in 1997, but implementation of new cost structures may be phased in by region or
service. In the event that this rulemaking proceeding has not concluded by June
30, 1997, the FCC may extend the interim formulation date.
40
<PAGE> 42
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, non-dominant long distance carriers such as the Company
were permitted to enter into individual contracts with customers without
disclosing in public tariffs 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 U.S. 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.
Subsequently, the Telecommunications Act of 1996 amended the Communications
Act of 1934 to allow the FCC to forbear from applying any provision of the
Communications Act if enforcement of the provision: (1) is not necessary to
ensure that charges are just, reasonable and non-discriminatory; (2) is not
necessary to protect consumers; and (3) is consistent with the public interest.
On October 31, 1996, the FCC released an order finding that the statutory
conditions of the Telecommunications Act of 1996 were met with regard to most
tariff requirements for nondominant long distance carriers. The FCC's order
required all nondominant carriers to cancel their tariffs for interstate,
domestic, interexchange services on file with the FCC no later than September
22, 1997, and not file any such tariffs thereafter. International services,
however, continue to be tariffed.
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 requires telecommunications
carriers to interconnect with other carriers and requires local exchange
carriers 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: (i)
audio/video programming; (ii) internet services for schools; (iii) mobile
services; (iv) information or alarm services; and (v) telecommunications
signaling. In order for a RBOC to provide in-region long distance service, the
Telecommunications Act requires the RBOC to comply with a comprehensive
competitive checklist and expands the role of the U.S. Justice Department in the
FCC's determination of whether the entry of a RBOC 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 RBOC
providing in-region long distance service. RBOCs must provide long distance
services through a separate subsidiary for at least three years. Until the RBOCs
are allowed into long distance or three years have passed, long distance
carriers with more than 5% of the nation's access lines may not jointly market
RBOC resold local telephone service, and states may not require RBOCs to provide
intra LATA dialing parity except for single LATA states and states that had
earlier required an RBOC to implement such parity.
Telecommunications companies may also provide video programming and cable
operators may provide telephone service in the same service area under certain
circumstances. The Telecommunications Act prohibits telecommunications carriers
and cable operators from acquiring more than 10% 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
41
<PAGE> 43
in providing long distance service today. The removal of the long distance
restrictions on the RBOCs is not anticipated to have an immediate significant
impact on UStel because of the substantial preconditions that must be met before
the RBOCs 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. Subsequently, the FCC's rules adopted in the August
1, 1996 Order were published and challenged in federal court. Pending the
outcome of this challenge to the FCC's rules, the U.S. Court of Appeals for the
Eighth Circuit stayed the implementation of the relevant rules adopted by the
FCC under the Telecommunications Act of 1996. Iowa Utilities Board et al. v.
Federal Communications Commission, Order Granting Stay Pending Judicial Review,
4 C.R. (P&F) 1360 (8th Cir. 1996). As this case is still pending, it is unclear
how any court decision and its subsequent impact on the FCC's rules 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 inter LATA basis), the Company may be required to obtain state
regulatory certification prior to commencing operations. At December 31, 1996,
the Company had received authorization to provide telecommunications services to
its customers in approximately 35 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.
Employees
At December 31, 1996, the Company had 49 full-time employees, including
three executives, five network, technical and operations personnel, and 41
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 December 31, 1996, Consortium 2000 employed 17 persons full time,
including two executives and 15 operations and accounting 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 4 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.
42
<PAGE> 44
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ----------------------------------
<S> <C> <C>
Robert L.B. Diener 48 Chairman and Chief Executive
Officer
Jerry Dackerman 46 President, Chief Operating Officer
and Director
Barry K. Epling 44 Executive Vice President,
Assistant Secretary and Director
Wouter van Biene 47 Executive Vice President, Chief
Financial Officer, Secretary and
Director
Abe M. Sher 35 Vice President and General Counsel
Royce Diener(1) 78 Director
Andrew J. Grey(1) 41 Director
Noam Schwartz 45 Director
Ann Graham Ehringer, PhD(1) 57 Director, nominee
</TABLE>
- ---------------
(1) Member of Audit Committee and Compensation Committee.
Robert L. B. Diener served the Company as a consultant from July, 1995, to
January 1996, devoting a substantial portion of his time to the Company's
business. He became Executive Vice President in January, 1996, President and
Chief Executive Officer on August 14, 1996 and Chairman and Chief Executive
Officer on December 23, 1996. 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 ("NYSE") listed real estate
investment trust specializing in health care. From 1976 through 1986, Mr. Diener
held various positions with American Medical International, Inc., ("AMI"), a
multinational hospital management company listed on the NYSE and included in the
S&P 500, 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.
Jerry Dackerman served the Company as Executive Vice President and Director
since August 14, 1996, and on December 23, 1996, was elected President and Chief
Operating Officer. Mr. Dackerman founded Consortium 2000 in 1988 as a
communications user group specializing in the design of large scale
telecommunications networks utilizing a group purchasing approach. Mr. Dackerman
is President and Chief Executive Officer of Consortium 2000 and will continue to
serve in such capacities after the Merger is completed. Mr. Dackerman's initial
experience in the telecommunications field was with Executone, Inc. and RCA
American Communications. In 1977, he founded Robin & Dackerman, Inc., an
international telecommunications consulting firm specializing in the design and
implementation of telecommunications networks. Mr. Dackerman is also a director
of New USA Growth Fund.
Barry K. Epling has served as Vice President and a director since March 1,
1993, and served as Executive Vice President and Chief Operating Officer from
September, 1995 to December 31, 1996. On December 23, 1996 he became Executive
Vice President. 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.
43
<PAGE> 45
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, Chief Financial Officer and Secretary 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 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.
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 1994 through 1996, Mr. Sher served as a corporate finance consultant to
Micro Bell, Inc., a telecommunications/paging hardware manufacturer. 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
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.
Royce Diener has served as an advisor to the Company since July, 1995,
became a director of the Company in January, 1996 and served as Chairman from
August 14, 1996 to December 23, 1996. Mr. Diener served for over 18 years as
President, then Chairman and Chief Executive Officer of AMI. He serves on the
Board of Directors of Acuson, Inc. and American Health Properties, Inc., both
listed on the NYSE. Among 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.
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 a 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.
Noam Schwartz founded the Company in July, 1991 and served as President,
Chief Executive Officer and a director from March 20, 1992 to August 14, 1996.
He was an Executive Vice President of the Company from August 14, 1996 to
December 31, 1996. 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.
Ann Graham Ehringer, PhD, will become a director effective at the
conclusion of the Offering. Ms. Ehringer is Director of the Family &
Closely-Held Businesses Program and Associate Professor in the Entrepreneur
Program in the Marshall School of Business of the University of Southern
California. For six years prior to accepting these positions, she coached dozens
of owners/presidents/CEOs and key executives of small and mid-sized companies.
Dr. Ehringer's areas of expertise include decision-making, strategic thinking
and entrepreneurial management. In addition, she is Chairman and Chief Executive
Officer of S.P. Land, Inc. and S.P. Lodge, Inc., a real-estate holding entity
and a fine-dining entity, respectively. Dr. Ehringer is the author of Make Up
Your Mind; Entrepreneurs Talk About Decision-Making (1995). Her education
includes degrees from the University of Southern California, Harvard Business
School, Stanford University and the University of Hawaii. She is a member of the
Executive Advisory Panel for the "Executive," a publication of the Academy of
Management, and of the National Association of Corporate Directors. She serves
on the boards of directors of Dycam, Inc. (AMEX), Styles-on-Video, Inc. (AMEX)
and numerous private and not-for-profit organizations.
44
<PAGE> 46
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 reimburse its non-employee
directors for reasonable expenses incurred in attending meetings of the Board.
The Audit Committee of the Board of Directors, comprised of Royce Diener
and Andrew J. Grey, is 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, comprised of Royce Diener and Andrew J. Grey, is responsible for
recommending to the Board of Directors all officer salaries, management
incentive programs and bonus payments.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to August 1996, 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
Chief Executive Officer 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,
1994, 1995 and 1996.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
PAYOUTS
------------
ANNUAL SECURITIES
COMPENSATION UNDERLYING
------------ OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR SALARY #
- ---------------------------------------------------------- ---- ------------ ------------
<S> <C> <C> <C>
Robert L.B. Diener(1)..................................... 1996 $ -- --
Chairman, Chief Executive Officer and Former President 1995 -- --
1994 -- --
Jerry Dackerman(1)........................................ 1996 -- --
President, Chief Operating Officer and Director 1995 -- --
1994 -- --
Wouter van Biene(1)....................................... 1996 -- --
Executive Vice President, Chief Financial Officer,...... 1995 -- --
Secretary and Director 1994 -- --
Barry K. Epling........................................... 1996 102,440 100,000
Executive Vice President, Assistant Secretary, 1995 93,000 --
Director and Former Chief Operating Officer 1994 93,000 --
Noam Schwartz............................................. 1996 120,000 100,000
Former President, Chief Executive Officer and Director 1995 100,000 210,000
1994 60,000 210,000
</TABLE>
- ---------------
(1) In January 1997, the Company entered into three-year employment agreements,
retroactive to August 15, 1996, with Messrs. Diener, Dackerman and van
Biene, at annual salaries of $200,000, $180,000, and $140,000, respectively,
with bonuses to be determined at the discretion of the Board of Directors.
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
45
<PAGE> 47
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 to Diener Financial Group, a company wholly owned by Mr. Diener,
under a one-year consulting agreement effective September 1, 1995. Pursuant to
this arrangement, the Company agreed to pay Mr. Diener $7,500 per month. In
addition, Mr. Diener was to personally receive $5,000 per month for a one year
period starting November 1, 1995. The consulting agreement further provided that
Diener Financial Group and Mr. Diener were to receive five-year warrants to
purchase up to 100,000 shares each 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.
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 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 from the date of grant
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 by an additional 350,000 shares. 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 10 years. With respect to any participant who
owns stock representing more than 10% of the voting rights of the Company's
outstanding capital stock, the exercise price of any option must be equal at
least to 110% 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.
At December 31, 1995, there were outstanding options to acquire 210,000
shares of the Company's Common Stock under the Stock Option Plan. These options
were granted in January, 1994 to Noam Schwartz, the Company's former 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's outstanding options to $5.00
per
46
<PAGE> 48
share. In January, 1996, the Company also granted to each of Noam Schwartz and
Barry Epling from the 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 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.
47
<PAGE> 49
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of December 31, 1996 and as adjusted
to give effect to the sale of 1,250,000 Units by the Company and 100,000 Units
by the Selling Stockholder in the offering by (i) each person known by the
Company to be the beneficial owner of more than 5% 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 OWNED SHARES SHARES BENEFICIALLY
PRIOR TO THE BEING OWNED AFTER
OFFERING(1) OFFERED OFFERING(1)
-------------------- ------- -----------------------
NAME AND ADDRESS(1) NUMBER PERCENT NUMBER NUMBER PERCENT
- ----------------------------------- -------- ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
Robert L.B. Diener(2).............. 210,000 9.0% -- 210,000 4.3%
Jerry Dackerman(3)................. -- * -- -- *
Wouter van Biene(3)................ -- * -- -- *
Abe M. Sher(4)..................... 232,000 10.0 -- 232,000 4.8
Barry Epling(5).................... 202,851 9.5 -- 202,851 4.3
Royce Diener(3)(6)................. 1,019,833 46.1 200,000 819,833 17.4
Noam Schwartz(7)(8)................ 310,000 12.7 -- 310,000 6.2
Andrew J. Grey(9).................. 95,000 4.5 -- 95,000 2.0
Kamel B. Nacif(10)................. 750,000 26.0 -- 750,000 13.9
Jeflor, Inc.(11)................... 240,000 10.0 -- 240,000 5.0
SAS, Ltd........................... 112,000 5.3 -- 112,000 2.4
RGB/TAD Investment Partnership
(12)............................. 150,000 7.0 -- 150,000 3.2
All directors and officers as a
group (eight persons)(3)(13)..... 2,069,684 68.5 1,869,684 33.9
</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 January 22, 1997, are deemed to be outstanding for the purpose
of 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
January 22, 1997 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, and 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 and 200,000 shares of Common
Stock issuable upon the exercise of warrants that were exercisable within
60 days of January 22, 1997.
(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 and 270,750 shares of
Common Stock which the Trust has agreed to purchase from the RGB/TAD
Investment Partnership and does not give effect to the possible exercise of
the option described in footnote (12) below. 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 January 22, 1997 to
purchase up to 83,333 shares of Common Stock.
(7) Consists of 310,000 shares issuable upon exercise of options granted under
the Company's Stock Option Plan.
(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.
48
<PAGE> 50
(10) Consists of 750,000 shares of Common Stock underlying 550,000 shares of
Series A Convertible Preferred stock issued to Mr. Nacif.
(11) Consists of warrants to purchase 240,000 shares of Common Stock. See
"Description of Securities -- Outstanding Warrants."
(12) Consists of an option to acquire 150,000 shares of Common Stock from the
Trust, at a purchase price of $6.00 per share, exercisable at any time
through February 5, 1999, or earlier if the Common Stock trades at $7.50
per share.
(13) Includes an aggregate of 893,333 shares of Common Stock as to which the
named directors and executive officers may acquire, as described in
footnotes (2), (4), (5), (6), (7) and (8) above.
CERTAIN TRANSACTIONS
The Company has advanced funds to Mr. Noam Schwartz. At December 31, 1995
and 1996, Mr. Schwartz owed the Company approximately $193,000 and $177,000,
respectively.
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
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 currently is the
Company's Chairman 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 to the Diener Financial Group
and $5,000 a month to Mr. Diener personally. 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. As of August 14, 1996, the
engagement agreement with the Diener Financial Group was terminated with no
additional sums owing to the Diener Financial Group.
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.
49
<PAGE> 51
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 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, ("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 September,
1996, these shares converted into 95,000 shares of Common Stock.
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." Effective August 14, 1996
this agreement was terminated.
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 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, 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 a
portion of the proceeds of this Offering to repay this obligation. 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
50
<PAGE> 52
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.
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 December 31, 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. The Company intends to reincorporate in California, which provides for
cumulative voting. 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. 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 December 31, 1996 and 95,000 shares of Series B Preferred, 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 as a result of an amendment to the terms of the
Series A Preferred made on January 24, 1997, is convertible at any time into
1.3636 shares 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
51
<PAGE> 53
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 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 (the
"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 Debentures were converted, an aggregate of 71,429 shares of Common
Stock would be issued.
UNITS
Each Unit offered by this Prospectus consists of two shares of Common Stock
and one Warrant, each Warrant to purchase one share of Common Stock for $4.00
per share. The Common Stock and Warrants will be separately transferable as of
the date of this Prospectus. As soon as is practical, the Transfer and Warrant
Agent (as defined) will cause to be delivered or mailed to the registered
holders of the Units the certificates representing the Common Stock and the
Warrants. Any transfer of a Unit will constitute a transfer of the holder's
beneficial interest in the related Common Stock and Warrants.
WARRANTS
The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Warrant Agreement between the Company and
American Securities Transfer & Trust, Inc. (the "Transfer and Warrant Agent"). A
copy of the Warrant Agreement will be filed as an exhibit to the Registration
Statement of which the Prospectus is a part. See "Additional Information."
Exercise Price and Terms. Each Warrant entitles the holder thereof to
purchase at any time over a five year period from the date of this Prospectus,
one share of Common Stock at a price of $4.00 per share, subject to adjustment
in accordance with the anti-dilution and other provisions referred to below. The
holder of any Warrant may exercise such Warrant by surrendering the certificate
representing the Warrant to the Transfer and Warrant Agent, with the
subscription form on the reverse side of such certificate properly completed and
executed, together with payment of the exercise price. The Warrants may be
exercised until , 2002 in whole or in part at the applicable
exercise price until expiration of the Warrants. No fractional shares will be
issued upon the exercise of the Warrants.
The exercise price of the Warrants bears no relation to any objective
criteria of value and should in no event be regarded as an indication of any
future market price of the securities offered hereby.
Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock and, excluding all
presently outstanding options, warrants, employee stock options, the
Representative's Warrants and the Warrants included in the Units, upon sale of
the Common Stock below the then fair market value. Additionally, an adjustment
would be made in the case of a reclassification or exchange of Common Stock,
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the surviving
corporation) or sale of all or substantially all of the assets of the Company in
order to enable warrantholders to acquire the kind and number of shares of stock
or other securities or property
52
<PAGE> 54
receivable in such event by a holder of the number of shares of Common Stock
that might otherwise have been purchased upon the exercise of the Warrant. No
adjustments will be made until the cumulative adjustments in the exercise price
per share amount to $0.05 or more. No adjustment to the number of shares and
exercise price of the shares subject to the Warrants will be made for dividends
(other than stock dividends), if any, paid on the Common Stock.
Redemption Provisions. The Warrants are subject to redemption at $0.01 per
Warrant on 30 days' written notice to the warrantholders if the closing bid
price of the Common Stock as reported on the Nasdaq SmallCap Market (or any
other market where the Common Stock is then traded) averages or exceeds $6.00
over a period of 20 consecutive trading days. In the event the Company exercises
the right to redeem the Warrants, such Warrant will be exercisable until the
close of business on the business day immediately preceding the date for
redemption fixed in such notice. If any Warrant called for redemption is not
exercised by such time, it will cease to be exercisable and the holder will be
entitled only to the redemption price.
Transfer, Exchange and Exercise. The Warrants are in registered form and
may be presented to the Transfer and Warrant Agent for transfer, exchange or
exercise at any time prior to their expiration date five years from the date of
this Prospectus, at which time the Warrants become wholly void and of no value.
If a market for the Warrants develops, the holder may sell the Warrants instead
of exercising them. There can be no assurance, however, that a market for the
Warrants will develop or continue.
Warrantholder Not a Shareholder. The Warrants do not confer upon holders
any voting, dividend or other rights as shareholders of the Company.
Modification of Warrant. The Company and the Transfer and Warrant Agent may
make such modifications to the Warrants that they deem necessary and desirable
that do not materially adversely affect the interests of the Warrantholders. No
other modifications may be made to the Warrants without the consent of the
majority of the Warrantholders. Modification of the number of securities
purchasable upon the exercise of any Warrant, the exercise price and the
expiration date with respect to any Warrant requires the consent of the holder
of such Warrant.
Certain Federal Income Tax Considerations. The basis of the Warrant and the
Common Stock purchased by the holder as part of a Unit or upon exercise of a
Warrant will be determined by allocating the cost of each Unit between the
Common Stock and the Warrant in accordance with the relative fair market values
of those elements at the time of acquisition.
No gain or loss will be recognized by a holder upon the exercise of a
Warrant. The sale of a Warrant by a holder or the redemption of a Warrant by a
holder will result in the recognition of gain or loss in an amount equal to the
difference between the amount realized by the holder and the Warrant's adjusted
basis in the hands of the holder. Provided that the holder is not a dealer in
the Warrants and that the Common Stock would have been a capital asset in the
hands of the holder had the Warrant been exercised, gain or loss from the sale
or redemption of a Warrant will be long-term or short-term capital gain or loss
to the holder. Loss on the expiration of a Warrant, equal to the Warrant's
adjusted basis in the hands of the holder, will be a long-term or short-term
capital loss, depending on whether the Warrant had been held for more than one
year.
THE ABOVE DISCUSSION DOES NOT ADDRESS ALL OF THE TAX CONSIDERATIONS THAT MAY BE
RELEVANT TO A PARTICULAR PURCHASER. ACCORDINGLY, ALL PROSPECTIVE PURCHASERS ARE
ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
UNITS, THE WARRANTS AND THE COMMON STOCK.
REGISTRATION RIGHTS
The Company has granted certain registration rights to the holder of the
Series A Preferred, 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, a director of the
Company, which now owns the RGB Trust's
53
<PAGE> 55
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 2,443,000. The Company intends to register with the Commission under Form S-4
the 1,076,923 shares to be issued in the Merger. However, officers and directors
and principal stockholders of the Company who receive shares in the Merger will
be subject to the two-year lock up agreement with the Representative.
CONTROL SHARE ACQUISITION
The Minnesota Control Share Act ("CSAA") provides that, generally, that 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 (i) 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 (ii) 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.
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. The Company
intends to reincorporate in California by merging with a wholly-owned California
corporation. Only stockholders of record before the effective date of this
Offering are expected to be able to vote on the Merger or on the reincorporation
in California. Upon the reincorporation in California, the shares held by the
Trust will have full voting power. California does not have provisions similar
to those in the CSAA. The Trust has agreed to vote 404,101 shares of the Common
Stock (amounting to 19% of the outstanding Common Stock entitled to vote) in
favor of the reincorporation.
54
<PAGE> 56
OUTSTANDING WARRANTS
The following table sets forth certain information as of December 31, 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
- -------- ------------------- ------------- -------- ----------- ---------- --------------------------
<C> <S> <C> <C> <C> <C> <C>
6/94 Registered 16,000 5.00 6/94 N/A In consideration of
Consulting Group financial public relations
services
6/94 Norcross 65,000 6.25 6/95 6/99 Granted to the Underwriter
Securities, Inc. upon completion of the
Company's initial public
offering.
8/95 Diener Financial 100,000 5.00 (1) 10/00 Issued in connection with
Group engagement 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. Diener 100,000 5.00 (1) 11/00 Issued in connection with
Mr. 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 equity 160,000 7.50 5/96 5/01 Issued as part of 160,000
private placement units (consisting of
160,000 shares of Common
Stock and 160,000 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. 240,000(2) 5.00 8/96 6/01 Issued in connection with
a loan for $1,200,000 due
June 19, 1997, subject to
four 90 day extensions
Total 1,081,000
=========
</TABLE>
- ---------------
(1) The warrants are fully vested.
(2) As of December 19, 1996 Jeflor, Inc., was entitled to warrants for 240,000
shares. If the loan is not repaid by March 19, 1997, Jeflor, Inc. will be
entitled to a warrant for an additional 60,000 shares. If the loan is not
repaid by June 19, 1997 Jeflor, Inc., will be entitled to warrants for an
additional 60,000 shares for each 90 day period thereafter, or an additional
240,000 shares up to a maximum of 540,000 shares. It is anticipated that the
Company will retire this debt in full with the proceeds of this Offering and
thus, Jeflor Inc., will be entitled only to warrants for 240,000 shares. See
"Use of Proceeds."
TRANSFER AND WARRANT AGENT AND REGISTRAR
The Transfer and Warrant Agent and Registrar for the Common Stock, Warrants
and Units is American Securities Transfer & Trust, Inc.
55
<PAGE> 57
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. The officers,
directors and certain principal stockholders have agreed not to sell their
Common Stock into the open market for a period of two years from the date of
this Prospectus without the consent of the Representative. Sales of substantial
amounts of the Common Stock 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 4,626,851
shares of Common Stock outstanding, assuming no exercise of options or warrants
after January 22, 1997. Of these shares, the 2,700,000 shares included in the
Units 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. In
addition, 1,081,000 shares of Common Stock were subject to outstanding warrants,
and as of January 24, 1997, 750,000 shares of Common Stock were issuable upon
conversion of the Series A Preferred, and 71,429 shares of Common Stock were
issuable upon conversion of the Debentures. See Notes 5 and 6 of Notes to the
Company's Financial Statements and Note 7 of Notes to the Company's Condensed
Financial Statements. These shares and the shares underlying options, warrants
and convertible securities 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.
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, 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 initial public offering are entitled to
sell such shares 90 days after the effective date of the initial public 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.
The 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.
56
<PAGE> 58
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom Barber & Bronson
Incorporated is acting as representative (the "Representative"), have severally
agreed to purchase from the Company and the Selling Stockholder, and the Company
and the Selling Stockholder have agreed to sell to the Underwriters, the
respective number of Units set forth opposite each Underwriter's name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS UNITS
---------------------------------------------------------------- ---------
<S> <C>
Barber & Bronson Incorporated...................................
Noble Investment Co. of Palm Beach..............................
---------
Total................................................. 1,350,000
========
</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 and
certain certificates from the Selling Stockholder. The nature of the
Underwriters' obligation is such that they are committed to purchase and pay for
all the Units if any are purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the Units 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 202,500 Units
at the public offering price set forth or 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 Units in
approximately the same proportion as set forth in the above table.
The Company has paid the Representative $25,000 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 Units to be sold in this Offering.
The Company has agreed to issue to the Representative, for total
consideration of $100, warrants (the "Representative's Warrants") to purchase up
to 125,000 Units, at an exercise price per share equal to $7.50 (125% of the
initial public offering price per Unit). 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 prior to the
exercise date except to the officers and directors 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 Representative's Warrants with a fair market value
equal to the exercise price of the remaining Representative's Warrants. The
holders of the Representative's Warrants
57
<PAGE> 59
will have no voting, dividend or other stockholders rights until the Warrants
are 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.
Except for the issuance of shares of Common Stock to be issued (i) upon the
exercise of any options or warrants or upon conversion of any convertible
securities, outstanding as of the date of this Prospectus, or upon the exercise
of the Warrants included in the Units or upon exercise of the Representative's
Warrants, (ii) pursuant to and in order to consummate a merger with or
acquisition from an unaffiliated party in a transaction negotiated at arms'
length and approved by a majority of the Company's Board of Directors, (iii) in
a public offering, at a price not less than 90% of the average of the closing
bid prices of the Common Stock as reported on the Nasdaq SmallCap Market for the
20 consecutive trading day period immediately preceding the date of sale (the
"Exempt Price") and (iv) in a private sale at a price not less than 75% of the
Exempt Price, during the period of five years from the date of this Prospectus,
the Company will not sell or otherwise dispose of any securities without prior
written consent of the Representative.
The Company has agreed to enter into a financial consulting agreement with
an affiliate of the Representative ("Consultant"), for a three year period
commencing as of the date of this Prospectus, for an aggregate consideration of
$81,000. If the Company enters into a merger, acquisition or similar
transaction, the Consultant is to receive a fee ranging from 1% to 5% of the
consideration paid in the transaction.
The Representative has the right to designate a director to the Company's
Board of Directors for a period of five years from the date of this Prospectus.
The Company's officers, directors and significant shareholders have agreed to
vote their shares in favor of the election of the Representative's designee for
the Board. The Representative will receive a warrant solicitation fee of 7% with
respect to the exercise of the Warrants included in the Units, if the market
price of the Common Stock on the date of such exercise is greater than the
exercise price of the Warrant, (ii) the exercise of the Warrant was solicited by
a NASD member, and (iii) the Warrant is not held in a discretionary account of
the Representative. A portion of such fee may be reallowed to NASD member
broker-dealers soliciting in such exercise.
The Underwriting Agreement provides that the Company and the Selling
Stockholder 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 Selling Stockholder has agreed to reimburse the Company
for $65,328 of the expenses of this Offering.
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 Units, Common Stock and the Warrants offered hereby
will be passed upon for 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 Broad and Cassel, a partnership including
professional associations, Miami, Florida.
58
<PAGE> 60
EXPERTS
The financial statements of UStel, Inc. at December 31, 1994 and 1995, and
for each of the three years ended 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.
59
<PAGE> 61
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 sheets at December 31, 1995 and September 30, 1996............... F-15
Condensed statements of operations for the nine months ended September 30, 1995 and
1996............................................................................ F-16
Condensed statements of changes in stockholders' equity for the nine months ended
September 30, 1996.............................................................. F-17
Condensed statements of cash flows for the nine months ended September 30, 1995 and
1996............................................................................ F-18
Notes to condensed financial statements............................................ F-19
HISTORICAL FINANCIAL STATEMENTS OF CONSORTIUM 2000, INC.
Report of Independent Certified Public Accountants................................... F-22
Audited financial statements
Balance sheet at June 30, 1996..................................................... F-23
Statement of operations for the year ended June 30, 1996........................... F-24
Statement of changes in stockholders' equity for the year ended June 30, 1996...... F-25
Statement of cash flows for the year ended June 30, 1996........................... F-26
Summary of accounting policies..................................................... F-27
Notes to financial statements...................................................... F-29
Unaudited financial statements
Condensed balance sheets at June 30, 1996 and September 30, 1996................... F-31
Condensed statements of operations for the three months ended September 30, 1995
and 1996........................................................................ F-32
Condensed statements of changes in stockholders' equity for the three months ended
September 30, 1996.............................................................. F-33
Condensed statements of cash flows for the three months ended September 30, 1995
and 1996........................................................................ F-34
Notes to condensed financial statements............................................ F-35
</TABLE>
F-1
<PAGE> 62
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> 63
USTEL, INC.
BALANCE SHEETS
ASSETS (Note 2)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
Current
Cash..................................................................... $ 2,207,304 $ 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......................................................... 182,871 506,824
----------- -----------
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> 64
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> 65
USTEL, INC.
STATEMENT 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> 66
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> 67
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 consist 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' calls over a transmission network consisting primarily of
dedicated long distance lines secured by the Company from a
F-7
<PAGE> 68
USTEL, INC.
SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)
variety of other carriers. One of these carriers provides the call record
information from which the Company 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> 69
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 deposit 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> 70
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..................................... $ 31,049 $ 20,505
Officers............................................. 51,949 144,567
Loans:
Related entities..................................... 132,822 --
Officers............................................. 163,546 181,658
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> 71
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 1994, the Company retained an independent sales representative,
Consortium 2000, Inc., 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 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 is Chairman of the Board of the
sales agent.
(g) Financial Consultant
Effective as of September 1995, the Company engaged the Diener Financial
Group, a company wholly-owned by Robert L.B. Diener, as a financial consultant
for a period of one year and agreed to grant him 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. Robert L. B. Diener is the son of Royce Diener, a
director of the Company.
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
F-11
<PAGE> 72
USTEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 an annual salary 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 issued him 32,000 shares of common stock.
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
F-12
<PAGE> 73
USTEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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 ownership. 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 carryforward 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 and payables 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 to the related party and
decreased its 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.
F-13
<PAGE> 74
USTEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 Robert L.B.
Diener the sum of $25,000 and granted him 100,000 warrants exercisable at $5.00
per share, expiring November 2000.
F-14
<PAGE> 75
USTEL, INC.
CONDENSED BALANCE SHEETS (NOTE 3)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
DECEMBER 31, -------------
1995
------------ (UNAUDITED)
<S> <C> <C>
Current
Cash..................................................................... $ 1,200 $ 394,126
Restricted cash.......................................................... 3,133,433 --
Accounts receivable, less allowance for doubtful accounts of $652,000 and
$1,346,000, respectively.............................................. 5,900,722 6,947,345
Due from related parties................................................. 348,519 293,817
Prepaid expenses......................................................... 506,824 551,320
----------- -----------
Total current assets............................................. 9,890,698 8,186,608
Property and equipment
Office furniture and equipment........................................... 1,440,294 2,398,192
Leasehold improvements................................................... 164,063 175,749
----------- -----------
1,604,357 2,573,941
Less accumulated depreciation............................................ (241,176) (410,491)
----------- -----------
Net property and equipment....................................... 1,363,181 2,163,450
----------- -----------
Other assets
Other receivables, net................................................... -- 139,625
Start-up costs less accumulated amortization of $59,022 and $73,777,
respectively.......................................................... 39,347 24,592
Deferred charges (Note 2)................................................ 684,805 846,044
----------- -----------
$ 11,978,031 $ 11,360,319
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Notes payable (Note 3)................................................... $ 2,900,000 $ 2,437,931
Notes payable to others (Note 4, 5)...................................... 1,500,000 5,144,275
Accounts payable and accrued expenses.................................... 2,192,479 594,117
Accrued revenue taxes.................................................... 1,097,779 250,229
----------- -----------
Total current liabilities........................................ 7,690,258 8,426,552
Long-term liabilities
Convertible subordinated debentures...................................... 500,000 500,000
----------- -----------
Total liabilities................................................ 8,190,258 8,926,552
----------- -----------
Stockholders' equity
Series A & B convertible preferred stock................................. 6,450 5,500
Common stock............................................................. 16,000 21,269
Additional paid-in capital............................................... 6,291,178 7,710,562
Accumulated deficit...................................................... (2,525,855) (5,303,564)
----------- -----------
Total stockholders' equity....................................... 3,787,773 2,433,767
----------- -----------
Total liabilities and stockholders' equity....................... $ 11,978,031 $ 11,360,319
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-15
<PAGE> 76
USTEL, INC.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
---------------------------
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues.......................................................... $11,310,018 $16,166,344
Operating expenses
Cost of services sold........................................... 8,240,409 12,006,378
Selling......................................................... 900,960 1,676,705
General and administrative...................................... 2,282,329 4,762,971
Depreciation and amortization................................... 120,813 184,071
------------ ------------
Total operating expenses................................ 11,544,511 18,630,125
------------ ------------
Loss from operations.............................................. (234,493) (2,463,781)
Interest expense, net of interest income.......................... (64,576) (313,928)
Other expense..................................................... (104,412) --
------------ ------------
Net loss................................................ $ (403,481) $(2,777,709)
============ ============
Loss per share.................................................... $ (0.25) $ (1.37)
============ ============
Weighted average common shares outstanding........................ 1,600,000 2,025,740
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
F-16
<PAGE> 77
USTEL, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1996 THROUGH SEPTEMBER 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, January 1, 1996.............. 645,000 $6,450 1,600,000 $16,000 $6,291,178 $(2,525,855) $3,787,773
Conversion of debt.................. -- -- 180,000 1,800 888,200 -- 890,000
Conversion of Series B Preferred
Stock to Common Stock............ (95,000) (950) 95,000 950 -- -- --
Cost of Preferred Stock issued in
prior period..................... -- -- 112,000 1,120 (47,120) -- (46,000)
Acquisition of switching
equipment........................ -- -- 107,851 1,079 514,624 -- 515,703
Stock issued in connection with
debt............................. -- -- 32,000 320 63,680 -- 64,000
Net loss for period................. -- -- -- -- -- (2,777,709) (2,777,709)
------- ------ --------- ------- ---------- ----------- ----------
Balance, September 30, 1996
(unaudited)......................... 550,000 $5,500 2,126,851 $21,269 $7,710,562 $(5,303,564) $2,433,767
======= ====== ========= ======= ========== =========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-17
<PAGE> 78
USTEL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
----------------------------
1995 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net loss......................................................... $ (403,481) $ (2,777,709)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 120,813 184,071
Provision for losses on accounts receivable.................... 321,098 1,469,151
Change in operating assets and liabilities
Accounts receivable......................................... (2,619,185) (2,497,116)
Due from related parties.................................... 141,672 54,702
Prepaid expenses............................................ (378,534) (44,496)
Accounts payable and accrued expenses....................... 2,323,466 1,414,363
Other receivables........................................... (405,973) (158,283)
----------- ------------
Net cash used in operating activities.................. (900,124) (2,355,317)
----------- ------------
Cash flows from investing activities
Purchase of equipment............................................ (650,634) (180,553)
Increase in deferred charges..................................... (277,507) (161,240)
----------- ------------
Net cash used in investment activities................. (928,141) (341,793)
----------- ------------
Cash flows from financing activities
Restricted cash.................................................. (1,000,000) 3,133,433
Proceeds from related party payable.............................. 1,585,000 400,000
Payment on related party debt.................................... -- (316,000)
Proceeds from notes payable...................................... -- 19,647,390
Payment on notes payable......................................... (120,000) (19,774,787)
----------- ------------
Net cash provided by financing activities.............. 465,000 3,090,036
----------- ------------
Net increase (decrease) in cash.................................. (1,363,265) 392,926
Cash, beginning of period........................................ 2,207,034 1,200
----------- ------------
Cash, end of period.............................................. $ 843,769 $ 394,126
=========== ============
Supplemental information
Interest paid.................................................. $ 160,271 $ 361,837
Income taxes paid.............................................. 800 22,997
</TABLE>
See accompanying notes to condensed financial statements.
F-18
<PAGE> 79
USTEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
NOTE 1 -- INTERIM FINANCIAL INFORMATION
The interim financial statements for the nine months ended September 30,
1996 and September 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 nine-month period ended
September 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, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Development costs.................................. $336,690 $ 233,787
Offering costs..................................... 164,792 342,500
Loan fees.......................................... 35,000 129,608
Calling card program............................... 118,157 138,108
Deposits and others................................ 82,166 82,166
-------- --------
736,805 926,169
Accumulated amortization........................... (52,000) (80,125)
-------- --------
$684,805 $ 846,044
======== ========
</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
$10 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 at December 31, 1995 and September 30, 1996 were
$2,900,000 and $0, respectively.
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 December 31, 1995 and September 30, 1996 were $0 and $2,437,931,
respectively.
NOTE 4 -- SHORT-TERM BORROWINGS
During February, 1996 the Company borrowed $400,000 from a related party.
The note is payable on demand and bears interest at 12% per annum. In June 1996
$116,000 of this borrowing was repaid. An additional repayment of $200,000 was
made in September 1996. Interest is payable at the earlier of maturity or
repayment of the full amount borrowed. The amount outstanding at September 30,
1996 was $84,000.
F-19
<PAGE> 80
USTEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
During 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 $5.00 per share. Warrants for the purchase of 120,000 common
shares were issuable at the time the loan was funded. Additional warrants become
issuable in increments of 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 before application of
certain volume discounts available under the contract for those services. 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 at September 30, 1996 (before application of volume
discounts available under the service contract between the Company and WilTel)
to the earlier of February 28, 1997 or the completion of an offering. Such
amounts bears interest at 18% per annum.
NOTE 5 -- RELATED PARTY TRANSACTIONS
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 L.B. Diener 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 January, 1996, the Company entered into a supplemental consulting
agreement with Integrated Financial Consultants, Inc., ("IFC") a company wholly
owned by Andrew J. Grey, a director, 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.
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 $117,934 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 $68,522 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.
NOTE 6 -- OTHER MATTERS
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
F-20
<PAGE> 81
USTEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
development. Pursuant to this agreement, Vanguard Consultants, Inc. will receive
$7,500 per month for such services.
On August 14, 1996, the Company, Consortium Acquisition Corporation (a
wholly-owned subsidiary created by the Company) 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 the Company. As a result of the Merger Agreement, Consortium
2000, Inc. will become a wholly-owned subsidiary of the Company.
NOTE 7 -- SUBSEQUENT EVENT
On January 24, 1997, the Company agreed to amend the terms of the Series A
Convertible Preferred Stock to change the conversion ratio from 1:1 to 1.3636:1.
As a result of this change, the 550,000 shares of Series A Convertible Preferred
Stock will be convertible into 750,000 shares of the Company's Common Stock.
F-21
<PAGE> 82
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-22
<PAGE> 83
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........................................... 46,590
----------
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............................................................. 405,342
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 deficit.................................................... 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-23
<PAGE> 84
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 loss............................................................ $ (92,667)
==========
Net loss per share....................................................... $ (0.01)
==========
Weighted average number of shares outstanding............................ 6,751,676
==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-24
<PAGE> 85
CONSORTIUM 2000, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<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 $(361,529) $742,167
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-25
<PAGE> 86
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-26
<PAGE> 87
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.
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.
F-27
<PAGE> 88
CONSORTIUM 2000, INC.
SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)
INCOME TAX
The Company has adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes," 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 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.
Statement 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. The Company does not expect adoption to have a material effect on
its financial position or results of operations.
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS No. 125) issued by the Financial Accounting Standards Board (FASB) is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive applications are not permitted. The new
standard provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. The Company does not
expect adoption to have a material effect on its financial position or results
of operations.
F-28
<PAGE> 89
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>
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
F-29
<PAGE> 90
CONSORTIUM 2000, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
employee's installment payments and the stock price of $3,750. As of June 30,
1996, the treasury stock balance was $2,871.
NOTE 6 -- SUBSEQUENT EVENT
On August 14, 1996, UStel, Inc. ("UStel"), Consortium Acquisition
Corporation (a wholly-owned subsidiary created by the Company) 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 Agreement,
Consortium 2000, Inc. will become a wholly-owned subsidiary of UStel.
As a result of entering into the Merger Agreement, Consortium 2000 agreed
to write off a one time difference of $775,943 between UStel's commission
expenses to Consortium 2000 and Consortium 2000's commission revenue from UStel
during the fiscal year ended June 30, 1996. This difference was included in
general and administrative expenses. The management of Consortium 2000 agreed
not to pursue collection of bad debt from UStel.
F-30
<PAGE> 91
CONSORTIUM 2000, INC.
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
JUNE 30, 1996 ------------------
------------- (UNAUDITED)
(AUDITED)
<S> <C> <C>
Current
Cash......................................................... $ 116,068 $ 68,671
Accounts receivable, less allowance for doubtful accounts of
$115,000.................................................. 810,470 854,124
Due from related parties (Note 2)............................ 60,496 51,717
Prepaid expenses and other................................... 121,734 120,591
---------- ----------
Total current assets................................. 1,108,768 1,095,103
---------- ----------
Furniture and equipment........................................
Furniture and fixtures....................................... 22,107 22,107
Professional equipment....................................... 79,327 79,667
---------- ----------
101,434 101,774
Less accumulated depreciation................................ (54,844) (57,844)
---------- ----------
Net furniture and equipment............................... 46,590 43,930
---------- ----------
Other assets
Deposits..................................................... 5,000 5,000
Investments.................................................. -- 115,000
Intangible assets, less accumulated amortization of $74,510
and $76,310, respectively (Note 3)........................ 68,088 66,288
---------- ----------
Total assets......................................... $ 1,228,446 $1,325,321
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Bank loan (Note 4)........................................... $ 100,000 $ 200,000
Accounts payable and accrued expenses........................ 495,538 609,958
Deferred salaries............................................ 37,381 37,381
Dividends payable............................................ 10,764 10,764
---------- ----------
Total current liabilities............................ 643,683 858,103
---------- ----------
Commitments and contingencies (Note 5)
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 67,530
Additional paid-in deficit................................... 1,036,166 1,036,166
Accumulated deficit.......................................... (518,933) (636,478)
---------- ----------
Total shareholders' equity........................... 584,763 467,218
---------- ----------
Total liabilities and shareholders equity............ $ 1,228,446 $1,325,321
========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to condensed financial
statements.
F-31
<PAGE> 92
CONSORTIUM 2000, INC.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
SEPTEMBER 30,
-------------------------
1995 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues, net....................................................... $ 843,662 $ 748,954
Cost of service provided............................................ 327,227 483,653
---------- ----------
Gross profit................................................... 516,435 265,301
---------- ----------
Operating expenses
Depreciation and amortization..................................... 2,200 4,800
General and administrative........................................ 321,497 387,006
---------- ----------
Income (loss) from operations....................................... 192,738 (126,505)
---------- ----------
Other income (expense)
Other income...................................................... 11,136 12,556
Interest income................................................... 535 361
Interest expense.................................................. (1,531) (3,957)
---------- ----------
Net income (loss) before income tax................................. 202,878 (117,545)
Income tax provision................................................ 66,000 --
---------- ----------
Net income (loss).............................................. $ 136,878 ($ 117,545)
========== ==========
Net income (loss) per share......................................... $ 0.02 ($ 0.02)
========== ==========
Weighted average number of shares outstanding....................... 6,751,676 6,751,676
========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to condensed financial
statements.
F-32
<PAGE> 93
CONSORTIUM 2000, INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD JULY 1, 1996 THROUGH SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1996.......... 6,750,009 $67,530 $1,036,166 $(518,933) $ 584,763
Net loss for period............ -- -- -- (117,545) (117,545)
--------- ------- ---------- ---------- ----------
Balance, September 30, 1996.... 6,750,009 $67,530 $1,036,166 $(636,478) $ 467,218
========= ======= ========== ========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to condensed financial
statements.
F-33
<PAGE> 94
CONSORTIUM 2000, INC.
CONDENSED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
----------------------
1995 1996
-------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net income (loss)................................................... $136,878 $(117,545)
Adjustments to reconcile net income (loss) to net cast provided by
operating activities:
Depreciation and amortization.................................... 2,200 4,800
Amounts due from related party................................... -- (115,000)
Change in operating assets and liabilities
Accounts receivable............................................ 11,917 (35,375)
Prepaid expenses and other..................................... (83,521) 1,643
Accounts payable and accrued expenses.......................... (8,193) 114,420
-------- ---------
Net cash provided by (used in) operating activities......... 59,281 (147,057)
-------- ---------
Cash flows from investing activities
Purchase of equipment............................................... (10,010) (340)
-------- ---------
Net cash used in investing activities....................... (10,010) (340)
-------- ---------
Cash flows from financing activities
Proceeds from related party loans................................... 51,420 --
Proceeds from bank loans............................................ -- 100,000
-------- ---------
Net cash provided by financing activities................... 51,420 100,000
-------- ---------
Net increase (decrease) in cash....................................... 100,691 (47,397)
Cash, beginning of period............................................. 80,527 116,068
-------- ---------
Cash, end of period................................................... $181,218 $ 68,671
======== =========
</TABLE>
See accompanying summary of accounting policies and notes to condensed financial
statements.
F-34
<PAGE> 95
CONSORTIUM 2000, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996 AND SEPTEMBER 30, 1996
NOTE 1 -- INTERIM FINANCIAL INFORMATION
The interim financial statements for the three months ended September 30,
1995 and 1996 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 three-month period ended September 30, 1996 are
not necessarily indicative of the results for the entire year.
NOTE 2 -- 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 and September 30, 1996 was $52,242 and $43,963,
respectively.
(b) Officer Loan Receivables
The balance due to the Company from an officer at June 30, 1996 and
September 30, 1996 is $8,254 and $7,754, respectively. Interest accrues monthly
at seven percent per annum.
NOTE 3 -- INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1996
-------- -------------
<S> <C> <C>
Start-up cost....................................... $142,598 $ 142,598
Less accumulated amortization....................... 74,510 76,310
-------- --------
$ 68,088 $ 66,288
======== ========
</TABLE>
NOTE 4 -- 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
l, 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 5 -- OPERATING LEASES
The Company conducts its operations from facilities that are leased under a
56 month noncancelable operating lease expiring in June 1998.
F-35
<PAGE> 96
CONSORTIUM 2000, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1997............................................................. $60,000
1998............................................................. 60,000
</TABLE>
NOTE 6 -- STOCKHOLDERS' 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 and September 30, 1996, the treasury stock
balance was $2,871 and is included as a component of the accumulated deficit.
NOTE 7 -- BUSINESS COMBINATION
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-36
<PAGE> 97
- ------------------------------------------------------
- ------------------------------------------------------
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
PAGE
<TABLE>
<S> <C>
Available Information................... 2
Prospectus Summary...................... 3
Risk Factors............................ 7
Use of Proceeds......................... 14
Capitalization.......................... 15
Price Range of Common Stock............. 16
Dividend Policy......................... 16
Selected Financial Data................. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 24
Business................................ 31
Management.............................. 43
Principal and Selling Stockholders...... 48
Certain Transactions.................... 49
Description of Securities............... 51
Shares Eligible for Future Sale......... 56
Underwriting............................ 57
Legal Matters........................... 58
Experts................................. 59
Index to Financial Statements........... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
LOGO
USTEL, INC.
1,350,000 UNITS
------------------------
PROSPECTUS
------------------------
LOGO
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 98
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. The Selling
Stockholder has agreed to pay $65,328 of these expenses.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 6,345
NASD filing fee................................................... 2,225
Representative's non-accountable expense allowance................ 243,000
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
Directors and Officers' Liability Insurance....................... 80,000
Miscellaneous expenses............................................ 51,250
--------
Total................................................... $882,820
========
</TABLE>
II-1
<PAGE> 99
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 notes
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 8125176, 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 8125176, Marianna Smith, U.S. Rentals, Inc., Robert L.B. Diener and
Royce Diener.
II-2
<PAGE> 100
In January, 1996, the Company issued 32,000 shares of Common Stock to Abe
M. Sher for consideration of $0.001 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
---------------- -------------------------------------------------------------------------
<S> <C>
1.4 Form of Underwriting Agreement with Barber & Bronson Incorporated
2 Merger Agreement and Plan of Reorganization by and among UStel, Inc.,
Consortium Acquisition Corporation and Consortium 2000, Inc. dated August
13, 1996(4)
3.1 Articles of Incorporation of the Company(1)
3.1-a,b (a) Statement of Designation of Preferences and Rights of Series A
Convertible Preferred Stock(2)
(b) Form of Amendment to Statement of Designation of Preferences and
Rights of Series A Convertible Preferred Stock
3.2 Bylaws of the Company(1)
4.1 Form of Certificate evidencing shares of Common Stock(l)
4.1-a Form of Warrant Agreement between the Company and American Transfer &
Trust, Inc.
4.2 Form of 12% Convertible Subordinated Debenture(1)
4.3 Form of Representative's Warrant between the Company and Barber & Bronson
Incorporated
4.4 Form of Warrant Certificate
4.5 Form of Unit Certificate
</TABLE>
II-3
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
---------------- -------------------------------------------------------------------------
<S> <C>
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., dated January 9, 1995(3)
10.5 Lease Agreement between the Company and California Mart, dated June 11,
1993(1)
10.12-a,b,c (a) Leases for 3,400 square feet in Las Vegas, Rainbow Interim Partners,
dated June 19, 1995(3)
(b) NY Lease Forty-Seventh-Fifth Company, dated July, 1994(3)
(c) PacTel Meridian Systems, Equipment Agreement, dated 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 between the Company and Abe Sher, as of January 4,
1996
10.24-a+ Modification to Employment Agreement between the Company and Abe Sher.
10.25 Consulting Agreement between the Company and Integrated Financial
Consultants ("IFC"), dated November 10, 1995, and Supplement and
Cancellation of Indebtedness Agreement between the Company and IFC dated
January 10, 1996(3)
10.26 Coast Business Credit Agreement, dated as of December 21, 1995(3)
10.28 Consortium 2000 Agreement, dated as of August 5, 1994(3)
10.29 Subscription Documents, 160 Units, January 15, 1996, Form of(3)
10.30 Registered Consulting Group Agreement, dated June 20, 1994(3)
10.33 Robert L. Diener Consulting Agreements, dated November 1, 1995, August
15, 1995(3)
10.34 Service Agreement between the Company and Cardservice International,
dated December 21, 1993(3)
10.35 Interconnect Agreement between the Company and Euronet International,
dated December 17, 1994(3)
10.37 Service Agreement between the Company and Digital Communications of
America, Inc., dated October 14, 1992(3)
10.38 Carrier Transport and Switched Services Agreement, dated December 15,
1993(4)
10.39 Telecommunication Services Agreement between the Company and WilTel,
Inc., dated July 25, 1994, Confidential Redacted Version (3)
</TABLE>
II-4
<PAGE> 102
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
---------------- -------------------------------------------------------------------------
<S> <C>
10.41 Registration Rights Agreement, dated August 14, 1996 between the Company
and Consortium 2000 Shareholders (exhibit 10.1 to the Company's report on
Form 8-K filed with the SEC on August 27, 1996)(4)
10.42 Registration Rights Agreement, dated August 14, 1996 between the Company
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)(4)
10.43+ Promissory Note, and ancillary agreement, between the Company and Kamel
B. Nacif, dated February 29, 1996
10.44+ Beverly Hills Switching Equipment Letter Agreement, among the Company,
Barry Epling individually and d/b/a TYC and TYC, Inc., dated June 5, 1996
10.45+ Form of Employment and Non-Disclosure Agreement between the Company and
Danny Knoller, dated September 1, 1996
10.46+ Consulting Agreement between the Company and Vanguard Consultants, Inc.,
dated August 1, 1996
10.47+ Indemnification Agreement between the Company and Noam Schwartz, dated
August 2, 1996
10.48+ Letter Agreement between the Company and Consortium 2000, Inc., dated
August 7, 1996
10.49+ Amendment Number One to Loan and Security Agreement, Secured Promissory
Note and Amended and Restated Secured Promissory Note between the Company
and Coast Business Credit, dated September, 1996
10.50+ WilTel, Inc. Extension Documents:
(a) promissory note, dated September 10, 1996
(b) security agreement, dated September 19, 1996
(c) letter agreement, dated December 27, 1996
10.51+ Sublease between Consortium 2000, Inc., and Primdex Corporation, dated
September 25, 1993
10.52+ Sales Agency Agreement between Consortium 2000, Inc., and WorldCom, Inc.,
d/b/a/ LDDS WorldCom, dated June 1, 1995 Confidential Redacted Version
10.53+ Hertz Technologies, Inc., Marketing Agreement and Amendments No. 1 and 2
thereto, between Consortium 2000, Inc., and Hertz Technologies, Inc.,
dated July 7, 1995 Confidential Redacted Version
10.54+ Distributor Program Agreement and Amendment No. 1 and 2 thereto, between
Consortium 2000, Inc., and LCI International Telecom Corp., dated
November 3, 1994, January 31, 1996 and March 26, 1996, respectively,
Confidential Redacted Versions
10.55+ Marketing Services Agreement between Consortium 2000, Inc. and New
Enterprise Wholesale Telephone Services, Limited Partnership, dated
August 15, 1994, Confidential Redacted Version
10.56+ Consortium 2000 and Call Points, Inc. Agreement between Consortium 2000
and Call Points, Inc., dated September 7, 1995, Confidential Redacted
Version
10.57+ Client Contract among Consortium 2000, Inc., Verifications Plus and
Advanced Data Com, Inc., dated January 24, 1996, Confidential Redacted
Version
</TABLE>
II-5
<PAGE> 103
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
---------------- -------------------------------------------------------------------------
<S> <C>
10.59+ Promissory Note, Commercial Security Agreement and Letter Agreement
between Consortium 2000, Inc., and City National Bank, dated May 28,
1996, May 28, 1996 and May 30, 1996, respectively
10.60-a,b,c,d+ (a) Letter Agreement between the Company and Jeflor, Inc., dated June 10,
1996
(b) Subordinated Convertible Debenture, dated June 19, 1996
(c) Warrant, dated June 21, 1996
(d) Guaranty of Loan by Noam Schwartz, Ronnie Schwartz and Haskel Iny,
dated June 17, 1996
10.61 Employment and Non-Disclosure Agreement between the Company and Robert B.
Diener, effective as of August 15, 1996
10.62 Employment and Non-Disclosure Agreement between the Company and Jerry
Dackerman, effective as of August 15, 1996
10.63 Employment and Non-Disclosure Agreement between the Company and Wouter
van Biene, effective as of August 15, 1996
10.64 Form of Indemnification Agreement between the Company and Robert B.
Diener, effective as of August 15, 1996
10.65 Form of Indemnification Agreement between the Company and Jerry
Dackerman, effective as of August 15, 1996
10.66 Form of Indemnification Agreement between the Company and Wouter van
Biene, effective as of August 15, 1996
10.67 Form of Financial Consulting Agreement between the Company and BC Capital
Corp.
11+ Computation of Earnings per Share
23.1 Consent of BDO Seidman, LLP, dated January 23, 1997
23.2 Consent of Freshman, Marantz, Orlanski Cooper & Klein (included in
Opinion, Exhibit 5.1)
23.3 Consent of nominee director
24+ Power of Attorney, included in signature page
</TABLE>
- ---------------
+ 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.
II-6
<PAGE> 104
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
(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-7
<PAGE> 105
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. 3
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 February 10,
1997.
UStel, INC.
By: /s/ ROBERT L. B. DIENER
------------------------------------------
Robert L. B. Diener
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 3 to the Registration Statement of Form SB-2 has been signed by
the following persons in the capacities and on the dates stated.
<TABLE>
<S> <C> <C>
/s/ ROBERT L. B. DIENER Chairman of the Dated February 10, 1997
- ----------------------------------------------- Board, Chief
Robert L. B. Diener Executive Officer
(Principal Executive
Officer)
* President, Chief Dated February 10, 1997
- ----------------------------------------------- Operating Officer
Jerry Dackerman and Director
* Executive Vice Dated February 10, 1997
- ----------------------------------------------- President, Chief
Wouter van Biene Financial Officer
and Director
(Principal Financial
Officer)
* Executive Vice Dated February 10, 1997
- ----------------------------------------------- President, Assistant
Barry K. Epling Secretary and
Director
* Director Dated February 10, 1997
- -----------------------------------------------
Royce Diener
* Director Dated February 10, 1997
- -----------------------------------------------
Noam Schwartz
* Director Dated February 10, 1997
- -----------------------------------------------
Andrew J. Grey
</TABLE>
*By: /s/ ROBERT L. B. DIENER
---------------------------------
Robert L. B. Diener
Attorney in Fact
II-8
<PAGE> 106
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGES
------- -------- ------------
<S> <C> <C>
1.4 Form of Underwriting Agreement with Barber & Bronson
Incorporated...........................................
2 Merger Agreement and Plan of Reorganization by and
among UStel, Inc., Consortium Acquisition Corporation
and Consortium 2000, Inc. dated August 13, 1996(4).....
3.1 Articles of Incorporation of the Company(1)............
3.1-a,b (a) Statement of Designation of Preferences and Rights
of Series A Convertible Preferred Stock(2).............
(b) Form of Amendment to Statement of Designation of
Preferences and Rights of Series A Convertible
Preferred Stock....................................
3.2 Bylaws of the Company(1)...............................
4.1 Form of Certificate evidencing shares of Common
Stock(l)...............................................
4.1-a Form of Warrant Agreement between the Company and
American Transfer & Trust, Inc.........................
4.2 Form of 12% Convertible Subordinated Debenture(1)......
4.3 Form of Representative's Warrant between the Company
and Barber & Bronson Incorporated......................
4.4 Form of Warrant Certificate............................
4.5 Form of Unit Certificate...............................
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., dated January 9,
1995(3)................................................
10.5 Lease Agreement between the Company and California
Mart, dated June 11, 1993(1)...........................
10.12-a,b,c (a) Leases for 3,400 square feet in Las Vegas, Rainbow
Interim Partners, dated June 19, 1995(3)...............
(b) NY Lease Forty-Seventh-Fifth Company, dated July,
1994(3)................................................
(c) PacTel Meridian Systems, Equipment Agreement, dated
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).......................
</TABLE>
<PAGE> 107
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGES
---------------- ------------------------------------------------------- ------------
<S> <C> <C>
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 between the Company and Abe Sher,
as of January 4, 1996..................................
10.24-a+ Modification to Employment Agreement between the
Company and Abe Sher...................................
10.25 Consulting Agreement between the Company and Integrated
Financial Consultants ("IFC"), dated November 10, 1995,
and Supplement and Cancellation of Indebtedness
Agreement between the Company and IFC dated January 10,
1996(3)................................................
10.26 Coast Business Credit Agreement, dated as of December
21, 1995(3)............................................
10.28 Consortium 2000 Agreement, dated as of August 5,
1994(3)................................................
10.29 Subscription Documents, 160 Units, January 15, 1996,
Form of(3).............................................
10.30 Registered Consulting Group Agreement, dated June 20,
1994(3)................................................
10.33 Robert L. Diener Consulting Agreements, dated November
1, 1995, August 15, 1995(3)............................
10.34 Service Agreement between the Company and Cardservice
International, dated December 21, 1993(3)..............
10.35 Interconnect Agreement between the Company and Euronet
International, dated December 17, 1994(3)..............
10.37 Service Agreement between the Company and Digital
Communications of America, Inc., dated October 14,
1992(3)................................................
10.38 Carrier Transport and Switched Services Agreement,
dated December 15, 1993(4).............................
10.39 Telecommunication Services Agreement between the
Company and WilTel, Inc., dated July 25, 1994,
Confidential Redacted Version (3)......................
10.41 Registration Rights Agreement, dated August 14, 1996
between the Company and Consortium 2000 Shareholders
(exhibit 10.1 to the Company's report on Form 8-K filed
with the SEC on August 27, 1996)(4)....................
10.42 Registration Rights Agreement, dated August 14, 1996
between the Company 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)(4)....................
10.43+ Promissory Note, and ancillary agreement between the
Company and Kamel B. Nacif, dated February 29, 1996....
10.44+ Beverly Hills Switching Equipment Letter Agreement,
among the Company, Barry Epling individually and d/b/a
TYC and TYC, Inc., dated June 5, 1996..................
</TABLE>
<PAGE> 108
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGES
------- -------- ------------
<S> <C> <C>
10.45+ Form of Employment and Non-Disclosure Agreement between
the Company and Danny Knoller, dated September 1,
1996...................................................
10.46+ Consulting Agreement between the Company and Vanguard
Consultants, Inc., dated August 1, 1996................
10.47+ Indemnification Agreement between the Company and Noam
Schwartz, dated August 2, 1996.........................
10.48+ Letter Agreement between the Company and Consortium
2000, Inc., dated August 7, 1996.......................
10.49+ Amendment Number One to Loan and Security Agreement,
Secured Promissory Note and Amended and Restated
Secured Promissory Note between the Company and Coast
Business Credit, dated September, 1996.................
10.50+ WilTel, Inc. Extension Documents:
(a) promissory note, dated September 10, 1996..........
(b) security agreement, dated September 19, 1996.......
(c) letter agreement, dated December 27, 1996..........
10.51+ Sublease between Consortium 2000, Inc., and Primdex
Corporation, dated September 25, 1993..................
10.52+ Sales Agency Agreement between Consortium 2000, Inc.,
and WorldCom, Inc., d/b/a/ LDDS WorldCom, dated June 1,
1995 Confidential Redacted Version.....................
10.53+ Hertz Technologies, Inc., Marketing Agreement and
Amendments No. 1 and 2 thereto, between Consortium
2000, Inc., and Hertz Technologies, Inc., dated July 7,
1995 Confidential Redacted Version.....................
10.54+ Distributor Program Agreement and Amendment No. 1 and 2
thereto, between Consortium 2000, Inc., and LCI
International Telecom Corp., dated November 3, 1994,
January 31, 1996 and March 26, 1996, respectively,
Confidential Redacted Versions.........................
10.55+ Marketing Services Agreement between Consortium 2000,
Inc. and New Enterprise Wholesale Telephone Services,
Limited Partnership, dated August 15, 1994,
Confidential Redacted Version..........................
10.56+ Consortium 2000 and Call Points, Inc. Agreement between
Consortium 2000 and Call Points, Inc., dated September
7, 1995, Confidential Redacted Version.................
10.57+ Client Contract among Consortium 2000, Inc.,
Verifications Plus and Advanced Data Com, Inc., dated
January 24, 1996, Confidential Redacted Version........
</TABLE>
<PAGE> 109
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGES
---------------- ------------------------------------------------------- ------------
<S> <C> <C>
10.59+ Promissory Note, Commercial Security Agreement and
Letter Agreement between Consortium 2000, Inc., and
City National Bank, dated May 28, 1996, May 28, 1996
and May 30, 1996, respectively.........................
10.60-a,b,c,d+ (a) Letter Agreement between the Company and Jeflor,
Inc., dated June 10, 1996
(b) Subordinated Convertible Debenture, dated June 19,
1996...................................................
(c) Warrant, dated June 21, 1996.......................
(d) Guaranty of Loan by Noam Schwartz, Ronnie Schwartz
and Haskel Iny, dated June 17, 1996....................
10.61 Employment and Non-Disclosure Agreement between the
Company and Robert B. Diener, effective as of August
15, 1996...............................................
10.62 Employment and Non-Disclosure Agreement between the
Company and Jerry Dackerman, effective as of August 15,
1996...................................................
10.63 Employment and Non-Disclosure Agreement between the
Company and Wouter van Biene, effective as of August
15, 1996...............................................
10.64 Form of Indemnification Agreement between the Company
and Robert B. Diener, effective as of August 15,
1996...................................................
10.65 Form of Indemnification Agreement between the Company
and Jerry Dackerman, effective as of August 15, 1996...
10.66 Form of Indemnification Agreement between the Company
and Wouter van Biene, effective as of August 15,
1996...................................................
10.67 Form of Financial Consulting Agreement between the
Company and BC Capital Corp............................
11+ Computation of Earnings per Share......................
23.1 Consent of BDO Seidman, LLP, dated January 23, 1997....
23.2 Consent of Freshman, Marantz, Orlanski Cooper & Klein
(included in Opinion, Exhibit 5.1).....................
23.3 Consent of nominee director............................
24+ Power of Attorney, included in signature page..........
</TABLE>
- ---------------
+ 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
USTEL, INC.
1,350,000 UNITS
EACH CONSISTING OF 2 SHARES
OF COMMON STOCK, $.01 PAR VALUE
AND 1 WARRANT TO PURCHASE
1 SHARE OF COMMON STOCK
Underwriting Agreement
As of _____________, 1997
James S. Cassel, Executive Vice President
Barber & Bronson Incorporated
201 South Biscayne Boulevard
Suite 2950
Miami, Florida 33131
Ladies and Gentlemen:
Ustel, Inc., a Minnesota corporation (the "Company"), and the
Palisades USTL Trust (the "Selling Stockholder") propose to issue and sell to
Barber & Bronson Incorporated, a Florida corporation (the "Representative"),
and the several other underwriters named on Schedule I attached hereto
(collectively, the "Underwriters") upon the basis of representations,
warranties and agreements of the Company and the Selling Stockholder contained
in this Underwriting Agreement (the "Agreement") and, subject to the terms and
conditions hereof, and the Underwriters propose to purchase 1,250,000 Units (as
hereinafter defined) from the Company and 100,000 Units from the Selling
Stockholder. Each unit ("Unit") consists of two shares of the Company's common
stock, $.01 par value per share (the "Common Stock"), and one warrant to
purchase one share of Common Stock (the "Warrant") (when referred to
collectively, the Units and the securities comprising the Units will be
referred to as the "Securities"). The Common Stock and the Warrants comprising
the Units will be detachable and separately tradeable immediately upon
issuance.
In addition, the Company proposes to grant to the Underwriters the
option to purchase from the Company up to an additional 187,500 Units (the
"Optional Units") solely for the purpose of covering over-allotments (the
"Over-Allotment Option"), if any, in connection with the sale of the Units.
(The Units described above and Optional Units described herein are referred to
collectively as the "Units," unless the context otherwise requires).
1. PURCHASE, SALE, AND DELIVERY OF THE UNITS AND REPRESENTATIVE'S WARRANTS
(a) PURCHASE AND SALE OF THE UNITS. On the basis of
the representations, warranties, covenants, and agreements of the Company and
the Selling Stockholder herein contained, but subject to the terms and
conditions herein set forth, (a) the Company agrees to sell to the
Underwriters, and the Underwriters agree to purchase from the Company,
1,250,000 Units
<PAGE> 2
at a purchase price of $5.40 per Unit and (b) the Selling Stockholder agrees to
sell to the several Underwriters and the Underwriters, severally and not
jointly, agree to purchase from the Selling Stockholder 100,000 Units at a
purchase price of $5.40 per Unit. The Underwriters plan to offer the Units for
sale to the public at the price (the "Public Offering Price") and upon the
terms set forth in the Prospectus (as defined below) (the "Public Offering") as
soon as practicable after the date the Registration Statement (as defined
below) is declared effective (the "Effective Date") by the U.S. Securities and
Exchange Commission (the "Commission"). The Company and the Selling
Stockholder acknowledge that the Underwriters shall have the right to enter
into agreements with co-underwriters, if any, and with selected dealers for the
sale of the Units to the public.
(b) PURCHASE AND SALE OF THE OPTIONAL UNITS. The Company
hereby grants to the Underwriters an option to purchase from the Company,
solely for the purpose of covering over-allotments in connection with the sale
of the Units, all or any portion of the Optional Units for a period of 45 days
from the date hereof at the same purchase price per Optional Unit payable by
the Underwriters for each Unit as provided in Subsection 1(a) above.
The option to purchase Optional Units granted in Subsection
1(b) hereof may be exercised on such number of occasions as is determined by
the Underwriters during the term thereof by written notice to the Company from
the Underwriters. Such notice shall set forth the aggregate number of Optional
Units as to which the option is being exercised and the time and date of
payment and delivery therefor. Such time and date of delivery shall not be
later than either the Closing Date (as defined below) or the seventh business
day after the day on which the option shall have been exercised (the "Option
Closing Date"). The Option Closing Date shall also refer to any subsequent
Option Closing Date in the event such option is exercised in part on more than
one occasion. Delivery and payment for such Optional Units shall be at the
offices set forth below for delivery and payment of the Securities.
The obligation of the Underwriters to purchase and pay for any
of the Optional Units is subject (as of the date hereof and as of the Closing
Date and/or the Option Closing Date) to the accuracy and completeness of and
compliance in all material respects with the representations and warranties of
the Company herein, to the accuracy and completeness of the statements of the
Company or its officers made in any certificate or other documents to be
delivered by the Company pursuant to this Agreement, to the performance in all
material respects by the Company of its obligations hereunder, to the
satisfaction by the Company of the conditions as of the date hereof and as of
the Closing Date and/or Option Closing Date, set forth in Subsection 1(c)
hereof, and to the delivery to the Representative of opinions, certificates and
letters dated the Closing Date and/or Option Closing Date substantially similar
in scope to those specified in Section 7, but with each reference to the
"Securities" and the "Closing Date" being deemed to be the "Optional Units" and
"Option Closing Date."
(c) DELIVERY OF AND PAYMENT FOR THE UNITS. Delivery of
the certificates representing the Units shall be made to the Underwriters at
the offices of Barber & Bronson Incorporated, 201 South Biscayne Boulevard,
Suite 2950, Miami, Florida 33131, or such other location as the Underwriters
shall determine and advise the Company upon at least two full business days'
notice in writing, against payment therefor by federal wire transfer to the
Company
-2-
<PAGE> 3
as appropriate at 9:30 A.M., Eastern Time, on _______________, 199__, or at
such other time and business day (Saturdays, Sundays, and legal holidays in
Miami, Florida, not being considered business days for the purposes of this
Agreement), not later than the tenth business day following the Effective Date,
as shall be agreed upon by the Representative and the Company, which time and
date are herein called the "Closing Date." If the Underwriters purchase any
Optional Units pursuant to the Over-Allotment Option, delivery and payment for
the certificates representing the Optional Units shall be made in the same
manner described herein on the Option Closing Date.
Delivery of the certificates representing the Securities shall
be made in registered form in such name or names and in such denominations as
the Representative shall specify to the Company upon at least two full business
days' notice in writing prior to the Closing Date or the Option Closing Date,
as the case may be. The Company will make the certificates available to the
Representative for examination at the offices of Barber & Bronson Incorporated,
201 South Biscayne Boulevard, Suite 2950, Miami, Florida 33131, or at such
other location as the Representative shall specify to the Company, not later
than 2:00 P.M., Eastern Time, on the business day immediately preceding the
Closing Date or the Option Closing Date, as the case may be.
(d) DELIVERY AND PAYMENT OF THE REPRESENTATIVE'S
WARRANTS. On the Closing Date, the Company will sell to the Representative,
and the Representative shall purchase, the Representative's Warrants, as more
fully described in Subsection 6(a) herein. The Representative's Warrants will
be in the form of, and in accordance with, the provisions of the
Representative's Warrants attached as an exhibit to the amendment to the
Registration Statement (as defined below). The Representative's Warrants may
not be assigned, sold or transferred during the 12 months after the Effective
Date except to the officers or directors of the Representative and to selected
dealers. The aggregate purchase price for the Representative's Warrants is the
lesser of $.01 per Representative's Warrant or an aggregate of $100. Payment
for the Representative's Warrants will be made to the Company by check or
checks payable to its order on the Closing Date against delivery of the
certificates representing the Representative's Warrants. The certificates
representing the Representative's Warrants will be in such denominations and in
such names as the Representative may request at least two days prior to the
Closing Date.
(e) USE OF PROSPECTUS. The Company hereby confirms its
authorization to the Underwriters to use, and to make available for use by
dealers, the Preliminary Prospectus and Prospectus (as defined below), and the
Company hereby authorizes the Underwriters, all selected dealers, and all other
dealers to whom any of the Securities may be sold by the Underwriters or
selected dealers, to use the Preliminary Prospectus and Prospectus, as from
time to time amended or supplemented, in connection with the sale of the
Securities in accordance with the applicable provisions of the Securities Act
of 1933, as amended (the "Securities Act"), the rules and regulations of the
Commission thereunder (the "Regulations"), and applicable state law until
completion of the Public Offering and for such longer period as the
Underwriters may request if the Prospectus is required to be delivered in
connection with sales of the Securities by the Underwriters or a dealer.
-3-
<PAGE> 4
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
STOCKHOLDER
(a) REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company represents and warrants to, and agrees with, the Underwriters that:
(1) MERGER. 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"). 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 Consortium 2000,
enforceable against each of them in accordance with its terms. The Merger
Agreement conforms to the description thereof in the Prospectus.
(2) REGISTRATION STATEMENT ON FORM SB-2. The
Company has prepared in conformity with the requirements under the Securities
Act, and the Regulations, and has filed with the Commission under the
Securities Act, a registration statement on Form SB-2 to describe the proposed
offering, File No. 333-12981 (the "Registration Statement"), including the
related Prospectus, for the registration of the sale of the Securities and the
Representative's Warrants and the securities underlying the Representative's
Warrants (collectively, the "Warrant Securities"). The conditions for the use
of a registration statement on Form SB-2 set forth in the General Instructions
thereto have been satisfied with respect to the Company, the transactions
contemplated herein, and the Registration Statement. As used in this
Agreement, the term "Registration Statement" means such registration statement
of the Company, as amended (pre- or post-effectiveness), on file with the
Commission at the time the registration statement becomes effective under the
Securities Act (including all financial statements and financial schedules,
exhibits, all other documents filed as a part thereof or incorporated by
reference therein, and all the information contained in any final Prospectus
filed with the Commission pursuant to Rule 424(b) under the Securities Act or
deemed by virtue of Rule 430A under the Securities Act to be part of the
Registration Statement). The term "Prospectus" as used herein means the final
Prospectus included as part of the Registration Statement, including, if
applicable, the information contained in any final Prospectus filed with the
Commission pursuant to Rule 424(b) under the Securities Act or deemed by virtue
of Rule 430A under the Securities Act to be part of the Registration Statement.
The term "Preliminary Prospectus" refers to and means any prospectus included
in the Registration Statement or any amendment thereto prior to the
Registration Statement becoming effective under the Securities Act.
(3) USE AND ACCURACY OF PROSPECTUS. Neither the
Commission nor any state regulatory authority has issued any order preventing
or suspending the use of any Prospectus or any part thereof, and no proceedings
for that purpose have been instituted or, to the Company's knowledge, are
pending, threatened or contemplated. Each Prospectus delivered to the
Underwriters for dissemination in connection with the Public Offering, at the
time of filing thereof and delivery to the Underwriters for such dissemination,
did not contain any untrue statement of a material fact, or omit to state a
material fact required to be stated therein or necessary to make
-4-
<PAGE> 5
the statements therein, in the light of the circumstances under which they were
made, not misleading; the foregoing shall not apply, however, to statements in,
or omissions from, any Prospectus that are based upon and conform to written
information furnished to the Company with respect to any Underwriter (or any
affiliate or associate thereof) by or on behalf of the Underwriters or such
Underwriters specifically for use in the preparation thereof.
(4) EFFECTIVENESS AND ACCURACY OF REGISTRATION
STATEMENT. The Registration Statement has or will become effective under the
Securities Act as of the Effective Date. The Registration Statement and the
Prospectus, from the Effective Date through the Closing Date and, if Optional
Units are purchased, up to and including the Option Closing Date (and if there
are multiple Option Closing Dates, up to and including the last Option Closing
Date), will comply in all material respects with the applicable requirements of
the Securities Act and the Regulations, and neither the Registration Statement
nor the Prospectus will, on such 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, in light of the circumstances
under which they were made, not misleading, and, on such dates, no event will
have occurred that should have been set forth in an amendment or supplement to
the Registration Statement or the Prospectus that has not then been set forth
in such an amendment or supplement; the foregoing shall not apply, however, to
statements in, or omissions from, the Registration Statement or the Prospectus
that are based upon and conform to written information furnished to the Company
with respect to the Underwriters (or any affiliate or associate thereof) by or
on behalf of the Underwriters specifically for use in the preparation thereof.
The descriptions in the Registration Statement and the Prospectus of contracts
and other documents of the Company are accurate and present fairly the
information required to be disclosed, and there are no contracts or other
documents required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement under the
Securities Act or the Regulations which have not been so described or filed as
required. The Company has complied with all requests of the Commission and any
state securities commission in a state designated by the Representative
pursuant to Subsection 6(a) hereof for additional information to be included in
the Registration Statement and Prospectus or otherwise.
(5) INDEPENDENT PUBLIC ACCOUNTANTS. BDO Seidman,
L.L.P., the accountants whose reports on the financial statements of the
Company and its subsidiaries are filed with the Commission as a part of the
Registration Statement are, and were during the periods covered by their
respective reports, independent public accountants as required by the
Securities Act and the Regulations.
(6) ORGANIZATION, QUALIFICATION, ETC. The
Company does not have any subsidiaries other than Acquisition Corp. and
Celmart Communications, Inc., a Nevada corporation (the "Subsidiaries"), 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.
Each of the Company, the Subsidiaries and Consortium 2000 is (A) a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, with full power and authority to own or
lease all of the assets owned or leased by it and to conduct its business as
described in the Registration Statement and the Prospectus and (B) duly
qualified to do business and in good standing as a foreign corporation in all
jurisdictions in which the nature
-5-
<PAGE> 6
of the activities conducted by it or the character of the assets owned or
leased by it makes such qualification necessary, except where the failure to so
qualify would not have a material adverse effect on the condition (financial or
otherwise), earnings, business, assets, properties, results of operations or
prospects (financial or otherwise) of the Company, the Subsidiaries or
Consortium 2000 (hereinafter a "Material Adverse Effect"). The Company does
not own, and at the Closing Date and/or Option Closing Date will not own,
directly or indirectly, any shares of stock or any other securities of any
corporation or have any equity interest in any firm, partnership, joint
venture, association or other entity, other than its Subsidiaries. The Company
owns, directly or indirectly, 100% of the outstanding capital stock of each of
the Subsidiaries, and all of such shares have been validly issued, are fully
paid and non-assessable, were not issued in violation of any preemptive rights,
and, except as set forth in the Prospectus, are owned free and clear of any
liens, charges, claims, encumbrances, pledges, security interests, defects or
other restrictions or equities of any kind whatsoever. Complete and correct
copies of the articles of incorporation and the by-laws of the Company, the
Subsidiaries and Consortium 2000 in effect on the date hereof have been
delivered to you, the receipt of which is acknowledged by your execution of
this Agreement, and no changes therein will be made on or subsequent to the
date hereof and prior to the Closing Date and/or Option Closing Date.
(7) PERMITS AND LICENSES. Each of the Company,
the Subsidiaries and Consortium 2000 have all approvals, licenses, franchises,
authorizations and permits (collectively, "Permits") necessary under all
applicable statutes, codes, rules, regulations, orders and decrees of
governments or governmental bodies (collectively, "Laws") to own, lease or use
their assets and to conduct their business as described in the Prospectus,
except where the failure to have any such Permits will not have a Material
Adverse Effect. Neither the Company, any of the Subsidiaries nor Consortium
2000 has received notice of any proceedings relating to the revocation or
modification of any such Permits and each of the Company, the Subsidiaries and
Consortium 2000 is in all respects in compliance with all of their Permits,
except where the failure will not have a Material Adverse Effect. Neither the
Company, any of the Subsidiaries nor Consortium 2000 is aware of any breach,
violation or default with respect to such Permits.
(8) CAPITALIZATION AND LEGALITY OF SECURITIES.
The authorized, issued and outstanding capital stock of the Company is as set
forth in the Prospectus under the caption "Capitalization." The Company will
have the adjusted capitalization set forth therein on the Closing Date and each
Option Closing Date, if any, based on the assumptions set forth therein. There
are no preemptive rights with respect to any outstanding securities of the
Company. The capital stock and other securities of the Company conform to the
descriptions thereof contained in the Prospectus under the caption "Description
of Securities." Except as otherwise set forth in the Prospectus, there are no
outstanding options, warrants, or other rights to purchase any shares of Common
Stock or other capital stock of the Company, or to purchase any other
securities convertible into or exchangeable for Common Stock or any other
capital stock of the Company. The outstanding securities of the Company have
been duly authorized and validly issued and are fully paid and nonassessable.
All the shares of Common Stock to be offered by the Prospectus have been duly
authorized and, when issued and delivered against payment therefor as provided
in this Agreement, the Prospectus, and the Representative's Warrant, as
applicable, will be validly issued, fully paid and nonassessable. The
Representative's Warrant will constitute, when sold and delivered as
contemplated, a valid and binding obligation of the Company enforceable in
-6-
<PAGE> 7
accordance with its terms, except to the extent that enforcement thereof may be
limited by (i) bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and similar laws and court decisions now or hereafter in effect
relating to or affecting creditors' rights and remedies generally and (ii)
general principles of equity (regardless of whether such enforcement is
considered in a proceeding at law or in equity). A sufficient number of shares
of Common Stock have been reserved for issuance upon sale and exercise of the
Warrants, the Representative's Warrants, and the Warrants issuable upon
exercise of the Representative's Warrants.
(9) REGISTRATION OF SECURITIES. The Common Stock
is registered under Section 12(g) of the Exchange Act, and all necessary
filings have been made to include the shares of Common Stock described herein
(the "Shares") in such registration. Upon the effectiveness of the
Registration Statement, the Shares will be listed on the Nasdaq SmallCap
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
Commission is contemplating terminating such registration.
(10) TAXES. No transfer tax, stamp duty or other
similar tax is payable by or on behalf of the Underwriters in connection with
(i) the issuance by the Company of the Securities, (ii) the purchase by the
Underwriters of the Securities from the Company and the Selling Stockholder and
the purchase by the Representative of the Representative's Warrants from the
Company, (iii) the consummation by the Company of any of its obligations under
this Agreement, or (iv) resales of the Securities in connection with the
distribution contemplated hereby.
(11) FINANCIAL STATEMENTS. The financial
statements (audited and unaudited), and related financial schedules and notes
(collectively, the "Financial Statements"), filed with and as part of the
Registration Statement, comply in all material respects with the requirements
of the Securities Act and the Regulations and present fairly the financial
position of the Company, its Subsidiaries and Consortium 2000 as of the dates
thereof and results of operations and changes in cash flows of the Company, its
Subsidiaries and Consortium 2000, for the periods to which they apply, and such
Financial Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved. All adjustments that, in the opinion of management, are necessary
for a fair presentation of the results for all such periods have been made.
The Financial Statements included in the Registration Statement and the
Prospectus are the only financial statements required under the Securities Act
or the Regulations to be included in the Registration Statement and the
Prospectus. The other financial and statistical information included in the
Prospectus, including, without limitation, "Prospectus Summary", "Summary
Financial Data" 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 Subsidiary and Consortium 2000.
(12) PRO FORMA FINANCIAL STATEMENTS. 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 Securities Act and
(i) management of the Company believes that the assumptions underlying the pro
forma
-7-
<PAGE> 8
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.
(13) MATERIAL LOSS. The Company, its Subsidiaries
and Consortium 2000 have not, since the date of the latest financial statements
included in the Prospectus or the Registration Statement, sustained any
material loss or interference with its business from fire, explosion, flood, or
other calamity, whether or not covered by insurance, or from any labor dispute
or court or governmental action, order, or decree, other than as set forth in
the Prospectus. Since the respective dates as of which information is set
forth in the Prospectus, and except as otherwise set forth therein: (i) there
has not been any change in the capital stock, or material increase in the short
term or long-term debt, of the Company, its Subsidiaries and Consortium 2000
taken as a whole; (ii) there has not been any Material Adverse Effect or any
prospective Material Adverse Effect in the condition (financial or otherwise),
business, prospects (financial or otherwise), results of operations, general
affairs, or management of the Company, its Subsidiaries and Consortium 2000
taken as a whole, whether or not arising in the ordinary course of business;
(iii) no event has occurred that would result in a material write-down of
assets of the Company, its Subsidiaries or Consortium 2000, (iv) the Company,
its Subsidiaries and Consortium 2000, have not incurred any material liability
or obligation, direct or contingent, or entered into any material transaction,
other than those in the ordinary course of business; (v) the Company has not
purchased any of its outstanding capital stock; (vi) there has been no dividend
or distribution of any kind declared, paid, or made by the Company in respect
of the Common Stock; and there has not been any execution or imposition of any
material lien, charge, or encumbrance upon the respective property or assets of
the Company, its Subsidiaries or Consortium 2000.
(14) INSURANCE. Each of the Company, the
Subsidiaries and Consortium 2000 maintains insurance policies, including, but
not limited to, general liability, product and property insurance, which
insures each of the Company, the Subsidiaries and Consortium 2000, and their
respective employees, against such losses and risks generally insured against
by comparable businesses. None of the Company, the Subsidiaries nor Consortium
2000 (A) has failed to give notice or present any insurance claim with respect
to any matter, including but not limited to such entity's business, property or
employees, under any insurance policy or surety bond in a due and timely
manner, (B) has any disputes or claims against any underwriter of such
insurance policies or surety bonds or has not failed to pay any premiums due
and payable thereunder, or (C) has failed to comply with all conditions
contained in such insurance policies and surety bonds. There are no facts or
circumstances under any such insurance policy or surety bond which would
relieve any insurer of its obligation to satisfy in full any valid claim of the
Company, any Subsidiary or Consortium 2000.
(15) COMPLIANCE WITH DOCUMENTS AND LAWS. The
Company, its Subsidiaries and Consortium 2000 are not in violation of their
respective certificates of incorporation, by-laws, or other governing
documents. Except for any default that could not
-8-
<PAGE> 9
reasonably be expected to have a Material Adverse Effect, neither the Company,
any of its Subsidiaries nor Consortium 2000 is in default in the due
performance of any lease or other contract, indenture, mortgage, deed of trust,
note, loan, or other agreement or instrument to which the Company, such
Subsidiary or Consortium 2000 is a party or by which it, or any of its
properties or businesses are subject or any applicable license, franchise,
certificate, permit, authorization, statute, rule or regulation of or from any
public, regulatory, or governmental agency or authority having jurisdiction
over the Company, its Subsidiaries and Consortium 2000, or any of its
properties or assets, or any approval, consent, order, judgment or decree. The
Company, its Subsidiaries and Consortium 2000 are in material compliance with
all laws, rules and regulations applicable to their respective businesses. The
execution and performance of this Agreement by the Company will not conflict
with or result in a breach or violation of, or default under, any material
lease or other material contract, indenture, mortgage, deed of trust, note,
loan, or other material agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which it, or any of their properties or
businesses are subject, and no consent, approval, authorization, or order of
any court or governmental authority or agency having jurisdiction over any of
the Company or its Subsidiaries or any of their properties or assets is
required to be obtained by the Company or any of its Subsidiaries for the
consummation by the Company and its Subsidiaries of the transactions
contemplated herein, except such as have been obtained or may be required under
the Securities Act or the Regulations or under state securities (or "Blue Sky")
laws or the applicable rules and regulations promulgated thereunder.
(16) AUTHORIZATION OF AGREEMENTS. Each of this
Agreement, the Representative's Warrants and the Financial Consulting Agreement
(as described in the Prospectus), has been duly authorized, executed, and
delivered by the Company and constitutes valid and binding obligations of the
Company, enforceable in accordance with its terms. The execution, delivery and
performance of this Agreement, the Representative's Warrants and the Financial
Consulting Agreement by the Company, the consummation by the Company of the
transactions herein and therein contemplated, and the compliance by the Company
with the terms of this Agreement, the Representative's Warrants and the
Financial Consulting Agreement have been duly authorized by all necessary
corporate action and do not and will not, with or without the giving of notice
or the lapse of time, or both, (i) result in any violation of the certificate
of incorporation and by-laws of the Company or any of its Subsidiaries, (ii)
result in a breach of or conflict with any of the terms or provisions of, or
constitute a default under, or result in the modification or termination of, or
result in the creation or imposition of any lien, security interest, charge or
encumbrance upon any of the properties or assets of the Company or any of its
Subsidiaries pursuant to any indenture, mortgage, note, contract, commitment or
other agreement or instrument to which the Company or any of its Subsidiaries
is a party or which the Company or any of its Subsidiaries or any of their
properties or assets are or may be bound or affected (iii) violate any existing
applicable law, rule, regulation, judgment, order or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over the Company, any
of its Subsidiaries or any of their properties or business, or (iv) violate any
Permits of the Company or its Subsidiaries except for any Permits, the
violation of which will not cause a Material Adverse Effect. The Agreement,
the Representative Warrants and the Financial Consulting Agreement conform to
the descriptions thereof in the Prospectus.
-9-
<PAGE> 10
(17) TITLE TO PROPERTY. The Company, its
Subsidiaries and Consortium 2000 have good and marketable title to, and valid
and enforceable leasehold estates in, all items of property described in the
Registration Statement or Prospectus as owned or leased by them, as the case
may be, or that are material to the conduct of the respective businesses of the
Company, its Subsidiaries or Consortium 2000, in each case free and clear of
all liens, encumbrances, claims, security interests, and other restrictions,
other than those described in the Registration Statement or Prospectus and
those that individually or in the aggregate could not reasonably be expected to
have a Material Adverse Effect. The leases, licenses or other contracts or
instruments under which the Company, its Subsidiaries or Consortium 2000 lease,
hold or are entitled to use any property, real or personal, are valid,
subsisting and enforceable only with such exceptions as are not material and do
not interfere with the use of such property by the Company, its Subsidiaries or
Consortium 2000, and neither the Company, its Subsidiaries nor Consortium 2000
nor, to the best of the Company's, its Subsidiaries' and Consortium 2000's
knowledge, any other party, is in material default thereunder and, no event has
occurred which, with the passage of time or the giving of notice, or both,
would constitute a material default thereunder. The Company, its Subsidiaries
and Consortium 2000 have not received notice of any violation of any applicable
law, ordinance, regulation, order or requirement relating to their owned or
leased properties except any such violation that will not have a Material
Adverse Effect. The Company, each of its Subsidiaries and Consortium 2000 have
insured their respective properties against loss or damage by fire or other
casualty and maintain such other insurance as management of the Company, such
Subsidiary or Consortium 2000, as the case may be, believe is adequate for the
present business operations of the Company, such Subsidiary or Consortium 2000.
(18) COPYRIGHTS, TRADEMARKS, SERVICE MARKS, TRADE
NAMES, ETC. Except as set forth in the Prospectus, the Company, its
Subsidiaries and Consortium 2000 own or possess the requisite licenses or
adequate rights to use all copyrights, trademarks, service marks, trade names,
logos, know-how, trade secrets, licenses, and rights in any way thereof
("Intellectual Property") presently used in or necessary to conduct their
respective businesses as described in the Prospectus and the Registration
Statement. The Company, its Subsidiaries and Consortium 2000 have not
knowingly infringed the rights of another with respect to the Intellectual
Property, and there is no outstanding claim of others alleging any such
infringement. There is no claim or action by any person pertaining to, or
proceeding pending or, to the Company's, any Subsidiary's or Consortium 2000's
knowledge, threatened, which challenges the exclusive rights of the Company,
its Subsidiaries and Consortium 2000 with respect to any Intellectual Property
used in the conduct of the respective businesses of the Company, its
Subsidiaries and Consortium 2000.
(19) LITIGATION. There is no litigation or
governmental or other proceeding or investigation before any court or before or
by any public, regulatory, or governmental agency or authority (or any
judgment, decree, or order of such court, agency, or authority) pending or, to
the best knowledge of the Company, any Subsidiary, or Consortium 2000
threatened, to which the Company, any Subsidiary or Consortium 2000 is a party
or of which the respective businesses or properties of the Company, any
Subsidiary or Consortium 2000 is the subject which is not disclosed in the
Prospectus or Registration Statement as required by the Securities Act or the
Regulations. There are no outstanding orders, judgments or decrees of any
court, governmental agency or other tribunal naming the Company, any Subsidiary
or Consortium 2000 and enjoining the Company from taking, or requiring the
Company, any Subsidiary or Consortium
-10-
<PAGE> 11
2000 to take, any action, or to which the Company, any Subsidiary or Consortium
2000, their properties or businesses are bound or subject.
(20) RELATED PARTY TRANSACTIONS. Except as set
forth in the Prospectus, no officer, director, stockholder or partner of the
Company or any Subsidiary, or any "affiliate" or "associate" (as these terms
are defined in Rule 405 promulgated under the Rules and Regulations) or any of
the foregoing persons or entities has or has had, either directly or
indirectly, (i) an interest in any person or entity which (A) furnishes or
sells services or products which are furnished or sold or are proposed to be
furnished or sold by the Company or any Subsidiary, or (B) purchases from or
sells or furnishes to the Company or any Subsidiary any goods or services, or
(ii) a beneficiary interest in any contract or agreement to which the Company
or any Subsidiary is a party or by which it may be bound or affected. Except
as set forth in the Prospectus under "Certain Transactions," there are no
existing agreements, arrangements, understandings or transactions, or proposed
agreements, arrangements, understandings or transactions, between or among the
Company, and any officer, director or 5% or greater securityholder of the
Company or any Subsidiary, or any partner, affiliate or associate of any of the
foregoing persons or entities.
(21) PROHIBITED PAYMENTS. Neither the Company nor
any of the directors or officers of the Company acting in any capacity on
behalf of the Company has used any corporate funds for unlawful contributions,
gifts, entertainment, or other unlawful expenses relating to political
activity; made any unlawful payment to foreign or domestic government officials
or employees or to foreign or domestic political parties or campaigns from
corporate funds; violated any provision of the Foreign Corrupt Practices Act of
1977, as amended; or made any bribe, rebate, payoff, influence payment,
kickback, or other unlawful payment.
(22) INTERNAL ACCOUNTING CONTROLS. The Company
maintains a system of internal accounting controls for the Company and its
Subsidiaries, which, taken as a whole, is sufficient to cause the Company to
comply with the Foreign Corrupt Practices Act of 1977, as amended, and to meet
the broad objectives of preventing and detecting errors or irregularities in
amounts that would be material to the Company's financial statements. Except
as specifically disclosed in the Prospectus, neither the Company nor any
employee or agent of the Company, has made any payment or transfer of any funds
or assets of the Company, conferred any personal benefit by the use of the
assets of the Company, or received any funds, assets, or personal benefit in
each case in violation of any law, rule, or regulation, which is required to be
disclosed in the Prospectus or necessary to make the statements therein not
misleading.
(23) TAX RETURNS. Each of the Company, its
Subsidiaries and Consortium 2000 (A) has paid all federal, state, local and
foreign taxes for which it is liable and has furnished all information returns
it is required to furnish pursuant to the Internal Revenue Code of 1986, as
amended, (B) has established adequate reserves for such taxes which are not yet
due and payable and (C) does not have any tax deficiency or claims outstanding,
proposed or assessed against it. The Company, its Subsidiaries and Consortium
2000 have not executed or filed with any taxing authority, foreign or domestic,
any agreement extending the period for assessment or collection of any income
taxes and are not a party to any pending action or
-11-
<PAGE> 12
proceeding by any foreign or domestic governmental agency for assessment or
collection of taxes; and no claims for assessment or collection of taxes have
been asserted against the Company, its Subsidiaries or Consortium 2000. The
Company, its Subsidiaries and Consortium 2000 have not been, and are not
currently being, audited by any taxing authority, nor has the Company, its
Subsidiaries or Consortium 2000 entered into any agreement to toll any
applicable statute of limitations with respect to the payment of any taxes.
(24) EMPLOYEE PLANS. Except as set forth in the
Registration Statement or the Prospectus, the Company, its Subsidiaries and
Consortium 2000 have no employee benefit plans (including, without limitation,
pension, profit sharing, and welfare benefit plans) or deferred compensation
arrangements.
(25) LABOR DISPUTES. Each of the Company, the
Subsidiaries and Consortium 2000 has generally enjoyed a satisfactory
employer-employee relationship with its employees and is in compliance with all
federal, state, local, and foreign laws and regulations respecting employment
and employment practices, terms and conditions of employment and wages and
hours. There are no pending investigations involving the Company, any of the
Subsidiaries or Consortium by the U.S. Department of Labor, or any other
governmental agency responsible for the enforcement of such federal, state,
local, or foreign laws and regulations. There is no unfair labor practice
charge or complaint against the Company, any of the Subsidiaries or Consortium
2000 pending before the National Labor Relations Board or any lockout, strike,
picketing, boycott, dispute, slowdown or stoppage pending or threatened against
or involving the Company, any of the Subsidiaries or Consortium 2000, or any
predecessor entity, and none has ever occurred. No representation question
exists respecting the employees of the Company, any of the Subsidiaries or
Consortium 2000, and no collective bargaining agreement or modification thereof
is currently being negotiated by the Company, the Subsidiaries or Consortium
2000. No grievance or arbitration proceeding is pending under any expired or
existing collective bargaining agreements of the Company or any of the
Subsidiaries. No labor dispute exists or, to the knowledge of the Company, any
Subsidiary or Consortium 2000, is imminent with the employees of the Company,
such Subsidiary or Consortium 2000. Neither the Company, any of its
Subsidiaries nor Consortium 2000 is a party to any collective bargaining
agreement.
(26) REGISTRATION RIGHTS. Except as set forth in
the Registration Statement or the Prospectus, no person, firm, or entity of any
nature whatsoever has any right to require the Company to register or attempt
to register under the Securities Act or any other securities law any shares of
capital stock including Common Stock or securities convertible into or
exchangeable or exercisable for any shares of capital stock including Common
Stock, by reason of the filing of the Registration Statement with the
Commission or otherwise.
(27) STABILIZATION. Neither the Company nor any
person that controls, is controlled by or is under common control with, the
Company has taken or will take, directly or indirectly, any action designed to,
or that might reasonably be expected to, cause or result in under the
Securities Exchange Act of 1934 (the "Exchange Act"), stabilization or
manipulation of the price of any security in order to facilitate the sale or
resale of any of the Securities.
-12-
<PAGE> 13
(28) INVESTMENT COMPANY. The Company is not, and
upon the issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectus under
the caption "Use of Proceeds" will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended (the "1940 Act").
(29) FINDER OR BROKER. The Company has not
retained or dealt with any broker or finder with respect to the transactions
contemplated hereby, and the Company knows of no outstanding claims for
services in the nature of a finder's fee or origination fee with respect to the
sale of the Securities hereunder. The Company will indemnify and hold harmless
the Underwriters with respect to any claim for a finder's fee by any party
claiming to be owed such fee based on contacts, conversations, or arrangements
with the Company.
(30) CONTRACTS. Other than those that
individually or in the aggregate could not reasonably be expected to have a
Material Adverse Effect, each contract or other instrument (however
characterized or described) to which the Company, any of its Subsidiaries or
Consortium 2000 is a party or by which their respective properties or
businesses are or may be bound or affected and to which reference is made in
the Registration Statement or Prospectus has been duly and validly executed by
the Company, its Subsidiaries or Consortium 2000, is in full force and effect
in all material respects and, based on the fact that each other party has full
power, corporate or otherwise, to execute, deliver and perform such contracts,
is enforceable against the parties thereto in accordance with its terms. None
of such contracts or instruments has been assigned by the Company, its
Subsidiaries or Consortium 2000 and neither the Company, its Subsidiaries nor
Consortium 2000 or any other party is in default thereunder and, no event has
occurred which, with the lapse of time or the giving of notice, or both, would
constitute a default thereunder which individually or in the aggregate could
reasonably be expected to have a Material Adverse Effect. Additionally, none
of the material provisions of such contracts or instruments violates any
existing applicable law, rule, regulation, judgment, order or decree of any
governmental agency or court having jurisdiction over the Company, its
Subsidiaries or Consortium 2000 or any of their assets or businesses, where
such violation or default would have a Material Adverse Effect.
(31) NASD INFORMATION. All information provided
by the Company to the Underwriters or their counsel in connection with any
filings made with the National Association of Securities Dealers, Inc. ("NASD")
with respect to the Public Offering is true and correct.
(32) COMPLIANCE WITH ENVIRONMENTAL LAWS AND
REGULATIONS. The Company, its Subsidiaries and Consortium 2000 are in
compliance in all material respects with all applicable federal, state and
local environmental laws and regulations, including, without limitation, those
applicable to emissions to the environment, waste management and waste disposal
(collectively, the "Environmental Laws"), except for any such noncompliance as
may be described in the Registration Statement or Prospectus and, to the
Company's knowledge, there are no circumstances that would prevent, interfere
with, or materially increase the cost of such compliance in the future. Except
as set forth in the Registration Statement or Prospectus, there is no claim
under any Environmental Laws ("Environmental Claim"), pending or threatened
-13-
<PAGE> 14
against or affecting the Company, its Subsidiaries or Consortium 2000 and,
there are no past or present actions, activities, circumstances, events or
incidents, including, without limitation, releases of any material into the
environment that could form the basis of any Environmental Claim against or
affecting the Company, its Subsidiaries or Consortium 2000.
(33) BUSINESS WITH CUBA. Neither the Company, any
of its Subsidiaries nor Consortium 2000 is doing business with the government
of Cuba or with any person or affiliate located in Cuba.
(34) INDEBTEDNESS. 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.
(35) ACQUISITIONS OR DISPOSITIONS. 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
Securities Act, and no such acquisition or disposition is probable.
(36) TELECOMMUNICATIONS AUTHORIZATIONS. To the
extent necessary to comply with the regulation of telecommunications carriers,
the Company, the Subsidiaries and Consortium 2000 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 (the "Authorizations") to own, lease,
license and use their properties and assets and to conduct their business in
the manner described in the Prospectus, except as described in the Prospectus,
and all material agreements or arrangements of the Company, the Subsidiaries
and Consortium 2000 comply with all applicable United States federal and state
and foreign laws. Neither the Company, any of the Subsidiaries nor Consortium
2000 is aware of any breach, violation or default with respect to such
Authorizations.
(37) COMPLIANCE WITH TELECOMMUNICATIONS LAWS.
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.
(38) CHANGES. At any time, if there is any change
in the information referred to in this Subsection 2(a), the Company will
immediately notify you of such change.
-14-
<PAGE> 15
(39) REPRESENTATIONS AND WARRANTIES OF THE SELLING
STOCKHOLDER. The Company is not aware, and has no reason to believe, that any
representation or warranty of the Selling Stockholder set forth in Subsection
2(b) below is untrue or inaccurate in any material respect.
(b) REPRESENTATIONS AND WARRANTIES OF THE SELLING
STOCKHOLDER. The Selling Stockholder represents and warrants to each
Underwriter that:
(1) OWNERSHIP. The Selling Stockholder is the
lawful owner of the Units to be sold by the Selling Stockholder pursuant to
this Agreement and has, and on the Closing Date will have, good and clear title
to such Units, free of all restrictions on transfer, liens, encumbrances,
security interests and claims whatsoever.
(2) TITLE TO UNITS. Upon delivery of and payment
for such Units pursuant to this Agreement, good and clear title to such Units
will pass to the Underwriters, free of all restrictions on transfer, liens,
encumbrances, security interests and claims whatsoever.
(3) DELIVERY OF CERTIFICATES. Certificates in
negotiable form for such Selling Stockholder's shares of Common Stock have been
placed in custody for delivery pursuant to the terms of this Agreement, under a
Custody Agreement duly authorized, executed and delivered by such Selling
Stockholder in the form heretofore furnished to you (the "Custody Agreement")
with ____________________, as Custodian (the "Custodian"); the shares of
Common Stock represented by the certificates so held in custody for such
Selling Stockholder are subject to the interests hereunder of the Underwriters;
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 of Common Stock
hereunder, certificates for the shares of Common Stock 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.
(4) STABILIZATION. The 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 of Common Stock pursuant to the distribution
contemplated by this Agreement, and other than as permitted by the Securities
Act, the Selling Stockholder has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and sale
of the Units.
(5) AUTHORIZATION OF AGREEMENTS. The execution,
delivery and performance of this Agreement by the Selling Stockholder,
compliance by the 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 Securities
-15-
<PAGE> 16
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 the Selling Stockholder is bound, or
violate or conflict with any laws, administrative regulation or ruling or court
decree applicable to the Selling Stockholder or property of the Selling
Stockholder.
(6) ACCURACY OF INFORMATION. All written
information furnished to the Company by or on behalf of the Selling Stockholder
with respect to the Selling Stockholder for use in connection with the
preparation of the Registration Statement is true, correct and complete in all
material respects as of the stated date of such information and the date
hereof; the Selling Stockholder has read the information appearing in the
Prospectus and, as it pertains to the Selling Stockholder, such information
does not contain an untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of
circumstances under which they were made, not misleading.
(7) FINDER OR BROKER. The Selling Stockholder
has not retained or dealt with any broker or finder with respect to the
transaction contemplated hereby, and the Selling Stockholder does not know of
any outstanding claims for services in the nature of a finder's fee or
origination fee with respect to the sale of Units by the such Selling
Stockholder hereunder. The Selling Stockholder will indemnify and hold
harmless the Underwriters with respect to any claims or finder's fee by any
party claiming to be owed such fee based on contacts, conversations, or
arrangements with the Company or the Selling Stockholder.
(8) REASON FOR SALE. The sale of Units by the
Selling Shareholder pursuant to this Agreement is not prompted by any
information concerning the Company which is not set forth in the Registration
Statement.
3. COVENANTS OF THE COMPANY. The Company covenants and agrees
with the Underwriters that:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. If the
Effective Date is not prior to the execution and delivery of this Agreement,
the Company will use its best efforts to cause the Registration Statement and
any subsequent amendments thereto to become effective as promptly as possible.
The Company will notify the Underwriters promptly (i) when the Registration
Statement or any subsequent amendment thereto has become effective or any
supplement to the Prospectus has been filed and (ii) of the receipt of any
requests, and the nature and substance thereof, by the Commission for any
amendment or supplement to the Registration Statement or Prospectus or for any
other additional information. The Company will prepare and file with the
Commission, promptly upon the Representative's reasonable request, any
amendment or supplement to the Registration Statement or Prospectus that may be
necessary or advisable in connection with the sale or distribution of the
Securities or any of the Representative's Warrants. The Company will file no
amendment or supplement to the Registration Statement or Prospectus (other than
any document required to be filed under the Exchange Act that upon filing is
deemed to be incorporated by reference therein) to which the Representative
shall reasonably object by notice to the Company after having been furnished a
copy within a reasonable time, but no later than five business days, prior to
the proposed filing thereof. The Company will furnish to the
-16-
<PAGE> 17
Underwriters at or prior to the filing thereof with the Commission a copy of
any document that upon filing is deemed to be incorporated by reference in
whole or in part in the Registration Statement or the Prospectus.
(b) NOTICE OF STOP ORDER. The Company will advise the
Underwriters promptly, and confirm in writing, when and if it receives notice
or obtains knowledge of (i) the issuance by the Commission or any state
securities commission in a state designated by the Representative pursuant to
Subsection 6(e) hereof of any stop order or other order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or the
effectiveness of the Registration Statement or (ii) the suspension of the
qualification of any of the Securities or the Representative's Warrants for
offering or sale in any jurisdiction in which they were previously qualified,
or (iii) the initiation or threat of any proceeding for that purpose. The
Company will promptly use its reasonable best efforts to prevent the issuance,
and to obtain the withdrawal if such issuance is not prevented, of any such
stop order or other suspension.
(c) COMPLIANCE WITH THE SECURITIES ACT AND THE EXCHANGE
ACT. Within the time during which a Prospectus relating to the Securities, or
the Representative's Warrants is required to be delivered under the Securities
Act, the Company will use its best efforts to comply with all requirements
imposed upon it by the Securities Act and the Exchange Act, as now in effect
and as hereafter amended, and by the Regulations, as from time to time in
force, to permit the continuance of sales of or dealings in the distribution of
the Securities or the Representative's Warrants or the Warrant Securities, as
contemplated by the provisions therein, herein, and in the Registration
Statement or Prospectus. If during such period any event as to which the
Company has knowledge occurs as a result of which the Registration Statement or
the Prospectus as then amended or supplemented includes an untrue statement of
a material fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances then existing, not
misleading, or if during such period it is necessary to amend the Registration
Statement or supplement the Prospectus to comply with the Securities Act, the
Company will notify the Underwriters promptly, will amend the Registration
Statement or supplement the Prospectus so as to correct such statement or
omission or otherwise to effect such compliance, and will furnish without
charge to the Underwriters and to any dealer in securities as many copies of
such amended or supplemented Prospectus as the Underwriters may from time to
time reasonably request. Furthermore, the Company will prepare and file with
the Commission, promptly upon the request of the Underwriters, any amendments
or supplements to the Registration Statement or the Prospectus, which in the
opinion of the Underwriters may be necessary to enable the Underwriters to
continue the distribution of the Securities, and will use its best efforts to
cause the same to become effective as promptly as possible.
(d) COPIES OF REGISTRATION STATEMENT, ETC. The Company
will deliver to the Underwriters, from time to time without charge, such number
of copies of the Registration Statement (two of which delivered to the
Representative shall be manually signed and will include all exhibits), each
Preliminary Prospectus, the Prospectus, and all amendments and supplements
thereto, in each case as soon as available and in such quantities and to such
persons as requested by the Underwriters. The Company consents to the use of
any Preliminary Prospectus as originally filed, any amended Preliminary
Prospectus, the Prospectus and any amendments or
-17-
<PAGE> 18
supplements thereto by the Underwriters and by any dealer for the purpose
contemplated by the Securities Act and the Regulations.
(e) BLUE SKY QUALIFICATIONS. The Company will use its
best efforts, in cooperation with the Underwriters and the Underwriters'
counsel, to register or qualify the Securities, the Representative's Warrants
and the Warrant Securities, for offer and sale under the securities laws of
such jurisdictions as the Underwriters may reasonably designate, and will
continue such qualifications in effect for so long as may be necessary to
complete the distribution and sale of such securities; provided that in no
event shall the Company be required in connection therewith to qualify to do
business in any jurisdiction where it is not now so qualified.
(f) SECTION 11(A) EARNINGS STATEMENT. The Company will
make generally available to its security holders (within the meaning of Section
11(a) of the Securities Act) and deliver to the Underwriters as soon as
practicable an earnings statement that shall satisfy the requirements of
Section 11(a) and Rule 158 under the Securities Act, covering a period of at
least 12 consecutive months after the Effective Date.
(g) INFORMATION TO THE REPRESENTATIVE. Until the fifth
anniversary of the Effective Date, the Company will furnish or cause to be
furnished to the Underwriters and the Underwriters' counsel, with reasonable
promptness, copies of (i) annual audited balance sheets and audited statements
of operations and changes in cash flows of the Company, and quarterly balance
sheets and statements of income of the Company (which need not be audited),
(ii) all reports, if any, to its shareholders, (iii) all reports filed by the
Company with the Commission, any securities exchange and/or the NASD; and (iv)
such other material documents and information with respect to the Company and
its affairs as the Underwriters may from time to time reasonably request and
the Company can produce at reasonable cost; provided, however, that the Company
shall not be required to produce such information or documents if the Company
has received a written opinion of its counsel that providing such information
to the Underwriters is reasonably likely to create liability under applicable
federal and state securities laws and a copy of such opinion is furnished to
the Underwriters. The Company shall cause the Board of Directors to meet, at
least quarterly, upon proper notice, and shall also cause the agenda and
minutes of the last meeting to be mailed to each Director prior to each meeting
and a copy of such report to be sent to the Underwriters. The Company shall
cause its transfer agent to provide the Underwriters with copies of the
Company's monthly transfer sheets and Depository Trust Company transfer sheets.
Upon request, the Company shall also provide the Underwriters with current
lists of its shareholders and warrantholders, if any. The Underwriters will
maintain the confidentiality of any documents or information provided to the
Underwriters pursuant to this Subsection 3(g), and will comply fully with
federal and state securities laws regarding the use of such documents or
information.
(h) LISTING IN SECURITIES MANUAL; AFTER-MARKET TRADING
MEMORANDUM; NON-ISSUER TRANSACTION. The Company shall use its best efforts to
maintain its listing in Standard and Poor's Corporation Reports and/or Moody's
OTC Guide for at least five years after the Closing Date. For a period of five
years from the Closing Date, at the request of the Underwriters and at the
Company's sole expense, the Company shall cause its counsel to provide to the
-18-
<PAGE> 19
Underwriters a list of those states in which the Company's securities may be
traded in non-issuer transactions under the Blue Sky laws of the 50 states.
(i) LISTING ON THE NASDAQ SMALLCAP MARKET. Prior to the
Effective Date, the Company, at its cost, shall use its best efforts to have
caused the Units, Warrants and Common Stock to be listed for trading on The
Nasdaq SmallCap Market system under symbols which are acceptable to the
Representative, and the Company shall use its best efforts to have the Units,
Warrants and Common Stock remain listed for at least five years.
(j) SECTION 12(G) REGISTRATION. The Company's Common
Stock is registered with the Commission under the provisions of Section 12(g)
of the Exchange Act. Prior to the Effective Date, the Company will arrange to
have Units and Warrants registered with the Commission under the provisions of
Section 12(g) of the Exchange Act. The Company will use its best efforts to
maintain the registration of the Common Stock, Warrants and Units under Section
12(g) of the Exchange Act for a minimum of five years after the Effective Date.
The Company shall comply with the Securities Act, the Regulations, the Exchange
Act and the rules and regulations promulgated thereunder, the applicable rules
and regulations of the NASD, and applicable state securities laws so as to
permit the continuance of sales of and dealings in the Common Stock and the
exercise of the Representative's Warrants and the issuance and sale of
Securities upon such exercise in compliance with applicable provisions of such
laws, rules, and regulations, including the filing with the Commission, the
NASD and state securities commissions in all states where the Securities,
including the Warrant Securities, have been issued or sold, all reports
required to be so filed, and the Company will deliver to the holders of the
Securities and/or Warrant Securities all reports required to be provided to
such holders pursuant to such laws, rules, or regulations. The Company shall
promptly file with the Commission and deliver to the Underwriters, from time to
time as required to make the same reasonably current, such statements and
reports as are required to be filed by a company registered under Section 12(g)
of the Exchange Act.
(k) USE OF PROCEEDS. The Company shall apply the net
proceeds received from the sale of the Units and the exercise of the
Representative's Warrants in the manner set forth under the caption "Use of
Proceeds" in the Registration Statement or Prospectus.
(l) BOARD MEETINGS AND MEMBERSHIP. For a period of five
years commencing on the Effective Date, the Representative shall have the right
to designate one nominee for election to the Company's Board of Directors. The
Company shall, prior to the Effective Date, cause the officers, directors and
holders of 5% or more of the outstanding Common Stock of the Company to agree
in writing to vote their shares of Common Stock during such five-year period in
favor of the election of such nominee. Following the election of such nominee
as director, such person shall receive no more or less compensation than is
paid to other non-officer directors of the Company for attendance at meetings
of the Board of Directors of the Company and shall be entitled to receive
reimbursement for all reasonable costs incurred in attending such meetings
including, but not limited to, food, lodging and transportation. The Company
agrees to indemnify and hold such director harmless to the maximum extent
permitted by law, against any and all claims, actions, awards and judgments
arising out of his or her service as director and, in the event the Company
maintains a liability insurance policy affording coverage for the acts of its
-19-
<PAGE> 20
officers and directors, to include such director as insured under such policy.
The rights and benefits of such indemnification and the benefits of such
insurance shall, to the extent possible, extend to the designee of the
Representative insofar as he or she may be or may be alleged to be responsible
for such director, provided that the extension of such rights and benefits to
the designee of the Representative may be done without additional cost to the
Company.
In the event that the Representative does not elect to
designate one member to the Company's Board of Directors, the Representative
shall have the right during such five-year period to have up to one
representative attend all meetings of the Board of Directors of the Company,
which meetings shall be held at least quarterly, including any meetings of any
committees of the Board of Directors. All information received by such
representative at such meetings shall be kept confidential, shall not be
disclosed by the representatives to any third party, and shall be dealt with in
full compliance with federal and state securities laws.
(m) FUTURE SALES. The Company will not, during the
period of the Public Offering and for a period of five years from the Effective
Date, without the Representative's prior written consent, offer, sell, contract
to sell, grant an option relating to, or otherwise dispose of, any securities
of the Company, except for the issuance of shares of Common Stock to be issued
(a) pursuant to options or options currently reserved for future grant and
disclosed in the Registration Statement and Prospectus, (b) pursuant to and in
order to consummate a merger with or acquisition from an unaffiliated party in
a transaction negotiated at arms' length and approved by a majority of the
Company's Board of Directors, (c) in a public offering, at a price not less
than 90% of the average of the closing bid prices of the Common Stock as
reported on The Nasdaq SmallCap Market for the 20 consecutive trading day
period immediately preceding the date of sale (the "Exempt Price"), and (d) in
a private sale at a price not less than 75% of the Exempt Price.
(n) UNDERTAKINGS. The Company will comply with the
provisions of all undertakings contained in the Registration Statement or made
in connection with any application to register or qualify any of the
Securities, including the Warrant Securities, under state Blue Sky laws.
(o) CERTAIN DELIVERIES TO THE REPRESENTATIVE. The
Company shall obtain from its officers, counsel, and accountants those
certificates, opinions, and letters referred to in Section 7. The Company
shall, upon request of the Underwriters, furnish to the Underwriters as early
as practicable prior to each of the date hereof, the Closing Date and any
Option Closing Date, but not later than two full business days prior thereto, a
copy of the latest available unaudited interim financial statements of the
Company (which in no event shall be as of a date more than 30 days prior to the
date of the Registration Statement) which have been read by the Company's
independent public accountants, as stated in the accountants' letter to be
furnished pursuant to Subsection 7(k) hereof.
(p) REDEMPTION AND DIVIDENDS. For a period of five years
from the Effective Date, the Company shall not redeem any of its
-20-
<PAGE> 21
securities and shall not (i) pay any dividends or make any other cash
distribution in respect of its securities in excess of the amount of the
Company's current and retained earnings after the Closing Date, or (ii) redeem
any of its securities outstanding as of the Closing Date other than redemptions
made in connection with the termination of an employee or director if such
employee's employment agreement, in effect prior to the Effective Date,
provides for redemption upon termination, or redemptions as otherwise provided
herein, without obtaining the Representative's prior written consent. The
Representative shall either approve or disapprove such contemplated redemption
of securities or dividend payment or distribution within 15 days from the date
the Representative receives written notice of the Company's proposal with
respect thereto; a failure of the Representative to respond within the five
business day period shall be deemed consent to the transaction.
(q) RESTRICTIONS ON SALES, OPTIONS AND VOTING BY
AFFILIATES. Except upon consent of the Representative, all directors,
officers, and holders of 5% or more of the Company's capital stock issued and
outstanding as of the Effective Date, as well as options, warrants or rights
thereto, shall agree not to sell any shares of any class of capital stock owned
by them, privately or publicly (either pursuant to Rule 144 of the General
Rules under the Securities Act or otherwise) for a period of not less than 24
months following the Effective Date. The Company will cause its transfer agent
to note such restriction on the transfer books and records of the Company and
will obtain "lock-up agreements" from such directors, officers, and
shareholders prior to the Effective Date. The agreement shall cease to be in
operation only to the extent that enforcement thereof may be limited by (A)
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and
similar laws and court decisions now or hereafter in effect relating to or
affecting creditors' rights and remedies generally and (B) general principles
of equity (regardless of whether such enforcement is considered in a proceeding
at law or in equity).
(r) OUTSTANDING WARRANTS, OPTIONS AND OTHER RIGHTS.
Unless the Representative has given its written consent prior to the Effective
Date, which consent shall not be unreasonably withheld, there shall not be
outstanding on the Closing Date any warrants, options, or other rights to
purchase any shares of Common Stock, except as otherwise set forth in the
Registration Statement or Prospectus.
(s) ACCOUNTING FIRM. The Company shall retain a national
independent public accounting firm reasonably acceptable to the Representative
for a period of five years from the Effective Date. The Representative hereby
acknowledge that BDO Seidman, L.L.P. is such a firm.
(t) BUSINESS WITH CUBA. The Company will inform the
Florida Department of Banking and Finance (the "Department") if at any time it
commences engaging in business with the government of Cuba or with any person
or affiliate located in Cuba after the Effective Date. Such information will
be provided to the Department within 90 days after the commencement of business
in Cuba or within 90 days after the change occurs with respect to previously
reported information.
(u) CLOSING BINDERS. 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
-21-
<PAGE> 22
Prospectus, the Prospectus, the Preliminary Blue Sky Memorandum and any
supplement thereto and all underwriting and other closing documents.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE UNDERWRITERS.
The Underwriters severally represent and warrant to, and agree with, the
Company and the Selling Stockholder that:
(a) REGISTRATION AS BROKER-DEALER AND MEMBER OF NASD.
Each of the Underwriters is registered as a broker-dealer with the Commission
and in all states in which it shall offer the Securities, and is a member in
good standing of the NASD.
(b) NO PENDING PROCEEDINGS. There is not now pending or
threatened against any of the Underwriters any action or proceeding of which it
has been advised, either in any court of competent jurisdiction or before the
Commission, or before any state securities commission or the NASD, concerning
its activities as a broker or dealer, that could have a Material Adverse Effect
upon the ability of such Underwriter to perform under its obligations this
Agreement.
(c) NO UNTRUE STATEMENTS. No information furnished to
the Company in writing by or on behalf of the Underwriters for the express
purpose of use in or for preparation of the Registration Statement or the
Prospectus contains any untrue statement of a material fact or omits 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. For all purposes under this Agreement, the only information which
shall be deemed to have been provided by or on behalf of the Underwriters for
the express purpose of use in or for preparation of the Registration Statement
or the Prospectus shall be the information contained in the "Underwriting"
section of the Prospectus.
(d) FINDER OR BROKER. Except as contemplated by this
Agreement, no Underwriter (i) has retained or dealt with any broker or finder
or financial consultant with respect to the transactions contemplated hereby,
or (ii) knows of any outstanding claims for services in the nature of a
finder's fee or origination fee with respect to transactions contemplated
hereby. The Underwriters will indemnify and hold harmless the Company with
respect to any claims for a finder's fee by any party claiming to be owed such
fee based on contacts, conversations, or arrangements with the Underwriters.
5. OFFERING EXPENSES AND RELATED MATTERS
(a) GENERAL. Whether or not the Public Offering is
consummated, the Company will pay all costs and expenses incident to the
performance of the obligations of the Company hereunder, including without
limiting the generality of the foregoing, (i) the preparation, printing,
filing, and copying of the Registration Statement, Preliminary Prospectus,
Prospectus, this Agreement, Blue Sky memoranda, the Agreement Among
Underwriters, if any, the Selected Dealers Agreement, and other underwriting
documents, if any, and any drafts, amendments or supplements thereto, including
the cost of all copies thereof supplied to the Underwriters in such quantities
as reasonably requested by the Underwriters, the costs of mailing Preliminary
and Final Prospectuses to offerees and purchasers of the Securities; and the
out of pocket travel expenses
-22-
<PAGE> 23
of the Underwriters and counsel to the Underwriters or other professionals
designated by the Underwriters to visit the Company's facilities for purposes
of discharging due diligence responsibilities; (ii) the printing, engraving,
issuance and delivery of certificates representing the Securities, including
any transfer or other taxes payable thereon; (iii) the registration or
qualification of the Securities, including the Warrant Securities, under state
securities or Blue Sky laws, including the reasonable fees and disbursements of
counsel (regardless of whether such counsel is also counsel to the
Representative, subject to the limitation set forth in Subsection 5(c) below)
and filing fees in connection therewith; (iv) all fees and expenses of the
Company's counsel and accountants; (v) all costs, expenses and filing fees in
connection with review of the terms of the Public Offering by the NASD; (vi)
all costs and expenses, including legal fees, of any listing of the Securities
on The Nasdaq SmallCap Market and/or on a stock exchange and/or in Standard and
Poor's Corporate Reports and/or in any other securities manuals; (vii) all
costs and expenses of four bound volumes provided to the Underwriters of all
closing documents, paper exhibits, correspondence and records forming the
materials included in the Public Offering; (viii) the reasonable costs and
expenses of all pre-closing and post-closing advertisements relating to the
Public Offering (such as tombstone ads); (ix) all costs of holding
informational meetings and "road shows"; and (x) all other costs and expenses
incurred or to be incurred by the Company in connection with the transactions
contemplated by this Agreement. The obligations of the Company under this
Subsection 5(a) shall survive any termination or cancellation of this
Agreement.
(b) NON-ACCOUNTABLE EXPENSE ALLOWANCE. In addition to
the Company's responsibility for payment of the foregoing expenses, the Company
shall pay to the Representative a non-accountable expense allowance equal to 3%
of the gross proceeds of the Public Offering, including in the computation of
such amount the proceeds from any sale of Optional Units. The non-accountable
expense allowance due shall be paid at the Closing Date and on each Option
Closing Date, as applicable.
(c) EXPENSES IF THE PUBLIC OFFERING IS NOT COMPLETED.
The Representative hereby acknowledges its prior receipt from the Company of
$25,000, which amount shall be applied to the non-accountable expense
allowance. If the proposed Public Offering is not completed because: (1) of
any reason solely within the control of the Company or its shareholders, (2)
the Company unilaterally withdraws the proposed Public Offering from the
Underwriters, (3) of any material discrepancy in any representation or warranty
made to the Representative or the failure of the Company to meet any of its
material obligations hereunder, then the $25,000 paid shall be retained by the
Underwriters as and for their expenses and without any further liability
whatsoever on the part of the Company except in the case of fraud or willful
misconduct on the part of the Company, in which case the Company shall be
responsible for the greater of: (A) such $25,000 or (B) the Underwriters'
actual costs, expenses, and legal fees incurred without limitation in
connection with the transaction contemplated hereunder. If the Underwriters
unilaterally withdraw from the Public Offering for any reason other than that
set forth in this Subsection 5(c) above, the Company will be obligated to
reimburse the actual expenses incurred in connection herewith. It is
understood and agreed by the parties hereto that any expenses incurred by the
Underwriters will be deemed to be reasonable and unobjectionable upon
demonstration by the Underwriters that such expenses were incurred, directly or
indirectly, in connection with the proposed transaction and/or relationship of
the parties hereto, as described herein.
-23-
<PAGE> 24
(d) REPRESENTATIVE'S RIGHT OF FIRST REFUSAL. The Company
hereby grants to the Representative a right of first refusal for a period of 5
years after the Effective Date of the Registration Statement for the
underwriting of any public or private sale of securities of the Company to be
made by the Company, or for any public or private sale of securities by the
Company to be made by its principal shareholders or subsidiaries.
(e) ENGAGEMENT OF THE REPRESENTATIVE AS WARRANT
SOLICITATION AGENT. The Company hereby appoints the Representative as warrant
solicitation agent for a period of five years after the Effective Date, and the
Representative shall be entitled to receive a 7% warrant conversion fee upon
exercise of the Warrants, pursuant to the NASD Notice to Members 81-38.
(f) COMPLIANCE WITH BLUE SKY LAWS. The Representative
shall determine in which states or jurisdictions the Securities, including the
Warrant Securities (as described below), shall be registered or qualified for
sale. Copies of all applications and related documents for the registration or
qualification of securities (except for the Registration Statement and
Prospectus) filed with the various states shall be supplied to the Company's
counsel as soon as possible following their transmission to the various states,
and copies of all comments and orders received from the various states shall be
made available promptly to the Company's counsel. Immediately prior to the
Effective Date, counsel for the Representative shall advise counsel for the
Company in writing of all states in which the offering has been registered or
qualified for sale or has been cancelled, withdrawn, or denied, the date of
each such event, and the number of Securities, including Warrant Securities,
registered or qualified for sale in each such state. The Company shall be
responsible for the cost of state registration or qualification filing fees and
the legal fees of Underwriters' counsel in connection with such filings, which
filing fees are payable to Underwriters' counsel in advance of such filings.
6. REPRESENTATIVE'S WARRANTS; OTHER FINANCIAL ARRANGEMENTS
(a) REPRESENTATIVE'S WARRANTS. On the Closing Date, the
Company will sell to the Representative, for an aggregate price of the lesser
of $.01 per Representative's Warrant or an aggregate of $100, warrants to
purchase the equivalent of 10% of the Units sold in the Public Offering, at an
exercise price per Unit of $7.20 (120% of the Public Offering price per Unit).
The Representative's Warrants shall be non-exercisable and non-transferable
(other than to officers or partners of members of the underwriting or selling
group) for a period of 12 months following the Effective Date. The
Representative's Warrants shall be exercisable, in whole or in part, commencing
12 months after the Effective Date and for a period of four years thereafter
(the "Term"). If the Representative's Warrants are not exercised during the
Term, they shall, by their terms, automatically expire. The Representative's
Warrants shall contain customary anti-dilutive provisions relating to any
recapitalization, stock split, stock dividend or similar event involving the
Company. The Representative's Warrants shall also contain provisions providing
for demand and "piggyback" registration rights with respect to the
Representative's Warrants and the Warrant Securities.
The Representative's Warrants shall otherwise be transferable
after one (1) year from the Effective Date pursuant to available exemptions
from registration under the Securities Act.
-24-
<PAGE> 25
(b) FINANCIAL CONSULTING AGREEMENT; FINDER'S FEE. On the
Closing Date, the Company and B C Capital Corp., an affiliate of the
Representative, shall enter into a financial consulting agreement pursuant to
which the Representative will offer to provide financial consulting services to
the Company for a one-year period (the "Financial Consulting Agreement"). The
Company shall pay to the Representative a consulting fee of 1/2% of the gross
proceeds of the Public Offering received by the Company for such one-year
period, which will be payable in full on the Closing Date. In addition, the
Company agrees to pay to the Representative a graduated finder's fee based on
the Transaction Value (as defined herein) of any merger, acquisition, joint
venture or other similar transaction to which the Company or a subsidiary of
the Company is a party and as to which the Representative originates, directly
or indirectly, as follows:
5% on the first $5,000,000;
4% on the amount from $5,000,001 to $6,000,000;
3% on the amount from $6,000,001 to $7,000,000;
2% on the amount from $7,000,001 to $8,000,000; and
1% on the amount over $8,000,001.
"Transaction Value" shall mean the aggregate value of all
cash, securities, and other property (i) paid to the Company, its affiliates,
or their shareholders in connection with any transaction referred to above
involving an investment in or acquisition of the Company or any affiliate (or
the assets of either), (ii) paid by the Company or any affiliate in any such
transaction involving an investment in or acquisition of another party or its
equity holdings by the Company or any affiliate, or (iii) paid or contributed
by the Company or any affiliate and by the other party or parties in the event
of any such transaction involving a joint venture or similar joint enterprise
or undertaking. The value of any such securities (whether debt or equity) or
other property shall be the fair market value thereof as determined by
unanimous agreement of the Representative and the Company or by an independent
appraiser jointly selected by the Representative and the Company.
7. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the Underwriters to purchase and pay for the Securities shall be
subject to the accuracy in all material respects, as of the date hereof and
each Closing Date (whether the Closing Date with respect to the Shares or an
Option Closing Date with respect to the Optional Shares), as if made on such
Closing Date, of the representations and warranties of the Company contained
herein and the following additional conditions, unless expressly waived in
writing by the Representative:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT.
(i) The Registration Statement shall have been
declared effective by the Commission not later than 5:00 P.M.,
Eastern Time, on the date of this Agreement, or such later
time or date as shall have been consented to by the
Representative in writing (the "Effective Date").
(ii) On the Closing Date, no stop order suspending
the effectiveness of the Registration Statement or the
qualification or registration of the Securities,
-25-
<PAGE> 26
including the Representative's Warrants and the Warrant
Securities, under the Blue Sky laws of any jurisdiction
(whether or not a jurisdiction specified by the
Representative) shall have been issued, and no proceeding for
that purpose shall have been initiated or shall be threatened
or contemplated by the Commission or the authorities of any
such jurisdiction.
(iii) Any request of the Commission or any such
authorities for additional information to be included in the
Registration Statement or Prospectus or otherwise shall have
been complied with to the reasonable satisfaction of counsel
for the Representative.
(b) REPRESENTATIONS; COMPLIANCE WITH AGREEMENT. The
representations and warranties of the Company in this Agreement shall be true
and correct on and as of the Closing Date, with the same effect as if made on
the Closing Date, and the Company shall have complied with all the agreements
and satisfied all the obligations required to be performed or satisfied by it
at or prior to the Closing Date.
(c) NO UNTRUE STATEMENTS. The Registration Statement and
the Prospectus shall not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and, since the Effective Date, there shall not have
occurred any event required to be set forth in an amended or supplemented
Prospectus that has not been so set forth (except any such statement or
omission based upon information furnished in writing by or on behalf of the
Underwriters for inclusion in the Registration Statement).
(d) NO MATERIAL CHANGE. Subsequent to the respective
dates as of which information is given in the Registration Statement and the
Prospectus, and except as set forth or contemplated in the Prospectus, (i)
there shall have been no Material Adverse Effect with respect to the properties
operations, business, financial condition, results of operations or prospects
of the Company, any of its Subsidiaries or Consortium 2000 (ii) the Company
shall not have entered into any material transaction not in the ordinary course
of business, (iii) the Company shall not have paid or declared any dividends or
other distributions on its capital stock, (iv) the conduct of the business and
operations of the Company, its Subsidiaries, or Consortium 2000 shall not have
been materially interfered with by strike, fire, flood, hurricane, accident or
other calamity (whether or not insured), or by any court or governmental
action, order or decree, and the properties of the Company, any of its
Subsidiaries or Consortium 2000 shall not have sustained any material loss or
damage (whether or not insured) as a result of any such occurrence.
(e) NASD. The NASD shall have indicated that it has no
objection (i) to the underwriting arrangements pertaining to the sale of the
Securities by the Underwriters and (ii) the participation by the Underwriters
in the sale of the Securities. No action shall have been taken by the
Commission or the NASD the effect of which would make it improper, at any time
prior to the Closing Date, for any member firm of the NASD to execute
transactions (as principal or as agent) in the Common Stock and no proceedings
for the purpose of taking such action shall have been instituted or shall be
pending, or, to the best of the Underwriters' or the Company's knowledge, shall
be contemplated by the Commission or the NASD. The Company represents
-26-
<PAGE> 27
at the date hereof, and shall represent as of the Closing Date or Option
Closing Date, as the case may be, that it has no knowledge that any such action
is in fact contemplated by the Commission or the NASD.
(f) OFFICERS' CERTIFICATE. The Company shall have
furnished to the Underwriters a certificate of the President and of the Chief
Financial Officer of the Company, dated the day of the Closing Date, to the
effect that each signer of such certificate has examined the Registration
Statement, the Prospectus, and this Agreement, and the conditions set forth in
Subsections 7(a) through 7(d) have been satisfied.
(g) OPINION OF COMPANY COUNSEL. At the time this
Agreement is executed and as of the Closing Date and the Option Closing Date,
as applicable, the Company shall have furnished to the Underwriters the opinion
of counsel for the Company, dated the Closing Date, in form and substance
reasonably satisfactory to counsel to the Representative and substantially in
the form of Exhibit A attached hereto.
(h) OPINION OF SPECIAL COUNSEL. 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 of Exhibit B attached hereto.
(i) ADDITIONAL DOCUMENTS. At the Closing Date and any
Option Closing Date, the Underwriters 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.
(j) CERTIFICATES, BYLAWS AND PROCEEDINGS. The Company's
Certificate of Incorporation and By-Laws, and all proceedings taken in
connection with the authorization, issuance, or sale of the Securities, the
Representative's Warrants and the Warrant Securities, as herein contemplated,
shall be reasonably satisfactory in form and substance to the Underwriters.
(k) ACCOUNTANTS' LETTER. At the time this Agreement is
executed and as of the Closing Date and each Option Closing Date, as
applicable, BDO Seidman, L.L.P., independent public accountants for the Company
and Consortium 2000, shall have furnished to the Underwriters a letter
addressed to the Underwriters and dated the date of this Agreement and/or the
Closing Date, and each Option Closing Date, as applicable, in form and
substance satisfactory to the Underwriters and counsel to the Underwriters,
confirming that it is the independent public accountants with respect to the
Company and Consortium 2000 within the meaning of the Securities Act and the
Regulations and published instructions, and stating to the effect that:
(i) In its opinion, the audited financial
statements included in the Registration Statement and
Prospectus covered by its report included therein, comply as
to form in all material respects with the applicable
requirements of the Securities Act and the Regulations and
published instructions.
-27-
<PAGE> 28
(ii) On the basis of a reading of the minutes of
the shareholders' and directors' meetings of the Company and
Consortium 2000, since its inception, inquiries of officials
of the Company and Consortium 2000 responsible for financial
and accounting matters, and other specified procedures and
inquiries, nothing came to its attention causing it to believe
that:
(A) the unaudited financial information
set forth in the Prospectus does not comply as to form
in all material respects with the applicable
requirements of the Securities Act and the related
published instructions and Regulations and is not
fairly presented in accordance with generally accepted
accounting principles applied on a basis substantially
consistent with the audited financial statements set
forth in the Prospectus, or
(B) with respect to the period subsequent
to __________, 1996, there were, at a specified date
not more than three business days prior to the date of
such letter, any changes in the capital stock or
long-term debt obligations of the Company, any of its
Subsidiaries or Consortium 2000, or any changes or
decreases in shareholders' equity, net assets, or
current net assets of the Company, any of its
Subsidiaries or Consortium 2000, or any material
adverse change in the financial position, revenues,
expenses, or results of operations of the Company, any
of its Subsidiaries or Consortium 2000, each as
compared with the amounts shown in the most recent
balance sheet of the Company, any such Subsidiary or
Consortium 2000 included in the Registration
Statement.
(iii) It has compared specific dollar amounts,
numbers of shares of securities, percentages of revenues and
earnings, and statements about other financial or statistical
information pertaining to the Company and Consortium 2000 set
forth in the Prospectus, in each case to the extent that such
amounts, numbers, percentages, statements, and information may
be derived from the general accounting records, which are
subject to the system of internal accounting controls,
including worksheets, of the Company and Consortium 2000 (and
excluding any questions requiring an interpretation by legal
counsel), with the results obtained from the application of
specific readings, inquiries, and other appropriate procedures
(which procedures do not constitute an examination in
accordance with generally accepted auditing standards) set
forth in the letter, and found them to be in agreement.
(l) CHANGE IN CAPITALIZATION. Subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, there shall not have been any Material Adverse Effect or
decrease in the capitalization of the Company that makes it impractical or
inadvisable in the reasonable judgment of the Underwriters to proceed with the
Public Offering or the delivery of the Securities, as the case may be, as
contemplated in the Prospectus.
-28-
<PAGE> 29
(m) OPINION OF REPRESENTATIVE'S COUNSEL. At the Closing
Date and the Option Closing Date, if any, Broad and Cassel, counsel to the
Underwriters, shall have furnished to you such opinion or opinions, dated as of
the date of its delivery, with respect to such matters as you may reasonably
request, and such counsel shall have received such documents as they may
reasonably request to enable them to pass upon such matters.
(n) NASDAQ STOCK MARKET. On or before the Closing Date,
the Units, Warrants and Common Stock shall have been approved for listing on
The Nasdaq SmallCap Market.
(o) "MARKET-OUT" PROVISION. The Underwriters' obligations
hereunder shall be subject to, among other things, there being, in its opinion:
(i) no material adverse change in the conditions or obligations of the Company,
the Subsidiaries or Consortium 2000 or its present or proposed business and
affairs; and (ii) no market conditions which might render the offer and sale of
the shares of Units herein contemplated inadvisable.
(p) CERTIFICATE OF SELLING STOCKHOLDER. The Selling
Stockholder shall have furnished to the Underwriters a certificate, signed by
the Selling Stockholder, dated the Closing Date 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 the Selling Stockholder 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.
(q) OTHER INFORMATION. Prior to the Closing Date, the
Company and the Selling Stockholder shall have furnished to the Underwriters
such further information, certificates, and documents in connection with the
Company's and the Selling Stockholder's obligations set forth herein as the
Underwriters may reasonably request.
If any of the conditions specified in this Section 7 shall not
have been fulfilled when and as required by this Agreement or expressly waived
in writing by the Underwriters, this Agreement and all obligations of the
Underwriters hereunder may be terminated by the Underwriters at, or at any time
prior to, the Closing Date. Notice of such termination shall be given to the
Company and the Selling Stockholder in writing, or by telegraph, facsimile
transmission or telephone and confirmed in writing. In such event, the
Company, the Selling Stockholder and the Underwriters shall not be under any
obligation to each other except to the extent provided in Section 6 and 8
hereof.
8. INDEMNIFICATION
(a) INDEMNIFICATION BY COMPANY. The Company agrees to
indemnify and hold harmless Selling Stockholder, each of the Underwriters and
each person, if any, who controls the Representative within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, and each of
them, from and against any and all loss, liability, claim, damage, expense or
action, joint or several (including, but not limited to, any and all reasonable
expenses incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever and any amount
paid in settlement of any litigation), commenced or
-29-
<PAGE> 30
threatened, or of any claim whatsoever, to which they or any of them may become
subject under the Securities Act, the Exchange Act or other Federal or state
statutory law or regulation, at common law or otherwise, insofar as such loss,
liability, claim, damage, expense or action arises out of or is based upon (i)
any untrue statement or alleged untrue statement made by the Company in this
Agreement, (ii) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (or any amendment thereto), or the
omission or alleged omission therefrom of a material fact required to be stated
therein or necessary in order to make the statements therein not misleading,
(iii) any untrue statement or alleged untrue statement of a material fact
contained in a Preliminary Prospectus or the Prospectus (or any amendment or
supplement thereto), or any omission or alleged omission therefrom of a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, or (iv) any untrue statement or alleged
untrue statement of a material fact contained in any application or other
document executed by the Company or based upon written information furnished by
or on behalf of the Company filed in any jurisdiction in order to qualify all
or any of the Securities, the Representative's Warrants or the Warrant
Securities under the securities laws thereof or filed with the Commission, the
NASD or any securities exchange, or any omission or alleged omission therefrom
of a material fact required to be stated therein or necessary in order to make
the statements therein not misleading; provided, however, that the Company
shall not be liable in any such case to the extent that such untrue statement
or omission or such alleged untrue statement or omission was made in reliance
upon and in conformity with information furnished in writing by or on behalf of
the Selling Stockholder or any of the Underwriters through you to the Company
expressly for use in the Registration Statement (or any amendment thereto), any
such Preliminary Prospectus or the Prospectus (or any amendment or supplement
thereto) or any such application or document. The Company acknowledges that
the statements under the caption "Underwriting" contained in any Preliminary
Prospectus and the Prospectus constitute the only information furnished in
writing by the Underwriters expressly for inclusion in the Registration
Statement, any Preliminary Prospectus or the Prospectus. The indemnity
agreement contained in this Subsection 8(a) is in addition to any liability
which the Company may otherwise have to the Underwriters or any controlling
person of the Underwriters. The Company agrees to pay any legal and other
expenses for which it is liable under this subsection (a) from time to time
(but not more frequently than monthly) within 30 days after its receipt of a
bill therefor.
(b) INDEMNIFICATION BY THE REPRESENTATIVE. The
Representative agrees that it will indemnify and hold harmless the Company,
each of the Company's officers who signs the Registration Statement, each of
its directors, and each person who controls the Company within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act against any
and all loss, liability, claim, damage, expense or action, joint or several, to
the same extent as the foregoing indemnity from the Company to the Selling
Stockholder, and the Underwriters in Subsection 8(a), but only with respect to
statements or omissions made in the Registration Statement (or any amendment
thereto) or a Preliminary Prospectus or the Prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with information
furnished in writing by the Selling Stockholder or the Underwriters through you
to the Company expressly for use in the Registration Statement (or any
amendment thereto). The indemnity agreement contained in this Subsection 8(b)
is in addition to any liability which the Representative may otherwise have to
the Company or any of its directors, officers, or controlling persons. The
Company and the Selling Stockholder acknowledge that the statements in any
Preliminary
-30-
<PAGE> 31
Prospectus and in the Prospectus made under the caption "Underwriting"
constitute the only information furnished in writing by the Representative
expressly for inclusion in the Registration Statement, any Preliminary
Prospectus or the Prospectus. The Representative agrees to pay any legal and
other expenses for which it is liable under this Subsection 8(b) from time to
time (but not more frequently than monthly) within 30 days of receipt of a bill
therefor.
(c) INDEMNIFICATION BY THE SELLING STOCKHOLDER. The
Selling Stockholder agrees to indemnify and hold harmless the Company, each of
the Company's officers who signs the Registration Statement, each of the
Underwriters and each person, if any, who controls the Company or any
Underwriter within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act, and each of them, to the same extent as the foregoing
indemnity from the Company to the Underwriters in Section 8(a) above but only
with respect to (i) statements or omissions of a material fact, if any, made in
any Preliminary Prospectus, any Rule 430A Prospectus, the Registration
Statement or the Prospectus (as from time to time amended and supplemented), or
any amendment or supplement thereto, or in any application in reliance upon and
in conformity with written information furnished to the Company by or on behalf
of the Selling Stockholder expressly for use in any Preliminary Prospectus, any
Rule 430A Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or in any application, as the case may be, or
(ii) any breach of any representation, warranty, covenant or agreement of the
Selling Stockholder contained in this Agreement. In case any action shall be
brought against the Company, any Underwriter or any other person so indemnified
based on any Preliminary Prospectus, any Rule 430A Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or in any
application, or with respect to any such breach, and in respect of which
indemnity may be sought against the Selling Stockholder, the Selling
Stockholder shall have the rights and duties given to the indemnifying parties,
and the Company, the Underwriters and each other person so indemnified shall
have the rights and duties given to the indemnified parties, by the provisions
of this Section 8.
(d) CLAIMS. Promptly after receipt by an indemnified
party under this Section 8 of notice of any claim, threatened claim or the
commencement of any action, the indemnified party shall, if a claim in respect
thereof is to be made against an indemnifying party under this Section 8,
notify the indemnifying party in writing of the claim, threatened claim or the
commencement of that action; provided, however, that the failure to notify an
indemnifying party shall not relieve such indemnifying party from any liability
which it may have to an indemnified party otherwise than under this Section 8.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein, and, to the extent that it wishes, jointly
with any other similarly notified indemnifying party, to assume the defense
thereof with its counsel, who shall be reasonably satisfactory to the
indemnified party. After notice from the indemnifying party to the indemnified
party of its election to assume the defense of such claim, threatened claim or
action, the indemnifying party shall not be liable to the indemnified party
under this Section 8 for any legal or other expenses subsequently incurred by
the indemnified party in connection with the defense thereof other than
reasonable costs of investigation; provided, however, that you shall have the
right to employ counsel to represent you and your controlling persons and the
other Representative and their respective controlling persons who may be
subject to liability arising out of any claim in respect of which indemnity may
be sought by the Representative against the
-31-
<PAGE> 32
Company under this Section 8 if, in your reasonable judgment, it is necessary
for you and those Representative and controlling persons to be represented by
separate counsel in order to avoid an actual or potential conflict of interest
or if you shall have reasonably concluded that there may be defenses available
to you, those Representative and controlling persons different from or in
addition to those available to the Company, and in either such event the
reasonable fees and expenses of such separate counsel shall be paid by the
Company. An indemnifying party shall not be liable for any settlement of any
action or claims effected without its written consent (which consent shall not
unreasonably be withheld).
Anything herein to the contrary notwithstanding, the indemnity
agreement of the Company in Subsection 8(a) hereof, the representations and
warranties in this Agreement and any representation or warranty as to the
accuracy of the Registration Statement or the Prospectus contained in any
certificate furnished by the Company pursuant to Section 7 hereof, insofar as
they may constitute a basis for indemnification for liabilities (other than
payment by the Company of expenses incurred or paid in the successful defense
of any action, suit or proceeding) arising under the Securities Act, shall not
extend to the extent of any interest therein of a controlling person or partner
of the Representative who is a director, officer or controlling person of the
Company when the Registration Statement has become effective, except in each
case to the extent that an interest of such person shall have been determined
by a court of appropriate jurisdiction as not against public policy as
expressed in the Securities Act. Unless in the opinion of counsel for the
Company the matter has been settled by a controlling precedent, the Company
will, if a claim for such indemnification is asserted, submit to a court of
appropriate jurisdiction the question whether such interest is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(e) CONTRIBUTION. In order to provide for just and
equitable contribution in circumstances in which indemnification provided for
in Subsections 8(a), or 8(b) or 8(c) is unavailable, the Company, the
Underwriters or the Selling Stockholder shall contribute to the aggregate loss,
claim, damage, expense and liability to which the Company, the Underwriters or
the Selling Stockholder may be subject (and, in any case where the Company is
seeking contribution, after seeking contribution from persons who control the
Company within the meaning of the Securities Act, officers of the Company who
signed the Registration Statement and directors of the Company, who may be
liable for contribution and after deducting from such loss, claim, damage,
expense and liability the amount of contribution obtained from such persons or
the Representative) in such proportions as are applicable to reflect the
relative benefits received by the Company, the Underwriters and the Selling
Stockholder from the offering of the Securities; provided, however, that if
such allocation is not permitted by applicable law or if the indemnified party
failed to give the notice required under Subsection 8(d), then the relative
fault of the Company, the Underwriters or the Selling Stockholder, in
connection with the statements or omissions which resulted in such losses,
claims, damages and liabilities and other relevant equitable considerations
will be considered together with such relative benefits. The relative benefits
received by the Company and the Selling Stockholder, on the one hand, and the
Underwriters, on the other hand, shall be deemed to be in the same proportion
as the total net proceeds from the Public Offering (before deducting expenses)
received by the Company and the Selling Stockholder bear to the total
underwriting discounts and commissions received by the Underwriters (the
"Underwriters Portion"), in each case appearing on the cover page of the
-32-
<PAGE> 33
Prospectus; provided, however, that (A) the provisions of the Agreement Among
Underwriters, if any, shall govern the contribution among Underwriters, (B) in
no case shall the Underwriters (except as may be provided in the Agreement
Among Underwriters, if any) be responsible for any amount in excess of its pro
rata share, based on the number of Securities purchased by it, of the amount of
the Underwriters Portion, and (C) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The relative fault of the Company and the
Selling Stockholder, on the one hand, and of the Underwriters, on the other
hand, shall be determined by reference to, among other things, whether in the
case of an untrue statement or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact, such statement or
omission relates to information supplied by the Company or the Selling
Stockholder, on the one hand, or by the Underwriters, on the other hand, and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statements or omission. The Company, the
Selling Stockholder and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Subsection 8(d) were determined by
pro-rata allocation (even if the Underwriters are treated as one entity for
such purpose) or by any other method of allocation that does not take account
of the equitable considerations referred to in this Subsection 8(d). The
amount paid or payable by the indemnified party as a result of the losses,
claims, damages or liabilities referred to above in this Subsection 8(d) shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending against or
appearing as a third-party witness in any such action or claim. For purposes
of this Subsection 8(d), each person, if any, who controls Underwriters within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act shall have the same rights to contribution as such Representative and each
person, if any, who controls the Company within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act, each officer who shall
have signed the Registration Statement and each director of the Company shall
have the same rights to contribution as the Company, subject in each case to
clause (C) of this Subsection 8(d). Each party entitled to contribution agrees
that upon the service of a summons or other initial legal process upon it in
any action instituted against it in respect of which contribution may be
sought, it will promptly give written notice of such service to the party or
parties from whom contribution may be sought, but the omission so to notify
such party or parties of any such service shall not relieve the party from whom
contribution may be sought from any obligations it may have hereunder or
otherwise (except as specifically provided in Subsection 8(c)). No party shall
be liable for contribution with respect to any action or claim settled without
its consent (which consent shall not unreasonably be withheld).
(f) SURVIVAL. The respective indemnity and contribution
agreements by the Underwriters, the Selling Stockholder and the Company
contained in this Section 8, and the covenants, representations and warranties
of the Selling Stockholder and the Company set forth herein, shall remain
operative and in full force and effect regardless of (i) any investigation made
by the Underwriters or on their behalf or by or on behalf of any person who
controls the Underwriters, by the Company or any controlling person of the
Company or any director or any officer of the Company, (ii) acceptance of the
Securities and payment therefor, or (iii) any termination of this Agreement,
and shall survive the delivery of the Securities, and any successor to the
Company or to the Underwriters or any person who controls Underwriters or the
Company,
-33-
<PAGE> 34
as the case may be, shall be entitled to the benefit of such respective
indemnity and contribution agreements.
9. EFFECTIVENESS. This Agreement shall become effective
contemporaneously with the effectiveness of the Registration Statement, or at
such date after the Effective Date as the Underwriters, in their discretion,
shall first release the Securities for sale to the public; provided, however,
that the provisions of Sections 5, 8, and 9 hereof shall at all times be in
full force and effect. For the purposes of this Section 9, the Securities
shall be deemed to have been released for sale to the public upon release by
the Underwriters after the Effective Date of a newspaper advertisement relating
to the Securities or upon release by the Underwriters thereafter of telegrams
advising securities dealers of the effectiveness of the Registration Statement,
whichever shall first occur.
10. TERMINATION. This Agreement may be terminated, in the
Representative's absolute discretion, by notice given to the Selling
Stockholder and the Company prior to the Closing Date if the Company or the
Selling Stockholder shall have failed, refused, or been unable, prior to the
Closing Date, to perform any material agreement required to be performed by it
hereunder, or if any other condition of the Underwriters' obligations hereunder
required to be fulfilled by the Company is not fulfilled. In addition, this
Agreement may be terminated, as set forth above, if, prior to the Closing Date,
any of the following shall have occurred: (a) material governmental
restrictions (not in force and effect on the date hereof) have been imposed on
trading in securities on The Nasdaq SmallCap Market or in the over-the-counter
market; (b) a material adverse change, beyond normal fluctuations, in general
financial market or economic conditions from such conditions on the date
hereof; (c) a material interruption in mail or telecommunications service or
other general means of communications within the United States after the
execution and delivery of this Agreement; (d) a banking moratorium has been
declared by federal or New York or Florida state authorities; (e) an outbreak
of major international hostilities or other national or international calamity
has occurred; (f) the passage by the Congress of the United States or by any
state legislative body of any act or measure, or the adoption of any orders,
rules, or regulations by any governmental body or executive or any
authoritative accounting institute or board, that the Underwriters believe will
have a Material Adverse Effect on the business, financial condition, or
financial statements of the Company or Consortium 2000 or the distribution of
the Securities or market for the Securities; or (g) any Material Adverse Effect
has occurred, since the respective dates of which information is given in the
Registration Statement and Prospectus, in the condition of the Company or
Consortium 2000, financial or otherwise, whether or not arising in the ordinary
course of business. Any such termination shall be without liability of any
party to any other party, except as provided in Section 8 herein and except
that the Company shall remain obligated to pay costs and expenses pursuant to
Section 5 herein. If the Underwriters elect to prevent this Agreement from
becoming effective, or to terminate this Agreement, as provided in this Section
10, the Underwriters shall promptly notify the Company and the Selling
Stockholder by telegram or telephone, and confirm by letter, and the
Underwriters shall not be under any liability to the Company or the Selling
Stockholder.
11. DEFAULT BY THE UNDERWRITERS. If the Underwriters shall fail
at the Closing Date to purchase the Securities that it is obligated to purchase
pursuant to this Agreement (the "Defaulted Securities"), the Underwriters shall
have the right, within 24 hours thereafter, to make
-34-
<PAGE> 35
arrangements for one or more of the non-defaulting Underwriters, or any other
underwriter, to purchase all, but not less than all, of the Defaulted Shares in
such amounts as may be agreed upon and upon the terms herein set forth; if,
however, the Underwriters shall not have completed such arrangements within
such 24-hour period, then:
(a) if the number of Defaulted Shares does not exceed 10%
of the total number of Shares, the non-defaulting Underwriters shall be
obligated to purchase the full amount thereof in the proportions that
their respective underwriting obligations bear to the underwriting
obligations of the non-defaulting Underwriters; and
(b) if the number of Defaulted Shares exceeds 10% of the
total number of Shares, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriters.
In the event of any such default that does not result in a termination of this
Agreement, either the Underwriters or the Company shall have the right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements. Nothing contained herein shall relieve a
defaulting Underwriter of any liability it may have for damages caused by its
default.
12. SURVIVAL OF REPRESENTATIONS, WARRANTIES, AND INDEMNITIES. The
respective agreements, representations, warranties, and indemnities contained
in this Agreement will remain in full force and effect regardless of any
investigation made by or on behalf of the Company or the Underwriters or their
respective officers or directors or controlling persons, and will survive
delivery of and payment for the Securities and the Representative's Warrants
and the Warrant Securities.
13. NOTICES. All notices and other communications hereunder
(unless otherwise expressly provided for herein) shall be in writing and shall
be deemed given when delivered in person, on the business day (before 5:00
P.M.) sent by facsimile transmission with confirmation of receipt, or on the
date indicated on the return receipt if sent by registered or certified mail
(return receipt requested) to the party to receive the same at the following
addresses (or at such other address for a party as shall be specified by like
notice):
If to the Company: Ustel, Inc.
2775 South Rainbow Boulevard
Las Vegas, Nevada 8910203
Attention: Mr. Robert L. B. Diener
with a copy to: Freshman, Marantz, Orlanski, Cooper
& Klein
9100 Wilshire Boulevard, 8th Floor East
Beverly Hills, California 90212
Attention: Leib Orlanski, Esquire
If to the Selling
Stockholder: Palisades USTL Trust
-35-
<PAGE> 36
________________________________________
________________________________________
________________________________________
with a copy to: ________________________________________
________________________________________
________________________________________
________________________________________
If to the Representative: Barber & Bronson Incorporated
201 South Biscayne Boulevard
Suite 2950
Miami, Florida 33131
Attention: Mr. James S. Cassel
In each case with a copy to: Broad and Cassel
201 South Biscayne Boulevard
Suite 3000
Miami, Florida 33131
Attention: Dale S. Bergman, P.A.
14. SUCCESSORS. This Agreement will inure to the benefit of and
be binding upon the parties hereto and their respective successors. Except as
only to the extent stated in Section 8 herein with respect to the officers,
directors and controlling persons referred to in such Section 8, no person
other than the parties hereto and their respective successors will have any
right or obligation hereunder. The terms "successor" and "successors and
assigns" as used in this Agreement shall not include any buyer, as such, of any
of the Securities from the Underwriters.
15. CONSENTS AND PRIOR APPROVALS. Any consent or approval by the
Underwriters required hereunder to any corporate action of the Company shall
not be unreasonably withheld, and, notwithstanding any other provision hereof,
any such consent or approval to any corporate action of the Company after the
Closing Date, shall not be required if the Company obtains an opinion from an
AV-rated law firm that the requirement of such consent or approval constitutes
an abrogation of the Board of Directors' duties under the corporate law of such
jurisdiction.
16. ENTIRE UNDERSTANDING. This Agreement contains the entire
understanding between the parties hereto and supersedes any prior
understandings or oral or written agreements between them respecting the
subject matter hereof.
17. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be an original but all of which taken
together shall constitute one and same agreement.
18. GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Florida,
without giving effect to choice of law or conflict of laws principles thereof.
-36-
<PAGE> 37
Please confirm, by signing and returning to the Company counterparts
of this Underwriting Agreement, that the foregoing correctly sets forth the
understanding between the Company, the Selling Stockholder and the
Representative, whereupon this Agreement will constitute a binding agreement
among us.
Very truly yours,
USTEL, INC., a Minnesota corporation
By:
---------------------------------
Name:
---------------------------------
Title:
---------------------------------
PALISADE USTL TRUST
By:
---------------------------------
Name:
---------------------------------
Title:
---------------------------------
Confirmed and Accepted as of the date
first above-written:
BARBER & BRONSON INCORPORATED,
a Florida corporation
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
-37-
<PAGE> 38
EXHIBIT A
OPINION OF COMPANY COUNSEL
1. Each of the Company, its Subsidiaries and Consortium 2000 has
been duly organized and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation, with all requisite
corporate power and authority to own or lease all of the assets owned or leased
by it and to conduct its business as described in the Registration Statement
and the Prospectus.
2. Each of the Company, its Subsidiaries and Consortium 2000 is
qualified to do business and in good standing as a foreign corporation in all
jurisdictions in which the nature of the activities conducted by it or the
character of the assets owned or leased by it makes such qualification
necessary, except for such jurisdictions where the failure, either singly or in
the aggregate, to do so or be in good standing would not have a material
adverse effect on the condition (financial or otherwise), earnings, business,
assets, properties, results of operations or prospects (financial or otherwise)
of the Company, its Subsidiaries and Consortium 2000 (hereinafter a "Material
Adverse Effect"). The Company owns, directly or indirectly, 100% of the
outstanding capital stock of each of the Subsidiaries, and all of such shares
have been validly issued, are fully paid and non-assessable, were not issued in
violation of any preemptive rights, and, except as set forth in the Prospectus,
are owned free and clear of any liens, charges, claims, encumbrances, pledges,
security interests, defects or other restrictions or equities of any kind
whatsoever. The Company does not own, directly or indirectly, any shares of
stock or any other securities of any corporation, or have any equity interest
in any firm, partnership, joint venture, association or other entity, other
than the Subsidiaries.
3. The Company has full corporate power and authority to execute
and deliver the Merger Agreement, the Underwriting Agreement, the
Representative's Warrant, and the Financial Consulting Agreement (collectively,
the "Transaction Documents") to perform its obligations thereunder and to
consummate the transactions provided for therein. The execution and delivery
of the Transaction Documents by the Company, the performance of its obligations
thereunder, the consummation by the Company of the transactions contemplated
thereby and the Company's compliance with the terms of the Transaction
Documents have been duly authorized by all necessary corporate action on the
part of the Company. The Transaction Documents have been duly executed and
delivered by the Company and constitute legal, valid and binding obligations of
the Company, enforceable against the Company in accordance with their
respective terms, except to the extent that (i) enforceability thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting creditors' rights generally, and general equitable
principles or a requirement as to commercial reasonableness, and (ii)
enforceability of the indemnification and contribution provisions set forth in
the Underwriting Agreement may be limited by federal or state securities laws
or public policy underlying such laws.
4. The "lock-up" agreements described in Section 3(a) of the
Underwriting Agreement have been duly executed and delivered by the
shareholders who are parties thereto, and constitute
A-1
<PAGE> 39
legal, valid and binding obligations of such shareholders, enforceable against
each of them in accordance with their respective terms, except to the extent
that enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally and by general equitable principles.
5. None of (i) the Company's issue and sale of the Securities,
the Representative's Warrant and Warrant Securities (collectively, the
"Registered Securities"), and (ii) the execution and delivery of the
Transaction Documents, performance of the Company's obligations thereunder,
consummation of the transactions contemplated therein or the conduct by the
Company and its subsidiaries of their respective businesses, as described in
the Prospectus, conflicts with, or will conflict with, results in, or will
result in, any breach or violation of any of the terms or provisions of,
constitutes, or will constitute, a default under, or results in, or will result
in, the creation of any lien, charge, claim, encumbrance or security interest
of any kind or nature whatsoever upon any property or assets of the Company or
its subsidiaries pursuant to (A) the certificate of incorporation or by-laws of
the Company or any of its subsidiaries, (B) to such counsel's knowledge after
due inquiry, any note, contract, commitment, indenture, deed of trust,
mortgage, voting trust agreement, shareholders agreement, license or other
agreement or instrument to which the Company or any of its subsidiaries is a
party, by which it is bound or to which any of its properties may be subject,
or (C) any federal, state or local law, rule or regulation applicable to the
Company or its subsidiaries or, to such counsel's knowledge after due inquiry,
any judgment, order or decree of any court, arbitrator, regulatory
administrative or other governmental agency or body having jurisdiction over
the Company or its subsidiaries or any of their respective properties or
businesses.
6. No consent, approval, authorization or order of, and no
registration or filing with, any third party or any court, regulatory body,
administrative agency or other governmental agency or official (other than such
as may be required under the Securities Act, the Exchange Act, by the NASD or
state securities or Blue Sky laws, as to which such counsel need not express an
opinion) is required for the valid authorization, issuance, sale and delivery
of the Registered Securities pursuant to the Transaction Documents, for the
execution and delivery by the Company of, and the performance by the Company of
its obligations under, the Transaction Documents and for the consummation by
the Company of the transactions contemplated by the Transaction Documents.
7. The Registration Statement has become effective under the
Securities Act. To such counsel's knowledge after due inquiry, no stop order
suspending the effectiveness of the Registration Statement or the use of the
Prospectus has been issued, and no proceedings for that purpose have been
instituted or are pending or threatened.
8. Each of the Registration Statement and the Prospectus, and
each amendment or supplement thereto, comply as to form in all material
respects with the requirements of the Securities Act (except for the financial
statements, notes and schedules, and other statistical or other financial data
included therein, as to which such counsel need not express an opinion). The
conditions to use Form SB-2 have been satisfied with respect to the
Registration Statement.
9. There are no laws, rules or regulations, judgments, orders or
decrees, required to be described in the Registration Statement and the
Prospectus other than those described in the
A-2
<PAGE> 40
Registration Statement and Prospectus. The statements in the Prospectus,
insofar as such statements constitute a summary of laws, rules, regulations or
legal conclusions, are accurate summaries and fairly and correctly present in
all material respects the information called for in the Securities Act with
respect to such laws, rules, regulations or conclusions.
10. To such counsel's knowledge after due inquiry, there are no
agreements, contracts or other documents or instruments required to be
described in the Registration Statement and the Prospectus or required to be
filed as an exhibit to the Registration Statement other than those described in
the Registration Statement and the Prospectus and filed as exhibits to the
Registration Statement.
11. The persons listed under the caption "Principal and Selling
Stockholders" in the Prospectus are the respective record and, to such
counsel's knowledge after due inquiry, "beneficial owners" (as such phrase is
defined in Regulation 13d-3 under the Exchange Act) of the Common Stock set
forth opposite their respective names as and to the extent set forth therein.
12. Except as described in the Prospectus, to such counsel's
knowledge after due inquiry, there are no claims, payments, issuances,
arrangements or understandings for services in the nature of a finder's or
origination fee with respect to the Shares.
13. The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company," as such terms are defined in the Investment Company Act of 1940, as
amended.
14. No transfer tax, stamp duty or other tax, levy, impost,
deduction, charge or withholding is payable by or on behalf of the Underwriters
in connection with (i) the issuance by the Company of the Registered
Securities, (ii) the purchase by the Underwriters of the Securities, (iii) the
purchase by the Representative of the Representative's Warrants or the purchase
of the Warrant Securities by the Representative (or their permitted assignees)
upon the exercise of the Representative's Warrants, and (iv) the execution and
delivery by the Company of, or the performance by the Company of its
obligations under, the Transaction Documents or the issuance of the
certificates and instruments representing the Registered Securities.
15. All of the material contracts, agreements, documents or
instruments of the Company, each of the Subsidiaries and Consortium 2000 have
been validly authorized, executed and delivered by the Company, the Subsidiary
or Consortium 2000 and constitute legal, valid and binding agreements of the
Company, the Subsidiary or Consortium 2000, enforceable against the Company,
the Subsidiary or Consortium 2000 in accordance with their respective terms,
except to the extent that enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and by general equitable principles.
None of the provisions of any such agreements, contracts, documents or
instruments violates any existing applicable law, rule, or regulation, or any
judgment, order or decree or any governmental agency or court having
jurisdiction over the Company, its Subsidiaries or Consortium 2000 or their
respective properties or businesses, except where such violation has not and
will not have a Material Adverse Effect.
A-3
<PAGE> 41
16. Except as described in the Prospectus, the Company, its
Subsidiaries and Consortium 2000 are not in violation of, or breach of, or in
default under (i) their respective certificates of incorporation or bylaws, or
(ii) to such counsel's knowledge after due inquiry, any material license,
contract, indenture, mortgage, installment contract, deed of trust, lease,
voting trust agreement, shareholders agreement, note, loan or credit agreement,
or other agreement or instrument to which the Company, its Subsidiaries or
Consortium 2000 are a party, by which the Company, its Subsidiaries and
Consortium 2000 are bound or to which any of their respective properties are
subject.
17. Except for such licenses, permits, certificates,
registrations, approvals, consents and exemptions, the absence of which would
not have a Material Adverse Effect on the Company, its Subsidiaries or
Consortium 2000 or their respective business and properties, to such counsel's
knowledge after due inquiry, the Company, its Subsidiaries and Consortium 2000
hold all licenses, permits, certifications, registrations, approvals, consents
and franchises from all governmental or regulatory authorities, officials or
agencies necessary to own or lease and operate their respective properties and
to conduct their respective business as described in the Prospectus.
18. To such counsel's knowledge after due inquiry, there are no
claims, actions, suits, proceedings, arbitrations, investigations or inquiries
pending, or to such counsel's knowledge after due inquiry, threatened, against
or involving the Company, its Subsidiaries or Consortium 2000 or any of their
respective properties (i) that are required to be disclosed in the Registration
Statement in accordance with the Securities Act and are not so disclosed, (ii)
which question the validity of the capital stock of the Company, (iii) which
question the validity, performance or enforceability of the Agreement or any
action taken or to be taken by the Company pursuant thereto or in connection
therewith, or (iv) which, in such counsel's opinion, if adversely determined,
would have a Material Adverse Effect.
19. Except as disclosed in the Prospectus, (i) there is no claim
or action by any person pertaining to, or proceeding pending or threatened,
that challenges the ownership or use by the Company, any of its Subsidiaries or
Consortium 2000 of any copyright, trademark, service mark, service name, and
trade name used by the Company, any of its Subsidiaries or Consortium 2000 in
the conduct of its business; and (ii) the Company, the Subsidiaries and
Consortium 2000 own and have full right, title and interest in and to, or have
the valid and exclusive right to, all copyright, trademarks, service marks,
service names and trade names necessary in the conduct of their business as
presently conducted, or as proposed to be conducted as described in the
Prospectus, except where such failure has not and will not have a Material
Adverse Effect.
20. The Company has the capitalization set forth in the
Prospectus. All of the issued and outstanding shares of Common Stock of the
Company have been duly authorized, validly issued and are fully paid and
nonassessable, and (i) the holders thereof have no rights of rescission with
respect thereto and are not subject to personal liability solely by reason of
being such holders, and (ii) none of such securities were issued in violation
of any preemptive or similar right. Except as described in the Prospectus, to
such counsel's knowledge after due inquiry, the Company is not a party to or
bound by any outstanding options, warrants or similar rights to subscribe for,
or contractual rights or obligations to issue, sell, transfer or acquire, any
of the capital stock of the Company or any securities convertible into or
exchangeable for any of the
A-4
<PAGE> 42
capital stock of the Company. All issuances of capital stock by the Company
prior to the date hereof were not subject to the registration requirements of
the Securities Act and were made in full compliance with all applicable federal
or state laws, rules and regulations.
21. The certificate representing the Units, Warrants and shares of
Common Stock are in due and proper form. The Securities conform to the
descriptions thereof set forth in the Prospectus.
22. Except as described in the Prospectus, no person (i) has the
right to include and/or register any securities of the Company in the
Registration Statement or to require the Company to file any registration
statement or, if filed, to include any security in any registration statement
filed by the Company, or (ii) holds any anti-dilution rights with respect to
any securities of the Company.
23. The Units to be sold by the Company under the Agreement, the
shares of Common Stock to be sold by the Company under Warrant Agreement, the
Representative's Warrants to be sold by the Company under the Agreement, the
shares of Common Stock to be sold by the Company upon the exercise of the
Representative's Warrants have been duly authorized, are not and will not be in
violation of any preemptive rights or any similar rights and, when issued, paid
for and delivered in accordance with the terms of the Agreement, and the
Representative's Warrants, the certificates representing the Representative's
Warrants, will be validly issued, fully paid and nonassessable, and (ii) the
holders thereof will not be subject to any restriction on the voting or
transfer thereof or to any personal liability solely by reason of being such
holders, and (ii) the issuance thereof is not in violation of any preemptive or
similar right.
24. All corporate action required to be taken for the
authorization, issue and sale of (i) the Securities, (ii) the Representative's
Warrants, and (iii) the shares of Common Stock underlying the Representative's
Warrants, and for the reservation of the shares of Common Stock required to be
reserved for issuance upon the exercise of the Warrants and Representative's
Warrants, have been duly and validly taken.
25. The Warrants and Representative's Warrants constitute valid
and binding obligations of the Company to issue and sell, upon exercise thereof
and payment therefor, the number and type of securities of the Company called
for thereby. The shares of Common Stock issuable upon exercise of the Warrants
and Representative's Warrants have been reserved for issuance at the exercise
prices and under the other terms and conditions provided for in the Warrant
Agreement and Representative's Warrants.
26. When the certificates for the Securities being sold under the
Agreement by the Company are duly countersigned by the Company's transfer agent
and delivered to the Underwriters against payment therefor, as provided in the
Agreement, the Underwriters will acquire the Securities free and clear of any
"adverse claim" that has been identified in a written claim received by the
Company (as such term is used in Section 678.302(2) of the Uniform Commercial
Code as in effect in the State of Florida), assuming the Underwriters acquired
such shares in good faith and without notice of any such "adverse claim".
A-5
<PAGE> 43
Counsel has participated in conferences with officers and other
representatives of the Company, representatives of the Company's accountants
and representatives of the Underwriters, at which the contents of the
Registration Statement, the Prospectus and related matters were discussed.
Although counsel is not passing upon and does not assume responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement and the Prospectus, on the basis of the foregoing, no
facts or circumstances have come to their attention which lead them to believe
that, on the Effective Date and on the Closing Date, the Registration Statement
and the Prospectus contained or contains any untrue statement of a material
fact or omitted or omits 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 (other than the financial statements
and other financial and statistical data included therein, as to which such
counsel need not express an opinion).
A-6
<PAGE> 44
EXHIBIT B
OPINION OF SPECIAL COUNSEL
B-1
<PAGE> 1
EXHIBIT 3.1(b)
AMENDMENT
TO
STATEMENT OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF SERIES A CONVERTIBLE PREFERRED STOCK OF
USTEL, INC.
Pursuant to Section 302A.401 of the Minnesota Business Corporation Act
of the State of Minnesota.
Introduction
UStel, Inc., a Minnesota corporation (the "Corporation") certifies
that pursuant to the authority contained in Article III of its Articles of
Incorporation and in accordance with the provision of Section 302A.401 of the
Minnesota Business Corporation Act of the State of Minnesota, its Board of
Directors adopted on February ___, 1997 the following resolution amending its
Statement of Designations, Preferences and Rights of Series A Convertible
Preferred Stock:
RESOLVED THAT the Statement of Designations, Preferences and Rights of
Series A Convertible Preferred Stock of UStel, Inc. under the heading
Conversion, subparagraph (iii) shall be amended to read as follows:
"(iii) Each share of Series A Convertible Preferred Stock shall be
convertible into 1.3636 shares of the Corporation's common stock,
subject to the provision set forth in (iv) below."
In witness whereof, UStel, Inc. has caused this Amendment to Statement of
Designations, Preferences and Rights of Series A Convertible Preferred Stock to
be duly executed by its Chairman and Chief Executive Officer and attested to by
its Secretary this ____ day of February 1997.
UStel, Inc.
________________________________________
By: Robert L.B. Diener
Chairman and Chief Executive Officer
Attest:
________________________________________
By: Wouter van Biene, Secretary
<PAGE> 1
EXHIBIT 4.1-a
WARRANT AGREEMENT
UStel, Inc., a Minnesota corporation (Company), and American Securities Transfer
& Trust, Inc. (AST), 1825 Lawrence Street, Suite 444, Denver, Colorado 80202, a
Colorado corporation (Warrant Agent), agree as follows:
1. Purpose. The Company proposes to publicly offer and issue
1,552,500 units (Units), each Unit consisting of (i) two
shares of the Company's $0.01 par value common stock (Shares)
and (ii) one warrant permitting the purchase of one Share
(Warrant).
2. Warrants. Each Warrant will entitle the registered holder of
a Warrant (Warrant Holder) to purchase from the Company one
Share at $4.00 per share (Exercise Price). A Warrant Holder
may exercise all of any number of Warrants resulting in the
purchase of a whole number of Shares.
3. Exercise Period. The Warrants may be exercised at any time
during the period commencing ____________, 1997 and ending at
3:00 p.m., Denver, Colorado time on ____________, 2002
(Expiration Date) except as changed by Section 12 of this
Agreement. After the Expiration Date, any unexercised warrants
will be void and all rights of Warrant Holders shall cease.
4. Non-Detachability. A Warrant Certificate may not be detached
from a Share certificate contained in a Unit
until after sixty days from ____________, or earlier at the
discretion of Barber & Bronson Incorporated. Until such time a
Warrant Certificate may be split up, combined, exchanged or
transferred on the books of the Warrant Agent only together
with Share Certificates. After _____________, 19___, a Warrant
Certificate may be split up, combined, exchanged or
transferred on the books of the Warrant Agent.
5. Certificates. The Warrant Certificates shall be in registered
form only and shall be substantially in the form set forth in
Exhibit A attached to this Agreement. Warrant
Certificates shall be signed by, or shall bear the facsimile
signature of, the President or a Vice President of the Company
and the Secretary or an Assistant Secretary of the Company and
shall bear a facsimile of the Company's corporate seal. If any
person, whose facsimile signature has been placed upon any
Warrant Certificate of the signature of an officer of the
Company, shall have ceased to be such officer before such
Warrant Certificate is countersigned, issued and delivered,
such Warrant Certificate shall be countersigned, issued and
delivered with the same effect as if such person had not
ceased to be such officer. Any Warrant Certificate may be
signed by, or made to bear the facsimile signature of, any
person who at the actual date of the preparation of such
Warrant Certificate shall be a proper
-1-
<PAGE> 2
officer of the company to sign such Warrant Certificate even
though such person was not such an officer upon the date of
the Agreement.
6. Countersigning. Warrant Certificates shall be manually
countersigned by the Warrant Agent and shall not be valid for
any purpose unless so countersigned. The Warrant Agent hereby
is authorized to countersign and deliver to, or in accordance
with the instructions of, any Warrant Holder any Warrant
Certificate which is properly issued.
7. Registration of Transfer and Exchanges. Subject to the
provisions of Section 4, the Warrant Agent shall from time to
time register the transfer of any outstanding Warrant
Certificate upon records maintained by the Warrant Agent for
such purpose upon surrender of such Warrant Certificate to the
Warrant Agent for transfer, accompanied by appropriate
instruments of transfer in form satisfactory to the Company
and the Warrant Agent and duly executed by the Warrant Holder
or a duly authorized attorney. Upon any such registration of
transfer, a new Warrant Certificate shall be issued in the
name of and to the transferee and the surrendered Warrant
Certificate shall be cancelled.
8. Exercise of Warrants.
a. Any one Warrant or any multiple of one Warrant
evidenced by any Warrant Certificate may be exercised
upon any single occasion on or after the Exercise
Date, and on or before the Expiration Date. A Warrant
shall be exercised by the Warrant Holder by
surrendering to the Warrant Agent the Warrant
Certificate evidencing such Warrant with the exercise
form on the reverse of such Warrant Certificate duly
completed and executed and delivering to the Warrant
Agent, by good check or bank draft payable to the
order of the Company, the Exercise Price for each
Share to be purchased.
b. Upon receipt of a Warrant Certificate with the
exercise form thereon duly executed together with
payment in full of the Exercise Price for the Shares
for which Warrants are then being exercised, the
Warrant Agent shall requisition from any transfer
agent for the Shares, and upon receipt shall make
delivery of, certificates evidencing the total number
of whole Shares for which Warrants are then being
exercised in such names and denominations as are
required for delivery to, or in accordance with the
instructions of, the Warrant Holder. Such
certificates for the Shares shall be deemed to be
issued, and the person to whom such shares are issued
of record shall be deemed to have become a holder of
record of such Shares, as of the date for the
surrender of such Warrant Certificate and payment of
the Exercise Price, whichever shall last occur,
provided that if the books of the Company with
respect to the Shares shall be deemed to be issued,
and
- 2 -
<PAGE> 3
the person to whom such Shares are issued of record
shall be deemed to have become a record holder of
such Shares, as of the date on which such books shall
next be open (whether before, on or after the
Expiration Date) but at the Exercise Price, whichever
shall have last occurred, to the Warrant Agent.
c. If less than all the Warrants evidenced by A Warrant
Certificate are exercised upon a single occasion, a
new Warrant Certificate for the balance of the
Warrants not so exercised shall be issued and
delivered to, or in accordance with, transfer
instructions properly given by the Warrant Holder
until the Expiration Date.
d. All Warrant Certificates surrendered upon exercise of
the Warrants shall be cancelled.
e. Upon the exercise, or conversion of any warrant, the
Warrant Agent shall promptly deposit the payment into
an escrow account established by mutual agreement of
the Issuer and the Warrant Agent at a federally
insured commercial bank. All funds deposited in the
escrow account will be disbursed on a weekly basis to
the issuer once they have been determined by the
Warrant Agent to be collected funds. Once the funds
are determined to be collected, the Warrant Agent
shall cause the share certificate(s) representing the
exercised warrants to be issued.
f. Expenses incurred by American Securities Transfer,
Inc. while acting in the capacity as Warrant Agent
will be paid by the Company. These expenses,
including delivery of exercised share certificates to
the shareholder, will be deducted from the exercise
fee submitted prior to distribution of funds to the
Issuer. A detailed accounting statement relating to
the number of shares exercised, names of registered
warrant holder and the net amount of exercised, funds
remitted will be given to the Issuer with the payment
of each exercise amount.
g. At the time of exercise of the warrant(s), the
transfer fee is to be paid by shareholder. In the
event the shareholder must pay the fee and fails to
remit same, the fee will be deducted from the
proceeds prior to distribution to the Company.
9. Taxes. The Company will pay all taxes attributable to the
initial issuance of Shares upon exercise of Warrants. The
Company shall not, however, be required to pay any tax which
may be payable in respect to any transfer involved in any
issue of Warrant Certificates or in the issue of any
certificates of Shares in the name other than that of the
Warrant Holder upon the exercise of any Warrant.
-3-
<PAGE> 4
10. Mutilated or Missing Warrant Certificates. If any Warrant
Certificate is mutilated, lost, stolen or destroyed, the
Company and the Warrant Agent may, on such terms as to
indemnify or otherwise as they may in their discretion impose
(which shall, in the case of a mutilated Warrant Certificate,
include the surrender thereof), and upon receipt of evidence
satisfactory to the Company and the Warrant Agent of such
mutilation, loss, theft or destruction, issue a substitute
Warrant Certificate of like denomination or tenor as the
Warrant Certificate so mutilated, lost, stolen or destroyed.
Applicants for substitute Warrant Certificates shall comply
with such other reasonable regulations and pay any reasonable
charges as the Company or the Warrant Agent may prescribe.
11. Reservation of Shares. For the purpose of enabling the
Company to satisfy all obligation to issue Shares upon
exercise of Warrants, the Company will at all times reserve
and keep available free from preemptive rights, out of the
aggregate of its authorized but unissued shares, the full
number of Shares which may be issued upon the exercise of
Warrants will upon issue be fully paid and nonassessable by
the Company and free from all taxes, liens, charges and
security interests with respect to the issue thereof.
12. Governmental Restrictions. If any Shares issuable upon the
exercise of Warrants require registration or approval of any
governmental authority, the Company will endeavor to secure
such registration or approval; provided that in no event shall
such Shares be issued, and the Company shall have the
authority to suspend the exercise of all Warrants, until such
registration or approval shall have been obtained; but all
Warrants, the exercise of which is requested during any such
suspension, shall be exercisable at the Exercise Price. If any
such period of suspension continues past the Expiration Date,
all Warrants, the exercise of which have been requested on or
prior to the Expiration Date, shall be exercisable upon the
removal of such suspension until the close of business on the
business day immediately following the expiration of such
suspension.
13. Adjustments. If prior to the exercise of any Warrants, the
Company shall have effected one or more stock split-ups, stock
dividends or other increases or reductions of the number of
shares of its $0.01 par value common stock outstanding without
receiving compensation therefore in money, services or
property, the number of shares of common stock subject to the
Warrant granted shall, (i) if a net increase shall have been
effected in the number of outstanding shares of the Company's
common stock, be proportionately increased, and the cash
consideration payable per share shall be proportionately
reduced, and, (ii) if a net reduction shall have been effected
in the number of outstanding shares of the Company's common
stock, be proportionately reduced and the cash consideration
payable per share be proportionately increased.
-4-
<PAGE> 5
14. Notice to Warrant Holders. Upon any adjustment as described
in Section 13, the Company within 20 days thereafter shall (i)
cause to be filed with the Warrant Agent a certificate signed
by a Company officer setting forth the details of such
adjustment, the method of calculation and the facts upon which
such calculation is based, which certificate shall be
conclusive evidence of the correctness of the matters set
forth therein, and (ii) cause written notice of such
adjustments to be given to each Warrant Holder as of the
record date applicable to such adjustment. Also, if the
Company proposes to enter into any reorganization,
reclassification, sale of substantially all of its assets,
consolidation, merger, dissolution, liquidation or winding up,
the Company shall give notice of such fact at least 20 days
prior to such action to all Warrant Holders which notice shall
set forth such facts as indicated the effect of such action
(to the extent such effect may be known at the date of such
notice) on the Exercise Price and the kind and amount of the
shares or other securities and property deliverable upon
exercise of the Warrants. Without limiting the obligation of
the Company hereunder to provide notice to each Warrant
Holder, failure of the Company to give notice shall not
invalidate corporate action taken by the Company.
15. No Fractional Warrants or Shares. The Company shall not be
required to issue fractions of Warrants upon the reissue of
Warrants, any adjustments as described in Section 13 or
otherwise; but the Company in lieu of issuing any such
fractional interest, shall round up or down to the nearest
full Warrant. If the total Warrants surrendered by exercise
would result in the issuance of a fractional share, the
Company shall not be required to issue a fractional share but
rather the aggregate number of shares issuable will be rounded
up or down to the nearest full share.
-5-
<PAGE> 6
16. Redemption.
a. The then outstanding Warrants may be redeemed, at the
option of the Company, at $0.01 per share of Common Stock
purchasable upon exercise of such Warrants, at any time after
the Daily Market Price (as defined) per share of the Common
Stock for a period of at least 20 consecutive trading days
within 30 days prior to the date notice of redemption is given
averages or exceeds $6.00, and prior to expiration of the
Warrants. The Daily Market Price of the Common Stock shall be
determined by the Company in the manner set forth in Section
16(e) as of the end of each trading day (or, if no trading in
the Common Stock occurred on such day, as of the end of the
immediately preceding trading day in which trading occurred)
and verified to the Warrant Agent before the Company may give
notice of redemption. All outstanding Warrants must be
redeemed if any are redeemed, and any right to exercise an
outstanding Warrant shall terminate at 3:00 p.m. (Rocky
Mountain Time) on the business day immediately preceding the
date fixed for redemption. A trading day shall mean a day in
which trading of securities occurred on the New York Stock
Exchange.
b. The Company may exercise its right to redeem the Warrants
only by giving the notice set forth in the following sentence
after the end of the applicable period of 20 consecutive
trading days referred to in Section 16 (a). In case the
Company shall exercise its right to redeem, it shall give
notice to the Warrant Agent and the registered holders of the
outstanding Warrants, by mailing to such registered holders a
notice of redemption, first class' postage prepaid, at their
addresses as they shall appear on the records of the Warrant
Agent. Any notice mailed in the manner provided herein shall
be conclusively presumed to have been duly given whether or
not the registered holder actually receives such notice.
c. The notice of redemption shall specify the redemption
price, the date fixed for redemption (which shall be between
the thirtieth and forty- fifth day after such notice is
mailed), the place where the Warrant certificates shall be
delivered and the redemption price shall be paid, and that the
right to exercise the Warrants shall terminate at 3:00 P.M.
(Rocky Mountain Time) on the business day immediately
preceding the date fixed for redemption.
d. Appropriate adjustment shall be made to the redemption
price and to the minimum Daily Market Price prerequisite to
redemption set forth in Section 16(a) hereof, in each case on
the same basis as provided in Section 13 hereof with respect
to adjustment of the Warrant Price.
e. For purposes of this Agreement, the term "Daily Market
Price" shall mean (i) if the Common Stock is traded in the
over-the-counter market and not in The Nasdaq National Market
nor on any national securities exchange, the
-6-
<PAGE> 7
closing bid price of the Common Stock on the trading day in
question, as reported by the Nasdaq Small Cap Market (or an
equivalent generally accepted reporting service if quotations
are not reported on The Nasdaq Small Cap Market), or (ii) if
the Common Stock is traded in The Nasdaq National Market or on
a national securities exchange, the daily per share closing
price of the Common Stock in The Nasdaq National Market or on
the principal stock exchange on which it is listed on the
trading day in question, as the case may be. For purposes of
clause (i) above, if trading in the Common Stock is not
reported by The Nasdaq Small Cap Market, the bid price
referred to in said clause shall be the lowest bid price as
reported in the Nasdaq Electronic Bulletin Board or, if not
reported thereon, as reported in the "pink sheets" published
by National Quotation Bureau, Incorporated, and, if such
Common Stock is not so reported, shall be the price of a share
of Common Stock determined by the Company's Board of Directors
in good faith. The closing price referred to in clause (ii)
above shall be the last reported sale price or, in the case no
such reported sale takes place on such day, the average of the
reported closing bid and asked prices, in either case in The
Nasdaq National Market or on the national securities exchange
on which the Common Stock is then listed.
17. Rights of Warrant Holders. No Warrant Holder, as such, shall
have any rights of a shareholder of the Company, either at a
law or equity, and the rights of the Warrant Holders, as such,
are limited to those rights expressly provided in this
Agreement or in the Warrant Certificates. The Company and the
Warrant Agent may treat the registered Warrant Holder in
respect of any Warrant Certificates as the absolute owner
thereof for all purposes notwithstanding any notice to the
contrary.
18. Warrant Agent. The Company hereby appoints the Warrant Agent
to act as the agent of the Company and the Warrant Agent
hereby accepts such appointment upon the following terms and
conditions by all of which the Company and every Warrant
Holder, by acceptance of his Warrants, shall be bound:
a. Statements contained in this Agreement and in the
Warrant Certificates shall be taken as statements of
the Company. The Warrant Agent assumes no
responsibility for the correctness of any of the same
except such as describes the Warrant Agent or for
action taken or to be taken by the Warrant Agent.
b. The Warrant Agent shall not be responsible for any
failure of the Company to comply with any of the
Company's covenants contained in this Agreement or in
the Warrant Certificates.
-7-
<PAGE> 8
c. The Warrant Agent may consult at any time with
counsel satisfactory to it (who may be counsel for
the Company) and the Warrant Agent shall incur no
liability or responsibility to the Company or to any
Warrant Holder in respect of any action taken,
suffered or omitted by it hereunder in good faith and
in accordance with the opinion or the advise of such
counsel, provided the Warrant Agent shall have
exercised reasonable care in the selection and
continued employment of such counsel.
d. The Warrant Agent shall incur no liability or
responsibility to the Company or to any Warrant
Holder for any action taken in reliance upon any
notice, resolution, waiver, consent, order,
certificate or other paper, document or instrument
believed by it to be genuine and to have been signed,
sent or presented by the proper party or parties.
e. The Company agrees to pay to the Warrant Agent
reasonable compensation for all services rendered by
the Warrant Agent in the execution of this Agreement,
to reimburse the Warrant Agent for all expenses,
taxes and governmental charges and all other charges
of any kind in nature incurred by the Warrant Agent
in the execution of this Agreement and to indemnify
the Warrant Agent and save it harmless against any
and all liabilities, including judgments, costs and
counsel fees, for this Agreement except as a result
of the Warrant Agent's negligence or bad faith.
f. The Warrant Agent shall be under no obligation to
institute any action, suit or legal proceeding or to
take any other action likely to involve expense
unless the Company or one or more Warrant Holders
shall furnish the Warrant Agent with reasonable
security and indemnity for any costs and expenses
which may be incurred in connection with such action,
suit or legal proceeding, but this provision shall
not effect the power of the Warrant Agent to take
such action as the Warrant Agent may consider proper,
whether with or without any such security or
indemnity. All rights of action under this Agreement
or under any of the Warrants may be enforced by the
Warrant Agent without the possession of any of the
Warrant Certificates or the production thereof at any
trial or other proceeding relative thereto, and any
such action, suit or proceeding instituted by the
Warrant Agent shall be brought in its name as Warrant
Agent, and any recovery of judgment shall be for the
ratable benefit of the Warrant Holders as their
respective rights or interest may appear.
g. The Warrant Agent and any shareholder, director,
officer or employee of the Warrant Agent may buy,
sell or deal in any of the Warrants or other
securities of the Company or become pecuniarily
interested in any
-8-
<PAGE> 9
transaction in which the Company may be interested,
or contact with or lend money to the Company or
otherwise act as fully and freely as though it were
not Warrant Agent under this Agreement. Nothing
herein shall preclude the Warrant Agent from acting
in any other capacity for the Company or for any
other legal entity.
19. Successor Warrant Agent. Any corporation into which the
Warrant Agent may be merged or converted or with which it may
be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Warrant Agent shall
be a party, or any corporation succeeding to the corporate
trust business of the Warrant Agent, shall be the successor to
the Warrant Agent hereunder without the execution or filing of
any paper of any further act of a party or the parties hereto.
In any such event or if the name of the Warrant Agent is
changed, the Warrant Agent or such successor may adopt the
countersignature of the original Warrant Agent and may
countersign such Warrant Certificates either in the name of
the predecessor Warrant Agent or in the name of the successor
Warrant Agent.
20. Change of Warrant Agent. The Warrant Agent may resign or be
discharged by the Company from its duties under this Agreement
by the Warrant Agent or the Company, as the case may be,
giving notice in writing to the other, and by giving a date
when such resignation or discharge shall take effect, which
notice shall be sent at least 30 days prior to the date so
specified. If the Warrant Agent shall resign, be discharged or
shall otherwise become incapable of acting, the Company shall
appoint a successor to the Warrant Agent. If the Company shall
fail to make such appointment within a period of 30 days after
it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Warrant Agent or
by any Warrant Holder or after discharging the Warrant Agent,
then any Warrant Holder may apply to the District Court for
Denver County, Colorado, for the appointment of a successor to
the Warrant Agent. Pending appointment of a successor to the
Warrant Agent, either by the Company or by such Court, the
duties of the Warrant Agent shall be carried out by the
Company. Any successor Warrant Agent, whether appointed by the
Company or by such Court, shall be a bank or a trust company,
in good standing, organized under the laws of the State of
Colorado or of the United States of America, having its
principal office in Denver, Colorado and having at the time of
its appointment as Warrant Agent, a combined capital and
surplus of at least four million dollars. After appointment,
the successor Warrant Agent shall be vested with the same
powers, rights, duties and responsibilities as if it had been
originally named as Warrant Agent without further act or deed
and the former Warrant Agent shall deliver and transfer to the
successor Warrant Agent any property at the time held by it
thereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for effecting the delivery
or transfer. Failure to give any notice provided for in the
section, however, or any defect
-9-
<PAGE> 10
therein, shall not affect the legality or validity of the
resignation or removal of the Warrant Agent or the appointment
of the successor Warrant Agent, as the case may be.
21. Notices. Any notice or demand authorized by this Agreement to
be given or made by the Warrant Agent or by any Warrant Holder
to or on the Company shall be sufficiently given or made if
sent by mail, first class, certified or registered, postage
prepaid, addressed (until another address is filed in writing
by the Company with the Warrant Agent), as follows:
UStel, Inc.
Attn: Robert L.B. Diener
2775 South Rainbow Blvd., #102
Las Vegas, Nevada 89102
Any notice or demand authorized by this Agreement to be given
or made by any Warrant Holder or by the Company to or on the
Warrant Agent shall be sufficiently given or made if sent by
mail, first class, certified or registered, postage prepaid,
addressed (until another address is filed in writing by the
Warrant Agent with the Company), as follows:
American Securities Transfer & Trust, Inc.
1825 Lawrence Street, Suite 444
Denver, CO 80202-1817
Any distribution, notice or demand required or authorized by
this Agreement to be given or made by the Company or the
Warrant Agent to or on the Warrant Holders shall be
sufficiently given or made if sent by mail, first class,
certified or registered, postage prepaid, addressed to the
Warrant Holders at their last known addresses as they shall
appear on the registration books for the Warrant Certificates
maintained by the Warrant Agent.
22. Supplements and Amendments. The Company and the Warrant Agent
may from time to time supplement or amend this Agreement
without the approval of any Warrant Holders in order to cure
any ambiguity or to correct or supplement any provision
contained herein which may be defective or inconsistent with
any other provisions herein, or to make any other provisions
in regard to matters or questions arising hereunder which the
Company and the Warrant Agent may deem necessary or desirable.
23. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Warrant
Agent shall bind and inure to the benefit of their respective
successors and assigns hereunder.
-10-
<PAGE> 11
24. Termination. This Agreement shall terminate at the close of
business on the Expiration Date or such earlier date upon
which all Warrants have been exercised; provided, however,
that if exercise of the Warrants is suspended pursuant to
Section 12 and such suspension continues past the Expiration
Date, this Agreement shall terminate at the close of business
on the business day immediately following expiration of such
suspension. The provisions of Section 18 shall survive such
termination.
25. Governing Law. This Agreement and each Warrant Certificate
issued hereunder shall be deemed to be a contract made under
the laws of the State of Colorado and for all purposes shall
be construed in accordance with the laws of said State.
26. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give any person or corporation other than the
Company, the Warrant Agent and the Warrant Holders any legal
or equitable right, remedy or claim under this Agreement; but
this Agreement shall be for the sole and exclusive benefit of
the Company, the Warrant Agent and the Warrant Holders.
27. Counterparts. This Agreement may be executed in any number of
counterparts, each of such counterparts shall for all purposes
be deemed to be an original and all such counterparts shall
together constitute but one and the same instrument.
-11-
<PAGE> 12
Date: _____________________
UStel, Inc.
A __________ corporation
By: ___________________
SEAL
ATTEST:
____________________________
Secretary:
American Securities Transfer & Trust, Inc.
A Colorado corporation
By:_________________________________
Vice President:
SEAL
ATTEST:
_____________________________
-12-
<PAGE> 1
EXHIBIT 4.3
DRAFT DATED 1/19/97
THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES
ACT"), AND THEREFORE MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
UNLESS (1) A REGISTRATION STATEMENT REGISTERING THIS WARRANT, AND THE
SECURITIES ISSUABLE UPON ITS EXERCISE, HAS BEEN FILED AND DECLARED EFFECTIVE
UNDER THE SECURITIES ACT OR (2) THE COMPANY IS SATISFIED THAT NO SUCH
REGISTRATION STATEMENT IS THEN REQUIRED AND THAT, THIS WARRANT AND THE
UNDERLYING SECURITIES MAY BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE
MANNER CONTEMPLATED WITHOUT REGISTRATION UNDER THE SECURITIES ACT.
USTEL, INC.
2775 SOUTH RAINBOW BOULEVARD, #102
LAS VEGAS, NEVADA 89102
REPRESENTATIVE'S WARRANT
WARRANT NO. FIELD(CERT. NO.)
Date of Issuance: As of , 1997 Right to Purchase FIELD(Units) Units
-----------
FOR VALUE RECEIVED, UStel, Inc., a Minnesota corporation (the
"Company"), promises to issue in the name of, and sell and deliver to,
FIELD(Holder) (the "Holder") a certificate or certificates for an aggregate of
FIELD(Units) units (the "Units"), each Unit consisting of two shares (the "Unit
Shares") of the Company's common stock, $.01 par value per share (the "Common
Stock"), and one common stock purchase warrant (the "Underlying Warrants") to
purchase one share of Common Stock (the "Warrant Shares"), which number of Unit
Shares and Warrant Shares is subject to adjustment from time to time, as
described below, upon payment therefor of the exercise price of $7.20 per Unit
in lawful funds of the United States of America, such amounts (the "Basic
Exercise Price") being subject to adjustment in the circumstances set forth
hereinbelow. This applicable Basic Exercise Price, until such adjustment is
made and thereafter as adjusted from time to time, is called the "Exercise
Price." This Warrant expires in its entirety at 5:00 p.m. Eastern Time on
____________________, 2002 (the "Expiration Date"). This Warrant is one of a
series of Representative's Warrants dated ____________________, 1997. The terms
and conditions of the Representative's Warrants shall be identical in all
material respects except that the number of Units to which the Holder is
entitled to purchase may differ.
SECTION 1.
CERTAIN DEFINITIONS
As used in this Warrant, the following terms have the meanings set
forth below:
"COMMON STOCK DEEMED OUTSTANDING" means, at any given time, the number
of shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to Section 4 of this
Warrant.
<PAGE> 2
"DATE OF ISSUANCE" is the date set forth on the front page of this
Warrant, and the terms "date hereof," "date of this Warrant," and similar
expressions shall be deemed to refer to the Date of Issuance, as specified in
Section 11 of this Warrant.
"EXERCISE PERIOD" means the period of time commencing at 12:01 A.M.,
Eastern Time, on the first anniversary of the Effective Date and ending at
12:00 Midnight, Eastern Time, on the fifth anniversary of the Effective Date.
"MARKET PRICE" means as to any security the average of the closing
prices of such security's sales on the principal domestic securities exchange
on which such security may at the time be listed, or, if there have been no
sales on any such exchange on any day, the average of the highest bid and
lowest asked prices on all such exchanges at the end of such day, or, if on any
day such security is not so listed, the average of the representative bid and
asked prices quoted in the Nasdaq SmallCap as of the close of trading in New
York City on such day, or, if on any day such security is not quoted in the
Nasdaq SmallCap, the average of the high and low bid and asked prices on such
day in the domestic over- the-counter market as reported by the National
Quotation Bureau, Incorporated, or any similar successor organization, in each
such case averaged over a period of 20 consecutive business days consisting of
the business day immediately preceding the day as of which "Market Price" is
being determined and the 19 consecutive business days prior to such day;
provided that if such security is listed on any domestic securities exchange or
quoted in the Nasdaq SmallCap, the term "business day" or "business days" as
used in this sentence means a day or days, as applicable, on which such
exchange or the Nasdaq SmallCap is open for trading or quotation, as the case
may be. If at any time such security is not listed on any domestic securities
exchange or quoted in the Nasdaq SmallCap or the domestic over-the-counter
market, the "Market Price" will be the fair value thereof determined jointly by
the Company and the Holders of Warrants representing at least 50% of the Common
Stock purchasable upon the exercise of all the Warrants then outstanding;
provided that if such parties are unable to reach agreement, such fair value
will be determined by an appraiser jointly selected by the Company and the
Holders of Warrants representing at least 25% of the Common Stock purchasable
upon the exercise of all the Warrants then outstanding.
"NASDAQ SMALLCAP" means the Nasdaq SmallCap Market or such other
similar quotation system as may in the future be used generally by members of
the National Association of Securities Dealers, Inc. for transactions in
securities.
"PERSON" means an individual, a partnership, a corporation, a trust, a
joint venture, an unincorporated organization, and a government or any
department or agency thereof.
"UNDERLYING SECURITIES" means the Unit Shares, Underlying Warrants and
shares of Common Stock issuable upon exercise of the Underlying Warrant,
collectively.
"WARRANTS" mean this Warrant and all other Warrants issued in exchange
or substitution for this Warrant or any such other options issued pursuant to
the terms hereof or thereof, as the case may be.
SECTION 2.
EXERCISE OF WARRANT
2.1 EXERCISE PERIOD. The Holder may exercise this Warrant, in
whole or in part (but not as to a fractional Share), at any time and from time
to time, during the Exercise Period.
-2-
<PAGE> 3
2.2 EXERCISE PROCEDURE.
(a) This Warrant will be deemed to have been exercised at
such time as the Company has received all of the following items (the "Exercise
Date"):
(i) a completed Exercise Agreement, in the form
set forth as Exhibit II hereto, executed by the Person exercising all or part
of the purchase rights represented by this Warrant (the "Purchaser");
(ii) this Warrant (subject to delivery by the
Company of a new Warrant with respect to any unexercised portion, as provided
in Subsection 2.2(b));
(iii) if this Warrant is not registered in the name
of the Purchaser, an Assignment or Assignments in the form set forth as Exhibit
II hereto, evidencing the assignment of this Warrant to the Person; and
(iv) a certified check or other certified funds
payable to the Company in an amount equal to the product of the Exercise Price
multiplied by the number of Units being purchased upon such exercise.
Notwithstanding anything contained herein to the contrary, the Exercise Price
for the Warrant may be satisfied by the delivery of an unexercised portion of
this Warrant to the Company or the Transfer Agent for cancellation having a
market value, as determined by the spread as of the date of surrender equal to
the difference between the then Exercise Price and the market price of the
shares of Common Stock and Warrants underlying this Warrant, equal to the
aggregate Exercise Price of the portion of this Warrant desired to be then
exercised.
(b) Certificates for Unit Shares and Underlying Warrants
purchased upon exercise of this Warrant will be delivered by the Company to the
Purchaser within five calendar days after the Exercise Date. Unless this
Warrant has expired or all of the purchase rights represented hereby have been
exercised, the Company will prepare a new Warrant representing the rights
formerly represented by this Warrant that have not expired or been exercised.
The Company will, within such five day period, deliver such new Warrant to the
Person designated for delivery in the Exercise Agreement.
(c) The Unit Shares and Underlying Warrants issuable upon
the exercise of this Warrant will be deemed to have been transferred to the
Purchaser on the Exercise Date, and the Purchaser will be deemed for all
purposes to have become the record holder of such Common Stock on the Exercise
Date.
(d) The issuance of certificates for Unit Shares and
Underlying Warrants upon exercise of this Warrant and the issuance of
certificates for shares of Common Stock upon exercise of the Underlying Warrant
will be made without charge to the Holder or the Purchaser for any issuance tax
in respect thereof or any other cost incurred by the Company in connection with
such exercise and the related transfer of the Underlying Securities; provided,
however, that the Company shall not be required to pay any tax that may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate or instrument in a name other than that of the Holder of this
Warrant, and the Company shall not be required to issue or deliver any such
certificate or instrument unless and until the Person or Persons requesting the
issue thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been
paid.
(e) The Company will not close its books for the transfer
of this Warrant or of any of the Underlying Securities in any manner that
interferes with the timely exercise of this Warrant. The
-3-
<PAGE> 4
Company will from time to time take all such action as may be necessary to
assure that the par value per share of the unissued Common Stock acquirable
upon exercise of this Warrant and the Underlying Warrants is at all times equal
to or less than the Exercise Price (divided by such number of shares) then in
effect.
2.3 EXERCISE AGREEMENT. The Exercise Agreement will be
substantially in the form set forth as Exhibit I hereto, except that if the
Unit Shares and Underlying Warrants are not to be issued in the name of the
Holder of this Warrant, the Exercise Agreement will also state the name of the
Person to whom the certificates or instrument for the Unit Shares and
Underlying Warrants are to be issued, and if the number of Unit Shares
purchasable does not include all of such securities purchasable hereunder, it
will also state the name of the Person to whom a new Warrant for the
unexercised portion of the rights hereunder is to be delivered.
2.4 FRACTIONAL SHARES OR WARRANTS. If a fractional share of
Common Stock or fractional Underlying Warrant would, but for the provisions of
Subsection 2.1, be issuable upon exercise of the rights represented by this
Warrant, the Company will, within twenty days after the Exercise Date, deliver
to the Purchaser a check payable to the Purchaser, in lieu of such fractional
share or fractional Underlying Warrant, in an amount equal to the Market Price
of such fractional share or fractional Underlying Warrant as of the close of
business on the Exercise Date.
SECTION 3.
EXERCISE PRICE
3.1 GENERAL.
(a) The Holder of this Warrant shall be entitled to
purchase such numbers of Units at an Exercise Price of $7.20 per Unit which,
for purposes of this Warrant, shall be allocated between the Unit Shares and
the Underlying Warrant at $___________ per share and $______ per warrant.
(b) If and whenever the Company issues or sells, or in
accordance with Subsection 3.2 is deemed to have issued or sold, any shares of
its Common Stock for a consideration per share less than the Exercise Price in
effect immediately prior to the time of such issuance or sale (except for the
issuance or deemed issuance of securities in a transaction described in
paragraph (c) of this Subsection 3.1), then immediately upon such issuance or
sale the Exercise Price will be reduced to a price determined by multiplying
the Exercise Price in effect immediately prior to the issuance or sale by a
fraction, the numerator of which shall be the sum of (i) the number of shares
of Common Stock outstanding prior to the issuance or sale plus (ii) the number
of shares of Common Stock (in terms of Common Stock issuable upon an exercise
of this Warrant) that the maximum aggregate amount receivable by the Company
upon such issuance or sale would purchase at the Exercise Price in effect
immediately prior to the issuance or sale, and the denominator of which shall
be the number of shares of Common Stock Deemed Outstanding immediately after
such issuance or sale.
(c) The following securities or transactions shall be
excluded from the operation of paragraph (b) of this Subsection 3.1 and
Subsection 3.2:
(i) The existence and any exercise of the
Warrants;
-4-
<PAGE> 5
(ii) The existence and any exercise of any option,
warrant, or other right to purchase Common Stock, that is outstanding on the
date of this Warrant; and
(iii) Any grant or exercise of options for Common
Stock granted under the Company's stock option plans with an exercise price (as
possibly adjusted) of at least the last reported sale price on date of grant.
3.2 EFFECT ON EXERCISE PRICE OF CERTAIN EVENTS. For purposes of
determining the adjusted Exercise Price under Subsection 3.1 above, the
following provisions will be applicable:
(a) If the Company in any manner grants any rights or
options to subscribe for or to purchase Common Stock or any stock or other
securities convertible into or exchangeable for Common Stock (such rights or
options being herein called "Rights" and such convertible or exchangeable stock
or securities being herein called "Convertible Securities") and the price per
share for which Common Stock is issuable upon the exercise of such Rights or
upon conversion or exchange of such Convertible Securities is less than the
Exercise Price in effect immediately prior to the time of the granting of such
Rights, then the total maximum number of shares of Common Stock issuable upon
the exercise of such Rights or upon conversion or exchange of the total maximum
amount of such Convertible Securities issuable upon the exercise of such Rights
will be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For purposes of this paragraph, the "price
per share for which Common Stock is issuable upon exercise of such Rights or
upon conversion or exchange of such Convertible Securities" will be determined
by dividing (i) the total amount, if any, received or receivable by the Company
as consideration for the granting of such Rights, plus the minimum aggregate
amount of additional consideration payable to the Company upon exercise of all
such Rights, plus, in the case of Rights that relate to Convertible Securities,
the minimum aggregate amount of additional consideration, if any, payable to
the Company upon the issuance or sale of such Convertible Securities and the
conversion or exchange thereof, by (ii) the total maximum number of shares of
Common Stock then issuable upon the exercise of such Rights or upon the
conversion or exchange of all Convertible Securities issuable upon the exercise
of such Rights. Except as otherwise provided in paragraphs (c) and (d) below,
no adjustment of the Exercise Price will be made when Convertible Securities
are actually issued upon the exercise of such Rights or when Common Stock is
actually issued upon the exercise of such Rights or the conversion or exchange
of such Convertible Securities.
(b) The following adjustments apply to the Exercise Price
of the Warrants with respect to the Unit Shares and the number of Unit Shares
purchasable upon exercise of the Warrants. In the event such Exercise Price
and number of Unit Shares is adjusted, then the Exercise Price of the
Underlying Warrants and the number of Warrant Shares purchasable upon exercise
of the Underlying Warrants shall be adjusted accordingly.
(c) If the Company in any manner issues or sells any
Convertible Securities, and the price per share for which Common Stock is
issuable upon such conversion or exchange is less than the Exercise Price in
effect immediately prior to the time of such issuance or sale, then the maximum
number of shares of Common Stock then issuable upon conversion or exchange of
all such Convertible Securities will be deemed to be outstanding and to have
been issued and sold by the Company for such price per share. For purposes of
this paragraph, the "price per share for which Common Stock is issuable upon
such conversion or exchange" will be determined by dividing (i) the total
amount received or receivable by the Company as consideration for the issuance
or sale of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the conversion or
exchange thereof, by (ii) the total maximum number of shares of Common Stock
then issuable upon the conversion or exchange of all such Convertible
Securities. Except as otherwise provided in paragraphs
-5-
<PAGE> 6
(c) and (d) below, no adjustment of the Exercise Price will be made when Common
Stock is actually issued upon the conversion or exchange of such Convertible
Securities, and if any such issuance or sale of such Convertible Securities is
made upon exercise of any options for which adjustments of the Exercise Price
had been or are to be made pursuant to other provisions of this Section 3, no
further adjustment of the Exercise Price will be made by reason of such
issuance or sale.
(d) If the purchase price provided for in any Rights, the
additional consideration, if any, payable upon the conversion or exchange of
any Convertible Securities, or the rate at which any Convertible Securities are
convertible into or exchangeable for Common Stock changes at any time (other
than under or by reason of provisions that are designed to protect against
dilution of the type set forth in this Section 3 and are no more favorable on
the holders of such Rights or Convertible Securities than this Section 3 would
have if this Section 3 were included in such Rights or Convertible Securities),
then the Exercise Price in effect at the time of such change will be readjusted
to the Exercise Price that would have been in effect at such time had such
Rights or Convertible Securities still outstanding provided for such changed
purchase price, additional consideration, or changed conversion rate, as the
case may be, at the time initially granted, issued, or sold; such adjustment of
the Exercise Price will be made whether the result thereof is to increase or
reduce the Exercise Price then in effect under this Warrant, provided that no
such adjustment shall increase the Exercise Price above the initial Exercise
Price hereof; such adjustments shall be made by the Board of Directors of the
Company who shall promptly provide notice of the new Exercise Price to each
Holder.
(e) Upon the expiration of any Right, or the termination
of any right to convert or exchange any Convertible Security, without the
exercise of such Right, the Exercise Price then in effect hereunder will be
adjusted to the Exercise Price that would have been in effect at the time of
such expiration or termination had such Right or Convertible Security never
been issued, but such subsequent adjustment shall not affect the number of
shares of Common Stock issued upon any exercise of this Warrant prior to the
date such adjustment is made.
(f) If any Common Stock, Rights, or Convertible
Securities are issued or sold or deemed to have been issued or sold for
consideration that includes cash, then the amount of cash consideration
actually received by the Company will be deemed to be the cash portion thereof.
If any Common Stock, Rights, or Convertible Securities are issued or sold or
deemed to have been issued or sold for a consideration part or all of which is
other than cash, then the amount of the consideration other than cash received
by the Company will be the fair value of such consideration as determined by
the Board of Directors of the Company, except where such consideration consists
of securities, in which case the amount of consideration received by the
Company will be the Market Price thereof as of the date of receipt. If any
Common Stock, Rights, or Convertible Securities are issued in connection with
any merger or consolidation in which the Company is the surviving corporation,
then the amount of consideration therefor will be deemed to be the fair value
of such portion of the net assets and business of the non- surviving
corporation as is attributable to such Common Stock, Rights, or Convertible
Securities, as the case may be.
(g) If any Right is issued in connection with the
issuance or sale of other securities of the Company, together comprising one
integrated transaction in which no specific consideration is allocated to such
Right by the parties thereto, the Right will be deemed to have been issued
without consideration.
(h) The number of shares of Common Stock Deemed
Outstanding at any given time does not include shares owned or held by or for
the account of the Company, and the disposition of any shares so owned or held
will be considered an issuance or sale of Common Stock.
-6-
<PAGE> 7
3.3 SUBDIVISION OR COMBINATION OF COMMON STOCK AND STOCK
DIVIDENDS. If the Company shall at any time after the date hereof (a) issue any
shares of Common Stock or Convertible Securities, or any rights to purchase
Common Stock or Convertible Securities, as a dividend upon Common Stock, (b)
issue any shares of Common Stock, in subdivision of outstanding shares of
Common Stock by reclassification or otherwise, or (c) combine outstanding
shares of Common Stock, by reclassification or otherwise, then the Exercise
Price that would apply if purchase rights hereunder were being exercised
immediately prior to such action by the Company shall be adjusted by
multiplying it by a fraction, the numerator of which shall be the number of
shares of Common Stock Deemed Outstanding immediately prior to such dividend,
subdivision, or combination and the denominator of which shall be the number of
shares of Common Stock Deemed Outstanding immediately after such dividend,
subdivision, or combination.
3.4 CERTAIN DIVIDENDS OF DISTRIBUTIONS. If the Company shall
declare a dividend or distribution upon the Common Stock payable otherwise than
out of earnings or earned surplus and otherwise than in Common Stock, Rights or
Convertible Securities, the Exercise Price that would apply if purchase rights
hereunder were being exercised immediately prior to the declaration of such
dividend or distribution shall be reduced by an amount equal, in the case of a
dividend or distribution in cash, to the amount thereof payable per share of
the Common Stock or, in the case of any other dividend or distribution, to the
fair value of such dividend or distribution per share of the Common Stock as
determined in good faith by the Board of Directors of the Company. For
purposes of the foregoing, a dividend or distribution other than in cash shall
be considered payable out of earnings or earned surplus only to the extent that
such earnings or earned surplus are charged an amount equal to the fair value
of such dividend or distribution as determined in good faith by the Board of
Directors of the Company. Such reductions shall take effect as of the date on
which a record is taken for the purpose of such dividend or distribution or, if
a record is not taken, the date as of which the holders of Common Stock of
record entitled to such dividend or distribution are to be determined.
3.5 NO DE MINIMIS ADJUSTMENTS. No adjustment of the Exercise
Price shall be made if the amount of such adjustment would be less than one
cent per share, but in such case any adjustment that otherwise would be
required to be made shall be carried forward and shall be made at the time and
together with the next subsequent adjustment that, together with any adjustment
or adjustments so carried forward, shall amount to not less than one cent per
share.
SECTION 4.
ADJUSTMENT OF NUMBER OF
SHARES ISSUABLE UPON EXERCISE
Upon each adjustment of the Exercise Price pursuant to Section 3
hereof, the Holder of this Warrant shall thereafter (until another such
adjustment) be entitled to purchase, at the adjusted Exercise Price in effect
on the date purchase rights under this Warrant are exercised, the number of
Units, calculated to the nearest number of Units, determined by (a) multiplying
the number of Units purchasable hereunder immediately prior to the adjustment
of the Exercise Price by the Exercise Price in effect immediately prior to such
adjustment, and (b) dividing the product so obtained by the adjusted Exercise
Price in effect on the date of such exercise. The provisions of Subsection 2.4
shall apply, however, so that no fractional Unit Share or fractional Underlying
Warrant shall be issued upon exercise of this Warrant.
-7-
<PAGE> 8
SECTION 5.
EFFECT OF REORGANIZATION,
RECLASSIFICATION, CONSOLIDATION, MERGER, OR SALE
If at any time while this Warrant is outstanding there shall be any
reorganization or reclassification of the capital stock of the Company (other
than a subdivision or combination of shares provided for in Subsection 3.3
hereof), any consolidation or merger of the Company with another corporation
(other than a consolidation or merger in which the Company is the surviving
entity and which does not result in any change in the Common Stock), or any
sale or other disposition by the Company of all or substantially all of its
assets to any other corporation, then the Holder of this Warrant shall
thereafter upon exercise of this Warrant be entitled to receive the number of
Unit Shares, Underlying Warrants or other securities or property of the
Company, or of the successor corporation resulting from such consolidation or
merger, as the case may be, to which the Units (and any other securities and
property) of the Company, deliverable upon the exercise of this Warrant, would
have been entitled upon such reorganization, reclassification of capital stock,
consolidation, merger, sale, or other disposition if this Warrant had been
exercised immediately prior to such reorganization, reclassification of capital
stock, consolidation, merger, sale, or other disposition. In any such case,
appropriate adjustment (as determined in good faith by the Board of Directors
of the Company) shall be made in the application of the provisions set forth in
this Warrant with respect to the rights and interests thereafter of the Holder
of this Warrant to the end that the provisions set forth in this Warrant
(including those relating to adjustments of the Exercise Price and the number
of shares issuable upon the exercise of this Warrant) shall thereafter be
applicable, as near as reasonably may be, in relation to any shares or other
property thereafter deliverable upon the exercise hereof as if this Warrant had
been exercised immediately prior to such reorganization, reclassification of
capital stock, consolidation, merger, sale, or other disposition and the Holder
hereof had carried out the terms of the exchange as provided for by such
reorganization, reclassification of capital stock, consolidation, or merger.
If in any such reorganization, reclassification, consolidation, or merger,
additional Unit Shares or Common Stock shall be issued in exchange, conversion,
substitution, or payment, in whole or in part, for or of a security of the
Company other than Common Stock deliverable from exercise of this Warrant, any
such issue shall be treated as an issue of Common Stock covered by the
provisions of Section 3, with the amount of the consideration received upon the
issue thereof being determined in good faith by the Board of Directors of the
Company. The Company shall not effect any such reorganization, consolidation,
or merger unless, upon or prior to the consummation thereof, the successor
corporation shall assume by written instrument the obligation to deliver to the
Holder hereof such shares of stock or other securities, cash, or property as
such Holder shall be entitled to purchase in accordance with the foregoing
provisions. Notwithstanding any other provisions of this Warrant, in the event
of sale or other disposition of all or substantially all of the assets of the
Company as a part of a plan for liquidation of the Company, all rights to
exercise the Warrant shall terminate upon the earlier of the expiration of the
Exercise Period and 60 days after the Company gives written notice to the
Holder of this Warrant that such sale or other disposition has been
consummated.
SECTION 6.
NOTICE OF ADJUSTMENT
Immediately upon any adjustment of the Exercise Price, or increase or
decrease in the number of Unit Shares and Underlying Warrants purchasable upon
exercise of this Warrant, the Company will send written notice thereof to all
Holders, stating the adjusted Exercise Price and the increased or decreased
number of Unit Shares and Underlying Warrants purchasable upon exercise of this
Warrant and setting forth in reasonable detail the method of calculation for
such adjustment and increase or decrease. When
-8-
<PAGE> 9
appropriate, such notice may be given in advance and included as part of any
notice required to be given pursuant to Section 7 below.
SECTION 7.
PRIOR NOTICE OF CERTAIN EVENTS
If at any time:
(a) the Company shall pay any dividend payable in stock
upon its Common Stock or make any distribution (other than cash dividends) to
the holders of its Common Stock;
(b) the Company shall offer for subscription pro rata to
the holders of its Common Stock any additional shares of stock of any class or
any other rights;
(c) there shall be any reorganization or reclassification
of the capital stock of the Company, any consolidation or merger of the Company
with another corporation, or a sale or disposition of all or substantially all
its assets; or
(d) there shall be a voluntary or involuntary
dissolution, liquidation, or winding up of the Company,
then, in each such case, the Company shall give prior written notice, by hand
delivery or by certified mail, postage prepaid, addressed to the Holder of this
Warrant at the address of such holder as shown on the books of the Company, of
the date on which (i) the books of the Company shall close or a record shall be
taken for such stock dividend, distribution, or subscription rights or (ii)
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation, or winding up shall take place, as the case may be.
A copy of each such notice shall be sent simultaneously to each transfer agent
of the Company's Common Stock. Such notice shall also specify the date as of
which the holders of Common Stock of record shall participate in said dividend,
distribution, or subscription rights or shall be entitled to exchange their
Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, or winding up, as the case may be. Such written notice shall be
given at least 30 days prior to the record date or the effective date,
whichever is earlier, of the subject action or other event.
If any other event (not listed above) would require adjustment to the
Exercise Price, then the Company shall give prior written notice thereof (in
substance as set forth above) to the Holders, at their addresses and in the
manner provided in Subsection 15.3. Notwithstanding the foregoing, the Company
shall not be required to give prior written notice where it is not reasonably
possible.
SECTION 8.
NEW PRO RATA PURCHASE RIGHTS
If at any time the Company grants, issues, or sells any warrants,
Convertible Securities, or rights to purchase stock, warrants, securities, or
other property pro rata to the record holders of Common Stock (the "Purchase
Rights"), then the Holder of this Warrant will be entitled to acquire, upon the
terms applicable to such Purchase Rights, the aggregate Purchase Rights that
such Holder could have acquired
-9-
<PAGE> 10
if such Holder had held the number of shares of Common Stock acquirable upon
exercise of this Warrant had this Warrant been fully exercised immediately
prior to the date on which a record was taken for the grant, issuance, or sale
of such Purchase Rights, or, if no such record was taken, the date as or which
the record holders of Common Stock were determined for the grant, issuance, or
sale of such Purchase Rights.
SECTION 9.
RESERVATION OF COMMON STOCK
The Company will at all times reserve and keep available such number
of shares of Common Stock as will be sufficient to permit the exercise in full
of all outstanding Warrants and the Underlying Warrants. Upon exercise of this
Warrant and the Underlying Warrants, the Holder will acquire fully paid and
non-assessable ownership rights of the Common Stock, free and clear of any
liens, claims or encumbrances.
SECTION 10.
NO SHAREHOLDER RIGHTS OR OBLIGATION
This Warrant will not entitle the holder hereof to any voting rights
or other rights as a shareholder of the Company. Until the shares of Common
Stock issuable upon exercise of this Warrant and the Underlying Warrants are
recorded as issued on the books and records of the Company's transfer agent,
the Holder shall not be entitled to any voting rights or other rights as a
shareholder; provided, however, the Company uses its best efforts to ensure
that, upon receipt of an Exercise Agreement, the appropriate documentation
necessary to effectuate the exercise of the Warrant and issuance of the Common
Stock is accomplished as expeditiously as possible. No provision of this
Warrant, in the absence of affirmative action by the Holder to purchase Shares,
and no enumeration in this Warrant of the rights or privileges of the Holder,
will give rise to any obligation of such Holder for the Exercise Price of the
Unit Shares and the Underlying Warrants acquirable by exercise hereof or as a
shareholder of the Company.
SECTION 11.
EXCHANGEABLE FOR DIFFERENT DENOMINATIONS
This Warrant is exchangeable, upon the surrender hereof by the Holder
at the principal office of the Company, for new Warrants of like tenor
representing in the aggregate the purchase rights hereunder, and each of such
new Warrants, as set forth on the front page hereof, will represent such
portion of such rights as is designated by the Holder at the time of such
surrender. The date the Company initially issued this Warrant, which is set
forth on the front page hereof, will be deemed to be the "Date of Issuance" of
this Warrant and any option purchase warrant exchanged or substituted herefor,
regardless of the number of times (and dates on which) new certificates
representing the unexpired and unexercised rights formerly represented by this
Warrant are issued.
-10-
<PAGE> 11
SECTION 12.
TRANSFERABILITY
Subject to the transfer conditions referred to in Section 2 or in the
remaining provisions or this Section 12, this Warrant and all rights hereunder
are transferable, in whole or in part, without charge to the Holder, upon
surrender of this Warrant with a properly executed Assignment (in the form of
Exhibit Il hereto) at the principal office of the Company. This Warrant and
the Unit Shares and the Underlying Warrants issued upon exercise hereof may not
be offered, sold, or transferred except in compliance with the Securities Act
of 1933, as amended (the "Act"), and any applicable state securities laws; and
then only against receipt of an agreement of the Person to whom such offer or
sale is made to comply with the provisions of this Section 13 with respect to
any resale or other disposition of such securities; provided that no such
agreement shall be required from any Person purchasing this Warrant or any
underlying security pursuant to a registration statement effective under the
Act. The Holder of this Warrant agrees that, prior to the disposition of any
security purchased on the exercise hereof under circumstances that might
require registration of such security under the Act, or any similar statute
then in effect, the Holder shall give written notice to the Company, expressing
his intention as to such disposition. Promptly upon receiving such notice, the
Company shall present a copy thereof to its securities counsel. If, in the
opinion of such counsel, the proposed disposition does not require registration
of such security under the Act, or any similar statute then in effect, the
Company shall, as promptly as practicable, notify the Holder of such opinion,
whereupon the Holder shall be entitled to dispose of such security in
accordance with the terms of the notice delivered by the Holder to the Company.
The above agreement by the Holder of this Warrant shall not be deemed to limit
or restrict in any respect the exercise of rights set forth in Section 13
hereof.
-11-
<PAGE> 12
SECTION 13.
REGISTRATION RIGHTS
13.1 DEMAND REGISTRATION RIGHTS. At any time during the Exercise
Period, the Holders of Warrants whose holdings thereof comprise a majority of
the Units purchasable upon the exercise of outstanding Warrants and outstanding
shares of Common Stock not previously sold pursuant to a registration statement
as contemplated by this Section 13 (collectively, the "Warrant Securities")
shall have the right to require the Company (a) to prepare and file with the
Commission up to two new registration statements under the Act (or, in lieu of
either, a post-effective amendment or amendments to the Registration
Statement, if then permitted under the Act), covering all or any portion of the
Warrant Securities and to use its best efforts to obtain promptly and maintain
the effectiveness thereof for at least 180 days and (b) to register or qualify
the subject Warrant Securities for sale in up to ten states identified by such
holders. The Company shall bear all expenses incurred in the preparation and
filing of such registration statements or post-effective amendments (and
related state registrations, to the extent permitted by applicable law) and the
furnishing of copies of the preliminary and final prospectus thereof to such
Holders of Warrant Securities.
13.2 PIGGY BACK REGISTRATION RIGHTS. In addition, if at any time
during the Exercise Period, the Company shall prepare and file one or more
registration statements under the Act, with respect to a public offering of
equity or debt securities of the Company, or of any such securities of the
Company held by its security holders, the Company will include in any such
registration statement such information as is required, and such number of
Shares held by the Holders thereof or their respective designees or transferees
as may be requested by them, to permit a public offering of the Shares so
requested; provided, however, that if, in the written opinion of the Company's
managing underwriter, if any, for such offering, the inclusion of the Shares
requested to be registered, when added to the securities being registered by
the Company or the selling security holder(s), would exceed the maximum amount
of the Company's securities that can be marketed without otherwise materially
and adversely affecting the entire offering, then the Company may exclude from
such offering that portion of the Shares requested to be so registered, so that
the total number of securities to be registered is within the maximum number of
shares that, in the opinion of the managing underwriter, may be marketed
without otherwise materially and adversely affecting the entire offering,
provided that the Company shall be required to include in the offering and in
the following order: first, the pro rata number of securities requested by the
Holder along with all other holders of securities requesting registration
pursuant to registration rights which were granted on or prior to the date
hereof and are described in the Company's Registration Statement; and, second,
the pro rata number of securities requested by all other holders of securities
requesting registration pursuant to other registration rights. The Company
shall bear all fees and expenses incurred by it in connection with the
preparation and filing of such registration statement. In the event of such a
proposed registration, the Company shall furnish the then Holders with not less
than thirty (30) days' written notice prior to the proposed date of filing of
such registration statement. The Company shall use its best efforts to ensure
that such registration statement is declared effective and remains effective
until such time as all of the Shares have been registered or may be sold
without registration under the Act or applicable state securities laws and
regulations, and without limitation as to volume, pursuant to Rule 144 of the
Act. The holders of Shares shall exercise the rights provided for in this
Subsection 13.2 by giving written notice to the Company, within twenty (20)
days of receipt of the Company's notice of its intention to file a registration
statement.
13.3 SURVIVAL. The rights and obligations set forth in this
Section 13 shall survive the exercise and surrender of this Warrant.
-12-
<PAGE> 13
SECTION 14.
REGISTRATION UNDER THE SECURITIES ACT
This Warrant and the Unit Shares and Underlying Warrants issuable upon
exercise of this Warrant have not been registered under the Act. Unless and
until so registered, this Warrant and all replacement Warrants shall bear the
following legend:
THIS WARRANT, AND THE SECURITIES ISSUABLE UPON THE EXERCISE OF
THIS WARRANT, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED ("SECURITIES ACT"), AND THEREFORE MAY
NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS (i) A
REGISTRATION STATEMENT REGISTERING THIS WARRANT, AND THE
SECURITIES ISSUABLE UPON ITS EXERCISE, HAS BEEN FILED AND
DECLARED EFFECTIVE UNDER THE SECURITIES ACT OR (ii) THE
COMPANY IS SATISFIED THAT NO SUCH POST-EFFECTIVE AMENDMENT OR
OTHER REGISTRATION STATEMENT IS THEN REQUIRED AND THAT THIS
WARRANT AND THE UNDERLYING SECURITIES MAY BE SOLD, TRANSFERRED
OR OTHERWISE DISPOSED OF IN THE MANNER CONTEMPLATED WITHOUT
REGISTRATION UNDER THE SECURITIES ACT.
SECTION 15.
MISCELLANEOUS
15.1 ORIGINAL ISSUE TAXES. The Company will pay all United States,
state and local (but not foreign) original issue taxes, if any, upon the
issuance of this Warrant, the Unit Shares and the Underlying Warrants
deliverable upon exercise hereof.
15.2 AMENDMENT AND WAIVER. Except as otherwise provided herein,
the provisions of this Warrant may be amended, and the Company may take any
action herein prohibited or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
Holders of Warrants representing at least 50% of the shares of Common Stock
obtainable upon the exercise of the Warrants outstanding at the time of such
consent.
15.3 NOTICES. Any notices required to be sent to a Holder of this
Warrant or of any Warrant Securities purchased upon the exercise hereof will be
delivered to the address of such Holder shown on the books of the Company. All
notices referred to herein will be delivered in person or sent by registered or
certified mail, postage prepaid, and will be deemed to have been given when so
delivered in person or on the third business day following the date so sent by
mail.
If to the Holder: Barber & Bronson Incorporated
201 South Biscayne Boulevard
Suite 2950
Miami, Florida 33131
Attention: Mr. James S. Cassel
-13-
<PAGE> 14
With a copy to: Broad and Cassel
Miami Center
201 S. Biscayne Boulevard
Suite 3000
Miami, Florida 33131
Attention: Dale S. Bergman, P.A.
If to the Company: UStel, Inc.
2775 South Rainbow Boulevard
Suite 102
Las Vegas, Nevada 89102
Attention: Robert L.B. Diener
With a copy to: Freshman, Marantz, Orlanski, Cooper & Klein
9100 Wilshire Boulevard
8th Floor East
Beverly Hills, California 90212
Attention: Leib Orlanski, Esquire
15.4 DESCRIPTIVE HEADINGS. The descriptive headings of the
sections and paragraphs of this Warrant are inserted for convenience only and
do not constitute a part of this Warrant.
15.5 GOVERNING LAW; ARBITRATION. This Warrant is governed by,
interpreted under and construed in all respects in accordance with the
substantive laws of the State of Florida, without regard to the conflicts of
law provisions thereof, and irrespective of the place of domicile or residence
of the party. In the event of a controversy arising out of the interpretation,
construction, performance or breach of this Warrant, the parties hereby agree
and consent to the jurisdiction and venue of the Courts of the State of
Florida, or the United States District Court for the Southern District of
Florida; and further agree and consent that personal service of process in any
such action or proceeding outside the State of Florida shall be tantamount to
service in person in Florida.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
and attested by its duly authorized officers under its corporate seal.
USTEL, INC., a Minnesota corporation
By:
-------------------------------------------
Robert L.B. Diener, Chief Executive Officer
[Corporate Seal]
Attest:
- -------------------------------------------
Warter van Biene, Secretary
-14-
<PAGE> 15
EXHIBIT I
EXERCISE AGREEMENT
To: Dated:
The undersigned Record Holder, pursuant to the provisions set forth in
the within Warrant, hereby subscribes for and purchases _____ Units covered by
such Warrant and herewith makes full cash payment of $__________________ for
such Units at the Exercise Price provided by such Warrant.
----------------------------------
(Signature)
----------------------------------
(Print or type name)
----------------------------------
(Address)
----------------------------------
----------------------------------
NOTICE: The signature on this Exercise Agreement must correspond with
the name as written upon the face of the within Warrant, or upon the Assignment
thereof if applicable, in every particular, without alteration, enlargement, or
any change whatsoever, and must be guaranteed by a bank, other than a saving
bank, having an office or correspondent in New York, New York, or Fort
Lauderdale or Miami, Florida, or by a firm having membership on a registered
national securities exchange and an office in New York, New York, or Fort
Lauderdale or Miami, Florida.
SIGNATURE GUARANTEE
Authorized Signature:
--------------------------------------------------------
Name of Bank or Firm:
--------------------------------------------------------
Dated:
-----------------------------------------------------------------------
<PAGE> 16
EXHIBIT II
ASSIGNMENT
FOR VALUE RECEIVED, __________________________________________, the
undersigned Holder hereby sells, assigns, and transfers all of the rights of
the undersigned under the within Warrant with respect to the number of Units
covered thereby set forth below, unto the Assignee identified below, and does
hereby irrevocably constitute and appoint____________________________________
to effect such transfer of rights on the books of the Company, with full power
of substitution:
Name of Assignee Address of Assignee No. of Units
- ---------------- ------------------- ------------
Dated:
-------------------------------- ------------------------------------
(Signature of Holder)
------------------------------------
(Print or type name)
NOTICE: The signature on this Assignment must correspond with the name
as written upon the face of the within Warrant, in every particular, without
alteration, enlargement, or any change whatsoever, and must be guaranteed by a
bank, other than a savings bank, having an office or correspondent in New York,
or New York, Fort Lauderdale or Miami, Florida, or by a firm having membership
on a registered national securities exchange and an office in New York, New
York, or Fort Lauderdale or Miami, Florida.
SIGNATURE GUARANTEE
Authorized Signature:
--------------------------------------------------------
Name of Bank or Firm:
--------------------------------------------------------
Dated:
-----------------------------------------------------------------------
<PAGE> 1
EXHIBIT 4.4
- -------------------------------------------------------------------------------
VOID AFTER 3:00 P.M. WARRANT
ROCKY MOUNTAIN TIME, ON _____________________, 2002
WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK
WA-
[UStel LOGO]
USTEL, INC. CUSIP 917325 11 0
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
THIS CERTIFICATE IS TRANSFERABLE IN THE CITY OF DENVER, COLORADO
THIS CERTIFIES THAT, FOR VALUE RECEIVED
the registered holder hereof or assignee (the "Holder"), is entitled to
purchase from USTEL, INC., a Minnesota corporation (the "Company"), at any time
after the Warrants become separately transferable from the Common Stock with
which they were concurrently issued as Units (the Separation Date") and before
3:00 p.m., Rocky Mountain Time, on _____________________, 2002, at the purchase
price per Share of $4.00 (the "Warrant Price"), the number of shares of Common
Stock of the Company set forth above (the "Shares"). The number of Shares
purchasable upon exercise of each Warrant evidenced hereby and the Warrant
Price per Share shall be subject to adjustment from time to time as set forth
in the Warrant Agreement referred to below. This Warrant is subject to
redemption by the Company of $0.01 per Share of Common Stock purchasable upon
exercise hereof, upon 30 days' prior written notice, at any time after the
Separation Date and after the ????? Market Price (determined pursuant to the
Warrant Agreement) per share of Common Stock ???? ???? ??? amended $6.00 for a
period of at least 20 consecutive trading days ???? ???? 30 days prior to the
date of this notice of redemption, and prior to ???? of the Warrants.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant certificate with the Purchase Form on the reverse
side ???? duly executed (with a signature guarantee as provided on the reverse
side ???? and ????? payment of the Warrant Price (subject to adjustment) at the
principal office in Denver, Colorado, of American Securities Transfer & Trust,
Inc. (the "Warrant Agent"). Payment of such price shall be made at the option
of the Holder in cash or by good check or bank draft, and as provided in the
Warrant Agreement.
The Warrants evidenced hereby are part of a duly authorized Issue of
Common Stock Purchase Warrants with rights to purchase an aggregate of up to
1,582,500 shares of Common Stock of the Company and are issued under and in
accordance with a Warrant Agreement dated as of __________________, 1997,
between the Company and the Warrant Agent and are subject to the ???? and
provisions contained in such Warrant Agreement, to all of which the Holder of
this Warrant certificate by acceptance ???? consents. A copy of the Warrant
Agreement may be obtained for inspection by the Holder hereof upon written
request to the Warrant Agent.
Upon any partial exercise of the Warrants evidenced hereby, there shall
be countersigned and issued to the Holder a new Warrant certificate in respect
of the Shares as to which the Warrants evidenced hereby shall not have been
exercised. This Warrant certificate may be exchanged at the office of the
Warrant Agent by surrender of this Warrant Certificate properly endorsed (with
signature guarantee) either separately or in combination with one or more other
Warrants for one or more new Warrants to purchase the same aggregate number of
Shares as here evidenced by the Warrant or Warrants exchanged. No fractional
shares will be issued upon the exercise of rights to purchase hereunder, but
the Company shall pay the cash value of any ???? upon the exercise of one or
more Warrants. The Warrants evidenced hereby are transferable at the office of
the Warrant Agent in the manner and subject to the limitations set forth in the
Warrant Agreement.
The Holder hereof may be ???? by the Company, the Warrant Agent and all
other persons dealing with this Warrant certificate as the ???? owner himself
for all purposes and as the person entitled to ???? ???? the rights represented
hereby, any notice to the contrary notwithstanding, and until such transfer is
entered on such ????, the Company may ???? the Holder hereof as the owner for
all purposes.
The Warrant certificate does not entitle the Holder hereof to any of
the rights of a shareholder of the Company.
The Warrant certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Warrant Agent.
Dated:
[UStel, Inc. SEAL]
PRESIDENT SECRETARY
- -------------------------------------------------------------------------------
COUNTERSIGNED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
P.O. Box 1596
Denver, Colorado 80201
Warrant Agent
By
<PAGE> 2
USTEL, INC.
PURCHASE FORM
Mailing Address:
c/o American Securities Transfer & Trust, Inc.
P.O. Box 1596
Denver, Colorado 80201
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant certificate for, and to purchase
thereunder, _____ shares of Common Stock provided for therein, and requests
that certificates for such Shares be issued in the name of:
- -------------------------------------------------------------------------------
(Please Print or Type Name, Address and Social Security Number)
- -------------------------------------------------------------------------------
and, if said number of Shares shall not be all the Shares purchasable hereunder,
that a New Warrant certificate for the balance of the Shares purchasable under
the within Warrant certificate be registered in the name of the undersigned
Holder or his Assignee as below indicated and delivered to the address stated
below.
The undersigned represents that the exercise of the within Warrant was
solicited by a member of the National Association of Securities Dealers, Inc. If
not solicited by an NASD member, please write "unsolicited" in the space below.
Unless otherwise indicated in the space below, it will be assumed that the
exercise was solicited by Barber & Bronson Incorporated.
Dated: ____________________________ _____________________________________
(Name of NASD member if other than
Barber & Bronson Incorporated)
Name of Holder or Assignee: __________________________________________________
(Please Print)
Address: _____________________________________________________________________
______________________________________________________________________________
Signature: ___________________________________________________________________
Note: The above signature must correspond with the name as it appears
upon the face of the within Warrant certificate in every
particular without alteration or enlargement or any change
whatsoever unless these Warrants have been assigned.
Signature Guaranteed:
_________________________________________________
(Signature must be guaranteed by a bank or trust
company having an office or correspondent in the
United States or by a member firm of a registered
securities exchange or the National Association
of Securities Dealers, Inc.)
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto
______________________________________________________________________________
(Please Print or Type Name, Address and Social Security Number)
______________________________________________________________________________
the within Warrants, hereby irrevocably constituting and appointing
_____________________________________________________________________ Attorney
to transfer said Warrants on the books of the Company, with full power of
substitution in the premises.
Dated: ______________________________ ______________________________________
Signature of Registered Holder
Note: The signature of this assignment
must correspond with the name as
it appears upon the face of the
within Warrant certificate in
every particular, without
alteration, impairment or any
change whatever.
Signature Guaranteed:
_____________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION, (Banks, Stockbrokers,
Savings and Loan Associations and Credit Unions) WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
Exhibit 4.5
UNIT NO. UNITS
[LOGO]
USTEL, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
UNIT CERTIFICATE CUSIP 917325 20 1
EACH UNIT COMPOSED OF TWO SHARES OF COMMON STOCK AND
ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT
THIS IS TO CERTIFY that
or registered assigns, is the registered holder of the number of Units
("Units") set forth above, each of which entitles the holder to two shares of
Common Stock, par value $0.01 per share ("Common Stock" or the "Shares"), of
UStel, Inc. (the "Company"), and one Redeemable Common Stock Purchase Warrant
("Warrants"). Each Warrant entitles the holder to purchase one share of the
Company's Common Stock, at an exercise price of $4.00 subject to adjustment, at
any time after the securities included in the Units become separately
transferable through _________________________________, 2002
The Common Stock and the Warrants may not be traded separately until
____________________. or earlier upon the mutual agreement of the Company and
Barber & Bronson Incorporated (the "Underwriter") in their sole discretion. At
any time after the securities are separately transferable, this Unit
Certificate is exchangeable upon the surrender hereof by the registered holder
to the Transfer Agent in exchange for one or more new Stock Certificates,
representing in the aggregate the number of Shares comprising the Units
represented hereby and one or more Warrant Certificates, representing in the
aggregate the number of Warrants comprising the Units represented hereby.
The Company agrees at all times to reserve or hold available a
sufficient number of shares of its Common Stock and Warrants to cover the number
of securities issuable upon the exchange of this Certificate and the exercise
of rights of the underlying securities.
This Unit Certificate entitles the holder hereof, either at law or in
equity to any rights as a shareholder or warrant holder of the Company as shall
pertain to the underlying securities.
This Unit Certificate is exchangeable at any time upon the surrender
hereof by the registered holder to the Transfer Agent for one or more new Unit
Certificates of like tenor and date representing in the aggregate the right to
the number of Units represented hereby.
The Company may deem and treat the registered holder of this Unit
Certificate at any time as the absolute owner hereof and of the securities
covered hereby for all purposes and shall not be affected by any notice to the
contrary.
The Warrants covered by this Certificate are subject to the terms of the
Warrant Agreement. The Warrant Agreement is available at the executive offices
of the Company. The Warrant Agreement is incorporated herein by reference and
made a part hereof and reference is hereby made thereto for a full description
of the rights, limitations of rights, obligations, duties and immunities
hereunder.
This Unit Certificate shall not be valid or obligatory for any purpose
unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the company has cause this Unit Certificate to be
executed by its duly authorized officers
USTEL, INC.
Dated:
By:
[SEAL] PRESIDENT
By:
SECRETARY
COUNTERSIGNED AND REGISTERED:
American Securities Transfer & Trust,Inc.
P.O. Box 1596
Denver, Colorado 80201
Transfer and Registrar
By
AUTHORIZED SIGNATURE
<PAGE> 2
USTEL, INC.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C> <C>
TEN COM - as tenants in common UNIF TRANS MIN ACT - ____________ Custodian _____________
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Transfers to Minors Act
JT TEN - as joint tenants with right
of survivorship and not as _____________________________________
tenants in common (State)
Additional abbreviations may also be used though not in the above list.
</TABLE>
For Value received hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________ _______________________________________
_______________________________________________________________________________
(name AND ADDRESS OF TRANSFEREE SHOULD BE PRINTED OR TYPEWRITTEN)
_______________________________________________________________________________
_________________________________________________________________________ Units
represented by the within Certificate and do hereby irrevocably constitute and
appoint
______________________________________________________________________ Attorney
to transfer the said units on the books of the within-named Company with full
power of substitution in the promises.
Dated ________________________
______________________________
SIGNATURE
Signature(s) Guaranteed
By ____________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS) WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15.
04816 1/02-5-97 USTEL, Inc.-Units
<PAGE> 1
EXHIBIT 5.1
[FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN LETTERHEAD]
February 7, 1997
UStel, Inc.
2775 South Rainbow Boulevard
Suite 102
Las Vegas, Nevada 89102
Re: UStel, Inc.
Registration Statement on Form SB-2,
SEC File No. 333-12981
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form SB-2 (File
No.333-12891) of UStel, Inc. (the "Company"), together with Amendments No. 1,
No. 2 and No. 3 thereto (the "Registration Statement"), with exhibits as filed
in connection therewith, and the form of prospectus contained therein, which
you have filed with the Securities and Exchange Commission ("SEC") in
connection with the registration under the Securities Act of 1933, as amended,
of 1,552,500 units (the "Units"), comprised of one share of common stock, no
par value per share (the "Common Stock") and one five-year redeemable Common
Stock purchase warrant, to purchase one share of Common Stock of the Company
(the "Unit Warrants"), of which up to 202,500 Units may be purchased to cover
over-allotments, if any (the "Option Units"). The Registration Statement also
registers warrants to be issued to the representative of the underwriters of
the public offering to purchase 125,000 Units (the "Representative's
Warrants"), the 125,000 Units issuable upon the exercise of the
Representative's Warrants and the 125,000 shares of Common Stock underlying the
warrants included in the Units issuable upon exercise of the Representative's
Warrants. The Unit Warrants and the Representative's Warrants are referred to
collectively herein as the "Warrants". The Units and the Representative's
Warrants and the securities underlying such Units and Representative's Warrants
are collectively referred to as the "Securities". The Securities are to be
sold to Barber & Bronson Incorporated, as the representative of the several
underwriters (the "Underwriters"), pursuant to an Underwriting Agreement to be
entered into by and among the Company, and the Underwriters (the "Underwriting
Agreement").
For purposes of this opinion, we have examined such matters of law and
originals, or copies certified or otherwise identified to our satisfaction, of
such documents, corporate records and other instruments as we have deemed
necessary. In our examination, we have assumed the genuiness of all
signatures, the authenticity of all documents submitted to us as originals, the
<PAGE> 2
UStel, Inc.
February 7, 1997
Page 2
conformity to originals of all documents submitted to us as certified,
photostatic or conformed copies, and the authenticity of the originals of all
such latter documents. We have also assumed the due execution and delivery of
all documents where due execution and delivery are prerequisites to the
effectiveness thereof. We have relied upon certificates of public officials
and certificates of officers of the Company for the accuracy of material,
factual matters contained therein which were not independently established.
Based on the foregoing and on all other instruments, documents and matters
examined for the rendering of this opinion, and subject to effectiveness of the
Registration Statement with the SEC (such Registration Statement as amended and
finally declared effective, and the form of Prospectus contained therein or
subsequently filed pursuant to Rule 430A or Rule 424 under the Securities Act
of 1933, as amended, being hereinafter referred to as the "Registration
Statement" and the "Prospectus," respectively) and to registration or
qualification under the securities laws of the states in which the securities
may be sold, upon the sale and issuance of the Securities in the manner
referred to in the Registration Statement and in accordance with the terms of
the Underwriting Agreement, and upon payment therefor, it is our opinion that:
1. The issuance of the Common Stock comprising a part of the
Units has been duly authorized by the Board of Directors of the Company, and,
such shares when issued will be legally issued, fully paid and non-assessable
shares of the Company's Common Stock.
2. The issuance of the Unit Warrants has been duly authorized by
the Board of Directors of the Company, and, such warrants when issued will
constitute legal, valid and binding obligations of the Company, and will be
enforceable against the Company in accordance with their terms, except (i) as
enforceability may be limited by bankruptcy, insolvency, fraudulent transfer,
moratorium or other similar laws relating to or limiting creditors' rights
generally and by general principles of equity (regardless of whether such
enforceability is considered in a proceeding at law or in equity) and (ii) to
the extent that rights to indemnity and contribution thereunder may be limited
under applicable laws.
3. The issuance of the Representative's Warrants has been duly
authorized by the Board of Directors of the Company, and such warrants when
issued will constitute legal, valid and binding obligations of the Company, and
will be enforceable against the Company in accordance with its terms, except
(i) as enforceability may be limited by bankruptcy, insolvency, fraudulent
transfer, moratorium or other similar laws relating to or limiting creditors'
rights generally and by general principles of equity (regardless of whether
such enforceability is considered in a proceeding at law or in equity) and (ii)
to the extent that rights to indemnity and contribution thereunder may be
limited under applicable laws.
<PAGE> 3
UStel, Inc.
February 7, 1997
Page 3
4. The shares of Common Stock issuable upon the exercise of the
Warrants have been duly authorized by the Board of Directors of the Company,
and, upon exercise of the Warrants in accordance with their terms and payment
of the exercise price therefor, will be validly issued, fully paid and
non-assessable.
We express no opinion as to the applicability or effect of any laws, orders or
judgements of any state of jurisdiction other than federal securities laws and
the substantive laws of the State of California. Further, our opinion is based
solely upon existing laws, rules and regulations, and we undertake no
obligation to advise you of any changes that may be brought to our attention
after the date hereof.
We consent to the use of our name under the caption "Legal Matters" in the
Prospectus, constituting part of the Registration Statement, and to the filing
of this opinion as an exhibit to the Registration Statement.
By giving you this opinion and consent, we do not admit that we are experts
with respect to any part of the Registration Statement or Prospectus within the
meaning of the term "expert" as used in Section 11 of the Securities Act of
1933, as amended, or the rules and regulations promulgated thereunder by the
SEC, nor do we admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended.
<PAGE> 4
UStel, Inc.
February 7, 1997
Page 4
Should you have any questions or comments concerning the foregoing, please do
not hesitate to contact Lieb Orlanski, Esq. of this office.
Very truly yours,
/s/ FRESHMAN, MARANTZ, ORLANSKI,
COOPER & KLEIN
---------------------------------
Freshman, Marantz, Orlanski,
Cooper & Klein
<PAGE> 1
EXHIBIT 10.61
EMPLOYMENT AND NON-DISCLOSURE AGREEMENT
THIS EMPLOYMENT AND NON-DISCLOSURE AGREEMENT is made effective as of
the 15th day of August, 1996, by and between UStel, Inc. ("Employer"), and
Robert L. B. Diener, 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 the date first set forth above;
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 pricing, strategy, product and service marketing plans,
customer needs and peculiarities, and customer lists and confidential
information regarding Employer's business 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. Employer hereby employs
Employee and Employee hereby agrees to perform the services of President, Chief
Executive Officer and director through December 31, 1996 and from December 31,
1996 through the term of this agreement, the services of Chairman and Chief
Executive Officer, with the duties consistent therewith. Employee agrees to
devote substantially all of his working hours to rendering the services for
which Employee has been hired. Employee shall render his services to Employer
by and subject to the instructions and directions of Employer's Board of
Directors to whom Employee shall directly report.
- 1 -
<PAGE> 2
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 (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) Upon dissolution and termination of the
Employer;
(c) 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 or neglect in the performance
of his duties under this Agreement or has refused or failed to effectively
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;
(e) By Employee if both of the following occur:
in the event of a change of control of Employer of the type as would be
required to be reported under Form 8-k of the Securities Exchange Act of 1934,
and a change in the services Employee is to perform, if such change in services
is unacceptable to Employee.
- 2 -
<PAGE> 3
2.3 Except for the remaining obligations set forth in
Sections 4, 5, 6 and 7 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 due and owing to Employee
as of the Termination Date.
2.4 Except for the remaining obligations set forth in
Sections 4, 5, 6 and 7 herein, in the event that Employee's employment is
terminated pursuant to Section 2.2(e) (the date when such termination occurs
being herein referred to as the Termination Date"), 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) all such compensation as would be due
pursuant to Section 3.1(a) for the period from the Termination Date to the date
which is two years from the Termination Date, or to the balance of the Term,
which ever is longer;
(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
owing 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.
Except as set forth in Section 2.2(e), in the event
of any such merger, transfer of assets or capital stock, dissolution,
liquidation, or consolidation, the surviving corporation or transferee, as the
case may be, Employee shall be bound by and
- 3 -
<PAGE> 4
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 salary of Two Hundred Thousand Dollars
($200,000) per year ("Salary"), payable in equal installments semi monthly on
those days when Employer normally pays its employees, said Salary to be subject
to annual review;
(b) A bonus to be determined at the discretion of
the Board of Directors of Employer;
(c) Employee shall be entitled to three (3) weeks
paid vacation per year;
(d) Employer shall be entitled to participate in
Employee incentive stock options, such options to be determined by the Board of
Directors in their discretion.
(e) Employer agrees to provide Employee with
insurance and health coverages and other benefits generally available to other
employees of similar rank of Employer;
(f) Reimbursement for out-of-pocket expenses
incurred by Employee on behalf of Employer; and
(g) 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.
4. 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
- 4 -
<PAGE> 5
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%) 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.
5. 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.
6. 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.
7. 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.
8. Reference Provision
(a) Each controversy, dispute or claim between the parties
arising out of or relating to this Agreement, which controversy, dispute or
claim is not settled in writing within thirty (30) days after the "Claim Date"
(defined as the date on which a party subject to the Agreement gives written
notice to the other that a controversy, dispute or claim exists), will be
settled by binding arbitration in Los Angeles, California in accordance with
the provisions of the American Arbitration Association, which shall constitute
the exclusive remedy for the settlement of any controversy, dispute or claim,
- 5 -
<PAGE> 6
and the parties waive their rights to initiate any legal proceedings against
each other in any court or jurisdiction other than the Superior Court of Los
Angeles (the "Court"). Any decision rendered by the arbitrator and such
arbitration will be final, binding and conclusive and judgment shall be entered
pursuant to CCP Section 644 in any court in the State of California having
jurisdiction.
(b) Except as expressly set forth in this Agreement, the
arbitrator shall determine the manner in which the proceeding is conducted,
including the time and place of all hearings, the order of presentation of
evidence, and all other questions that arise with respect to the course of the
proceeding. All proceedings and hearings conducted before the arbitrator,
except for trial, shall be conducted without a court reporter, except that when
any party so requests, a court reporter will be used at any hearing conducted
before the arbitrator. The party making such a request shall have the
obligation to arrange for any pay for the court reporter. The costs of the
court reporter shall be borne equally by the parties.
(c) The arbitrator shall be required to determine all
issues in accordance with existing case law and the statutory laws of the State
of California. The rules of evidence applicable to proceedings at law in the
State of California will be applicable to the reference proceeding. The
arbitrator shall be empowered to enter equitable as well as legal relief, to
provide all temporary and/or provisional remedies and to enter equitable orders
that will be binding upon the parties. The arbitrator shall issue a single
judgement at the close of the proceeding which shall dispose of all of the
claims of the parties that are the subject of the proceeding. The parties
hereto expressly reserve the right to contest or appeal from the final judgment
or any appealable order or appealable judgement entered by the arbitrator. The
parties hereto expressly reserve the right to findings of fact, conclusions of
law, a written statement of decision, and the right to move for a new trial or
a different judgment, which new trial, if granted, is also to be a proceeding
governed under this provision.
9. Binding Agreement
This Agreement shall inure to the benefit of and shall be
binding upon Employer, its successors and assigns.
10. 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.
11. 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
- 6 -
<PAGE> 7
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.
12. Governing Law
This Agreement shall be governed and construed in accordance
with the laws of the State of California.
13. 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:
Jerry Dackerman, President
UStel, Inc.
2775 South Rainbow Boulevard, Suite 102
Las Vegas, Nevada
Telephone: (702) 247-7400
Facsimile: (702) 247-7447
If to the Employee, to:
Robert L.B. Diener
P.O. Box 2011
Avon, CO 81620
Telephone: (970) 845-8002
Facsimile: (970) 845-8129
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.
14. 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
- 7 -
<PAGE> 8
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: Jerry Dackerman
Title: President
"EMPLOYEE"
/s/ ROBERT L.B. DIENER
------------------------------
Robert L.B. Diener
- 8 -
<PAGE> 1
EXHIBIT 10.62
EMPLOYMENT AND NON-DISCLOSURE AGREEMENT
THIS EMPLOYMENT AND NON-DISCLOSURE AGREEMENT is made effective as of
the 15th day of August, 1996, by and between UStel, Inc. ("Employer"), and
Jerry Dackerman, 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 the date first set forth above;
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 pricing, strategy, product and service marketing plans,
customer needs and peculiarities, and customer lists and confidential
information regarding Employer's business 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. Employer hereby employs
Employee and Employee hereby agrees to perform the services of Executive Vice
President Sales and director through December 31, 1996 and from December 31,
1996 through the Term of this Agreement, the services of President and Chief
Operating Officer, with the duties consistent therewith. Employee agrees to
devote substantially all of his working hours to rendering the services for
which Employee has been hired, recognizing that until the merger between
Employer and C-2000, Inc., is completed, Employee will also devote a portion of
his time in the service of C-2000, Inc. 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 -
<PAGE> 2
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 (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) Upon dissolution and termination of the
Employer;
(c) 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 or neglect in the performance
of his duties under this Agreement or has refused or failed to effectively
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;
(e) By Employee if both of the following occur:
in the event of a change of control of Employer of the type as would be
required to be reported under Form 8-k of the Securities Exchange Act of 1934,
and a change in the services Employee is to perform, if such change in services
is unacceptable to Employee.
- 2 -
<PAGE> 3
2.3 Except for the remaining obligations set forth in
Sections 4, 5, 6 and 7 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 due and owing to Employee
as of the Termination Date.
2.4 Except for the remaining obligations set forth in
Sections 4, 5, 6 and 7 herein, in the event that Employee's employment is
terminated pursuant to Section 2.2(e) (the date when such termination occurs
being herein referred to as the "Termination Date"), 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) all such compensation as would be due
pursuant to Section 3.1(a) for the period from the Termination Date to the date
which is two years from the Termination Date, or to the balance of the Term,
which ever is longer;
(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
owing 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
Except as set forth in Section 2.2(e), in the event
of any such merger, transfer of assets or capital stock, dissolution,
liquidation, or consolidation, the surviving corporation or transferee, as the
case may be, Employee 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 salary of One Hundred Eighty Thousand
Dollars ($180,000) per year ("Salary"), payable in equal installments semi
monthly on those days when Employer normally pays its employees, said Salary to
be subject to annual review;
(b) A bonus to be determined at the discretion of
the Board of Directors of Employer;
(c) Employee shall be entitled to three (3) weeks
paid vacation per year;
(d) Employer shall be entitled to participate in
Employee incentive stock options, such options to be determined by the Board of
Directors in their discretion.
(e) Employer agrees to provide Employee with
insurance and health coverages and other benefits generally available to other
employees of similar rank of Employer;
(f) Reimbursement for out-of-pocket expenses
incurred by Employee on behalf of Employer; and
(g) 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.
4. 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,
- 4 -
<PAGE> 5
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, with the exception of
C-2000, Inc.
(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.
5. 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.
6. 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.
7. 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.
8. Reference Provision
(a) Each controversy, dispute or claim between the parties
arising out of or relating to this Agreement, which controversy, dispute or
claim is not settled in writing within thirty (30) days after the "Claim Date"
(defined as the date on which a party subject to the Agreement gives written
notice to the other that a controversy, dispute or claim exists), will be
settled by binding arbitration in Los Angeles, California
- 5 -
<PAGE> 6
in accordance with the provisions of the American Arbitration Association,
which shall constitute the exclusive remedy for the settlement of any
controversy, dispute or claim, and the parties waive their rights to initiate
any legal proceedings against each other in any court or jurisdiction other
than the Superior Court of Los Angeles (the "Court"). Any decision rendered by
the arbitrator and such arbitration will be final, binding and conclusive and
judgment shall be entered pursuant to CCP Section 644 in any court in the State
of California having jurisdiction.
(b) Except as expressly set forth in this Agreement, the
arbitrator shall determine the manner in which the proceeding is conducted,
including the time and place of all hearings, the order of presentation of
evidence, and all other questions that arise with respect to the course of the
proceeding. All proceedings and hearings conducted before the arbitrator,
except for trial, shall be conducted without a court reporter, except that when
any party so requests, a court reporter will be used at any hearing conducted
before the arbitrator. The party making such a request shall have the
obligation to arrange for any pay for the court reporter. The costs of the
court reporter shall be borne equally by the parties.
(c) The arbitrator shall be required to determine all
issues in accordance with existing case law and the statutory laws of the State
of California. The rules of evidence applicable to proceedings at law in the
State of California will be applicable to the reference proceeding. The
arbitrator shall be empowered to enter equitable as well as legal relief, to
provide all temporary and/or provisional remedies and to enter equitable orders
that will be binding upon the parties. The arbitrator shall issue a single
judgement at the close of the proceeding which shall dispose of all of the
claims of the parties that are the subject of the proceeding. The parties
hereto expressly reserve the right to contest or appeal from the final judgment
or any appealable order or appealable judgement entered by the arbitrator. The
parties hereto expressly reserve the right to findings of fact, conclusions of
law, a written statement of decision, and the right to move for a new trial or
a different judgment, which new trial, if granted, is also to be a proceeding
governed under this provision.
9. Binding Agreement
This Agreement shall inure to the benefit of and shall be
binding upon Employer, its successors and assigns.
10. 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.
- 6 -
<PAGE> 7
11. 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.
12. Governing Law
This Agreement shall be governed and construed in accordance
with the laws of the State of California.
13. 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, Chairman
UStel, Inc.
2775 South Rainbow Boulevard, Suite 102
Las Vegas, Nevada
Telephone: (702) 247-7400
Facsimile: (702) 247-7447
If to the Employee, to:
Jerry Dackerman
_________________________________________
_________________________________________
Telephone: ( )
Facsimile: ( )
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.
- 7 -
<PAGE> 8
14. 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: ROBERT L.B. DIENER
----------------------------
Name: Robert L.B. Diener
Title: Chairman and Chief
Executive Officer
"EMPLOYEE"
-------------------------------
Jerry Dackerman
- 8 -
<PAGE> 1
EXHIBIT 10.63
EMPLOYMENT AND NON-DISCLOSURE AGREEMENT
THIS EMPLOYMENT AND NON-DISCLOSURE AGREEMENT is made effective as of
the 15th day of August, 1996, by and between UStel, Inc. ("Employer"), and
Wouter van Biene, 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 the date first set forth above;
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 pricing, strategy, product and service marketing plans,
customer needs and peculiarities, and customer lists and confidential
information regarding Employer's business 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. Employer hereby employs
Employee and Employee hereby agrees to perform the services of Executive Vice
President, Chief Financial Officer and Secretary, with the duties consistent
therewith. Employee agrees to devote substantially all of his working hours to
rendering the services for which Employee has been hired, recognizing that
until the merger between Employer and C-2000, Inc., is completed, Employee
will also devote a portion of his time in the service of C-2000, Inc. 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 -
<PAGE> 2
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 (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) Upon dissolution and termination of the
Employer;
(c) 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 or neglect in the performance
of his duties under this Agreement or has refused or failed to effectively
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;
(e) By Employee if both of the following occur:
in the event of a change of control of Employer of the type as would be
required to be reported under Form 8-k of the Securities Exchange Act of 1934,
and a change in the services Employee is to perform, if such change in services
is unacceptable to Employee.
- 2 -
<PAGE> 3
2.3 Except for the remaining obligations set forth in
Sections 4, 5, 6 and 7 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 due and owing to Employee
as of the Termination Date.
2.4 Except for the remaining obligations set forth in
Sections 4, 5, 6 and 7 herein, in the event that Employee's employment is
terminated pursuant to Section 2.2(e) (the date when such termination occurs
being herein referred to as the "Termination Date"), 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) all such compensation as would be due
pursuant to Section 3.1(a) for the period from the Termination Date to the date
which is two years from the Termination Date, or the balance of the Term, which
ever is longer;
(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
owing 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
Except as set forth in Section 2.2(e), in the event
of any such merger, transfer of assets or capital stock, dissolution,
liquidation, or consolidation, the surviving corporation or transferee, as the
case may be, Employee 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 salary of One Hundred Eighty Thousand
Dollars ($140,000) per year ("Salary"), payable in equal installments semi
monthly on those days when Employer normally pays its employees, said Salary to
be subject to annual review;
(b) A bonus to be determined at the discretion of
the Board of Directors of Employer;
(c) Employee shall be entitled to three (3) weeks
paid vacation per year;
(d) Employer shall be entitled to participate in
Employee incentive stock options, such options to be determined by the Board of
Directors in their discretion.
(e) Employer agrees to provide Employee with
insurance and health coverages and other benefits generally available to other
employees of similar rank of Employer;
(f) Reimbursement for out-of-pocket expenses
incurred by Employee on behalf of Employer; and
(g) 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.
4. 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,
- 4 -
<PAGE> 5
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, with the exception of
C-2000, Inc.
(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.
5. 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.
6. 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.
7. 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.
8. Reference Provision
(a) Each controversy, dispute or claim between the parties
arising out of or relating to this Agreement, which controversy, dispute or
claim is not settled in writing within thirty (30) days after the "Claim Date"
(defined as the date on which a party subject to the Agreement gives written
notice to the other that a controversy, dispute or claim exists), will be
settled by binding arbitration in Los Angeles, California
- 5 -
<PAGE> 6
in accordance with the provisions of the American Arbitration Association,
which shall constitute the exclusive remedy for the settlement of any
controversy, dispute or claim, and the parties waive their rights to initiate
any legal proceedings against each other in any court or jurisdiction other
than the Superior Court of Los Angeles (the "Court"). Any decision rendered by
the arbitrator and such arbitration will be final, binding and conclusive and
judgment shall be entered pursuant to CCP Section 644 in any court in the State
of California having jurisdiction.
(b) Except as expressly set forth in this Agreement, the
arbitrator shall determine the manner in which the proceeding is conducted,
including the time and place of all hearings, the order of presentation of
evidence, and all other questions that arise with respect to the course of the
proceeding. All proceedings and hearings conducted before the arbitrator,
except for trial, shall be conducted without a court reporter, except that when
any party so requests, a court reporter will be used at any hearing conducted
before the arbitrator. The party making such a request shall have the
obligation to arrange for any pay for the court reporter. The costs of the
court reporter shall be borne equally by the parties.
(c) The arbitrator shall be required to determine all
issues in accordance with existing case law and the statutory laws of the State
of California. The rules of evidence applicable to proceedings at law in the
State of California will be applicable to the reference proceeding. The
arbitrator shall be empowered to enter equitable as well as legal relief, to
provide all temporary and/or provisional remedies and to enter equitable orders
that will be binding upon the parties. The arbitrator shall issue a single
judgement at the close of the proceeding which shall dispose of all of the
claims of the parties that are the subject of the proceeding. The parties
hereto expressly reserve the right to contest or appeal from the final judgment
or any appealable order or appealable judgement entered by the arbitrator. The
parties hereto expressly reserve the right to findings of fact, conclusions of
law, a written statement of decision, and the right to move for a new trial or
a different judgment, which new trial, if granted, is also to be a proceeding
governed under this provision.
9. Binding Agreement
This Agreement shall inure to the benefit of and shall be
binding upon Employer, its successors and assigns.
10. 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.
- 6 -
<PAGE> 7
11. 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.
12. Governing Law
This Agreement shall be governed and construed in accordance
with the laws of the State of California.
13. 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, Chairman
UStel, Inc.
2775 South Rainbow Boulevard, Suite 102
Las Vegas, Nevada
Telephone: (702) 247-7400
Facsimile: (702) 247-7447
If to the Employee, to:
Wouter van Biene
_________________________________________
_________________________________________
Telephone: ( )
Facsimile: ( )
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.
- 7 -
<PAGE> 8
14. 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: ROBERT L. B. DIENER
----------------------------
Name: Robert L.B. Diener
Title: Chairman and Chief
Executive Officer
"EMPLOYEE"
WOUTER VAN BIENE
-----------------------------
Wouter van Biene
- 8 -
<PAGE> 1
EXHIBIT 10.64
INDEMNIFICATION AGREEMENT
This Indemnification Agreement is entered into as this 15th day of
August 1996, by and between Robert L.B. Diener (hereinafter referred to as
"Officer") and UStel, Inc. a Minnesota corporation (hereinafter the "Company")
with reference to the following facts:
1. WHEREAS, Officer is employed with the Company;
2. WHEREAS, the Company and Officer agree that the Company should
indemnify Officer and hold him harmless in connection with any claims, damages
or liabilities that might arise as a result of the performance of his duties as
an Officer of the Company.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
For valuable consideration, the Company hereby agrees to indemnify,
protect, defend and hold the Officer harmless in connection with any claims,
liabilities, expenses, obligations, indebtness and/or damages of any kind or
nature including attorneys fees, arising out of or connected with the
performance of the duties of the Officer to the Company, to the fullest extent
permitted by law. In the event the Officer must bring an action or seek the
services of an attorney to enforce these provisions, the Company shall further
pay all of the Officers legal expenses and costs in connection with enforcing
this Indemnification Agreement.
IN WITNESS WHEREOF, this agreement is entered into as of the date
first above written.
USTEL, INC.
By:
--------------------------
OFFICER
--------------------------
<PAGE> 1
EXHIBIT 10.65
INDEMNIFICATION AGREEMENT
This Indemnification Agreement is entered into as this 15th day of
August 1996, by and between Jerry Dackerman (hereinafter referred to as
"Officer") and UStel, Inc. a Minnesota corporation (hereinafter the "Company")
with reference to the following facts:
1. WHEREAS, Officer is employed with the Company;
2. WHEREAS, the Company and Officer agree that the Company should
indemnify Officer and hold him harmless in connection with any claims, damages
or liabilities that might arise as a result of the performance of his duties as
an Officer of the Company.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
For valuable consideration, the Company hereby agrees to indemnify,
protect, defend and hold the Officer harmless in connection with any claims,
liabilities, expenses, obligations, indebtness and/or damages of any kind or
nature including attorneys fees, arising out of or connected with the
performance of the duties of the Officer to the Company, to the fullest extent
permitted by law. In the event the Officer must bring an action or seek the
services of an attorney to enforce these provisions, the Company shall further
pay all of the Officers legal expenses and costs in connection with enforcing
this Indemnification Agreement.
IN WITNESS WHEREOF, this agreement is entered into as of the date
first above written.
USTEL, INC.
By:
--------------------------
OFFICER
--------------------------
<PAGE> 1
EXHIBIT 10.66
INDEMNIFICATION AGREEMENT
This Indemnification Agreement is entered into as this 15th day of
August 1996, by and between Wouter van Biene (hereinafter referred to as
"Officer") and UStel, Inc. a Minnesota corporation (hereinafter the "Company")
with reference to the following facts:
1. WHEREAS, Officer is employed with the Company;
2. WHEREAS, the Company and Officer agree that the Company should
indemnify Officer and hold him harmless in connection with any claims, damages
or liabilities that might arise as a result of the performance of his duties as
an Officer of the Company.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
For valuable consideration, the Company hereby agrees to indemnify,
protect, defend and hold the Officer harmless in connection with any claims,
liabilities, expenses, obligations, indebtness and/or damages of any kind or
nature including attorneys fees, arising out of or connected with the
performance of the duties of the Officer to the Company, to the fullest extent
permitted by law. In the event the Officer must bring an action or seek the
services of an attorney to enforce these provisions, the Company shall further
pay all of the Officers legal expenses and costs in connection with enforcing
this Indemnification Agreement.
IN WITNESS WHEREOF, this agreement is entered into as of the date
first above written.
USTEL, INC.
By:
--------------------------
OFFICER
--------------------------
<PAGE> 1
EXHIBIT 10.67
B C CAPITAL CORP
201 S. Biscayne Blvd.
Suite 2950
Miami, FL 33131
Tel: (305) 536-8500
THIS FINANCIAL CONSULTING AGREEMENT, made as of this ___ day of
_________, 1997, is by and between UStel, Inc., a Minnesota corporation (the
"Company"), with its principal place of business at 2775 South Rainbow
Boulevard, Suite 102, Las Vegas, Nevada 89102 and B C Capital Corp., a Florida
corporation and an affiliate of Barber & Bronson Incorporated ("B C Capital"),
having its principal place of business at 201 S. Biscayne Blvd., Suite 2950,
Miami, Florida 33131.
R E C I T A L S:
- - - - - - - -
A. The Company is a public company with a class of equity
securities publicly traded, and desires to retain B C Capital to provide
certain financial consulting services.
B. B C Capital desires to provide certain financial consulting
services to the Company in accordance with the terms and conditions contained
hereinafter.
NOW, THEREFORE, in consideration of the mutual promises set forth
herein, the parties hereto hereby agree as follows:
1. CONSULTING SERVICES. During the term of this Agreement, B C
Capital is hereby retained by the Company to provide financial consulting
services to the Company, as said services relate to corporate finance matters.
B C Capital shall provide such financial consulting services as reasonably
requested by the Company during the term of this Agreement, provided that
nothing hereunder shall require B C Capital to devote a minimum number of hours
per calendar month toward the performance of services hereunder. Unless
otherwise agreed to by B C Capital, all services hereunder shall be performed
by B C Capital, in its sole discretion, at its principal place of business or
other offices. Notwithstanding anything contained herein to the contrary, the
services to be performed by B C Capital hereunder may be performed by any
employee of or consultant to B C Capital.
2. TERM. The term of this Agreement shall be for three years
commencing as of the date first written above and terminating one day prior to
the third anniversary hereof. Thereafter, this Agreement shall be renewed for
subsequent one year terms upon mutual agreement of the parties.
<PAGE> 2
-2-
3. COMPENSATION. In consideration for the performance of services
hereunder, the Company hereby agrees to pay B C Capital the aggregate sum of one
percent (1%) of the gross proceeds raised in the public offering of the
Company's securities (the "Public Offering") pursuant to the Prospectus which
comprises part of Registration No. 333-12981 filed with the Securities and
Exchange Commission. Such amount shall be paid upon the closing of the Public
Offering.
4. FINDER'S FEE. In the event the Company effectuates a corporate
restructuring, merger, joint venture, acquisition or similar transaction,
subsequent to the date hereof and on or prior to one year from the date of
termination of this Agreement, irrespective of any reason for such termination,
then the Company hereby agrees to pay B C Capital the following cash
consideration, which payment shall be due and payable in cash on the date of
any such closing with respect thereto:
5% of the consideration from $1 and up to $5,000,000, plus
4% of the consideration in excess of $5,000,000 and up to
$10,000,000, plus
3% of the consideration in excess of $10,000,000 and up to
$15,000,000, plus
2% of the consideration in excess of $15,000,000 and up to
$20,000,000, plus
1% of the consideration paid in excess of $20,000,000.
For purposes of this Agreement, "consideration" shall mean the value of
the transaction described herein and shall include all cash, the principal of
any notes executed as part of the purchase price for such acquisition, the
value, as determined by the mutual agreement of the Board of Directors of the
Company and B C Capital, of any securities paid or exchanged in connection with
the transaction, and the amounts of any loans or other obligations owed by the
acquired entity and which are paid or assumed by the acquiring entity as part
of the purchase price for the acquisition.
In the event B C Capital (or its affiliate) agrees to assist the Company
in raising equity and/or debt to finance an acquisition, the parties hereto
hereby agree that the compensation to be paid to B C Capital (or its affiliate)
for said assistance shall be the subject of an agreement, the terms of which are
to be mutually agreed to by and between the parties hereto.
5. RIGHT OF FIRST REFUSAL. For a period of three years from the
date of this Agreement, the Company hereby grants to Barber & Bronson,
Incorporated ("Barber & Bronson") the right to act as the Company's exclusive
managing underwriter or placement agent, as the case may be, in any public
offering(s) and/or any private placement(s) to be effectuated by or on behalf
of the Company or any subsidiary or affiliate, on such terms no less favorable
than any other underwriter, broker-dealer, or placement agent, and with such
compensation to be determined on a deal-by-deal basis. In the event Barber &
Bronson elects not to participate in any such financing and the terms thereof
are then subsequently changed, the Company shall grant Barber & Bronson the
opportunity to act as the exclusive managing underwriter or placement agent, as
the case may be, in any such financing as modified. Notwithstanding
B C CAPITAL CORP.
<PAGE> 3
-3-
anything contained in this Section 5 to the contrary, nothing hereunder shall
obligate Barber & Bronson to participate in any such financing.
6. REPRESENTATIONS OF THE COMPANY. The Company hereby represents
and warrants that any and all information supplied hereunder to B C Capital in
connection with any and all services to be performed hereunder by B C Capital
for and on behalf of the Company shall be true, complete and correct as of the
date of such dissemination and shall not fail to state a material fact not
necessary to make any of such information not misleading. The Company hereby
acknowledges that the ability of B C Capital to adequately provide financial
consulting services hereunder is dependent upon the prompt dissemination of
accurate, correct and complete information to B C Capital. The Company further
represents and warrants hereunder that this Agreement and the transactions
contemplated hereunder, including the issuance of the warrants hereunder, have
been duly and validly authorized by all requisite corporate action; that the
Company has the full right, power and capacity to execute, deliver and perform
its obligations hereunder; and that this Agreement, upon execution and delivery
of the same by the Company, will represent the valid and binding obligation of
the Company enforceable in accordance with its terms. The representations and
warranties set forth herein shall survive the termination of this Agreement.
7. INDEMNIFICATION. See Exhibit A attached hereto.
8. CONFIDENTIALITY. See Exhibit A attached hereto.
9. INDEPENDENT CONTRACTOR. See Exhibit A attached hereto.
10. AMENDMENT. No modification, waiver, amendment, discharge or
change of this Agreement shall be valid unless the same is evidenced by a
written instrument, executed by the party against which such modification,
waiver, amendment, discharge, or change is sought.
11. NOTICES. All notices, demands or other communications given
hereunder shall be in writing and shall be deemed to have been duly given when
delivered in person or transmitted by facsimile transmission or on the third
calendar day after being mailed by United States registered or certified mail,
return receipt requested, postage prepaid, to the addresses herein above first
mentioned or to such other address as any party hereto shall designate to the
other for such purpose in the manner hereinafter set forth.
12. ENTIRE AGREEMENT. This Agreement contains all of the
understandings and agreements of the parties with respect to the subject matter
discussed herein. All prior agreements, whether written or oral, are merged
herein and shall be of no force or effect.
13. SEVERABILITY. The invalidity, illegality or unenforceability
of any provision or provisions of this Agreement will not affect any other
provision of this Agreement, which will remain in full force and effect, nor
will the invalidity, illegality or unenforceability of a portion of any
provision of this Agreement affect the balance of such provision. In the event
hat any one or more of the provisions contained in this Agreement or any
portion thereof shall for any
B C CAPITAL CORP.
<PAGE> 4
-4-
reason be held to be invalid, illegal or unenforceable in any respect, this
Agreement shall be reformed, construed and enforced as if such invalid, illegal
or unenforceable provision had never been contained herein.
14. CONSTRUCTION AND ENFORCEMENT. This Agreement shall be
construed in accordance with the laws of the State of Florida, without
application of the principles of conflicts of laws. If it becomes necessary
for any party to institute legal action to enforce the terms and conditions of
this Agreement, the successful party will be awarded reasonable attorneys' fees
at all trial and appellate levels, expenses and costs.
15. BINDING NATURE. The terms and provisions of this Agreement
shall be binding upon and inure to the benefit of the parties, and their
respective successors and assigns.
16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, including facsimile signatures which shall be deemed as original
signatures. All executed counterparts shall constitute one Agreement,
notwithstanding that all signatories are not signatories to the original or the
same counterpart.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
UStel, Inc., a Minnesota corporation
By:
---------------------------------------
Name:
Title:
B C Capital Corp., a Florida corporation
By:
---------------------------------------
James S. Cassel, President
B C CAPITAL CORP.
<PAGE> 5
EXHIBIT A
INDEMNIFICATION; CONFIDENTIALITY; AND INDEPENDENT CONTRACTOR STATUS
1. (a) The Company hereby agrees to indemnify, defend and hold
harmless B C Capital, its officers, directors, principals, employees,
affiliates, and shareholders, and their successors and assigns from and against
any and all claims, damages, losses, liability, deficiencies, actions, suits,
proceedings, costs or legal expenses (collectively the "Losses") arising out
of or resulting from: (i) any breach of a representation, or warranty by the
Company contained in the attached Agreement; or (ii) any activities or services
performed hereunder by B C Capital, unless such Losses were the result of the
gross negligence, intentional misconduct or gross misconduct of B C Capital or
were the result of any information supplied by B C Capital; or (iii) any and
all costs and expenses (including reasonable attorneys' and paralegals' fees)
related to the foregoing, and as more fully described below.
(b) If B C Capital receives written notice of the commencement
of any legal action, suit or proceeding with respect to which the Company is or
may be obligated to provide indemnification pursuant to this Paragraph, B C
Capital shall, within thirty (30) days of the receipt of such written notice,
give the Company written notice thereof (a "Claim Notice"). Failure to give
such Claim Notice within such thirty (30) day period shall not constitute a
waiver by B C Capital of its right to indemnity hereunder with respect to such
action, suit or proceeding, unless the defense thereof is prejudiced thereby.
Upon receipt by the Company of a Claim Notice from B C Capital with respect to
any claim for indemnification which is based upon a claim made by a third party
("Third Party Claim"), the Company may assume the defense of the Third Party
Claim with counsel of its own choosing, as described below. B C Capital shall
cooperate in the defense of the Third Party Claim and shall furnish such
records, information and testimony and attend all such conferences, discovery
proceedings, hearings, trial and appeals as may be reasonably required in
connection therewith. B C Capital shall have the right to employ its own
counsel in any such action, but the fees and expenses of such counsel shall be
at the expense of B C Capital unless the Company shall not have with reasonable
promptness employed counsel to assume the defense of the Third Party Claim, in
which event such fees and expenses shall be borne solely by the Company. The
Company shall not satisfy or settle any Third Party Claim for which
indemnification has been sought and is available hereunder, without the prior
written consent of B C Capital, which consent shall not be unreasonably
withheld or delayed and which shall not be required if B C Capital is granted a
release in connection therewith. If the Company shall fail with reasonable
promptness to defend such Third Party Claim, B C Capital may defend, satisfy or
settle the Third Party Claim at the expense of the Company (but subject to its
consent which shall not be unreasonably withheld) and the Company shall pay to
B C Capital the amount of any such Loss within ten (10) days after written
demand therefor. The indemnification provisions hereunder shall survive the
termination of the attached Agreement.
2. B C Capital agrees that all non-public information pertaining
to the prior, current or contemplated business of the Company are valuable and
confidential assets of the Company. Such information shall include, without
limitation, information relating to customer lists, bidding procedures,
intellectual property, patents, trademarks, trade secrets, financing techniques
and sources and such financial statements of the Company as are not
B C CAPITAL CORP.
<PAGE> 6
-6-
available to the public. B C Capital, its officers, directors, employees,
agents and shareholders shall hold all such information in trust and confidence
for the Company and shall not use or disclose any such information for other
than the Company's business and shall be liable for damages incurred by the
Company as a result of the use or disclosure of such information by B C
Capital, its officers, directors, employees, agents or shareholders for any
purpose other than the Company's business, except (i) where such information is
publicly available or later becomes publicly available other than through a
breach of the attached Agreement, or (ii) where such information is
subsequently lawfully obtained by B C Capital from a third party or parties, or
(iii) if such information is known to B C Capital prior to the execution of the
attached Agreement, or (iv) as may be required by law. The terms of this
Section 2 of Exhibit A shall survive the termination of the attached Agreement.
3. It is expressly understood and agreed that B C Capital shall,
at all times, act as an independent contractor with respect to the Company and
not as an employee or agent of the Company, and nothing contained in the
attached Agreement shall be construed to create a joint venture, partnership,
association or other affiliation, or like relationship, between the parties.
It is specifically agreed that the relationship is and shall remain that of
independent parties to a contractual relationship and that B C Capital shall
have no right to bind the Company in any manner. In no event shall either
party be liable for the debts or obligations of the other except as otherwise
specifically provided in the attached Agreement. B C Capital shall not have
any claim under the attached Agreement, or otherwise against the Company for
vacation pay, paid sick leave, retirement benefits, social security, worker's
compensation, health, disability, unemployment insurance benefits, or other
employee benefits of any kind. B C Capital understands and agrees that: (i) B
C Capital will not be treated as an employee of the Company for Federal tax
purposes; (ii) the Company will not withhold on B C Capital's behalf any sums
for income tax, unemployment insurance, social security or any other
withholding pursuant to any law or requirement of any governmental body, or
make available any of the benefits afforded to employees of the Company; (iii)
all of such payments, withholdings or benefits, if any, are B C Capital's sole
responsibility; and (iv) B C Capital will indemnify and hold harmless the
Company from any and all loss or liability arising fro its failure to make such
payments, withholdings and benefits, if any. In the event the Internal Revenue
Service or any other governmental agency should question or challenge B C
Capital's independent contractor status, the parties hereby agree that both B C
Capital and the Company shall have the right to participate in any discussion
or negotiation occurring with such agency or agencies, regardless of with whom
or by whom such discussions or negotiations are initiated.
B C CAPITAL CORP.
<PAGE> 1
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
Registration Statement on Amendment No. 3 to 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.
/s/ BDO SEIDMAN, LLP
--------------------------------------
BDO SEIDMAN, LLP
Los Angeles, California
February 7, 1997
<PAGE> 1
EXHIBIT 23.3
ANN GRAHAM EHRINGER, PhD
24402 Malibu Road
Malibu, CA 90265
310 456-3810
February 9, 1997
Robert L. B. Diener
Chairman, Board of Directors
UStel, Inc.
2775 South Rainbow Boulevard
Las Vegas, NV 89102
Dear Robert:
This letter will serve as my consent to appointment to the Board of Directors
of UStel, Inc. following the completion of the Company's currently pending
secondary equity offering.
I look forward to working with you and the other members of the Board.
Yours very truly,
/s/ Ann Ehringer
- ----------------------------
Ann Graham Ehringer, PhD
