<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1998.
REGISTRATION NO. 333-47045.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3 TO
FORM SB-2 ON
FORM S-1 REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COLORADO 4813 84-1238018
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
8 SOUTH NEVADA AVENUE, SUITE 200 ROBERT A. SPADE, CHIEF EXECUTIVE
COLORADO SPRINGS, COLORADO 80903 OFFICER
(719) 471-3332 8 SOUTH NEVADA AVENUE, SUITE 200
(ADDRESS, INLUDING ZIP CODE, AND COLORADO SPRINGS, COLORADO 80903
TELEPHONE NUMBER, INCLUDING AREA (719) 471-3332
CODE, OF REGISTRANT'S PRINCIPAL (NAME, ADDRESS, INCLUDING ZIP CODE,
EXECUTIVE OFFICES) AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
Copies to:
DOUGLAS R. WRIGHT, ESQ. ROBERT W. WALTER, ESQ.
JEFFREY A. SHERMAN, ESQ. BERLINER ZISSER WALTER & GALLEGOS, P.C.
PARCEL, MAURO & SPAANSTRA, P.C. 1700 LINCOLN
1801 CALIFORNIA STREET, SUITE 3600 SUITE 4700
DENVER, COLORADO 80202 DENVER, COLORADO 80203
(303) 292-6400 (303) 830-1700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED OFFERING PRICE FEE (1)
- ------------------------------------------------------------------------------
<S> <C> <C>
Common Stock(2)................................ $36,800,000 $10,856.00
- ------------------------------------------------------------------------------
Common Stock(3)................................ $ 9,529,160 $ 2,811.10
- ------------------------------------------------------------------------------
Representatives' Warrants(4)................... $ -- $ -- (5)
- ------------------------------------------------------------------------------
Common Stock Underlying Representatives'
Warrants(6)................................... $ 3,840,000 $ 1,132.80
- ------------------------------------------------------------------------------
TOTAL.......................................... $50,169,160 $14,799.90
- ------------------------------------------------------------------------------
AMOUNT PREVIOUSLY PAID........................................ $13,218.83
- ------------------------------------------------------------------------------
AMOUNT OWED................................................... $ 1,581.07
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Calculated pursuant to Rule 457 of the rules and regulations promulgated
under the Securities Act of 1933, as amended.
(2) These shares will be offered to the public in the registrant's public
offering (including 600,000 shares that the representatives of the
underwriters (the "Representatives") have the option to purchase from the
registrant to cover over-allotments, if any).
(3) These shares consist of the Registered Securityholders' Shares which will
be offered to the public by the Registered Securityholders. The number of
such shares is estimated solely for the purpose of calculating the
Registration Fee.
(4) The registrant will issue to the Representatives at the closing of this
offering warrants to purchase 400,000 shares of Common Stock (the
"Representatives' Warrants").
(5) No fee pursuant to Rule 457(g).
(6) These shares of Common Stock are issuable upon exercise of the
Representatives' Warrants. An indeterminate number of additional shares
of Common Stock are registered hereunder which may be issued as provided
in the Representatives' Warrants in the event that the provisions against
dilution in the Representatives' Warrants become operative.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTES
This Registration Statement contains two prospectuses: one related to the
offering of 4,000,000 shares of Common Stock (the "Common Stock") by CSI and
certain Selling Shareholders (the "Prospectus"); and one relating to the
offering of 1,191,145 shares of Common Stock by certain securityholders who
were granted registration rights (the "Registered Securityholders'
Prospectus"). Following the Prospectus are certain substitute pages of the
Registered Securityholders' Prospectus, including alternate front outside and
back outside cover pages, an alternate "The Offering" section of the
"Prospectus Summary" and sections entitled "Concurrent Offering" and "Plan of
Distribution." Each of the alternate pages for the Registered Securityholder
Prospectus included herein is labeled "Alternate Page for Registered
Securityholders' Prospectus" or "Additional Page for Registered
Securityholders' Prospectus." All other sections of the Prospectus, other than
"Underwriting" and "Concurrent Offering," are to be used in the Registered
Securityholders' Prospectus. In addition, cross-references in the Prospectus
will be modified in the Registered Securityholders' Prospectus to refer to the
appropriate sections.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO A TIME THE REGISTRATION STATEMENT BECOMES +
+EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE +
+SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALES OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE LAWS OF ANY SUCH +
+STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION, DATED JULY 21, 1998
4,000,000 SHARES
[LOGO OF COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. APPEARS HERE]
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
COMMON STOCK
---------
Of the shares of Common Stock offered hereby, 3,778,026 shares are being sold
by Communications Systems International, Inc. ("CSI") and 221,974 shares are
being sold by certain shareholders of CSI (the "Selling Shareholders"). See
"Principal and Selling Shareholders." CSI will not receive any proceeds from
the sale of shares by the Selling Shareholders. The Common Stock is currently
traded on the OTC Bulletin Board under the symbol "CSYG." Prior to the
offering, there has been a limited public market for the Common Stock of CSI.
On July 17, 1998, the closing bid price of the Common Stock was $6.75 per
share. See "Underwriting" for a discussion of factors to be considered in
determining the offering price. Application has been made to have the Common
Stock approved for quotation on the Nasdaq SmallCap Market under the symbol
"CSGL." Following quotation on the Nasdaq SmallCap Market, the Common Stock
will no longer be quoted on the OTC Bulletin Board.
Concurrent with the offering, 1,191,145 shares of Common Stock are being
registered for offer and sale by certain Securityholders (collectively, the
"Registered Securityholders") of the Company. Such shares consist of a maximum
of shares of Common Stock and shares underlying warrants that were issued in
private placements and shares issued in connection with the exchange of certain
promissory notes (collectively, the "Registered Securityholders' Shares"). The
Registered Securityholders' Shares are not part of the underwritten offering.
Other than receipt of the exercise price of certain warrants, the Company will
not receive any proceeds from the sale of the Registered Securityholders'
Shares. In addition, the Registered Securityholders have agreed with CSI and
the Representatives not to sell or transfer the Registered Securityholders'
Shares for periods ranging from 180 days to one year following the date of this
Prospectus.
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR INFORMATION
PROSPECTIVE INVESTORS SHOULD CONSIDER.
-----------
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 COM- MISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............. $ $ $ $
- ---------------------------------------------------------------------------------------------
Total(3)............... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) CSI and the Selling Shareholders have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. CSI has also agreed to sell to the Representatives of
the Underwriters warrants to purchase 400,000 shares of Common Stock
exercisable at $ per share (the "Representatives' Warrants"). See
"Underwriting."
(2) Before deducting expenses payable by CSI estimated at $ and $ payable
by the Selling Shareholders, including the Representatives' nonaccountable
expense allowance.
(3) CSI has granted to the Underwriters a 45-day option to purchase an
aggregate of up to 600,000 additional shares of Common Stock solely to
cover over-allotments, if any. If this option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, and Proceeds
to Company and Proceeds to Selling Shareholders will be $ , $ , $
and $ , respectively. See "Underwriting."
---------
The shares of Common Stock are offered by the Underwriters subject to prior
sale when, as and if delivered to and accepted by them, and subject to the
right of the Underwriters to withdraw, cancel or modify such offer without
notice and reject orders in whole or in part. It is expected that delivery of
the certificates for the Common Stock will be made at the offices of Cruttenden
Roth Incorporated, Irvine, California or in book entry form through the book
entry facilities of The Depository Trust Company on or about , 1998.
---------
CRUTTENDEN ROTH
INCORPORATED
FERRIS, BAKER WATTS
INCORPORATED
JOHN G. KINNARD AND COMPANY
INCORPORATED
KAUFMAN BROS., L.P.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
COMBINED COMPANY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING BIDS, THE
IMPOSITION OF PENALTY BIDS, THE PURCHASE OF SECURITIES TO COVER SYNDICATE
SHORT POSITIONS AND OVER-ALLOTMENT IN CONNECTION WITH THE OFFERING. FOR A
DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103
OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE
"EXCHANGE ACT"). SEE "UNDERWRITING."
[Inside front cover containing a map of North and South America surrounded
by the phrases "global desktop," "universal messaging," "enhanced virtual
private networks" and "discounted international voice." Also surrounding the
map are pictures of a fax machine, a computer, a satellite and cellular
telephone. Above the map is the name "CS International."]
<PAGE>
[Gatefold containing a map of the world with cities marked with different
symbols. Below the map is a key to the symbols. The symbols identify "Current
Network," "Planned Expansion of Networks," "Planned Expansion and Sales and
Marketing" and "Equant Network, points of presence." Above the map is the
name, "CS International."]
1
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and the notes thereto appearing elsewhere
in this Prospectus. Unless the context otherwise requires, (i) references to
the "Combined Company" refer to Communications Systems International, Inc.,
GlobalTel Resources, Inc. and International Telephone Company, assuming the
GlobalTel Merger and the ITC Acquisition are consummated, (ii) references to
"CSI" refer to Communications Systems International, Inc., (iii) references to
"GlobalTel" refer to GlobalTel Resources, Inc. and its two wholly owned
subsidiaries, and (iv) references to "ITC" refer to International Telephone
Company.
THE COMPANY
The Combined Company is a growing provider of international
telecommunications services offering long distance, calling cards and enhanced
voice and data services. With more than 16,700 customers in over 170 countries,
the Combined Company primarily serves markets that have been historically
underserved by large telecommunications providers and incumbent telephone
operators ("ITOs"). The Combined Company presently focuses on international
call-reorigination, capitalizing on the arbitrage opportunity created by
differences between U.S. and international long-distance rates. Going forward,
the Combined Company intends to leverage the expertise derived from its
callreorigination business, and capitalize on the established customer base
generated by its call-reorigination business, to provide higher margin
telecommunications services such as call-through, enhanced fax and business
grade Internet services.
The world's larger telecommunications carriers, such as AT&T, MCI, British
Telecom, Deutsche Telecom AG and France Telecom, have focused on developed
telecommunications markets that are characterized by high teledensity (ratio of
telephone lines to inhabitants), an advanced stage of deregulation, a large
volume of international telecommunications traffic and a concentration of
multinational corporations. These markets include the United States, the United
Kingdom, Germany, France and Japan. The Combined Company focuses on what it
characterizes as emerging telecommunications markets, which are (i) smaller
developed countries such as Argentina, Austria, Brazil, Switzerland, Ireland,
Singapore and South Africa, and (ii) markets that typically have less developed
telecommunications infrastructures, are in an earlier stage of deregulation and
have more monopolistic distribution profiles. Based on data from the
International Telecommunications Union, the Combined Company has calculated
that the approximately 145 countries that the Combined Company targets as
emerging telecommunications markets generated approximately 23.0 billion
minutes in outgoing international telecommunications traffic in 1995.
The Combined Company's telecommunications services are marketed and sold
through a network of independent sales agents, strategic relationships and in-
house direct marketing. The Combined Company relies primarily on over 170
independent sales agents that cover over 170 countries. GlobalTel has an
exclusive agreement with the International Business Network for World Commerce
and Industry, Ltd. ("IBNET"), the managing member of the Consortium of Global
Commerce, under which IBNET will market the services of GlobalTel, and
ultimately the Combined Company, through several thousand individual chambers
of commerce located in over 200 countries. In addition, GlobalTel has a
strategic relationship with Novell that provides it with a distribution channel
for its services, and ultimately those of the Combined Company, through a
select number of Novell's network of over 25,000 value-added resellers.
The Combined Company has a broad customer base including foreign offices of
multinational corporations, including Microsoft Corporation, Mitsubishi
Corporation and Chrysler Corporation; major international hotels, including the
Inter-Continental Hotel and the Copacabana Palace in Rio de Janeiro, Brazil and
Southern Sun Group's Holiday Inn Hotels in South Africa; and embassies and
international agencies, including the United States embassies in Korea and
Australia and the United Nations consulate in South Africa.
3
<PAGE>
The Combined Company provides telecommunications services through its (i)
voice switching and global fax messaging infrastructure in Los Angeles,
California, (ii) voice switching and billing center in Ft. Lauderdale, Florida,
(iii) access to third party infrastructure through international
telecommunications carriers and through Equant, a global data network services
provider, and (iv) enhanced fax nodes in Hong Kong and Mexico City. The
Combined Company uses both off-the-shelf technologies, which provide
flexibility to adapt to the rapidly changing telecommunications environment,
and proprietary automated call processing technologies (DIAL and LINK-US),
which enhance the Combined Company's competitive position in serving high
volume customers.
The principal components of the Combined Company's strategy are to (i)
increase penetration of emerging telecommunications markets by capitalizing
upon its call-reorigination experience, strategic marketing relationships and
proprietary technologies, (ii) pursue and implement additional strategic
acquisitions of complementary international customer bases, products and
infrastructure, (iii) exploit strategic marketing relationships to expand its
customer base and establish new relationships with independent ISPs and other
network providers in its target markets, (iv) provide an increasingly broad
range of services, such as enhanced voice and data services and a suite of
business grade Internet services, (v) employ flexible open architecture
technology that is modular, scalable and allows for the integration of a
variety of technologies, (vi) utilize proprietary call processing technologies
to provide quality telecommunications services to high volume customers, (vii)
increase revenue through targeted growth in its carrier and reseller business,
and (viii) exploit operating and marketing synergies and efficiencies resulting
from the GlobalTel Merger and the ITC Acquisition.
CSI is a Colorado corporation formed in April 1993. The Combined Company
intends to change its name to "CS GlobalTel, Inc." upon completion of the
GlobalTel Merger. The Combined Company's executive offices are located at 8
South Nevada Avenue, Colorado Springs, Colorado 80903, and its telephone number
is (719) 471-3332. The Combined Company's Internet address is
http://www.csil.com.
Unless otherwise indicated, the information contained in this Prospectus (i)
assumes no exercise of the Underwriters' over-allotment option or outstanding
options, warrants or convertible securities, and (ii) gives effect to a
proposed 1 for 4 reverse stock split that will be completed prior to the date
of this Prospectus. CSI has entered into agreements (i) to merge (the
"GlobalTel Merger") with GlobalTel, and (ii) to acquire all of the outstanding
stock of ITC (the "ITC Acquisition"), both of which are expected to occur
simultaneously with the completion of this offering. References to the present
action of the Combined Company refer to activities or matters that are common
to each of CSI, GlobalTel and ITC as of the date of this Prospectus. Statements
regarding prospective activities or matters relating to the Combined Company
refer to activities that may be undertaken or matters that may result following
the GlobalTel Merger and the ITC Acquisition. See "Glossary of Terms" for
definitions of certain technical and other terms used in this Prospectus.
Certain information contained herein is derived from industry sources. Although
the Combined Company believes that this information is reliable, it has not
independently verified this information.
The Combined Company claims proprietary rights in its logo and the terms
"LINK-US" and "DIAL." Primecall(R) is a service mark of GlobalTel. Trade names,
trademarks and service marks of other companies appearing in this Prospectus
are the property of their respective holders.
4
<PAGE>
RECENT DEVELOPMENTS
The Combined Company's historical combined revenue decreased $566,000 or 8.6%
from approximately $6.6 million for the three months ended March 31, 1998 to
$6.0 million for the three months ended June 30, 1998. There can be no
assurance that the Combined Company will achieve significantly increased
revenue or profitable operations.
In May and July 1998, CSI sold to ProFutures Special Equities Fund, L.P.
("ProFutures") an aggregate of $1.75 million principal amount promissory notes
bearing interest at a rate of 12% per annum (the "12% Notes") and 74,074 shares
of Common Stock. In connection with the purchase of the 12% Notes and shares of
Common Stock, ProFutures received warrants to purchase 400,000 shares of Common
Stock. In July 1998, ProFutures agreed to exchange $1 million principal amount
of the 12% Notes upon the closing of this offering in consideration of 204,079
shares of Common Stock, based on an assumed initial offering price of $7.00 per
share. See "Description of Securities."
In July 1998, the holders of certain promissory notes issued by GlobalTel
agreed to exchange $1.4 million of principal amount plus accrued interest in
consideration of 237,059 shares of Common Stock, based on an assumed initial
offering price of $7.00 per share. The holders of $700,000 principal amount of
such notes agreed to extend the maturity date of their notes from January 1999
until December 31, 1999 in consideration of the Combined Company increasing the
interest rate on the notes to 14% per annum and granted certain enhanced
registration rights. See "Description of Securities."
5
<PAGE>
THE OFFERING
Common Stock offered
By CSI..................... 3,778,026 shares
By the Selling
Shareholders................
221,974 shares
Common Stock outstanding
prior to the offering...... 4,839,482 shares(1)
Common Stock outstanding
after the offering......... 8,617,508 shares(1)
Use of Proceeds............. To repay certain indebtedness of the Combined
Company; to consummate the ITC Acquisition; to
install equipment to facilitate transparent call-
reorigination services for additional hotels and
businesses; for technical development associated
with the Combined Company's enhanced services; to
pay certain deferred payables; and for general
working capital to fund operating expenses. In
addition, a portion of the proceeds will be used
to fund the repurchase of any securities tendered
in connection with the rescission offer that the
Combined Company intends to commence immediately
after this offering. See "Use of Proceeds,"
"Business" and "Rescission Offer."
Risk Factors................ The Common Stock offered hereby is speculative
and involves a high degree of risk and immediate
substantial dilution and should not be purchased
by investors who cannot afford the loss of their
entire investment. See "Risk Factors" and
"Dilution."
Proposed Nasdaq SmallCap
Market symbol.............. CSGL
- --------
(1) Includes 162,286 shares of Common Stock (the "Bridge Shares") to be issued
immediately prior to the closing of this offering based on an assumed
offering price of $7.00 per share in connection with the notes (the "Bridge
Notes") issued by CSI in December 1997 (the "December 1997 Financing"),
1,198,779 shares of Common Stock issuable to GlobalTel shareholders in
connection with the GlobalTel Merger and 888,209 shares to be issued in
connection with certain promissory notes. Excludes (i) up to 862,265 shares
of Common Stock issuable upon exercise of outstanding options, (ii) up to
1,184,973 shares of Common Stock issuable upon the exercise of outstanding
warrants, (iii) an indeterminate number of shares of Common Stock issuable
upon conversion of outstanding promissory notes in the aggregate principal
amount of $30,000 which have a conversion price per share equal to 90% of
the average bid and asked price of the Common Stock on the day before
conversion, (iv) up to 400,000 shares of Common Stock issuable upon
exercise of the Representatives' Warrants, and (v) up to 295,714 shares
issuable in connection with the ITC Acquisition (collectively referred to
herein as "Additional Securities"). See "Management," "Description of
Securities" and "Underwriting."
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary financial information set forth below is derived from the
separate audited and unaudited financial statements of CSI, GlobalTel and ITC
and the unaudited pro forma condensed combined financial statements of CSI,
GlobalTel and ITC. Such information should be read in conjunction with such
financial statements and the notes thereto and the reports of the Independent
Public Accountants.
<TABLE>
<CAPTION>
HISTORICAL--CSI HISTORICAL--GLOBALTEL
----------------------------------------- ---------------------------
12 MONTHS THREE 12 MONTHS THREE
ENDED EIGHT MONTHS MONTHS ENDED MONTHS
APRIL 30, ENDED ENDED DECEMBER 31, ENDED
----------------- DECEMBER 31, MARCH 31, ---------------- MARCH 31,
1996 1997 1997 1998 1996 1997 1998
-------- ------- ------------ --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......... $ 6,741 $11,865 $8,115 $ 2,279 $ 9,136 $12,862 $ 1,698
Cost of
revenue........ 5,963 7,755 4,879 1,424 8,230 11,171 1,473
-------- ------- ------ -------- ------- ------- -------
Gross margin.... 778 4,110 3,236 855 906 1,691 225
Operating
expenses:
Sales and
marketing...... 1,573 2,080 2,007 557 682 788 120
General and
administrative.. 1,652 2,024 2,103 684 5,773 7,119 1,523
Depreciation
and
amortization.... 58 103 92 42 98 253 91
-------- ------- ------ -------- ------- ------- -------
Total operating
expenses....... 3,283 4,207 4,202 1,283 6,553 8,160 1,734
-------- ------- ------ -------- ------- ------- -------
Loss from
operations..... (2,505) (97) (966) (428) (5,647) (6,469) (1,509)
Interest
expense,
including
amortization of
debt discount.. (19) (162) (113) (698) (225) (1,368) (1,023)
Other income
(expense)...... -- -- (85) -- -- -- --
-------- ------- ------ -------- ------- ------- -------
Loss before
income taxes
and
extraordinary
item........... (2,524) (259) (1,164) (1,126) (5,872) (7,837) (2,532)
Income tax
(benefit)...... -- -- -- -- -- -- --
-------- ------- ------ -------- ------- ------- -------
Loss before
extraordinary
item........... (2,524) (259) (1,164) (1,126) (5,872) (7,837) (2,532)
Extraordinary
item--gain on
extinguishment
of debt........ -- -- 747 -- -- -- --
-------- ------- ------ -------- ------- ------- -------
Net loss........ $ (2,524) $ (259) $ (417) $ (1,126) $(5,872) $(7,837) $(2,532)
======== ======= ====== ======== ======= ======= =======
Series A
convertible
preferred stock
dividends...... -- -- -- -- -- (39) (16)
-------- ------- ------ -------- ------- ------- -------
Net loss
applicable to
common
shareholders... $ (2,524) $ (259) $ (417) $ (1,126) $(5,872) $(7,876) $(2,548)
======== ======= ====== ======== ======= ======= =======
EBITDA(1)....... $ (2,447) $ 6 $ (874) $ (386) $(5,549) $(6,216) $(1,418)
Basic loss per
share(excluding
extraordinary
item).......... $ (1.27) $ (.11) $ (.47) $ (.45) $ (5.88) $ (6.48) $ (1.46)
Weighted average
number of
shares
outstanding.... 1,990 2,321 2,472 2,514 999 1,215 1,745
<CAPTION>
HISTORICAL--ITC PRO FORMA AS ADJUSTED
--------------------- ----------------------
THREE THREE
10 MONTHS MONTHS 12 MONTHS MONTHS
ENDED ENDED ENDED ENDED
OCTOBER 31, MARCH 31, DECEMBER 31, MARCH 31,
1997 1998 1997 1998
----------- --------- ------------ ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......... $8,054 $2,610 $ 35,261 $ 6,587
Cost of
revenue........ 6,790 1,978 27,050 4,875
----------- --------- ------------ ---------
Gross margin.... 1,264 632 8,211 1,712
Operating
expenses:
Sales and
marketing...... 715 252 4,468 929
General and
administrative.. 1,388 421 12,787 2,628
Depreciation
and
amortization... 73 30 8,625 2,187
----------- --------- ------------ ---------
Total operating
expenses....... 2,176 703 25,880 5,744
----------- --------- ------------ ---------
Loss from
operations..... (912) (71) (17,669) (4,032)
Interest
expense,
including
amortization of
debt discount.. (57) (12) (1,001) (949)
Other income
(expense)...... 119 12 -- --
----------- --------- ------------ ---------
Loss before
income taxes
and
extraordinary
item........... (850) (71) (18,670) (4,981)
Income tax
(benefit)...... -- -- -- --
----------- --------- ------------ ---------
Loss before
extraordinary
item........... (850) (71) (18,670) (4,981)
Extraordinary
item--gain on
extinguishment
of debt........ -- -- -- --
----------- --------- ------------ ---------
Net loss........ $ (850) $ (71) $ (18,670) $(4,981)
=========== ========= ============ =========
Series A
convertible
preferred stock
dividends...... -- -- -- --
----------- --------- ------------ ---------
Net loss
applicable to
common
shareholders... $ (850) $ (71) $ (18,670) $(4,981)
=========== ========= ============ =========
EBITDA(1)....... $ (839) $ (41) $ (9,044) $(1,845)
Basic loss per
share(excluding
extraordinary
item).......... $ (708) $ (59) $ (2.19) $ (.58)
Weighted average
number of
shares
outstanding.... 1 1 8,536 8,617
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL-- PRO FORMA
HISTORICAL--CSI GLOBALTEL HISTORICAL--ITC AS ADJUSTED
---------------------- ---------------------- --------------------- -----------
DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, OCTOBER 31, MARCH 31, MARCH 31,
1997 1998 1997 1998 1997 1998 1998
------------ --------- ------------ --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................... $ 429 $ 236 $ 849 $ 98 $ 848 $ 980 $18,678
Working capital
(deficit).............. (2,612) (3,923) (4,934) (9,094) (1,259) (1,423) 5,723
Total assets............ 2,975 2,612 4,354 3,513 2,720 3,334 49,214
Long-term debt, net of
current maturities and
debt discount.......... -- -- 3,832 2,000 292 234 2,234
Common stock subject to
rescission............. -- -- 2,455 2,455 -- -- 740
Total shareholders'
equity (deficit)....... (1,112) (2,228) (8,534) (11,002) (781) (899) 29,503
</TABLE>
(1) "EBITDA' is defined as net income or loss plus depreciation, amortization
and interest expense, income taxes and other non-cash charges, minus
extraordinary income and gains and non-cash income, if any, and plus
extraordinary losses, if any. EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not
be considered a substitute for measures of performance prepared in
accordance with generally accepted accounting principles.
7
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the
Combined Company and its business before purchasing shares of Common Stock
offered hereby. This Prospectus contains certain forward-looking statements
that involve substantial risks and uncertainties. When used in this Prospectus,
the words "may," "will," "expect," "anticipate," "continue," "estimate,"
"project," "intend," "believe" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 (the "Securities Act") and Section 21E of the Exchange Act
regarding events, conditions and financial trends that may affect the Combined
Company's future plan of operations, business strategy, operating results and
financial position. Prospective investors are cautioned that any forward-
looking statements are not guarantees of future performance and are subject to
risks and uncertainties and that actual results could differ materially from
the results expressed in or implied by these forward-looking statements as a
result of various factors, many of which are beyond the Combined Company's
control. These factors are described under the headings "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and in the risk factors set forth below.
Risks Related to the Combined Company and the Telecommunications Industry
LIMITED OPERATING HISTORY; SUBSTANTIAL AND CONTINUING LOSSES; SUBSTANTIAL DOUBT
ABOUT THE ABILITY TO CONTINUE AS GOING CONCERNS
Both CSI and ITC commenced operations in 1993 and GlobalTel commenced
operations in 1995. Accordingly, CSI, GlobalTel and ITC have limited operating
histories upon which an evaluation of their performance can be based. The
Combined Company has no combined operating history. The Combined Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of operations. There
is no assurance that the Combined Company will operate profitably or be
successful in capitalizing on perceived synergies. CSI has incurred significant
losses, including losses of approximately $2.5 million and $259,000 during the
12 months ended April 30, 1996 and 1997, respectively, a loss of approximately
$417,000 during the eight months ended December 31, 1997 and a loss of
approximately $1.1 million for the three months ended March 31, 1998, resulting
in an accumulated deficit of approximately $5.5 million as of March 31, 1998.
GlobalTel has incurred significant losses, including losses of $5.9 million and
$7.8 million for the 12 months ended December 31, 1996 and 1997, respectively,
and a loss of approximately $2.5 million for the three months ended March 31,
1998 resulting in an accumulated deficit of $18.1 million as of March 31, 1998.
In addition, ITC incurred a loss of approximately $850,000 during the 10 months
ended October 31, 1997 and a loss of approximately $71,000 for the three months
ended March 31, 1998. Losses may continue until such time, if ever, that the
Combined Company is able to generate a level of revenue sufficient to offset
its cost structure. There can be no assurance that the Combined Company will
achieve significantly increased revenue or profitable operations. The Combined
Company's results of operations may be below the expectations of public market
analysts and investors in future quarters, which would likely result in a
decline in the trading price for the Common Stock. CSI's and GlobalTel's
independent auditors have each included an explanatory paragraph in their
respective reports on the financial statements stating that they have been
prepared assuming that each of CSI and GlobalTel, respectively, will continue
as separate going concerns. However, recurring losses from operations and
projected future cash requirements raise substantial doubt about each company's
ability to continue as a going concern. The explanatory paragraphs in the
reports on the financial statements do not consider the proposed consummation
of this offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements.
BILLING SYSTEM AND INTERNAL CONTROLS
In November 1997, GlobalTel commenced using a new billing system to record
revenue from calls made by GlobalTel's customers and the application of cash
receipts to customer accounts. In connection with auditing GlobalTel's 1997
financial statements, GlobalTel's independent auditors identified a material
weakness in
8
<PAGE>
GlobalTel's internal accounting controls with respect to the administration of
the billing system that could, if not corrected, lead to errors in revenue
reporting which may not be detected by management of GlobalTel on a timely
basis. GlobalTel's auditors considered GlobalTel's internal control structure
only to the extent necessary to determine the auditing procedures necessary to
report on the consolidated financial statements and not to determine the
adequacy of internal control or to provide specific assurances thereon. The
material weakness was reported to management and to GlobalTel's audit
committee. While considered in determining the scope of the audit, no
modification to GlobalTel's report on its audited consolidated financial
statements was made related to this material weakness. GlobalTel intends to
eliminate this material weakness by outsourcing the administration of its
billing system to its billing system vendor until the completion of the
GlobalTel Merger, at which time GlobalTel's billing functions will be
transferred to the Combined Company's billing system. In connection with
auditing CSI's financial statements for the eight months ended December 31,
1997, CSI's independent auditors identified a weakness involving CSI's internal
control structure and its operation that the auditors believe meets the
criteria of a reportable condition. According to the American Institute of
Certified Public Accountants, reportable conditions involve matters coming to
an auditor's attention relating to significant deficiencies in the design or
operation of the internal control structure that, in such auditor's judgment,
could adversely affect a company's ability to record, process, summarize, and
report financial data consistent with the assertions of management in the
financial statements. CSI believes that it has remedied this condition through
the hiring of a Chief Financial Officer and a Controller and the implementation
of internal controls. There can be no assurance that these or other control
deficiences will not occur in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
NEED FOR ADDITIONAL CAPITAL AND CAPITAL REQUIREMENTS
The efforts of CSI, GlobalTel and ITC to develop and introduce an array of
enhanced telecommunications services have required, and will continue to
require, the Combined Company to invest in network infrastructure and systems
development. Also, the Combined Company has incurred substantial pro forma
losses and expects to continue to incur losses due, in part, to significant
depreciation and amortization expense, through the foreseeable future. At March
31, 1998, CSI, GlobalTel and ITC, respectively, had working capital deficits of
approximately $3.9 million, $9.1 million and $1.4 million, respectively. In
addition, CSI had working capital deficits of approximately $2.6 million, $2.3
million and $2.2 million at December 31, 1997, April 30, 1997 and April 30,
1996, respectively. The Combined Company believes that, based upon its present
business plan, the net proceeds of this offering, together with revenue from
operations, will be sufficient to finance operating losses, the development and
introduction of enhanced services and to meet its other currently planned
working capital and capital expenditure requirements through the next 12
months. However, due to the need to continue to expand its network operations
and service offerings and other factors, the Combined Company expects that it
will need to raise additional capital in future periods. The Combined Company
also intends to seek lease financing for a portion of the equipment and systems
that it acquires in 1998 and beyond, although there can be no assurance that
this financing will be available to the Combined Company when needed or on
acceptable terms. If the Combined Company experiences greater than anticipated
capital requirements, if the implementation of the Combined Company's operating
strategy fails to produce anticipated revenue growth and cash flows, if lease
financing is not available or if additional working capital is required for any
other reason, the Combined Company will be required to obtain additional
capital earlier than currently anticipated. The timing of the need for
additional capital subsequent to the next 12 months also will be affected by
the extent to which the Combined Company's rescission offer is accepted. See
"Rescission Offer." There can be no assurance that the Combined Company will be
able to obtain equity, debt or lease financing when needed or on terms that the
Combined Company finds acceptable. Any issuances of additional equity or
convertible debt may cause substantial dilution to the Combined Company's
shareholders. If the Combined Company is unable to obtain sufficient funds to
satisfy its capital requirements, it will be forced to reduce the scope of its
expansion plans, curtail operations, dispose of assets or seek extended payment
terms from its vendors, any of which could have a material adverse effect on
the Combined Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
9
<PAGE>
DEPENDENCE ON KEY INDEPENDENT SALES AGENTS
CSI currently depends on approximately 42 independent sales agents to sell
its services, including Edward Stoever, who operates in Argentina, and CS do
Brazil. These two independent sales agents accounted for approximately 56.9%,
and 12.2%, respectively, of CSI's revenue in the eight months ended December
31, 1997, and the ten largest independent sales agents accounted for
approximately 98.5% of CSI's revenue in the eight months ended December 31,
1997. GlobalTel currently depends on 81 independent sales agents to sell its
services. The 10 largest independent sales agents accounted for approximately
30.9% of GlobalTel's revenue in the 12 months ended December 31, 1997. ITC
currently depends on approximately 55 independent sales agents to sell its
services, including Generic Telecom, Inc., Zohair Attoue and Janel Richards
(collectively, with Mr. Stoever and CS do Brazil, the "Key Independent Sales
Agents"). These three independent sales agents accounted for approximately
26.6%, 21.4% and 12.7%, respectively, of ITC's revenue in the 10 months ended
October 31, 1997, and the ten largest independent sales agents accounted for
approximately 89.1% of ITC's revenue in the 10 months ended October 31, 1997.
If the Combined Company fails to retain the services of any of the Key
Independent Sales Agents for any reason or loses the services of other
independent sales agents that contribute significantly to the Combined
Company's revenue, the Combined Company's cash flow and results of operations
would be adversely affected because of expected high customer attrition. The
Combined Company also depends on its independent sales agents and persons
engaged by them to install and service much of the Combined Company's
technologies. The failure of such persons to properly install or service the
Combined Company's systems could adversely affect the Combined Company. The
Combined Company has entered into short term agreements with all of its Key
Independent Sales Agents other than CS do Brazil. Although independent sales
agents are generally subject to agreements, such agreements may be difficult to
enforce because the independent sales agents are domiciled in foreign
countries. Under the terms of the agreements, independent sales agents are
responsible for collecting customer payments except for credit card payments,
and are generally responsible for customer bad debts less, in some cases, an
allowance granted by the Combined Company. Failure of independent sales agents
to collect and remit customer payments to the Combined Company presents risks
to the Combined Company. In August 1997, CSI's former independent sales agent
in Singapore failed to remit aggregate payments of $215,000. CSI is
aggressively pursuing collection of this receivable, although its ultimate
recovery is not assured. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Sales and Marketing."
SIGNIFICANT OUTSTANDING INDEBTEDNESS; SECURITY INTERESTS
In order to finance its capital requirements, the Combined Company has
incurred significant indebtedness. At March 31, 1998, CSI, GlobalTel and ITC
had approximately $3.4 million, $7.3 million and $0.5 million of long and short
term indebtedness. In connection with the issuance of $2,840,000 principal
amount Bridge Notes in December 1997, CSI granted to the investors a security
interest in all of the assets of CSI. The Bridge Notes require that CSI pay all
accrued interest to such investors on June 30, 1998. CSI has not made such
payment. Although as of the date of this Prospectus no investor has declared
CSI in default on the Bridges Notes, there can be no assurance an investor will
not do so. In the event of a default, the investors could declare CSI's
indebtedness to become immediately due and payable and could foreclose on all
of CSI's assets. In addition, to the extent that CSI's assets continue to
secure such Bridge Notes, such assets will not be available to secure
additional indebtedness. The Combined Company has allocated $3 million of the
proceeds of this offering to repay the Bridge Notes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation" and
"Description of Securities."
NEED TO INTEGRATE AND MANAGE GLOBALTEL AND ITC
Management believes that the consummation of the GlobalTel Merger and the ITC
Acquisition will substantially increase the Combined Company's independent
sales agent base, technological capabilities, management expertise and carrier
relationships. The Combined Company's ability to realize any long-term
10
<PAGE>
advantages from the GlobalTel Merger and the ITC Acquisition will depend in
large part on successfully integrating, managing and improving the operations
of GlobalTel and ITC. The Combined Company's management team has no experience
in integrating acquired companies. Risks relating to such integration include
the risk of loss of services of executive officers, including Ronald P.
Erickson and Philip A. Thomas, the loss of independent sales agents of the
Combined Company or adverse changes in strategic or carrier relationships.
There can be no assurance that CSI will be able to successfully integrate
GlobalTel or ITC, the failure of which would have a material adverse effect on
the business of the Combined Company. See "The Acquisitions."
SELECTION AND INTEGRATION OF UNSPECIFIED ACQUISITIONS
A key element of the Combined Company's strategy is expansion through the
additional acquisitions of complementary international customer bases, products
and infrastructure. Except for the GlobalTel Merger agreement in principle and
the ITC Acquisition agreement, the Combined Company has no agreements,
arrangements or understandings for any such acquisition as of the date of this
Prospectus. There can be no assurance that the Combined Company will be
successful in identifying appropriate acquisition opportunities or negotiating
favorable terms. In most cases, the Combined Company will not be required to
obtain shareholder approval in order to complete its acquisitions. Under the
Colorado Business Corporation Act, a corporation may effect a merger with or an
acquisition of another company without shareholder approval if the corporation
will be the surviving entity, the articles of incorporation of the corporation
are not substantively amended, each shareholder will hold the same number and
type of shares after the transaction as he did before, and the outstanding
shares of the corporation will not be increased by more than 20% as a result of
the transaction. Any future acquisitions or related activity will involve
additional risks including, among others, the difficulty of identifying
appropriate acquisition candidates, the difficulty of assimilating the
operations and personnel of the respective entities, the potential disruption
of the Combined Company's ongoing business and the inability of management to
capitalize on the opportunities presented by the acquisitions. In addition, the
failure to successfully incorporate acquired technology and rights into the
Combined Company's services, the inability to maintain uniform standards,
controls, procedures and policies, the impairment of relationships with
employees and customers as a result of changes in management and an increase in
amortization of intangible assets in the Combined Company's financial
statements may adversely affect the Combined Company. If the Combined Company
completes acquisitions through the issuance of Common Stock, the ownership
interest of existing holders would be decreased. There can be no assurance that
the Combined Company will be able to finance any future acquisitions.
The successful integration of any such acquisition is critical to the future
financial performance of the Combined Company. Complete integration of any
acquisitions could take several fiscal quarters to accomplish and would
require, among other things, coordination of the respective companies' sales,
marketing and technical development efforts. The integration process may cause
management's attention to be diverted from operating the Combined Company, and
any difficulties encountered in the transition process could have an adverse
impact on the business, financial condition and results of operations of the
Combined Company. There can be no assurance that present and potential
customers of the Combined Company and any acquired entity would continue their
historic usage patterns without regard to the acquisition, and any significant
delay or reduction in usage could have an adverse effect on the Combined
Company's business, financial condition and results of operations.
The difficulty of combining companies may be increased by geographic
distances between companies and the need to integrate personnel. Changes
brought about by any acquisition may cause key employees, independent sales
agents, or carriers to terminate their relationships with the Combined Company.
There can be no assurance that the Combined Company will retain the employees,
independent sales agents and carrier relationships of an acquired entity or
that the Combined Company will realize any of the other anticipated benefits of
any acquisition. There can be no assurance that costs of combining potential
acquisitions will not have an adverse effect upon the Combined Company's
operating results. There can be no assurance that, following any acquisition,
the Combined Company will be able to operate any acquired business on a
profitable basis. See "Business--Business Strategy."
11
<PAGE>
MANAGEMENT OF GROWTH
The Combined Company's expected growth may place significant strains on the
Combined Company's management, staff, working capital and operating and
financial control systems. There can be no assurance that the Combined
Company's management, staff, working capital and systems will be adequate to
support its future anticipated growth. The failure to recruit qualified staff,
to continue to upgrade operating and financial control systems or to respond
effectively to difficulties encountered during expansion could have a material
adverse effect on the Combined Company's business, financial condition and
results of operations.
DEPENDENCE ON CARRIERS AND OTHER SUPPLIERS
The Combined Company's ability to achieve and maintain profitable operations
is heavily dependent upon the agreements the Combined Company has with certain
international long distance carriers. The Combined Company, among other things,
must negotiate favorable rates with these long distance carriers. Because of
the frequent fluctuations in rates of long distance carriers, the Combined
Company believes that it is in its best interest to have short-term agreements
with its carriers. Most of the Combined Company's agreements with its carriers
will expire, or may be terminated by either party, within one year, and there
can be no assurance that these agreements will be renewed or that the Combined
Company will be able to obtain favorable rates from these or other carriers.
There are a small number of carriers with whom the Combined Company has carrier
agreements. The Combined Company's dependence on particular carriers will vary
because the Combined Company shifts its use of carriers depending on the rates
offered. The Combined Company periodically renegotiates rates with its current
carriers and seeks to establish relationships with new long distance carriers
that provide the most favorable rates. The Combined Company's ability to obtain
favorable rates from the carriers depends, in large part, on the Combined
Company's total volume of long distance traffic. There is no guarantee that the
Combined Company will be able to maintain the volume of international long
distance traffic necessary to obtain favorable rates. The loss of any carrier
could have a material adverse effect on the Combined Company.
Due to its financial condition, CSI defaulted on payment obligations to
certain carriers in 1995, 1996 and 1997. Although CSI was able to negotiate
deferred payment arrangements with these carriers (and thereafter made such
deferred payments) and was able to continue receiving service from certain of
these carriers, there is no assurance that it will be able to make such
arrangements with these or other carriers if required in the future. As of
March 31, 1998, CSI was in arrears on payments due to one carrier of
approximately $780,000. In October 1997, GlobalTel failed to pay amounts due to
one of its principal long distance carriers within the time period that this
carrier customarily had required payment. As a result, this carrier ceased
providing services to GlobalTel and, under the terms of its agreement with
GlobalTel, could demand a termination payment of up to $1.2 million. GlobalTel
was able to re-route traffic that previously had been carried by this carrier
without any interruption in service to GlobalTel's customers. In December 1997,
after GlobalTel paid this carrier a substantial portion of the amounts past
due, services were restored. GlobalTel has negotiated payment terms on the
remaining balance owed and does not believe that it will be required to pay an
amount in excess of that owed for carrier services provided. As of March 31,
1998, GlobalTel was in arrears on approximately $641,000 due to this carrier.
There can be no assurance that GlobalTel will not be required to pay a penalty
to this or any other supplier or that the Combined Company will not be in
default of its obligations to its suppliers in the future. In addition, in
November 1997, WorldCom, Inc. ("WorldCom") commenced an action against ITC in
Connecticut state court seeking damages of approximately $1.1 million for
alleged past due carrier bills. ITC recorded a $1.1 million charge against
earnings in the ten month period ended October 31, 1997. ITC believes it has
meritorious defenses to the suit. ITC intends to vigorously defend its position
and will attempt to reach a settlement with this carrier.
Under certain carrier contracts, the Combined Company obtains rate
commitments (subject to adjustment, as provided in each carrier contract),
which are generally more favorable than otherwise would be available by
committing to purchase a minimum number of minutes from such carriers. If the
Combined Company fails to meet its minimum requirements under a carrier
contract, it could still be required to pay some or all of its minimum monthly
commitment as a penalty. Historically, CSI failed to meet required minimum
purchases and
12
<PAGE>
incurred unused usage charges from AT&T and MCI. The Combined Company's
aggregate minimum monthly commitments currently are approximately $564,000,
which represent approximately 34.6% of the Combined Company's average monthly
cost of revenue for the three months ended March 31, 1998. Failure to maintain
favorable carrier contracts would increase the Combined Company's cost of
revenue and the ability to achieve and maintain profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
A failure by a carrier to deliver quality services or products on a timely
basis, or the inability of the Combined Company to develop alternative
suppliers if and as required, could result in delays in the provision of
service to the Combined Company's customers which could have a material adverse
effect on the Combined Company. The Combined Company's remedies against
carriers that fail to deliver services or products on a timely basis are
limited, in certain cases, by the Combined Company's desire to maintain
relationships with its key carriers. In addition, as the Combined Company's
carriers upgrade their technology, the Combined Company may encounter
difficulties in integrating new technology into the Combined Company's network.
The Combined Company is dependent on certain third-party suppliers of
equipment and hardware components, including its integrated computer systems
and switching platforms, and expects that it will become more dependent on such
suppliers as its business expands. A failure by a supplier to deliver quality
products on a timely basis, or the inability to develop other sources of supply
if required, could result in delays that could adversely affect the Combined
Company. In addition, the Combined Company's business is highly dependent on
its computer systems, telephone equipment and software. See "Business."
RECENT INTRODUCTION AND ONGOING DEVELOPMENT OF ENHANCED SERVICES
Substantially all of the Combined Company's revenue to date has been derived
from international call- reorigination services and reselling international
long distance minutes to other carriers and resellers. The Combined Company
believes that as deregulation occurs and competition increases in markets
around the world, the pricing advantage of traditional call-reorigination
relative to conventional international long-distance service will diminish. In
order to maintain its existing customer base, attract new customers and
increase its revenue, the Combined Company must offer a variety of enhanced
telecommunications services, as well as its own call-through service, at
competitive prices. Accordingly, the Combined Company is in the process of
developing a number of enhanced telecommunications services such as fax and
business grade Internet services. The first of these enhanced services was
offered to GlobalTel's customers in November 1997. To date GlobalTel has not
generated significant revenue from these services. Several other new services
described in this Prospectus are still under development and are not scheduled
for implementation until various times in 1998 or later. It is not uncommon for
the introduction of new telecommunications services to be delayed or occasioned
by technical problems. There can be no assurance that the Combined Company will
not encounter delays or technical problems in the introduction of new services
which will inhibit the Combined Company's ability to compete. Also, there can
be no assurance that the Combined Company will have sufficient capital to
complete development and introduction of all of the enhanced services that it
currently plans to offer to its customers or that the introduction of such
services will result in increased revenue. The failure to introduce enhanced
telecommunications and Internet-related services, failures in the systems that
would deliver those services or the absence of demand for such services when
introduced would have a material adverse effect on the Combined Company's
ability to achieve or sustain profitability in the future. See "Business--
Services."
DEPENDENCE ON NEW NETWORK SYSTEMS
The Combined Company's success is dependent upon its ability to deliver high
quality, uninterrupted telecommunications services. During 1997, GlobalTel
installed new switching software and hardware in its Los Angeles switching
center. These facilities did not commence carrying customer traffic until the
fourth quarter of 1997. Prior to implementing these new systems, virtually all
of GlobalTel's revenue was attributable to international call-reorigination
services and sales to carriers. Accordingly, successful implementation and
reliable operation of these new systems is essential to the Combined Company's
operations. Under terms of its
13
<PAGE>
Reciprocal Telecommunications Agreement with ITC, CSI transferred its
telecommunications traffic to ITC's switching center in Ft. Lauderdale in early
1998. This transfer occurred after CSI technicians upgraded ITC's switches to
accept Internet triggering of its call-reorigination services. There can be no
assurance that these recently installed systems and system upgrades will be
adequate to perform their intended functions or that the Combined Company will
not suffer adverse consequences in connection with their implementation. For
example, there can be no assurance that the Combined Company will not encounter
material delays in the introduction or provisioning of new services to new or
existing customers. There also can be no assurance that the Combined Company
will not encounter difficulties in enhancing, or integrating new technology
into, its systems. The inability of the Combined Company to implement any
required system enhancement, to acquire new systems or to integrate new
technology in a timely and cost effective manner could have a material adverse
effect on the Combined Company's business, financial condition and results of
operations. See "Business--Services" and "--Network and Operations."
CHANGING INDUSTRY ENVIRONMENT
The majority of the Combined Company's operations involve the international
call-reorigination industry. This industry operates under the guidelines of
multiple foreign and domestic government regulations. If the Combined Company
should lose the authorization to offer call-reorigination services in any of
its current markets, the results of operations of the Combined Company could be
materially adversely affected. The call-reorigination industry is based upon
the arbitrage opportunities created by higher international calling rates
charged by ITOs compared to rates charged by U.S.-based long distance carriers.
However, ITOs may lower their international calling rates, thereby eliminating
or severely affecting the market for call-reorigination services.
Representatives of 69 countries, including the United States, recently entered
into an agreement with the World Trade Organization ("WTO"), which became
effective on February 5, 1998, with the goal of increasing competition among
telecommunications providers in those markets. If some or all of the ITOs
operating in the Combined Company's current markets lower their rates, the
results of operations of the Combined Company in those markets would be
adversely affected. In addition, certain European countries have enacted or
have proposed enacting a value added tax (VAT) on international call-
reorigination services. In February 1997, the government of Argentina enacted
legislation that simultaneously lowered the international long distance calling
rates from Argentina and increased the domestic rates within Argentina.
Historically, the Combined Company has received a significant portion of its
revenue from customers in Argentina. To date, this legislation has not had an
adverse effect on the Combined Company's results of operations because the
rates charged by Argentina's ITOs remain higher than the Combined Company's
rates. There can be no assurance such an adverse effect will not occur in the
future as a result of this or other legislation. See "Business."
COMPETITION
General. The Combined Company faces a high level of competition for customers
and independent sales agents in all of its markets, and expects competition to
intensify in the future. There are no substantial barriers to entry in the
call-reorigination industry. The Combined Company believes that there are more
than 150 companies engaged in the international call-reorigination business.
Many of the Combined Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources, larger
networks and a broader portfolio of services than the Combined Company.
Additionally, many competitors have strong name recognition and brand loyalty,
long-standing relationships with the Combined Company's target customers, and
economies of scale that can result in a lower relative cost structure compared
to the Combined Company.
Competition for customers and independent sales agents in the
telecommunication markets in which the Combined Company operates is on the
basis of price, type and quality of services offered. Increased competition
could force the Combined Company to reduce its prices and profit margins if the
Combined Company's competitors are able to procure rates or enter into service
agreements comparable to or better than those the Combined Company obtains or
if competitors are able to offer other incentives to existing and potential
customers and independent sales agents. Similarly, the Combined Company has no
control over the prices set by its competitors in the long distance market. The
Combined Company is aware that its ability to market its long
14
<PAGE>
distance services depends upon the existence of spreads between the rates
offered by the Combined Company and those offered by the carriers with which it
competes as well as those from which it obtains service. A decrease in such
spreads or price competition in the Combined Company's markets could have a
material adverse effect on the Combined Company's business, financial condition
and results of operations.
Other potential competitors include cable television providers, wireless
telephone providers, Internet access providers, electric and other utilities
with rights of way, railways, microwave carriers and large end users that have
private networks. The intensity of such competition has recently increased and
the Combined Company believes that such competition will continue to intensify
as the number of new entrants increases. If the Combined Company's competitors
devote significant additional resources to the provision of international long
distance telecommunications services to the Combined Company's target customer
base, the Combined Company could suffer a reduction in revenue which could have
a material adverse effect on the Combined Company's business, financial
condition and results of operations.
U.S. Based Competition. The large U.S. long distance carriers have, in the
past, been reluctant to compete directly with ITOs by entering the
international call-reorigination business and attempting to capture significant
market share. This is changing and AT&T, among others, is entering the call-
reorigination business. The Combined Company's principal U.S.-based competitors
are providers of international call-reorigination services such as Access
Authority, AT&T, IDT Corporation, Justice Technology Corporation, International
Telecom, Ltd. (Kallback), Telegroup, Inc., USA Global Link, Inc., UTG
Communications International, Inc., Viatel, Inc. and Worldpass Communications
Corp., and as well as providers of traditional long distance services such as
AT&T, Cable & Wireless, Frontier Corp., GTE Communications, LCI International,
Inc., MCI, Qwest Communications International, Inc., Sprint, WorldCom, and
Regional Bell Operating Companies ("RBOCs") outside their exchange territories.
International Based Competition. The Combined Company's principal
international-based competitors include, among others, Telefonica de Argentina
and Telecom Argentina in Argentina; Optus Communications in Australia,
Telebras, Telesp and Telerj in Brazil; France Telecom in France; Deutsche
Telecom AG in Germany; Kokusan Denshin Denwa International Telecom Japan (KDD)
and International Digital Communications in Japan; PTT Telecom B.V. in the
Netherlands; and Telekom S.A. in South Africa; and Cable & Wireless plc,
British Telecommunications plc, Mercury Communications Ltd., AT&T, WorldCom,
Sprint and ACC Corp., Swiftcall Ltd., Oystel Communications, Ltd. and First
Telecom in the United Kingdom. The Combined Company also competes with non-U.S.
based providers of international call-reorigination or other alternative
international long-distance services. The Combined Company believes that ITOs
generally have certain competitive advantages due to their control over local
connectivity and close ties with national regulatory authorities. The Combined
Company also believes that, in certain instances, regulators have shown a
reluctance to adopt policies and grant regulatory approvals that would result
in increased competition for the ITO. If an ITO were to successfully pressure
national regulators to outlaw the provision of call-reorigination services and
prevent the Combined Company from providing its services, the Combined Company
could be denied regulatory approval in certain jurisdictions in which its
services would otherwise be permitted. Any delay in obtaining regulatory
approval, or failure to obtain regulatory approval, could have a material
adverse effect on the Combined Company's business, financial condition and
results of operations. If the Combined Company encounters anti-competitive
behavior in countries in which it operates (such as an ITO attempting to block
access to call-reorigination services) or if the ITO in any country in which
the Combined Company operates uses its competitive advantages to the fullest
extent, the Combined Company's business, financial condition and results of
operations could be materially adversely affected. Deregulation and increased
competition in international markets could cause prices for international calls
to decrease so much that the Combined Company's international call-
reorigination services would no longer be attractive to customers. See
"Business--Competition" and "--Regulation."
15
<PAGE>
REGULATION
United States domestic interstate long-distance telecommunications services
are subject to limited regulation by the FCC. Intrastate long distance services
are regulated by state commissions, which have varying requirements.
International call-reorigination services are subject to regulation by both
U.S. and foreign regulators. The United States Federal Communications
Commission ("FCC") has imposed certain restrictions on international call-
reorigination providers, including the requirement that authorized carriers
provide service in a manner consistent with the laws of the countries in which
they operate. Recently, the International Telephone Union ("ITU") agreed that
any country could ban call-reorigination services. The provision of some forms
of call-reorigination is illegal in Uruguay, Venezuela, the Philippines and
certain other countries. In addition, 34 countries, primarily in Central and
South America, the Middle East and Asia (including China), have informed the
FCC that they have banned certain forms of call-reorigination. Call-
reorigination service providers or customers violating these countries' laws
may be subject to fines or penalties. Call-reorigination services in these
countries comprised approximately 10.6% of the Combined Company's revenue in
the 12 months ended December 31, 1997. Currently, the Combined Company believes
that it is not in violation of any country's laws or regulations related to the
provision of international long distance services because it has either ceased
actively recruiting customers or employed alternate, non-banned forms of call-
reorigination in those countries. If the Combined Company is found to have
violated such foreign laws it could be subject to fines, penalties or
revocation of its FCC license. However, regulations could be adopted by one or
more countries that could prevent the Combined Company from operating in such
countries, thereby having a material adverse effect on the Combined Company's
operations. Local laws and regulations differ significantly among the
jurisdictions in which the Combined Company operates, and the interpretation
and enforcement of such laws and regulations are often based on the informal
views of the local ministries which, in some cases, are subject to influence by
ITOs. In addition, failure to interpret accurately the applicable laws and
regulations and the mode of their enforcement in particular jurisdictions could
result in monetary penalties imposed against the Combined Company that could be
significant. There can be no assurance that the Combined Company has accurately
predicted or will accurately predict the interpretation of foreign laws and
regulations or regulatory and enforcement trends or will be found to be in
compliance with all such laws and regulations. The Combined Company generates a
significant portion of its revenue from customers originating calls in South
America, Europe, the Pacific Rim, Africa, the Middle East and Central America.
There can be no assurance that foreign regulation will not have a material
adverse effect on the Combined Company's business, financial condition and
results of operations. See "Business--Regulation."
The Combined Company is regulated by the FCC and is currently authorized by
the FCC as a reseller of international long distance telephone services. The
Combined Company has not been the subject of any action by the FCC or any other
regulatory entity that would affect its ability to resell international long
distance services. The FCC has determined that call-reorigination service using
uncompleted call signaling, such as that used by the Combined Company, does not
violate United States or international law, but has held that United States
companies providing such services must comply with the laws of the countries in
which they operate as a condition of such companies' FCC authorizations. The
FCC reserves the right to condition, modify or revoke any authorizations and
impose fines for violations of the Communications Act of 1934, as amended (the
"Communications Act"), or the FCC's regulations, rules or policies promulgated
thereunder, or for violations of the clear and explicit telecommunications laws
of other countries that are unable to enforce their laws against U.S. carriers.
See "Business--Regulation."
The Telecommunications Act of 1996 (the "1996 Act") and the WTO Agreement
substantially altered the regulatory framework for the telecommunications
industry for domestic and international telecommunications services. The 1996
Act and the WTO Agreement will require the FCC to conduct a variety of
rulemakings to implement various requirements. The Combined Company cannot
predict the ultimate effects of the WTO Agreement or the 1996 Act upon the
Combined Company's business other than to note that the Combined Company will
not be required to contribute to the FCC's Universal Service fund. Such
contributions could be as much as 4.5% or more of revenue for the calendar year
1998, and would increase in subsequent years.
16
<PAGE>
LEGAL PROCEEDINGS
In November 1997, WorldCom commenced an action entitled "WorldCom, Inc. v.
International Telephone Company d/b/a Interglobal Telephone Company" against
ITC in Connecticut state court (Docket No. CV-970407418, Superior Court, J.D.
of New Haven) seeking damages of approximately $1.1 million for alleged past
due carrier bills. Although ITC believes it has meritorious defenses to the
suit, there can be no assurance that it will be successful in such defense.
Failure to successfully defend such suit could have a material adverse effect
on the Combined Company.
RESCISSION OFFER
On July 20, 1998, the Combined Company completed a rescission offer (the
"Rescission Offer") in accordance with the securities laws of the State of
Washington (the "Washington Securities Act") with respect to an aggregate of
496,466 shares of GlobalTel Common Stock (the "Rescission Stock"), $805,000 in
aggregate principal amount of promissory notes (the "Rescission Notes") and
warrants (the "Rescission Warrants") to purchase an aggregate of approximately
31,000 shares of GlobalTel Common Stock issued in conjunction with the
Rescission Stock and Rescission Notes. The Rescission Notes, the Rescission
Stock and the Rescission Warrants are hereinafter collectively referred to as
the "Rescission Securities." The Rescission Securities were issued or sold by
GlobalTel from 1995 through 1997 to approximately 40 individuals and entities
who GlobalTel believes at the time of purchase were residents of the State of
Washington.
GlobalTel believes that the Rescission Securities may have been issued or
sold in violation of the registration requirements of the Washington Securities
Act. As a precaution against potential claims by holders of Rescission
Securities, and without admitting non-compliance with the Washington Securities
Act, the Combined Company offered to rescind such prior issuances and sales by
offering to repurchase the Rescission Securities at the price paid therefor
plus interest at the statutory rate of 8% per annum from the date of purchase
to the expiration of the Rescission Offer. The Rescission Offer is contingent
on the completion of this offering and the GlobalTel Merger. Accordingly, if
such conditions are not satisfied, the Rescission Offer will by its terms
terminate without any obligation for the Combined Company to act upon
acceptances of the Rescission Offer. The price paid will be based upon the
price paid for the original security purchased by the purchaser from GlobalTel,
regardless of the type of Rescission Security currently held by the purchaser.
The Combined Company is obligated to pay approximately $740,000 upon the
closing of this offering to holders of Rescission Securities who have elected
rescission. See "Use of Proceeds."
The Rescission Offer was made in order to limit, so far as may be permitted
under applicable federal and state securities laws, the potential liability of
the Combined Company with respect to the offer and sale of the Rescission
Securities. Although the Combined Company believes that the offer and sale of
the Rescission Securities were made in compliance with an exemption from
registration under federal securities laws, if a holder of the Rescission
Securities were to assert a claim that the Rescission Securities were sold in
violation thereof, the position of the Securities and Exchange Commission is
that liabilities under the federal securities laws are not terminated by making
a rescission offer. Furthermore, notwithstanding the Rescission Offer, there
can be no assurance that the Combined Company will not be subject to penalties
or fines relating to past securities issuances or that other holders of the
Combined Company's securities will not assert or prevail in claims against the
Combined Company for rescission or damages under state or federal securities
laws. See "Use of Proceeds," "Rescission Offer," "Shares Eligible for Future
Sale" and Note 6 of Notes to GlobalTel's Consolidated Financial Statements.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Combined Company's strategy is to focus on international markets. In many
emerging telecommunications markets in which the Combined Company seeks to
market its services, ITOs control access to the local networks, enjoy better
brand recognition and customer loyalty and possess significant operational
economies, including operating agreements with other ITOs. Moreover, an ITO may
take many months before allowing competitors, such as the Combined Company, to
interconnect to its switches within the target market.
17
<PAGE>
There can be no assurance that the Combined Company will be able to obtain the
permits and operating licenses required to operate, access transmission
facilities or market and sell competitive services in its markets. In addition,
pursuit of international growth opportunities may require significant
investments for extended periods before returns, if any, on such investments
are realized.
The Combined Company's operations also will be subject to a wide range of
general business risks associated with international operations, including
unexpected changes in legal and regulatory requirements; changes in tariffs,
exchange rates and other barriers; political and economic instability;
restrictions on repatriation of funds or profits from foreign markets; long
accounts receivable payment cycles in certain countries; difficulty in
protecting the Combined Company's intellectual property; potentially adverse
tax consequences and the regulation of ISPs by foreign regulatory authorities.
Although the Combined Company's sales to date have been denominated in U.S.
dollars, the value of the U.S. dollar in relation to foreign currencies also
may adversely affect the Combined Company's results of operations. To the
extent the Combined Company changes its pricing practices to denominate prices
in foreign currencies, the Combined Company will be exposed to increased risks
of currency fluctuation. Any such fluctuation could have a material adverse
effect on the Combined Company's earnings or assets when translated into U.S.
dollars. Although the Combined Company has not entered into foreign exchange
contracts to hedge exchange transactions, it may do so in the future.
Additionally, the Combined Company generally will be subject to taxes in
foreign countries where the Combined Company operates. The Combined Company's
ability to claim a foreign tax credit against its U.S. federal income taxes is
subject to various limitations that could result in a high effective tax rate
on the Combined Company's earnings, if any. There can be no assurance that laws
or administrative practice relating to taxation, foreign exchange or other
matters in countries in which the Combined Company operates or will operate
will not change in a manner adverse to the Combined Company. There can be no
assurance that such factors will not have a material adverse effect on the
Combined Company's business, financial condition and results of operations.
The Combined Company is subject to the Foreign Corrupt Practices Act
("FCPA"), which generally prohibits U.S. companies and their intermediaries
from bribing foreign officials for the purpose of obtaining or keeping
business. The Combined Company may be exposed to liability under the FCPA as a
result of past or future actions taken without the Combined Company's knowledge
by independent sales agents, strategic partners and other intermediaries. Any
liability incurred by the Combined Company under the FCPA could be material.
RAPID CHANGES IN TECHNOLOGY
The telecommunications industry is characterized by rapidly changing
technology, evolving industry standards, emerging competition and frequent new
service introductions. Examples of some newly developed telecommunications
technologies include satellite-based transmission systems such as those
proposed by Iridium World Communications Ltd., GlobalStar Telecommunications
Limited and Teledesic Corporation, utilization of the Internet for voice and
data transmission, and digital wireless communications systems. The Combined
Company has invested significantly in sophisticated and specialized
telecommunications and computer technologies such as LINK-US and DIAL. The
Combined Company anticipates that it will be necessary to continue to select,
invest in and develop new and enhanced technology on a timely basis in order to
maintain its competitiveness. The Combined Company's future success will also
depend, in part, on its ability to continue to evolve and adapt
telecommunications technology solutions that keep pace with changing customer
demands. There can be no assurance that the Combined Company can successfully
identify new service opportunities and develop and bring new services to market
in a timely and cost-effective manner, or that services or technologies
developed by others will not render the Combined Company's services or
technologies noncompetitive or obsolete. In addition, there can be no assurance
that service developments or enhancements introduced by the Combined Company
will achieve or sustain market acceptance or that the Combined Company's
technologies will be compatible with new technology or new industry standards.
See "Business--Competition."
18
<PAGE>
DEPENDENCE ON EFFECTIVE MANAGEMENT INFORMATION SYSTEMS
As a telecommunications service provider, the Combined Company must record
and process millions of call detail records quickly and accurately to produce
customer bills and financial reports in a timely manner. The Combined Company
believes that the integration of its management information systems and
switching platforms is essential in order to provide least cost routing and
efficient billing. Although the Combined Company's billing systems and
switching platforms located at its network switching centers in Ft. Lauderdale
and Los Angeles, California are to be integrated following this offering, there
can be no assurance that such integration can be completed on a cost effective
and timely basis. If its current systems become obsolete or are damaged, the
Combined Company may be unable to upgrade or replace such systems with another
integrated system at commercially reasonable prices, or at all. Failure to
maintain integrated billing and management information systems could have a
material adverse effect on the Combined Company.
Demands on the Combined Company's information systems will increase
significantly if the Combined Company realizes anticipated growth and expands
its customer base. There can be no assurance that the Combined Company's
information systems will be adequate as the volume of customer traffic
increases or that the Combined Company will not suffer adverse consequences
should such systems fail to operate effectively. In addition, the Combined
Company has not previously reported financial results on a quarterly basis and
there can be no assurance that the Combined Company will not encounter material
delays or errors in billing of customers or in financial reporting. While the
Combined Company believes that its information systems are sufficient for its
current operations, it will be necessary to expand the capacities and
capabilities of its systems as the Combined Company grows. There can be no
assurance that the Combined Company will be able to do so, and the failure to
implement enhancements or to make the necessary investments in the Combined
Company's information systems in a timely fashion could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Network and Operations."
The computer system that runs the Combined Company's switches and billing
operation has not yet been upgraded to be Year 2000 compliant. The Combined
Company is currently evaluating its computer systems to identify potential
problems relating to the Year 2000 date change. The Combined Company does not
expect the cost to modify its computer systems to address Year 2000 issues will
be material to the Combined Company's financial condition or results of
operations, and does not anticipate any material disruption in its operations
as a result of any Year 2000 issues. The Combined Company does not have any
information concerning the potential impact of Year 2000 issues on any of its
suppliers or customers. In the event that the Combined Company or any of the
Combined Company's significant suppliers or customers does not successfully and
timely address Year 2000 issues, the Combined Company's business or operations
could be adversely affected.
RISK OF NETWORK FAILURE
The success of the Combined Company is largely dependent upon the efficient
and uninterrupted operation of its network infrastructure. While the Combined
Company has fully redundant network switching centers, the Combined Company's
systems and operations remain vulnerable to damage or interruption from fire,
earthquake or other natural disaster and from power loss, telecommunications
failure, break-ins and similar events. The Combined Company's switching centers
are located in Los Angeles, California and Ft. Lauderdale, Florida, and the
Combined Company has additional equipment located in Hong Kong, Mexico City,
Colorado Springs, Colorado and Seattle, Washington. Although the Combined
Company carries business interruption insurance, there can be no assurance that
such insurance will be sufficient to cover any losses suffered by the Combined
Company. In addition, despite the implementation of network security measures
by the Combined Company, its servers are vulnerable to computer viruses,
electronic break-ins and similar disruptions, any of which could lead to loss
of customer data. The occurrence of any of the foregoing could have a material
adverse effect on the Combined Company's business, financial condition and
results of operations.
In the first two quarters of 1997, GlobalTel experienced temporary technical
and operational difficulties associated with the relocation of its primary
switching platform from Las Vegas to Los Angeles. As the
19
<PAGE>
Combined Company attempts to expand its network to accommodate traffic growth,
there will be increased stress on its network equipment and traffic management
systems. There can be no assurance that the Combined Company will not
experience failure of all or part of its network. The Combined Company's
operations also are dependent on its ability to successfully expand its network
and integrate new and emerging technologies and equipment into its network,
which are likely to increase the risk of system failure and cause unforeseen
strains upon the network. Significant or prolonged system failures could damage
the reputation of the Combined Company and result in the loss of customers,
could hinder the Combined Company's ability to obtain new customers and could
have a material adverse effect on the Combined Company's business, financial
condition and results of operations. See "Business--Network and Operations."
DEPENDENCE UPON EXECUTIVE OFFICERS AND MANAGEMENT PERSONNEL
The Combined Company's operations are dependent upon the continued services
of Ronald P. Erickson, its Chairman of the Board, Robert A. Spade, its Vice-
Chairman of the Board and Chief Executive Officer, and Patrick R. Scanlon, its
President and Chief Operating Officer. The loss of the services of any of
Messrs. Erickson, Spade or Scanlon could have a material adverse effect on the
Combined Company. The Combined Company has employment agreements with Messrs.
Spade and Scanlon that expire in 2000 and intends to enter into an employment
agreement with Mr. Erickson. The Combined Company maintains a key-person life
insurance policy on the lives of Messrs. Spade and Scanlon in the amount of $2
million. The Combined Company's success also is dependent on its ability to
hire and retain other qualified management, technical, sales and customer
service personnel. There can be no assurance that the Combined Company will be
successful in recruiting and retaining such personnel. See "Management."
LIMITED PROPRIETARY RIGHTS
The Combined Company does not have a formal intellectual property protection
program. It relies on trade secrets and contractual restrictions to establish
and protect its technology. The Combined Company's success depends in part on
its ability to enforce intellectual property rights for its proprietary
technology, both in the United States and in other countries. The Combined
Company's proprietary technology is protected by the use of confidentiality
agreements that restrict the unauthorized distribution of the Combined
Company's proprietary data. While the Combined Company has attempted to limit
unauthorized use of its technology and the dissemination of its proprietary
information, there can be no assurance that the Combined Company will be able
to retain its proprietary technology and prohibit the unauthorized use of
proprietary information. The hardware and other equipment used by the Combined
Company for its call-reorigination systems are purchased from third party
suppliers and therefore are not proprietary to the Combined Company. See
"Business--Technology" and "--Intellectual Property."
VALUE ADDED TAX AND SALES TAX COLLECTION
The Combined Company does not currently collect value-added tax ("VAT"),
sales tax or other similar taxes (other than federal excise tax) in respect of
any of its services. In addition, the rules for imposition of VAT vary from
country to country. For example, some EU member states deem telecommunications
services provided by U.S.-based companies to be performed outside the EU and,
therefore, exempt from VAT. Other EU member states, however, impose VAT on
telecommunications services provided by non-EU based companies. If the Combined
Company is required to collect VAT, sales or similar taxes on the sale of its
services, its business, financial condition and results of operations could be
materially adversely affected.
Risks Related to the Offering
BENEFITS TO RELATED PARTIES; RELATED PARTY TRANSACTIONS
The Combined Company will use a portion of the net proceeds of the offering
to repay the Bridge Notes, as to which Robert A. Spade and Patrick R. Scanlon
have provided personal guaranties and pledged a portion of
20
<PAGE>
their Common Stock. Such guaranties and pledges will be released upon
completion of this offering. A number of the officers and directors of
GlobalTel who will become executive officers and directors of the Combined
Company hold notes and warrants to purchase common stock of GlobalTel. Messrs.
Ronald P. Erickson, Bruce L. Crockett and Lyman C. Hamilton, members of the
Board of Directors of the Combined Company, are also directors of IBNET, and
each holds options to purchase 50,000 shares of IBNET's common stock. In
addition, Mr. Hamilton owns 100,000 shares of IBNET's common stock. IBNET
previously entered into a ten-year marketing agreement with GlobalTel. See
"Management" and "Certain Transactions."
SIGNIFICANT PORTION OF PROCEEDS TO BE USED TO REPAY INDEBTEDNESS
The Combined Company will use an aggregate of approximately $7.5 million, or
33.8% of the net proceeds of the offering to the Combined Company, to repay
certain indebtedness of the Combined Company. See "Use of Proceeds."
ARBITRARY OFFERING PRICE DETERMINATION; LIMITED PUBLIC MARKET; PRICE
FLUCTUATIONS
The public offering price of the Common Stock has been determined by the
Combined Company and the Representatives of the Underwriters (the
"Representatives") and does not necessarily bear any relationship to the
assets, book value, or earnings history of the Combined Company or any other
investment criteria. Prior to this offering, there has been only a limited
public market for the Common Stock of CSI on the OTC Bulletin Board. Although
the Common Stock is expected to be approved for quotation on the Nasdaq
SmallCap Market upon notice of issuance, there can be no assurance that an
active trading market will develop. Factors such as quarterly fluctuations in
results of operations, the Combined Company's ability to meet analysts'
expectations, changes in financial estimates by securities analysts or market
conditions in general may cause the market price of the Common Stock to
fluctuate, perhaps substantially. In addition, in recent years the stock market
has experienced significant price and volume fluctuations. These fluctuations,
which are often unrelated to the operating performance of specific companies,
have had a substantial effect on the market price of the stock of many small
capitalization companies such as the Combined Company. Factors such as those
cited above, as well as other factors that may be unrelated to the operating
performance of the Combined Company and may be beyond its control, could
adversely affect the price of the Common Stock. See "Underwriting."
SIGNIFICANT SHARES ELIGIBLE FOR FUTURE SALE; RIGHTS TO ACQUIRE SHARES
Following this offering, 2,744,595 shares of the Combined Company's
outstanding shares of Common Stock will be "restricted securities" and may in
the future be sold upon registration or in compliance with an exemption from
registration such as the exemption provided by Rule 144 adopted under the
Securities Act. Rule 144 as currently in effect generally provides that
beneficial owners of shares who have held such shares for one year may sell
within a three-month period a number of shares not exceeding the greater of 1%
of the total outstanding shares or the average trading volume of the shares
during the four calendar weeks preceding such sale. Of the 1,676,702 shares of
restricted stock that are presently outstanding, 173,663 shares of restricted
stock will have satisfied the one year holding period required by Rule 144. The
remaining shares of restricted stock will become available for resale pursuant
to Rule 144 in various amounts each month, with all shares of restricted stock
being available for resale by August 1999. All of the officers and directors
and persons known by CSI to be the beneficial holders of 2% or greater of the
Common Stock outstanding prior to this offering (other than shares to be sold
by the Selling Shareholders hereunder and the Registered Securityholders) have
agreed with the Representatives not to sell such shares for a period of 12
months following the date of this Prospectus. The Registered Securityholders
have agreed with the Representatives not to sell their shares for periods of
180 days to one year following the date of this Prospectus. The sale of a
significant number of shares of Common Stock by existing shareholders could
have a material adverse effect on the market price of the Common Stock. See
"Shares Eligible For Future Sale."
At the date of this Prospectus, the Combined Company has reserved shares for
issuance upon the exercise or conversion of: (i) options to purchase up to
862,265 shares of Common Stock, which have a weighted average
21
<PAGE>
exercise price of $6.44 per share, (ii) warrants to purchase up to 1,184,973
shares of Common Stock, which have a weighted average exercise price of $6.69
per share, (iii) convertible promissory notes in the aggregate principal amount
of $30,000 convertible into an undeterminable number of shares of Common Stock,
which have a conversion price per share equal to 90% of the average bid and
asked price of the Common Stock on the day before conversion, and (iv) 213,581
shares of GlobalTel's Series A Convertible Preferred Stock, which will be
converted into approximately 136,692 shares of Common Stock and unpaid
dividends on the Series A Convertible Preferred Stock, which will be converted
into Common Stock at a price of $8.59 per share. At the completion of this
offering, the Representatives will receive warrants (the "Representatives'
Warrants") to purchase up to 400,000 shares of Common Stock at an exercise
price of $8.40 (120% of the offering price of the Common Stock) during a period
of four years commencing one year following the date of this Prospectus. During
the terms of the outstanding options and the Representatives' Warrants, the
holders thereof are given the opportunity to profit from a rise in the market
price of the Common Stock, and the exercise thereof may dilute the ownership
interests of existing shareholders, including investors in this offering. The
existence of warrants, options and the Representatives' Warrants may adversely
affect the terms on which the Combined Company may obtain additional equity
financing in the future. Moreover, the holders are likely to exercise their
rights to acquire Common Stock at a time when the Combined Company would
otherwise be able to obtain capital on terms more favorable than through the
exercise of such options and warrants. See "Management--Stock Option Plan" and
"Underwriting."
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND STATUTORY PROVISIONS
CSI's Articles of Incorporation authorizes the issuance of up to 5,000,000
shares of Preferred Stock. The Preferred Stock may be issued in series with the
material terms of any series determined solely by the Board of Directors. Such
terms would likely include dividend rights, conversion features, voting rights,
redemption rights and liquidation preferences. The Combined Company does not
currently anticipate that it will issue any Preferred Stock. However, if the
Combined Company does issue any series of Preferred Stock in the future, it is
likely that such shares will have dividend privileges and liquidation
preferences superior to those of the Common Stock. Further, the Preferred Stock
may be issued with voting, conversion or other terms determined by the Board of
Directors including, among others, dividend payment requirements, redemption
provisions, preferences as to dividends and distributions, and preferential
voting rights. In addition, certain provisions of Colorado law could have the
effect of delaying, deterring or preventing a change in control of the Combined
Company.
ABSENCE OF DIVIDENDS
The Combined Company does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. The Combined Company intends to retain
profits, if any, to fund growth and expansion. See "Dividend Policy."
DILUTION
This offering will result in immediate substantial dilution of $6.32 (90.3%)
per share, which amount represents the difference between the pro forma net
tangible book value per share after the offering and an assumed public offering
price of $7.00 per share. See "Dilution."
LIMITATION OF LIABILITY
The Combined Company's Articles of Incorporation provides that directors of
the Combined Company shall not be personally liable for monetary damages to the
Combined Company or its shareholders for a breach of fiduciary duty in their
capacities as directors, subject to limited exceptions. Although such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission, the presence of these provisions in
the Articles of Incorporation could prevent the recovery of monetary damages
against directors of the Combined Company. See "Management--Limitation of
Liability and Indemnification."
22
<PAGE>
LISTING AND MAINTENANCE CRITERIA FOR NASDAQ SECURITIES
The Combined Company has applied for listing on the Nasdaq SmallCap Market
and believes it will meet the recently adopted standards for such listing which
require: (i) net tangible assets of $4 million, (ii) a public float of one
million shares, (iii) a market value of the public float of $5 million, (iv)
three market makers, (v) a minimum $4.00 bid price per share of common stock,
and (vi) at least 300 shareholders.
Nasdaq has also adopted new criteria for continued Nasdaq SmallCap Market
eligibility. In order to continue to be included on the Nasdaq SmallCap Market
(thereby exempting a company from the "penny stock" regulations described
below), a company must maintain (i) at least two market makers, (ii) 300
holders of its common stock, (iii) a minimum bid price of $1.00 per share of
common stock, (iv) net tangible assets of $2 million (unless the company had
net income of $500,000 in two of the last three years or a market
capitalization of $35 million), (v) 500,000 shares in the public float, and
(vi) a market value of the public float of $1 million. The Combined Company's
failure to meet these maintenance criteria in the future may result in the
termination of listing of the Common Stock on the Nasdaq SmallCap Market. In
such event, trading, if any, in the Common Stock may continue to be conducted
in the non-Nasdaq over-the-counter market in what are commonly referred to as
OTC Bulletin Board and the "pink sheets." As a result, an investor may find it
more difficult to dispose of or to obtain accurate quotations as to the market
value of the Common Stock.
DISCLOSURE RELATED TO PENNY STOCKS
The Commission has adopted rules that define a "penny stock" as equity
securities priced at under $5.00 per share which are not listed for trading on
Nasdaq (unless (i) the issuer has a net worth of $2 million if in business for
more than three years or $5 million if in business for less than three years,
or (ii) the issuer has had average annual revenue of $6 million or more for the
prior three years). The Combined Company's Common Stock will not be considered
a "penny stock" initially if listed on the Nasdaq SmallCap Market. In the event
that the Common Stock is characterized in the future as penny stock, broker-
dealers dealing in the Common Stock will be subject to the disclosure rules for
transactions involving penny stocks which require the broker-dealer, among
other things, to (i) determine the suitability of purchasers of the Common
Stock, and obtain the written consent of purchasers to purchase such Common
Stock prior to the transaction, (ii) provide customers with required risk
disclosure documents, disclose quotation and compensation information and
provide monthly price information and other required information, and (iii)
disclose the best (inside) bid and offer prices for such Common Stock and the
price at which the broker-dealer last purchased or sold the Common Stock. The
additional burdens imposed upon broker-dealers may discourage them from
effecting transactions in penny stocks, which usually reduces the liquidity of
such securities.
RISKS RELATING TO FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Such forward-looking statements include, but are not limited to,
statements regarding the Combined Company's marketing plans, expectations
concerning growth in the market, and the planned use of proceeds. Actual
results could differ from those projected in any forward-looking statement. The
forward-looking statements are made as of the date of this Prospectus and the
Combined Company assumes no obligation to update such forward-looking
statements, or to update the reasons why actual results may differ from those
projected in the forward-looking statements. Numerous factors, including
without limitation those factors mentioned in this "Risk Factors" section,
could cause future results to differ substantially from those contemplated in
such forward-looking statements. A number of the factors that may influence
future results of operations are outside the Combined Company's control. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
23
<PAGE>
THE ACQUISITIONS
Following completion of the offering, CSI will complete the GlobalTel Merger
and the ITC Acquisition.
GlobalTel provides international telecommunications services, principally to
small- and medium-sized business customers, in emerging telecommunications
markets. Currently, GlobalTel offers international long-distance, calling cards
and enhanced voice services to more than 8,500 customers in over 120 countries.
GlobalTel began operations in 1995 with its entry into the international call-
reorigination business. GlobalTel primarily markets its telecommunications
services through a network of over 81 independent sales agents that currently
cover more than 80 countries. GlobalTel also has several strategic
relationships, including an exclusive marketing agreement with IBNET, the
managing member of the Consortium of Global Commerce, which will enable the
Combined Company to market its services through several thousand individual
chambers of commerce located in over 200 countries. In addition, Novell will
provide the Combined Company with a distribution channel for its services
through a select number of Novell's 25,000 value-added resellers ("VARs").
GlobalTel's telecommunications network includes an international network
switching center in Los Angeles, California consisting of two Summa Four
telecommunications switches and the use of a Northern Telecom DMS 250 tandem
switch.
ITC provides call-reorigination services, primarily targeting individuals and
small business customers in Europe, Africa and the Middle East. Currently, ITC
offers international long-distance, calling cards and enhanced voice services
to more than 5,800 customers. ITC markets its call-reorigination services
through a network of approximately 55 independent sales agents. ITC services
its customers through a switching platform located at its telecommunications
center in Ft. Lauderdale, Florida. The center is a fiber optic facility
consisting of two NACT 1000 port class 3 switches that direct international
telephone and facsimile traffic and also have a broad spectrum of Internet
capabilities. ITC's facility includes an integrated management information
system and switching platform, which enhances ITC's ability to provide least
cost routing and efficient billing services.
Benefit of Acquisitions
CSI believes that the GlobalTel Merger and the ITC Acquisition will provide a
number of advantages to the Combined Company. These advantages include:
Increased Buying Power with Carriers. The Combined Company will continue to
purchase minutes from substantial international telecommunications carriers
such as AT&T, Sprint, Cable & Wireless and Teleglobe. Upon completion of the
GlobalTel Merger and the ITC Acquisition, the Combined Company will use its
much larger combined call volume to seek lower rates from its carriers. In
addition, the carriers' minimum volume commitments will be easier for the
Combined Company to fulfill and redundant carrier deposits may be eliminated.
See "Business--Industry and Market Opportunity" and "--Network and Operations."
Combined Cost Structures. Although there can be no assurance, management
believes the integration of existing cost structures will result in immediate
savings for the Combined Company. CSI has traditionally concentrated its
marketing efforts on South America, GlobalTel has focused on the Pacific Rim,
while ITC has focused on Africa and Europe. Through relationships with its
carriers, each company believes it has achieved superior rate structures in its
geographic region. The Combined Company anticipates integrating the best of all
three rate structures to realize cost reductions.
Operating Efficiencies and Geographic Diversification. As the Combined
Company attains greater geographic diversity, management believes it will
realize efficiencies by having traffic spread more evenly over the 24-hour day.
Equipment and personnel can be allocated and optimized more efficiently over 24
hours, rather than over the shorter "peak" periods associated with each
continent. Geographic diversity also reduces the concentration of the Combined
Company's exposure to regulatory and business risk and reduces its dependence
upon individual independent sales agents.
24
<PAGE>
Cross-Marketing Additional Services. In addition to the telecommunications
services each company presently provides, GlobalTel's and ITC's switches make
it possible for the Combined Company to significantly expand its carrier and
reseller business, and to introduce new enhanced services such as enhanced fax
and business grade Internet services to its existing customers. In addition,
the Combined Company's DIAL and LINK-US technologies facilitate transparent
call-reorigination, under which the mechanics of the call-reorigination
process are invisible to the customer.
Elimination of Redundant Overhead. The Combined Company believes it will be
able to reduce its number of employees and its outside contractors through the
consolidation of functional areas such as accounting, customer service and
technical operations. The Combined Company intends that marketing, accounting
and administration functions will be centralized in Colorado Springs,
Colorado, while technical and customer service functions will be concentrated
in Fort Lauderdale, Florida. Some additional technical and administrative
functions will continue to be performed in Los Angeles, California and
Seattle, Washington.
Capitalizing on Personnel Experience and Expertise. CSI, GlobalTel and ITC
each possess broad telecommunications industry experience. The Combined
Company anticipates that synergies will be achieved in the areas of marketing,
collections, customer provisioning, carrier relationships, Internet expertise,
and development and enhancement of switch technologies. Pursuant to the
Reciprocal Telecommunications Agreement between CSI and ITC, those companies
have already integrated certain of their key operations and personnel.
Terms of the Acquisitions
In May 1998, CSI entered into an agreement to merge with GlobalTel.
Following the GlobalTel Merger, the Combined Company will be renamed "CS
GlobalTel, Inc." The agreement provides for the exchange of all of the
outstanding shares of common stock of GlobalTel for shares of Common Stock of
CSI. The holders of GlobalTel common stock will receive approximately .64
shares of Common Stock of CSI for each share of GlobalTel common stock. Upon
completion of the GlobalTel Merger, Ronald P. Erickson, the current Chief
Executive Officer of GlobalTel, will become Chairman of the Board of the
Combined Company. The GlobalTel Merger is conditioned on, among other things,
there being no material adverse change in the condition of either company. CSI
expects the GlobalTel Merger will be completed shortly after this offering.
CSI has entered into an agreement to acquire all of the outstanding capital
stock of ITC for $3.4 million in cash ($325,000 of which has already been paid
through June 30, 1998) and 295,714 shares of Common Stock based on an assumed
initial offering price of $7.00 per share, to be issued on the first
anniversary of the closing of this offering. A portion of the cash will be
held in escrow for one year to secure certain indemnification obligations of
the shareholders of ITC. ITC is currently owned by Lynch Family, LLC, Philip
A. Thomas and Sean Thomas. Upon completion of the ITC Acquisition, Philip A.
Thomas will become Vice President--General Manager and Sean Thomas will become
Director of Business Development for Europe of the Combined Company. The ITC
Acquisition is conditioned upon, among other things, there being no material
adverse change in the condition of either company. The ITC Acquisition is
expected to occur concurrent with the consummation of this offering.
Prior Acquisition
In September 1995, in an effort to increase the number of shareholders of
CSI's Common Stock, and become a publicly traded entity, CSI's shareholders
approved a plan of merger to acquire all of the outstanding shares of Redden
Dynamics Corporation ("Redden") for $34,500 cash and 204,694 shares of CSI's
Common Stock. Under the plan of merger, the shareholders of Redden received
one share of the CSI's Common Stock in exchange for each 54 shares of Redden
stock. Effective as of the date of the merger, all shares of Redden were
canceled, the assets of Redden became assets of CSI and Redden ceased to
exist. Redden's only recorded asset consisted of $11,050 of organizational
costs. Redden had no liabilities and had no revenue or expenses from its
inception. Subsequent to the merger, CSI determined that Redden's assets were
of no value to CSI. Accordingly, no amounts have been recognized for the
issuance of the Common Stock in connection with the merger of Redden. See
"Certain Transactions."
25
<PAGE>
USE OF PROCEEDS
Based on an assumed offering price of $7.00 per share, the gross proceeds
from sale of the shares of Common Stock offered by the Combined Company hereby
are estimated to be approximately $26.4 million ($30.6 million if the
Underwriters' overallotment option is fully exercised). After deducting
underwriting discounts and commissions and offering expenses, net proceeds
from the sale of the shares of Common Stock offered hereby are estimated to be
approximately $22.2 million ($26.0 million if the Underwriters' over-allotment
option is fully exercised). The Combined Company will not receive any proceeds
from the sale of shares by the Selling Shareholders or the Registered
Securityholders. The Selling Shareholders will pay the underwriting discounts
and commissions and offering expenses relating to the sale of Selling
Shareholders' shares of Common Stock. The Combined Company expects to use the
net proceeds during the 12 months following the offering as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
APPLICATION OF PROCEEDS DOLLAR AMOUNT NET PROCEEDS
----------------------- ------------- -------------
<S> <C> <C>
Payment of deferred payables (1).................. $3,500,000 15.8%
Completion of ITC Acquisition (2)................. 3,200,000 14.4
Repayment of Bridge Notes (3)..................... 3,000,000 13.5
Repayment of GlobalTel notes (4).................. 2,300,000 10.4
Capital expenditures (5).......................... 2,130,000 9.6
Merger and acquisition fee (6).................... 1,050,000 4.7
Repayment of GlobalTel Full Coverage Notes (7).... 925,000 4.2
Repayment of 12% Notes (8)........................ 810,000 3.7
Completion of Rescission Offer (9)................ 740,000 3.3
Repayment of short term debt (10)................. 500,000 2.3
Technical and development (11).................... 400,000 1.8
Sales and marketing (12).......................... 300,000 1.4
Working capital and general corporate
purposes (13).................................... 3,300,000 14.9
----------- -----
$22,155,000 100.0%
=========== =====
</TABLE>
- --------
(1) Represents amounts to be used for the payment of deferred payables, which
amounts consist primarily of $2.2 million to carriers and $1.1 million for
professional services.
(2) Represents amounts to be paid to Lynch Family, LLC, Philip Thomas and Sean
Thomas as partial consideration for all of the capital stock of ITC and
estimated acquisition costs of $100,000. Through June 30, 1998, the
Combined Company has paid $325,000 in connection with the ITC Acquisition.
In addition, on the first anniversary of the closing of this offering,
Lynch Family, LLC and Messrs. Thomas and Thomas will receive 295,714
shares of Common Stock based on an assumed initial offering price of $7.00
per Share. See "The Acquisitions."
(3) Represents amounts to be used for the repayment of the entire $2,840,000
amount of Bridge Notes and estimated accrued interest thereon. The Bridge
Notes bear interest at a rate of 10% per annum and are repayable on the
earlier of five days after the consummation of this offering or December
30, 1998. CSI used the proceeds of the December 1997 Financing principally
in connection with the repayment of trade payables and notes payable to
telecommunications carriers. Robert A. Spade and Patrick R. Scanlon each
guaranteed payment of up to $750,000 owed under the Bridge Notes. First
Mortgage Income Trust ("First Mortgage"), a trust affiliated with James L.
Williams, a principal shareholder of CSI, will be repaid $100,000 plus
accrued interest from the proceeds of this offering. See "Description of
Securities--Description of Indebtedness."
(4) Represents amounts to be used for the repayment of certain notes issued by
GlobalTel at various times in 1996 and 1997 and estimated accrued interest
thereon. Such notes bear interest at a rate of 10% per annum, and are
repayable in June 1998 through March 1999. The proceeds from the issuance
of such notes were for working capital and general corporate purposes.
Michael S. Brownfield, a director designee of the Combined Company, will
receive $385,000 plus accrued interest from the proceeds of this offering.
26
<PAGE>
(5) Represents amounts to be used to purchase or lease and locate regional
switches or other telecommunications equipment in South America, Europe,
Africa or Asia to facilitate least cost routing. See "Business."
(6) Represents amounts to be paid to Cruttenden Roth Incorporated as a fee in
conjunction with the GlobalTel Merger.
(7) Represents amounts to be used for the repayment of the entire $867,000
principal amount of outstanding GlobalTel Full Coverage Notes and estimated
accrued interest thereon. The GlobalTel Full Coverage Notes bear interest
at a rate of 10% per annum and are repayable in January 1999. The proceeds
from the issuance of the GlobalTel Full Coverage Notes were used for
working capital and general corporate purposes. Michael S. Brownfield and
Bruce L. Crockett, both director designees of the Combined Company, will be
repaid $25,000 and $25,000, respectively, plus accrued interest from the
proceeds of this offering. See "Description of Securities--Description of
Indebtedness."
(8) Represents amounts to be used for the repayment of $750,000 principal
amount of certain notes issued by CSI (the "12% Notes") and estimated
accrued interest thereon. The 12% Notes bear interest at a rate of 12% per
annum and are repayable upon the completion of this offering. The proceeds
of the issuance of the 12% Notes were used for working capital and general
corporate purposes. Robert A. Spade and Patrick R. Scanlon guaranteed
payment of all amounts owed under the 12% Notes. ProFutures Special
Equities Fund, L.P., the holder of the 12% Notes is a principal shareholder
of the Combined Company. See "Description of Securities--Description of
Indebtedness" and "Certain Transactions."
(9) Represents amount to be paid to certain securityholders of GlobalTel in
connection with the Rescission Offer. See "The Rescission Offer."
(10) Represents amounts to be used for the repayment of approximately $520,000
of certain short term debt incurred by CSI and estimated accrued interest
thereon. Such debt consists of $385,000 owed to certain holders of short
term notes issued by CSI and $133,000 for obligations to repurchase
shares of Common Stock. The notes bear interest at a rate of either 10%
or 15% per annum and are due upon completion of this offering. The
proceeds from the issuance of such notes were used for working capital
and general corporate purposes. First Mortgage will be repaid $40,000
plus accrued interest from the proceeds of this offering. Richard F.
Nipert, Dean H. Cary and Charles Shields, directors of the Combined
Company, will receive $40,000, $100,000 and $50,000, respectively, plus
accrued interest from the proceeds of this offering.
(11) Represents amounts to be used to purchase or lease and locate regional
switches or other telecommunications equipment in South America, Europe,
Africa or Asia to facilitate least cost routing. See "Business."
(12) Represents amounts to be paid for recruiting and for salaries of
specialized sales personnel to increase its penetration of emerging
telecommunications markets. This amount also represents funds to be used
to pay for additional technical, customer service and overhead resulting
from the expansion of the sales and marketing effort. See "Business--
Business Strategy."
(13) Working capital will be used, among other things, for capital
expenditures, to pay security deposits in connection with carrier
agreements and to pay general and administrative expenses. This amount
includes approximately $94,000 payable to a former employee of CSI and
$50,000 payable to a director of CSI.
The foregoing represents the Combined Company's best estimate of the use of
the net proceeds to be received in this offering, based on current planning
and business conditions. However, the Combined Company reserves the right to
change such uses when and if market conditions or unexpected changes in
operating conditions or results of operations occur. The amounts actually
expended for each use may vary significantly depending upon a number of
factors including, but not limited to, future growth and the amount of cash
generated by the Combined Company's operations. The Combined Company believes
that its existing capital resources, together with the net proceeds of this
offering, will be sufficient to maintain the current and planned operations of
the Combined Company for a period of at least 12 months from the date of this
Prospectus. Net proceeds not immediately required for the purposes described
above will be invested principally in U.S. government securities, short-term
certificates of deposit, money market funds or other short-term, interest-
bearing securities.
27
<PAGE>
DIVIDEND POLICY
CSI has never declared or paid any cash dividends or distributions on its
capital stock. The Combined Company anticipates that for the foreseeable future
all earnings will be retained for use in the Combined Company's business and no
cash dividends will be paid to shareholders. Any payment of cash dividends in
the future on the Common Stock will be dependent upon the Combined Company's
financial condition, results of operations, current and anticipated cash
requirements, plans for expansion, restrictions, if any, under debt
obligations, as well as other factors that the Board of Directors deems
relevant.
28
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock currently is traded infrequently in limited quantities on
the OTC Bulletin Board under the symbol CSYG. During the three month period
ended July 17, 1998, the average trading volume for the Common Stock was 1,481
shares per day, as adjusted to give effect to the proposed 1 for 4 reverse
stock split. The following table sets forth the range of high and low sales
prices per share for the Common Stock through the fiscal quarter ending
October 31, 1996, and the range of high and low closing bid prices thereafter,
as adjusted to give effect to the proposed 1 for 4 reverse stock split. Market
quotations represent prices between dealers and do not reflect retail mark-
ups, mark-downs or commissions, and may not represent actual transactions.
There was no market for the Common Stock prior to March 18, 1996.
<TABLE>
<CAPTION>
PRICE RANGE OF
FISCAL QUARTER ENDED COMMON STOCK
-------------------- --------------
HIGH LOW
------- ------
<S> <C> <C>
1996
April 30, 1996 (commencing March 18, 1996)................... $ 13.00 $ 6.00
1997
July 31, 1996................................................ 13.00 6.50
October 31, 1996............................................. 14.00 5.00
January 31, 1997............................................. 4.00 1.75
April 30, 1997............................................... 3.50 .75
1998
July 31, 1997................................................ 3.25 .81
October 31, 1997............................................. 2.50 .81
January 31, 1998............................................. 6.50 1.25
April 30, 1998............................................... 7.88 2.33
1999
July 31, 1998 (through July 17, 1998)........................ 7.88 3.63
</TABLE>
On July 17, 1998, the closing bid price of the Common Stock as reported on
the OTC Bulletin Board was $6.75 per share. CSI had approximately 672 holders
of record of Common Stock as of July 17, 1998. Of such amount, CSI believes
that 254 shareholders own Common Stock of CSI in street name.
29
<PAGE>
DILUTION
As of March 31, 1998, CSI's net tangible book value was a $(2.2) million
deficit or $(0.89) per share of Common Stock. After giving effect to the
issuance of the 12% Notes, the issuance of 74,074 shares of Common Stock for
$250,000 in May 1998, the GlobalTel Merger, the ITC Acquisition and the
issuance of shares of Common Stock in exchange for certain indebtedness upon
completion of this offering (the "Pro Forma Combined adjustments"), and the
sale by the Combined Company of 3,778,026 shares of Common Stock at an assumed
offering price of $7.00 per share and the receipt of the estimated net
proceeds thereof, the pro forma net tangible book value of the Combined
Company as of March 31, 1998 would have been approximately $5.9 million or
$0.68 per share. This represents an immediate increase in pro forma net
tangible book value of $3.90 per share to existing shareholders and an
immediate dilution of $6.32 per share to new investors. "Dilution" is
determined by subtracting pro forma net tangible book value per share after
the offering from the assumed offering price per share of Common Stock, as
illustrated by the following table:
<TABLE>
<S> <C> <C>
Assumed public offering price................................ $7.00
Net tangible book value (deficit) per share as of March 31,
1998...................................................... $(0.89)
Decrease per share of Common Stock attributable to the Pro
Forma
Combined adjustments ..................................... (2.33)
Increase per share of Common Stock attributable to new in-
vestors................................................... 3.90
------
Net tangible book value per share after the offering......... 0.68
-----
Dilution per share of Common Stock to new investors.......... $6.32
=====
Dilution as a percentage of assumed offering price........... 90.3%
=====
</TABLE>
The following table summarizes as of March 31, 1998, the number of shares of
Common Stock purchased for cash, the total consideration paid and the average
cash price per share paid by the existing shareholders and by new investors
(assuming the sale of 4.0 million shares of Common Stock at the assumed
offering price of $7.00 per share, before deduction of underwriting discounts
and commissions and other estimated offering expenses):
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
----------------- ------------------- (PER
NUMBER PERCENT AMOUNT PERCENT SHARE)
--------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing sharehold-
ers(1)(2).............. 4,839,482 54.7% $12,999,373 31.7% $2.69
New shareholders(2)..... 4,000,000 45.3 28,000,000 68.3 7.00
--------- ----- ----------- -----
Total................... 8,839,482 100.0% $40,999,373 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Includes 1,198,779 shares of Common Stock to be issued to GlobalTel
shareholders in connection with the GlobalTel Merger, 162,286 Bridge
Shares to be issued immediately prior to the closing of this offering
based on an assumed offering price of $7.00 per share, 74,074 shares of
Common Stock issued in May 1998, and 888,209 shares to be issued in
connection with certain promissory notes upon the completion of this
offering. See "Description of Securities."
(2) The sale of 221,974 shares of Common Stock by the Selling Shareholders in
this offering will reduce the number of shares of Common Stock held by
existing shareholders to 4,617,508, or 53.6% of the total shares of Common
Stock outstanding. See "Principal and Selling Shareholders."
The foregoing information excludes the Additional Securities and assumes no
exercise of the over-allotment option and no exercise of the Representatives'
Warrants. See "Description of Securities" and "Underwriting." To the extent
that the Additional Securities are issued, there will be further dilution to
new investors.
30
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of CSI at March
31, 1998, (ii) the Pro Forma Combined capitalization to reflect the issuance
of the 12% Notes, the issuance of 74,074 shares of Common Stock for $250,000
in May 1998, the GlobalTel Merger, the ITC Acquisition, and the issuance of
shares of Common Stock in exchange for certain indebtedness upon completion of
this offering and (iii) the Pro Forma As Adjusted capitalization to reflect
the sale of 3,778,026 million shares of Common Stock at an assumed public
offering price of $7.00 (after deducting underwriting discounts and
commissions and estimated offering expenses).
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------
PRO FORMA PRO FORMA
CSI ACTUAL COMBINED AS ADJUSTED
---------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash(3).................................... $ 236 $ 3,074 $ 20,223
====== ======= ========
Long-term debt, including current maturi-
ties of notes payable, bridge loans and
capital leases(3)......................... $2,993 $10,262 $ 6,843
Common stock subject to rescission, 85,174
issued and outstanding.................... -- 740 740
Shareholders' (deficit) equity:
Preferred stock, no par value; 5,000,000
shares authorized, none issued or
outstanding............................. -- -- --
Common Stock, no par value; 25,000,000
shares authorized; 2,516,134, 4,839,482
and 8,617,508 shares issued and
outstanding, respectively(1)(2)......... 2,651 13,977 35,999
Obligation to issue common stock......... 795 1,179 1,179
Common stock options..................... 37 571 571
Common stock warrants.................... -- 965 965
Notes receivable from shareholder........ (35) (35) (35)
Accumulated deficit...................... (5,543) (8,463) (9,176)
Treasury stock, at cost.................. (133) (133) --
------ ------- --------
Total shareholders' (deficit) equity .... (2,228) 8,061 29,503
------ ------- --------
Total capitalization..................... $ 765 $19,063 $ 37,086
====== ======= ========
</TABLE>
- --------
(1) Reflects 1,198,779 shares of CSI Common Stock issued to GlobalTel
shareholders to effect the GlobalTel Merger, 162,286 Bridge Shares, 74,074
shares of Common Stock issued in May 1998, and 888,209 shares of Common
Stock to be issued in connection with certain promissory notes on a Pro
Forma Combined basis; and, the sale of 3,778,026 shares of Common Stock in
the offering, which excludes sale of 221,974 shares by Selling
Shareholders, at an assumed offering price of $7.00 per share on a Pro
Forma As Adjusted basis.
(2) Excludes the Additional Securities. See "Summary--The Offering."
(3) Net cash proceeds on a Pro Forma As Adjusted basis are net of estimated
underwriters discounts and fees of $4,300,000 and the repayment of certain
indebtedness. See "Notes to Pro Forma Condensed Combined Financial
Statements."
31
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data should be read in conjunction with the
financial statements of CSI, GlobalTel and ITC and the related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected financial data below have been derived from CSI's
audited financial statements as of April 30 1996 and 1997 and December 31, 1997
and for each of the four years in the period ended April 30, 1997 and the eight
months ended December 31, 1997, from GlobalTel's audited consolidated financial
statements as of December 31, 1996 and 1997 and for each of the three years in
the period ended December 31, 1997, from ITC's audited statement of operations
data for the ten months ended October 31, 1997 and the years ended December 31,
1995 and 1996, and the balance sheet data as of December 31, 1996, and October
31, 1997. The selected financial data for CSI with respect to the three months
ended April 30, 1997 and March 31, 1998 and the balance sheet data as of March
31, 1998 have been derived from CSI's unaudited financial statements. The
selected financial data for GlobalTel and ITC with respect to the three months
ended March 31, 1997 and 1998 and the balance sheet data as of March 31, 1998
have been derived from GlobalTel's and ITC's unaudited financial statements.
Management believes that CSI's, GlobelTel's and ITC's interim financial
statements as of March 31, 1998 and for the three months ended March 31, 1997,
April 30, 1997 and March 31, 1998 include all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the financial position
and the results of operations of CSI, GlobelTel and ITC for such interim
periods. Prior results are not a prediction of future results of operations.
The Pro Forma As Adjusted information does not purport to present the Combined
Company's financial position or results of operations that would have occurred
had the transactions, to which pro forma effect is given, been consummated as
of the dates or for the periods indicated and do not purport to project the
Combined Company's financial position or results of operations at any future
date or for a future period, and should be read in conjunction with the
separate financial statements of CSI, GlobalTel and ITC and the pro forma
condensed combined financial statements of CSI, GlobalTel and ITC.
32
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL--CSI
-------------------------------------------------------------
EIGHT THREE
12 MONTHS ENDED MONTHS MONTHS
APRIL 30, ENDED ENDED
------------------------------- DEC. 31, -------------------
APRIL 30, MARCH 31,
1994 1995 1996 1997 1997 1997 1998
----- ------ ------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
operations
data:
Revenue......... $ 137 $1,838 $ 6,741 $11,865 $8,115 $3,206 $ 2,279
Cost of
revenue........ 191 1,298 5,963 7,755 4,879 2,060 1,424
----- ------ ------- ------- ------ ------ --------
Gross margin.... (54) 540 778 4,110 3,236 1,146 855
Operating
expenses:
Sales and
marketing...... 29 529 1,573 2,080 2,007 589 557
General and
administrative.. 461 625 1,652 2,024 2,103 628 684
Depreciation and
amortization... 13 19 58 103 92 33 42
----- ------ ------- ------- ------ ------ --------
Total operating
expenses....... 503 1,173 3,283 4,207 4,202 1,250 1,283
----- ------ ------- ------- ------ ------ --------
Income
(loss) from operations.. (557) (633) (2,505) (97) (966) (104) (428)
Interest expense, including
amortization of
debt
discounted..... -- -- (19) (162) (113) (49) (698)
Other income
(expense)...... -- -- -- -- (85) -- --
----- ------ ------- ------- ------ ------ --------
Income (loss)
before income
taxes and
extraordinary
item........... (557) (633) (2,524) (259) (1,164) (153) (1,126)
Income tax
provision
(benefit)...... -- -- -- -- -- -- --
----- ------ ------- ------- ------ ------ --------
Income (loss)
before
extraordinary
item........... (557) (633) (2,524) (259) (1,164) (153) (1,126)
Extraordinary
item--gain
on extinguishment of
debt........... -- -- -- -- 747 -- --
----- ------ ------- ------- ------ ------ --------
Net income
(loss)......... $(557) $ (633) $(2,524) $ (259) $ (417) $ (153) $ (1,126)
===== ====== ======= ======= ====== ====== ========
Series A
convertible
preferred stock
dividends...... -- -- -- -- -- -- --
----- ------ ------- ------- ------ ------ --------
Net income
(loss)
applicable to
common
shareholders... $(557) $ (633) $(2,524) $ (259) $ (417) $ (153) $ (1,126)
===== ====== ======= ======= ====== ====== ========
EBITDA.......... $(544) $ (614) $(2,447) $ 6 $ (874) $ (71) $ (386)
===== ====== ======= ======= ====== ====== ========
Basic income
(loss) per
share (excluding
extraordinary
item).......... $(.71) $(.43) $(1.27) $(.11) $(.47) $(.06) $(.45)
===== ====== ======= ======= ====== ====== ========
Weighted average
number of
shares
outstanding.... 788 1,484 1,990 2,321 2,472 2,408 2,514
===== ====== ======= ======= ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL--GLOBALTEL HISTORICAL--ITC AS ADJUSTED
-------------------------------------------- ------------------------------------------- ------------------
THREE THREE
12 MONTHS MONTHS 12 MONTHS MONTHS THREE
ENDED ENDED ENDED 10 MONTHS ENDED 12 MONTHS MONTHS
DEC. 31, MARCH 31, DEC. 31, ENDED MARCH 31, ENDED ENDED
-------------------------- ----------------- --------------- OCTOBER 31, --------------- DEC. 31, MARCH 31,
1995 1996 1997 1997 1998 1995 1996 1997 1997 1998 1997 1998
-------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
operations
data:
Revenue......... $ 2,113 $ 9,136 $12,862 $ 4,385 $ 1,698 $8,197 $7,603 $8,054 $2,126 $2,610 $ 35,261 $ 6,587
Cost of
revenue........ 1,928 8,230 11,171 3,811 1,473 5,407 5,070 6,790 1,698 1,978 27,050 4,875
-------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- ---------
Gross margin.... 185 906 1,691 574 225 2,790 2,533 1,264 428 632 8,211 1,712
Operating
expenses:
Sales and
marketing...... 238 682 788 227 120 1,220 1,099 715 211 252 4,468 929
General and
administrative.. 1,536 5,773 7,119 1,412 1,523 1,149 1,446 1,388 414 421 12,787 2,628
Depreciation and
amortization... 111 98 253 29 91 53 69 73 16 30 8,625 2,187
-------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- ---------
Total operating
expenses....... 1,885 6,553 8,160 1,668 1,734 2,422 2,614 2,176 641 703 25,880 5,744
-------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- ---------
Income
(loss) from
operation...... (1,700) (5,647) (6,469) (1,094) (1,509) 368 (81) (912) (213) (71) (17,669) (4,032)
Interest expense,
including
amortization of
debt
discounted..... (34) (225) (1,368) (192) (1,023) (11) (21) (57) (3) (12) (1,001) (949)
Other income
(expense)...... -- -- -- -- -- 8 113 119 (17) 12 -- --
-------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- ---------
Income (loss)
before income
taxes and
extraordinary
item........... (1,734) (5,872) (7,837) (1,286) (2,532) 365 11 (850) (233) (71) (18,670) (4,981)
Income tax
provision
(benefit)...... -- -- -- -- -- 21 4 -- -- -- -- --
-------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- ---------
Income (loss)
before
extraordinary
item........... (1,734) (5,872) (7,837) (1,286) (2,532) 344 7 (850) (233) (71) (18,670) (4,981)
Extraordinary
item--gain
on extinguishment
of debt........ -- -- -- -- -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- ---------
Net income
(loss)......... $(1,734) $(5,872) $(7,837) $(1,286) $(2,532) $ 344 $ 7 $ (850) $ (233) $ (71) $(18,670) $(4,981)
======== ======== ======== ======== ======== ======= ======= =========== ======= ======= ========== =========
Series A
convertible
preferred stock
dividends...... -- -- (39) -- (16) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- ---------
Net income
(loss)
applicable to
common
shareholders... $(1,734) $(5,872) $(7,876) $(1,286) $(2,548) $ 344 $ 7 $ (850) $ (233) $ (71) $(18,670) (4,981)
======== ======== ======== ======== ======== ======= ======= =========== ======= ======= ========== =========
EBITDA.......... $(1,589) $(5,549) $(6,216) $(1,065) $(1,418) $ 429 $ 101 $ (839) $ (197) $ (41) $ (9,044) $(1,845)
======== ======== ======== ======== ======== ======= ======= =========== ======= ======= ========== =========
Basic income
(loss) per
share (excluding
extraordinary
item).......... $(2.75) $(5.88) $(6.48) $(1.28) $(1.46) $287 $5.83 $(708) $194 $(59) $ (2.19) $ (.58)
======== ======== ======== ======== ======== ======= ======= =========== ======= ======= ========== =========
Weighted average
number of
shares
outstanding.... 630 999 1,215 1,002 1,745 1 1 1 1 1 8,536 8,617
======== ======== ======== ======== ======== ======= ======= =========== ======= ======= ========== =========
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL--CSI HISTORICAL--GLOBALTEL
-------------------------------------------------- -------------------------
APRIL 30, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
-------------------------- ------------ --------- -------------- ---------
1994 1995 1996 1997 1997 1998 1996 1997 1998
---- ---- ------ ------ ------------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................ $ 7 $ 82 $ 57 $ 147 $ 429 $ 236 $ 446 $ 849 $ 98
Working capital (deficit)....... (114) (288) (2,152) (2,331) (2,612) (3,923) (5,248) (4,934) (9,094)
Total assets.................... 161 459 1,519 1,946 2,975 2,612 3,701 4,354 3,513
Long-term debt, net of current
maturities and debt discount.... -- -- -- -- -- -- 2,283 3,832 2,000
Common stock subject to
rescission...................... -- -- -- -- -- -- 1,519 2,455 2,455
Total shareholders' equity
(deficit)....................... (42) (182) (1,856) (1,669) (1,112) (2,228) (7,565) (8,534) (11,002)
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL--ITC AS ADJUSTED
---------------------------------- ------------
DECEMBER 31, OCTOBER 31, MARCH 31, MARCH 31,
------------ ----------- --------- ------------
1996 1997 1998 1998
------------ ----------- --------- ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................ $ 218 $ 848 $ 980 $18,678
Working capital (deficit)....... (383) (1,259) (1,423) 5,723
Total assets.................... 1,956 2,720 3,334 49,214
Long-term debt, net of current
maturities and debt discount.... 21 292 234 2,234
Common stock subject to
rescission...................... -- -- -- 740
Total shareholders' equity
(deficit)....................... 69 (781) (899) 29,503
</TABLE>
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
With the exception of historical matters, the matters discussed herein are
forward-looking statements that involve risks and uncertainties. Forward-
looking statements include, but are not limited to, statements concerning
anticipated trends in revenue and net income, the mix of the Combined
Company's revenue, projections concerning operations and available cash flow.
The Combined Company's actual results could differ materially from the results
discussed in such forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed in "Risk Factors" and elsewhere in this Prospectus.
THE COMBINED COMPANY
OVERVIEW
The Combined Company is a growing provider of international
telecommunications services offering long distance, calling cards and enhanced
voice and data services. With more than 16,700 customers in over 170
countries, the Combined Company primarily serves markets that historically
have been underserved by large telecommunications providers and ITOs. The
Combined Company provides its telecommunications services through its (i)
voice switching and global fax messaging infrastructure in Los Angeles,
California, (ii) voice switching and billing center in Ft. Lauderdale,
Florida, (iii) access to third party infrastructure through international
telecommunications carriers and through Equant, a global data network services
provider, and (iv) enhanced fax nodes in Hong Kong and Mexico City.
The Combined Company currently focuses on international call-reorigination,
capitalizing on the arbitrage opportunity created by differences between U.S.
and international long-distance rates. The Combined Company also resells its
international long-distance services to other telecommunications carriers and
resellers on a wholesale basis. In addition, the Combined Company provides
prepaid calling cards and enhanced voice services, consisting of voice-mail
and conference calling. For the 12 months ended December 31, 1997,
approximately 88.0% of the Combined Company's revenue was derived from call-
reorigination and approximately 12.0% was provided by carrier resales. Going
forward, the Combined Company intends to leverage the expertise derived from,
and capitalize on the established customer base generated by, its call-
reorigination business to provide higher margin telecommunications services
such as call-through, enhanced fax and business grade Internet services.
The Combined Company generally realizes higher gross margins from its call-
reorigination services than from sales to carriers and resellers. Sales to
carriers and resellers, however, provide a source of additional revenue and
add significant minutes originating on the Combined Company's network, which
improves the Combined Company's purchasing power with its carriers and enables
it to take advantage of volume discounts. Unlike call-reorigination, minutes
generated from sales to carriers and resellers generally are "billable"
minutes even if the destination segment of the call is not answered or
connected. Furthermore, the Combined Company is not responsible for billing
end users or paying independent sales agent commissions. Therefore, operating
costs generally are lower for sales to carriers and resellers.
The Combined Company seeks to minimize costs through negotiation of
favorable rates with its existing long distance carriers. Under certain
carrier contracts, the Combined Company obtains guaranteed rates, which
generally are more favorable than otherwise would be available, by committing
to purchase a minimum number of minutes from such carriers. If the Combined
Company fails to meet its minimum requirements under a carrier contract, it
could still be required to pay its minimum monthly commitment as a penalty.
The Combined Company is seeking to enter into agreements with additional long
distance carriers in order to apply "least cost routing" techniques, which
enable the Combined Company to access the lowest transmission costs charged by
its carriers for each call segment. The Combined Company also intends to
establish additional switching facilities
34
<PAGE>
outside the U.S. in order to utilize a larger number of long distance carriers
and reduce its per minute transmission costs. See "Use of Proceeds" and
"Business--Business Strategy."
As part of its acquisition strategy, CSI has entered into an agreement in
principle to merge with GlobalTel and an agreement to acquire ITC. The
GlobalTel Merger and the ITC Acquisition will enable the Combined Company to
rapidly obtain access to complementary infrastructure, personnel, customer
bases, sales and marketing resources and strategic relationships. The
integration of GlobalTel and ITC with CSI will afford the Combined Company an
opportunity to increase revenue through cross-marketing its services to each
company's customer base and the sale of excess international capacity to other
carriers and resellers. The Combined Company will seek to improve its margins
through the administrative efficiencies and operating synergies created by the
combination of the companies and through improved rate structures with
carriers.
The Combined Company's fiscal year end will be December 31.
ACCOUNTING POLICIES AND PROCEDURES
Revenue is generated primarily from international call-reorigination services
and is based on the minutes of customer use billed by the Combined Company on
completed calls. The Combined Company's call-reorigination revenue represents
the majority of the Combined Company's revenue and has increased as the
Combined Company has added independent sales agents and introduced its services
into new countries. The Combined Company also sells international long distance
minutes to other telecommunications carriers and resellers on a wholesale
basis. The Combined Company's call re-origination customer base is diversified
both geographically and by customer type.
Approximately 60.0% of all revenue is collected through automatic charges to
pre-approved customer credit cards. Under the terms of their agreements, the
independent sales agents are responsible for collecting customer payments
except for credit card payments, and independent sales agents generally are
responsible for customer bad debts less, in some cases, an allowance granted by
the Combined Company. Failure of independent sales agents to collect and remit
customer payments to the Combined Company presents a risk to the Combined
Company. Although collection terms for cash customers are net 30 days, the time
necessary to process and collect billings through the Combined Company's
independent sales agents may at times result in receivables reaching 60 to 90
days.
Cost of revenue consists primarily of costs paid to carriers for the
origination and transmission of voice and data telecommunications services and
to a lesser extent, debit card costs and allowances and discounts. Currently, a
substantial portion of the Combined Company's telecommunications revenue is
derived from services that are accessed through the facilities of long distance
carriers. Accordingly, a significant portion of the Combined Company's cost of
telecommunications services is variable, based on the number of minutes of use,
with transmission costs being the Combined Company's most significant expense.
In March 1998, the Combined Company's aggregate minimum monthly commitments
were approximately $564,000, which represented approximately 34.6% of the
Combined Company's monthly variable transmission cost.
Sales and marketing expense primarily represents commissions paid to
independent sales agents, compensation paid to in-house salespersons and
advertising expense. To date, the Combined Company's decision to use
independent sales agents has been primarily driven by the low initial fixed
costs associated with this distribution channel, and the benefits of
independent sales agents' familiarity with local business and marketing
practices. See "Risk Factors--Dependence on Key Sales Agents" and "Business--
Sales and Marketing."
General and administrative expense primarily represents compensation for
customer service, executive and accounting personnel, costs associated with the
operation and maintenance of the Combined Company's network switching centers,
costs related to the technical development of, and market planning for, the
Combined Company's planned enhanced services, professional fees, bad debt
expense and other operating and corporate
35
<PAGE>
overhead costs. The Combined Company has a policy of aggressively attempting to
collect receivables from independent sales agents and customers who fail to
remit payment in a timely manner. While the Combined Company seeks to minimize
bad debt, the Combined Company's experience indicates that a certain portion of
past due receivables will never be collected.
Depreciation expense includes depreciation of switching and network
equipment, furniture and fixtures. The Combined Company provides for
depreciation using the straight line method of depreciation over the estimated
useful lives of the assets, which range from five to ten years. The Combined
Company will incur amortization expense which relates to the amortization of
the intangible assets recorded in the GlobalTel Merger and the ITC Acquisition.
The intangible assets will include identifiable intangible assets which will be
amortized over a two to seven year period and that relate to distribution and
customer arrangements, intellectual property and licenses. Identifiable
intangible assets also include in-process research and development which will
be charged to operating expense upon completion of the GlobalTel Merger. In
addition, intangible assets include goodwill, which will be amortized over a
five-year period.
Interest and debt discount expense includes interest expense on indebtedness
and non-cash financing expenses including amortized debt discount and amortized
deferred offering costs associated with debt financing.
As used herein, "EBITDA' is defined as net income or loss plus depreciation,
amortization and interest expense, income taxes and other non-cash charges,
minus extraordinary income and gains and non-cash income, if any, and plus
extraordinary losses, if any. EBITDA is not a measure of financial performance
under generally accepted accounting principles and should not be considered a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles.
COMPARISON OF 12 MONTHS ENDED DECEMBER 31, 1995, 1996 AND 1997
The Combined Company's historical combined revenue was $15.1 million, $27.1
million and $35.3 million for the 12 months ended December 31, 1995, 1996 and
1997, respectively. The increase in revenue resulted from increased usage by
existing customers, the addition of new customers as the Combined Company
expanded its independent sales agent network and commenced providing services
in new countries, and the commencement of sales to carriers and resellers.
Call-reorigination revenue represented 100.0%, 95.8% and 88.0% for 1995, 1996
and 1997, respectively, while carrier and reseller revenue represented 2.9% and
12.0% for 1996 and 1997, respectively. The Combined Company anticipates that
revenue will increase as it begins to cross-market its services to its
customers and continues to focus on carrier sales.
The Combined Company's historical combined cost of revenue was $11.2 million,
$20.8 million and $27.0 million for the 12 months ended December 31, 1995, 1996
and 1997, respectively. As a percent of revenue, these costs were 74.3%, 77.1%
and 76.7% for 1995, 1996 and 1997, respectively. The Combined Company
anticipates a significant increase in transmission costs associated with
greater calling volume. The growth in transmission volume should improve the
Combined Company's ability to negotiate preferential rates with its carriers.
In addition, integrating the cost structures of the Combined Company may result
in reduced costs per minute of use. The Combined Company expects gross margin
percentages may decline if carrier and reseller revenue increases as a
percentage of revenue or if price reductions occur due to competition.
The Combined Company's historical combined sales and marketing expense was
$2.6 million, $3.7 million and $4.5 million for the 12 months ended December
31, 1995, 1996 and 1997, respectively. As a percent of revenue, these costs
were 17.5%, 13.6% and 12.7% for 1995, 1996 and 1997, respectively. The Combined
Company anticipates a significant increase in sales and marketing expense in
absolute dollars due to an increase in independent sales agent commissions
caused by an expected increase in revenue. However, these costs as a percentage
of revenue are expected to decrease as the fixed portion of sales and marketing
expense, such as costs associated with in-house sales personnel and
advertising, are spread across a broader revenue base. In addition, the
Combined Company expects sales and marketing expense to decrease as a
percentage of revenue if carrier and reseller revenue increase as a percent of
total revenue because sales to carriers and resellers do not have advertising
and sales commission costs.
36
<PAGE>
The Combined Company's historical combined general and administrative expense
was $3.6 million, $9.3 million and $11.7 million for the 12 months ended
December 31, 1995, 1996 and 1997, respectively. General and administrative
expense in 1997 included non-recurring costs totaling $670,000 associated with
GlobalTel's terminated public offering and $447,000 of non-cash compensation
cost. As a percent of revenue, general and administrative expense was 24.0%,
34.5% and 33.3% for 1995, 1996 and 1997, respectively. The Combined Company
expects general and administrative expense will decrease as a percent of
revenue due to cost savings resulting from operating efficiencies and the
elimination of redundant overhead.
The Combined Company's historical combined depreciation and amortization
expense was $203,000, $251,000 and $480,000 for the 12 months ended December
31, 1995, 1996 and 1997, respectively. As a percent of revenue, these costs
were 1.3%, .9% and 1.4% for 1995, 1996 and 1997, respectively. The Combined
Company anticipates amortization expense will increase by $11.5 million
annually due to amortization of the intangible assets related to the GlobalTel
Merger, the ITC Acquisition and future acquisitions not yet identified. In
addition, the Combined Company expects that depreciation expense may increase
due to planned capital expenditures related to the purchase and installation of
regional switches and automated switching equipment for its high volume
customers.
The Combined Company's historical combined interest and debt discount expense
was $50,000, $341,000 and $1.6 million for the 12 months ended December 31,
1995, 1996 and 1997, respectively. As a percent of revenue, these costs were
.3%, 1.3% and 4.5% for 1995, 1996 and 1997, respectively. The Combined Company
anticipates non-cash financing expense of $3.5 million will be incurred until
completion of this offering due to the amortization of debt discount expense,
amortization of deferred offering costs and accrued interest expense related to
CSI's December 1997 Financing and the GlobalTel Full Coverage Notes. The
Combined Company expects interest expense may increase as the Combined Company
seeks other financing arrangements, such as a working capital line of credit,
lease financing, acquisition financing and term debt to be used to fund the
Combined Company's growth.
The Combined Company's historical combined negative EBITDA was $2.4 million,
$6.8 million and $8.3 million for the 12 months ended December 31, 1995, 1996
and 1997, respectively. As a percentage of revenue, negative EBITDA was 16.1%,
25.1% and 23.5% for 1995, 1996 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Combined Company's capital resources have been used to fund operating
losses, debt service and capital expenditures associated with development of
its customer base and the establishment and upgrade of its network
infrastructure. The Combined Company had a working capital deficit of $14.4
million at March 31, 1998. The Combined Company has historically satisfied its
capital requirements principally through a combination of sales of equity and
debt securities, borrowings from third parties and trade credit extended by
carriers.
The Combined Company believes that cash on hand, together with cash flow from
its operating activities and cash available from this offering, will be
sufficient to fund the Combined Company's existing operations at least for the
next 12 months. However, the Combined Company intends to continue its strategy
of rapid growth, primarily through the expansion of its infrastructure and
pursuing other growth opportunities such as acquisitions of complementary
international customer bases, products and infrastructure. The Combined Company
is currently reviewing various alternatives for obtaining additional financing
to fund this strategy. The proceeds from such financing are anticipated to be
used to expand the Combined Company's operations, fund the Combined Company's
growth and enable the Combined Company to undertake additional strategic
initiatives. There can be no assurance that the Combined Company will be able
to raise additional capital on acceptable terms or at all. If the Combined
Company is unable to obtain such additional capital, the Combined Company may
have to curtail its expansion of operations, growth and other strategic
initiatives, which could adversely affect the Combined Company's business,
financial condition and results of operations and its ability to compete.
37
<PAGE>
EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE
Although increases in salaries, carrier costs and operating overhead can
adversely affect the Combined Company's operations, the Combined Company does
not believe that inflation has had a material effect on its operating results.
However, because future increases in inflation may cause the Combined
Company's suppliers to increase prices of materials and services to the
Combined Company, an increase in inflation could increase the Combined
Company's cost of revenue and operating expenses. Although the Combined
Company's sales to date have been denominated in U.S. dollars, the value of
the U.S. dollar in relation to foreign currencies also may adversely affect
the Combined Company's revenue. To the extent the Combined Company changes its
pricing practices to denominate prices in foreign currencies, the Combined
Company will be exposed to increased risks of currency fluctuation. Any such
fluctuation could have a material adverse effect on the Combined Company's
earnings or assets when translated into U.S. dollars. Although the Combined
Company has not entered into foreign exchange contracts to hedge exchange
transactions, it may do so in the future.
SEASONALITY
The Combined Company's business exhibits a small degree of seasonality.
Historically, the Combined Company's revenue (as well as sales in the
telecommunications industry in general) has decreased slightly in August and
December, which CSI attributes to vacations and holidays in its European and
Latin American markets and in the United States. As a result of these factors,
reported quarterly revenue in future periods will vary and are not indicative
of revenue in subsequent comparable periods.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("Statement 131"), which is
effective for financial statements with fiscal years beginning after December
15, 1997. Statement 131 requires that public business enterprises report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. Statement 131 also requires that public
business enterprises report certain information about their products and
services, the geographic areas in which they operate and their major
customers.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits", which revises employers'
disclosures about pension and other postretirement benefit plans. Statement
132 does not change the measurement or recognition of those plans, but
requires additional information on changes in benefit obligations and fair
values of plan assets, and eliminates certain disclosures previously required
by SFAS Nos. 87, 88 and 106. Statement 132 is effective for financial
statements with fiscal years beginning after December 15, 1997.
During June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Statement 133 establishes new
standards by which derivative financial instruments must be recognized in an
entity's financial statements. Besides bringing derivatives on balance sheets
at fair value, Statement 133 generally requires that gains and losses from
later changes in a derivative's fair value be recognized currently in
earnings. Statement 133 also unifies qualifying criteria for hedges involving
all kinds of derivatives, requiring that a company document, designate and
assess the effectiveness of its hedges. Statement 133 is required to be
adopted by the Combined Company in 2000. Management, however, does not expect
the impact from this statement to have a material impact on the financial
statement presentation, financial position or results of operations.
The Combined Company has not determined what additional disclosures, if any,
may be required by the provisions of Statements 131, 132 and 133, but does not
expect adoption of either statement to have a material effect on its results
of operations.
38
<PAGE>
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which requires costs of start-up activities and organization costs
to be expensed as incurred. The SOP is effective for financial statements with
fiscal years beginning after December 15, 1998, although earlier application is
encouraged. The adoption of the SOP is not expected to have a material adverse
effect on the Combined Company.
YEAR 2000 STATEMENT
The Combined Company is currently evaluating its computer systems to identify
potential problems relating to the Year 2000 date change. The Combined Company
does not expect the cost to modify its computer systems to address Year 2000
issues will be material to its financial condition or results of operations,
and does not anticipate any material disruption in its operations as a result
of any Year 2000 issues. The Combined Company does not have any information
concerning the potential impact of Year 2000 issues on any of its suppliers or
customers. In the event that the Combined Company or any of the Combined
Company's significant suppliers or customers does not successfully and timely
address Year 2000 issues, the Combined Company's business or operations could
be adversely affected.
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to revenue of certain items in CSI's statements of operations:
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS
YEAR ENDED EIGHT MONTHS ENDED ENDED ENDED
APRIL 30, DECEMBER 31, APRIL 30, MARCH 31,
--------------------- ------------------ --------- ---------
1995 1996 1997 1997 1997 1998
----- ----- ----- ------------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue......... 70.6 88.5 65.4 60.1 64.3 62.5
----- ----- ----- ----- ----- -----
Gross margin............ 29.4 11.5 34.6 39.9 35.7 37.5
Operating expenses:
Sales and marketing... 28.8 23.3 17.5 24.7 18.4 24.4
General and adminis-
trative.............. 34.0 24.5 17.0 25.9 19.6 30.0
Depreciation and amor-
tization............. 1.0 0.9 0.9 1.1 1.0 1.8
----- ----- ----- ----- ----- -----
Total operating ex-
penses................. 63.8 48.7 35.4 51.7 39.0 56.2
----- ----- ----- ----- ----- -----
Loss from operations.... (34.4) (37.2) (0.8) (11.8) (3.3) (18.7)
Interest expense, in-
cluding amortization of
debt discount.......... -- (0.3) (1.4) (1.4) (1.5) (30.6)
Other expense........... -- -- -- (1.0) -- --
----- ----- ----- ----- ----- -----
Loss before extraordi-
nary item.............. (34.4) (37.5) (2.2) (14.2) (4.8) (49.3)
Extraordinary item...... -- -- -- 9.2 -- --
----- ----- ----- ----- ----- -----
Net loss................ (34.4)% (37.5)% (2.2)% (5.0)% (4.8)% (49.3)%
===== ===== ===== ===== ===== =====
</TABLE>
COMPARISON OF THREE MONTHS ENDED APRIL 30, 1997 TO THREE MONTHS ENDED MARCH 31,
1998
Revenue decreased $927,000 or 28.9% from approximately $3.2 million for the
three months ended April 30, 1997 to $2.3 million for the three months ended
March 31, 1998. This decrease in revenue was due to
39
<PAGE>
a decline in customers and usage resulting from service disruptions caused by
the transfer of CSI's switching and billing functions into ITC's systems. CSI
experienced operational difficulties during this transfer process which
resulted in service disruptions for a number of customers. Although CSI's
revenue was adversely affected during this period, CSI believes that it has
resolved these difficulties.
CSI's cost of revenue decrease $636,000 or 30.9% from approximately $2.1
million for the three months ended April 30, 1997 to approximately $1.4 million
for the three months ended March 31, 1998. As a percentage of revenue, these
costs decreased from 64.3% to 62.5% for the three month periods ended April 30,
1997 and March 31, 1998, respectively. As of March 1998, CSI had new
contractual commitments with Sprint reflecting more favorable rates that
resulted in improved gross margins during the three months ended March 31,
1998.
Sales and marketing expense decreased $32,000 or 5.4% from $589,000 for the
three months ended April 30, 1997 to $557,000 for the three months ended March
31, 1998. As a percentage of revenue, these costs increased from 18.4% to 24.4%
for the three month periods ended April 30, 1997 and March 31, 1998,
respectively. The decrease in absolute dollars was due in part to a decrease in
independent sales agent commissions caused by the decrease in revenue, while
the increase as a percentage of revenue was due primarily to a decrease in
revenue.
General and administrative expense increased $56,000 or 8.9% from $628,000
for the three months ended April 30, 1997 to $684,000 for the three months
ended March 31, 1998. As a percentage of revenue, these costs increased from
19.6% to 30.0% for the three month periods ended April 30, 1997 and March 31,
1998, respectively. The increase in costs were due to additional customer
support and administrative personnel. Expenses decreased as a percent of
revenue, due to the decrease in revenues.
Depreciation and amortization expense increased $9,000 or 27.3% from
approximately $33,000 for the three months ended April 30, 1997 to
approximately $42,000 for the three months ended March 31, 1998. These costs
increased primarily as a result of CSI's higher fixed asset base during the
three months ended March 31, 1998 as compared with the three months ended April
30, 1997.
Interest and amortization of debt discount increased $649,000, from
approximately $49,000 for the three months ended April 30, 1997 to
approximately $698,000 for the three months ended March 31, 1998. This increase
is primarily due to interest expense and amortized costs associated with the
December 1997 Financing. Interest and debt discount expense will increase
significantly until completion of this offering due to accrued interest and
amortized costs associated with the December 1997 Financing and 12% Note
financing in April and May 1998.
CSI did not record an income tax expense or benefit for the three month
periods ended April 30, 1997 or March 31, 1998 but recorded valuation
allowances to offset the deferred tax asset due to the uncertainty of the
ultimate realization of the net operating loss carryforwards.
CSI had a net loss of approximately $153,000 for the three months ended April
30, 1997 compared to a net loss of approximately $1.1 million for the three
months ended March 31, 1998. The increase in net loss was due primarily to the
decrease in revenue and the increases in interest expenses and amortized costs
associated with CSI's financing.
CSI had basic loss per share of $.06 for the three months ended April 30,
1997 compared to basic loss per share of $.45 for the three months ended March
31, 1998. The change in per share results was due primarily to an increase in
net loss and by an increase in weighted average shares outstanding.
CSI had negative EBITDA of $71,000 for the three months ended April 30, 1997
compared to negative EBITDA of $386,000 for the three months ended March 31,
1998. The decrease in EBITDA was primarily due to the decrease in revenue.
40
<PAGE>
COMPARISON OF TWELVE MONTHS ENDED APRIL 30, 1997 TO EIGHT MONTHS ENDED
DECEMBER 31, 1997
Revenue decreased $3.8 million from $11.9 million for the twelve months
ended April 30, 1997 to $8.1 million for the eight months ended December 31,
1997. This decrease is primarily due to the different periods presented.
Cost of revenue decreased $2.9 million from $7.8 million for the twelve
months ended April 30, 1997 to $4.9 million for the eight months ended
December 31, 1997. As a percentage of revenue, cost of revenue decreased from
65.4% to 60.1% respectively. Cost of revenue increased at a lower rate than
revenue as CSI recognized the benefit of more favorable carrier rates.
Sales and marketing expense decreased $73,000 from $2.1 million for the
twelve months ended April 30, 1997 to $2.0 million for the eight months ended
December 31, 1997. As a percentage of revenue, these costs increased from
17.5% to 24.7% for the twelve months ended April 30, 1997 and the eight months
ended December 31, 1997, respectively. The increase as a percentage of revenue
was due primarily to an increase in marketing expense and costs associated
with in-house sales persons.
General and administrative expense increased $79,000 from $2.0 million for
the twelve months ended April 30, 1997 to $2.1 million for the eight months
ended December 31, 1997. As a percentage of revenue, these costs increased
from 17.0% to 25.9% for the twelve months ended April 30, 1997 and the eight
months ended December 31, 1997, respectively. The increase in costs were due
to additional customer support and administrative personnel hired to support
the expected growth of CSI's operations and an increase in bad debt expense.
Depreciation and amortization expense decreased $11,000 from approximately
$103,000 for the twelve months ended April 30, 1997 to approximately $92,000
for the eight months ended December 31, 1997. As a percentage of revenue,
these costs increased from .9% to 1.1% for the twelve months ended April 30,
1997 and the eight months ended December 31, 1997, respectively.
Interest and amortization of debt discount decreased $49,000 from $162,000
for the twelve months ended April 30, 1997 to approximately $113,000 for the
eight months ended December 31, 1997. As a percentage of revenue, these costs
were 1.4% for both twelve months ended April 30, 1997 and the eight months
ended December 31, 1997.
CSI did not record an income tax benefit in for the twelve months ended
December 31, 1997 or the eight months ended December 31, 1997 but recorded
valuation allowances to offset the deferred tax asset due to the uncertainty
of the ultimate realization of the net operating loss carryforwards.
The net loss before extraordinary item increased $905,000 from $259,000 for
the twelve months ended April 30, 1997 to $1.2 million for the eight months
ended December 31, 1997. The increase in net loss was primarily due to an
increase in general and administrative expenses as a percent of revenue.
CSI had basic loss per share before extraordinary item of $.11 for the
twelve months ended April 30, 1997 compared to $.47 for the eight months ended
December 31, 1997. The increase in basic loss per share was due primarily to
an increase in net loss, offset by an increase in the weighted average number
of shares outstanding.
CSI had positive EBITDA of $6,000 for the twelve months ended April 30, 1997
compared to negative EBITDA of $874,000 for the eight months ended December
31, 1997. The decrease in EBITDA was primarily due to an increase in general
and administrative expenses as a percent of revenue.
COMPARISON OF FISCAL YEARS ENDED APRIL 30, 1996 AND 1997
Revenue increased $5.1 million or 76.0% from $6.7 million for fiscal 1996 to
$11.9 million for fiscal 1997. This increase was primarily due to growth in
the number of customers. The significant increase in revenue was primarily due
to CSI's efforts to increase its independent sales agent base in its target
markets.
41
<PAGE>
Cost of revenue increased $1.8 million or 30.1% from $6.0 million for fiscal
1996 to $7.8 million for fiscal 1997. As a percentage of revenue, cost of
revenue decreased from 88.5% to 65.4%, respectively. Cost of revenue increased
at a lower rate than revenue as CSI recognized the benefit of more favorable
carrier rates.
Sales and marketing expense increased $507,000 or 32.2% from $1.6 million for
fiscal 1996 to $2.1 million for fiscal 1997. As a percentage of revenue, these
costs decreased from 23.3% to 17.5% for fiscal 1996 and fiscal 1997,
respectively. The increase in absolute dollars was due primarily to commissions
due on increased revenue while the decrease as a percentage of revenue was due
primarily to revenue increasing at a greater rate than marketing expense and
costs associated with in-house salespersons.
General and administrative expense increased $372,000 or 22.5% from $1.7
million for fiscal 1996 to $2.0 million for fiscal 1997. As a percentage of
revenue, these costs decreased from 24.5% to 17.0% for fiscal 1996 and fiscal
1997, respectively. The increase in costs were due to additional customer
support and administrative personnel hired to support the growth of CSI's
operations.
Depreciation and amortization expense increased $45,000 or 77.6% from
approximately $58,000 for fiscal 1996 to approximately $103,000 for fiscal
1997. These expenses increased primarily as a result of CSI's higher fixed
asset base in fiscal 1997 which was principally due to investments in
telecommunications equipment, infrastructure and facility expansion.
Interest expense increased $143,000 from approximately $19,000 for fiscal
1996 to approximately $162,000 for fiscal 1997. The increase in interest
expense was due primarily to the issuance of notes to satisfy carrier
obligations.
CSI did not record an income tax benefit in either fiscal 1996 or fiscal 1997
but recorded valuation allowances to offset the deferred tax asset due to the
uncertainty of the ultimate realization of the net operating loss
carryforwards.
The net loss decreased from $2.5 million for fiscal 1996 to $259,000 for
fiscal 1997. The decrease in net loss was primarily due to CSI's obtaining more
favorable carrier rates and increases in customer volume.
CSI had basic loss per share of $1.27 for fiscal 1996 compared to basic loss
per share of $.11 for fiscal 1997. The decrease in basic loss per share was due
primarily to CSI's obtaining more favorable carrier rates and increases in
customer volumes as well as an increase in the weighted average number of
shares outstanding.
CSI had negative EBITDA of $2.4 million for fiscal 1996 compared to positive
EBITDA of $6,000 for fiscal year 1997. The increase in EBITDA was primarily due
to CSI's obtaining more favorable carrier rates, which improved gross margin
percentages.
COMPARISON OF FISCAL YEARS ENDED APRIL 30, 1995 AND 1996
Revenue increased $4.9 million or 266.8% from $1.8 million for fiscal 1995 to
$6.7 million for fiscal 1996. This increase was primarily due to growth in the
number of customers, which resulted from CSI's efforts to increase its
independent sales agent base in its target markets.
Cost of revenue increased $4.7 million or 359.4% from $1.3 million for fiscal
1995 to $6.0 million for fiscal 1996 and as a percentage of revenue increased
from 70.6% to 88.5%, respectively. During fiscal 1996, CSI increased minute
volume in advance of its ability to secure more favorable volume discount rates
with its carriers.
Sales and marketing expense increased $1.0 million or 197.4% from $529,000
for fiscal 1995 to $1.6 million for fiscal 1996. As a percentage of revenue,
these costs decreased from 28.8% to 23.3% for fiscal 1995 and fiscal 1996,
respectively. The increase in absolute dollars was due primarily to commissions
on increased revenue
42
<PAGE>
while the decrease as a percentage of revenue was due primarily to revenue
increasing at a greater rate than marketing expenses and costs associated with
in-house salespersons.
General and administrative expense increased $1.0 million or 164.3% from
$625,000 for fiscal 1995 to $1.7 million for fiscal 1996. As a percentage of
revenue, these costs decreased from 34.0% to 24.5% for fiscal year 1995 and
fiscal 1996, respectively. The increase in absolute dollars was due to
additional customer support and administrative personnel hired to support the
growth of CSI's operations.
Depreciation and amortization expense increased $39,000 or 205.3% from
approximately $19,000 for fiscal 1995 to approximately $58,000 for fiscal
1996. These expenses increased primarily as a result of CSI's higher fixed
asset base in fiscal 1996 which was principally due to investments in
telecommunications equipment, infrastructure and facility expansion.
Interest expense was approximately $19,000 for fiscal 1996 and was a nominal
amount in fiscal 1995. Interest expense was due primarily to the issuance of
notes payable to satisfy carrier obligations.
CSI did not record an income tax benefit in either fiscal 1995 or fiscal
1996 but recorded valuation allowances to offset the deferred tax asset due to
the uncertainty of the ultimate realization of the net operating loss
carryforwards.
The net loss increased from $633,000 for fiscal 1995 to $2.5 million for
fiscal 1996. The increase in net loss was primarily due to CSI's unfavorable
carrier rates and significant increase in operating expenses.
CSI had basic loss per share of $.43 for fiscal 1995 compared to basic loss
per share of $1.27 for fiscal 1996. The increase in basic loss per share was
due primarily to an increase in CSI's net loss, offset by an increase in the
weighted average number of shares outstanding.
CSI had negative EBITDA of $614,000 for fiscal 1995 compared to negative
EBITDA of $2.4 million for fiscal 1996. The decrease in EBITDA was due
primarily to a significant increase in operating expenses during fiscal 1996.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain quarterly financial data for the six
fiscal quarters ended October 31, 1997, the two month period ended December
31, 1997 and the quarter ended March 31, 1998. CSI changed its year end to
December 31. This quarterly information has been derived from CSI's unaudited
financial statements which, in the opinion of CSI's management, reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the information for the periods presented. Operating
results for any one quarter are not necessarily indicative of the results that
may be expected in any future period.
CSI's quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future as a result of a variety of factors,
some of which are outside CSI's control. These factors include demand for
international telecommunications services, capital expenditures and other
costs relating to the expansion of operations, the timing of new service
introductions by CSI or its competitors, market availability and acceptance of
new and enhanced versions of CSI's or its competitors' services, changes in
the mix of revenue, rates of customer acquisition and retention and general
economic conditions.
43
<PAGE>
<TABLE>
<CAPTION>
TWO
FISCAL 1997 QUARTER ENDED QUARTER ENDED MONTHS QUARTER
------------------------------------------ -------------------- ENDED ENDED
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, DECEMBER 31, MARCH 31,
1996 1996 1997 1997 1997 1997 1997 1998
-------- ----------- ----------- --------- -------- ----------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $2,579 $2,952 $3,129 $3,205 $3,370 $3,002 $1,743 $ 2,279
Cost of revenue......... 1,675 1,933 2,086 2,061 2,023 1,784 1,072 1,424
------ ------ ------ ------ ------ ------ ------ -------
Gross margin............ 904 1,019 1,043 1,144 1,347 1,218 671 855
------ ------ ------ ------ ------ ------ ------ -------
Operating expenses:
Sales and marketing.... 447 496 548 589 654 616 737 557
General and
administrative........ 388 455 484 697 798 918 387 684
Depreciation and
amortization.......... 19 23 28 33 33 35 24 42
------ ------ ------ ------ ------ ------ ------ -------
Total operating
expenses............... 854 974 1,060 1,319 1,485 1,569 1,148 1,283
------ ------ ------ ------ ------ ------ ------ -------
Income (loss) from
operations............. 50 45 (17) (175) (138) (351) (477) (428)
Interest expense........ (40) (36) (38) (48) (47) (42) (24) (698)
Other income (expense).. -- -- -- -- -- -- (85) --
------ ------ ------ ------ ------ ------ ------ -------
Net income (loss) before
extraordinary item..... 10 9 (55) (223) (185) (393) (586) (1,126)
Extraordinary item...... -- -- -- -- -- -- 747 --
------ ------ ------ ------ ------ ------ ------ -------
Net income (loss)....... $ 10 $ 9 $ (55) $ (223) $ (185) $ (393) $ 161 $(1,126)
====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
CSI experienced declining revenue in the quarters ended October 31, 1997 and
March 31, 1998 in comparison to prior quarters. This decline was primarily a
result of a decline in customers and usage resulting from service disruptions
caused by the transfer of CSI's switching and billing functions into ITC's
systems. CSI experienced operational difficulties during this transfer process
which resulted in service disruptions for a number of customers. Although CSI's
revenue was adversely affected during this period, CSI believes that it has
resolved these difficulties.
Operating expenses have increased during each quarter, reflecting an increase
in general and administrative expense associated with the development of CSI's
administrative infrastructure. Installation, sales and marketing expense has
increased primarily due to commissions on increased revenue and in-house sales
personnel. CSI also increased its reserve for bad debt during quarters ended
October 31, 1997, due to unpaid receivables owed by a former independent sales
agent. Interest expense increased significantly during the quarter ended March
31, 1998, primarily to non-cash financing activities in the quarter. CSI also
recognized gain on extinguishment of debt during the two months ended December
31, 1997, related to the repayment of notes using the proceeds of the December
1997 Financing.
LIQUIDITY AND CAPITAL RESOURCES
CSI's capital resources have been used to fund operating losses, debt service
and capital expenditures associated with development of its customer base and
the establishment and upgrade of its network infrastructure. Since its
inception, CSI has experienced net losses and negative cash flow from
operations. As of March 31, 1998, CSI had a working capital deficit of
approximately $3.9 million. CSI has satisfied its capital requirements
principally through a combination of sales of equity and debt securities,
borrowings from third parties (including its shareholders) and trade credit
extended by carriers. The proceeds from the issuance of stock and notes were
used for expansion of operations and general corporate purposes. During fiscal
1996 and fiscal 1997, CSI issued shares of its Common Stock for aggregate
proceeds of $537,000 and $111,000, respectively, and generated additional
working capital of $320,000 in fiscal 1997 through the issuance of convertible
notes. The notes bear interest at the rate of 10% per annum and mature two
years after issuance. In fiscal 1998, $95,000 of principal amount of such notes
were also issued. The notes are convertible into shares of Common Stock at a
conversion price equal to 90% of the average of the bid and asked price on the
day preceding the date of conversion. As of March 31, 1998, $385,000 of the
convertible notes had been converted. In fiscal 1997, CSI also raised $85,000
44
<PAGE>
through the issuance of notes that bear interest at 15% per annum and mature
in September 1998. In December 1997, CSI issued Bridge Notes in the principal
amount of $2.8 million. The Bridge Notes bear interest at 10% per annum and
are due five days following the closing of this offering. CSI has entered into
employment agreements that obligate the Combined Company to pay annual
salaries of approximately $475,000. CSI also has an agreement to pay certain
royalties to Gary Kamienski relating to CSI's LINK-US technology.
In May and July 1998, CSI sold to ProFutures Special Equities Fund, L.P.
("ProFutures") an aggregate of $1.75 million principal amount promissory notes
bearing interest at a rate of 12% per annum (the "12% Notes") and 74,074
shares of Common Stock. In connection with the purchase of the 12% Notes and
shares of Common Stock, ProFutures received warrants to purchase 400,000
shares of Common Stock. In July 1998, ProFutures agreed to exchange $1 million
principal amount of the 12% Notes upon the closing of this offering in
consideration of 204,079 shares of Common Stock, based on an assumed initial
offering price of $7.00 per share. See "Description of Securities."
As a result of CSI's operating losses, working capital has not always been
sufficient to satisfy CSI's obligations, and CSI from time to time has been in
arrears on its payment obligations to its carriers. During fiscal 1996 and
fiscal 1997, CSI incurred usage fees, which it was unable to pay on a current
basis, with two of its primary carriers totaling approximately $2.0 million.
In February 1997, CSI restructured these obligations and converted all amounts
into notes bearing interest ranging from 10% to 12% payable in monthly
installments ranging from $40,000 to $123,000 through August 1997 and $40,000
thereafter through January 2001. In December 1997, all carrier obligations
were paid in full from the proceeds of the December 1997 Financing. CSI
anticipates that its minimum commitments to carriers (exclusive of any carrier
commitments of GlobalTel or ITC) will be approximately $3.0 million and $1.5
million for fiscal 1998 and fiscal 1999, respectively. As of March 31, 1998,
CSI was again in arrears on carrier payments due to one carrier of
approximately $780,000. The Combined Company intends to use a portion of the
proceeds of this offering to repay such amount. There can be no assurance CSI
will not be required to pay a penalty to this or any other carrier or that CSI
will not be in default of its obligations to its carriers in the future.
Net cash provided by operating activities was approximately $341,000 for the
three months ended March 31, 1998, as compared to cash provided by operating
activities of approximately $200,000 for the three months ended April 30,
1997. Adjustments to the $1.1 million net loss for the period to reconcile to
net cash provided by operating activities consisted primarily of $623,000 in
amortized costs associated with the December 1997 Financing, $42,000 in
depreciation and amortization, $446,000 increase in accounts payable and a
$400,000 decrease in accounts receivable. Net cash used in investing
activities was approximately $85,000 for the three months ended March 31,
1998, compared to approximately $51,000 for the three months ended April 30,
1997. The increase was primarily due to acquisition deposits paid to ITC. Net
cash used in financing activities was approximately $450,000 for the three
months ended March 31, 1998, compared to cash used in financing activities of
approximately $52,000 for the three months ended April 30, 1997. The increase
in cash used in financing activities was primarily due to an increase in
deferred offering costs and repayments for treasury stock.
Net cash used in operating activities was approximately $1.1 million for the
eight months ended December 31, 1997, as compared to cash provided by
operating activities of approximately $730,000 for the twelve months ended
April 30, 1997. Adjustments to the $417,000 net loss for the period to
reconcile to net cash used in operating activities consisted primarily of a
$747,000 extraordinary gain on extinguishment of debt, and $92,000 in
depreciation and amortization. Net cash used in investing activities was
approximately $318,000 for the eight months ended December 31, 1997, compared
to approximately $244,000 for the twelve months ended April 30, 1997. The
increase was primarily due to acquisition deposits paid to ITC. Net cash
provided by financing activities was approximately $1.7 million for the eight
months ended December 31, 1997, compared to cash used in financing activities
of approximately $397,000 for the twelve months ended April 30, 1997. The
increase in cash provided by financing activities was primarily due to receipt
of proceeds from the Bridge Notes from the December 1997 Financing, issuance
of stock, net of cash payments to acquire treasury stock from two former CSI
employees, and repayment of a carrier note.
45
<PAGE>
Net cash provided by operating activities was approximately $730,000 for
fiscal 1997, compared to cash used in operating activities of approximately
$362,000 for fiscal 1996. The increase in cash provided was primarily due to a
$2.3 million decrease in net loss and by an increase in accounts payable of
approximately $911,000. Net cash used in investing activities was approximately
$244,000 for fiscal 1997, compared to approximately $223,000 for fiscal 1996.
The increase was primarily due to acquisition deposits paid to ITC. Net cash
used in financing activities was approximately $397,000 for fiscal 1997,
compared to cash provided by financing activities of approximately $560,000 for
fiscal 1996. The increase in cash used was primarily due to repayment of notes,
net of proceeds from the sale of stock and issuances of additional notes.
Net cash used in operating activities was approximately $362,000 for fiscal
1996, as compared to cash used in operating activities of approximately
$398,000 for fiscal 1995. The decrease in cash used was primarily due to an
increase in accounts payable of approximately $2.7 million partially offset by
a $1.9 million increase in net loss. Net cash used in investing activities was
approximately $223,000 for fiscal 1996, compared to approximately $54,000 for
fiscal 1995. The increase was primarily due to the acquisition of switching
equipment. Net cash provided by financing activities was approximately $560,000
for fiscal 1996, compared to cash provided by financing activities of
approximately $526,000 for fiscal 1995. The increase in cash provided was
primarily due to proceeds from the sale of stock and issuances of notes.
46
<PAGE>
GLOBALTEL RESOURCES, INC.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, the percentage
relationship to revenue of certain items in GlobalTel's statements of
operations.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, MARCH 31,
--------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Revenue........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue................... 91.3 90.1 86.9 86.9 86.7
----- ----- ----- ----- ------
Gross margin...................... 8.7 9.9 13.1 13.1 13.3
Operating expenses:
Sales and marketing............. 11.3 7.5 6.1 5.2 7.2
General and administrative...... 72.7 63.1 55.3 32.2 89.6
Depreciation and amortization... 5.2 1.1 2.0 0.7 5.4
----- ----- ----- ----- ------
Total operating expenses.......... 89.2 71.7 63.4 38.1 102.2
----- ----- ----- ----- ------
Loss from operations.............. (80.5) (61.8) (50.3) (25.0) (88.9)
Interest expense, including
amortization of debt discount.... (1.6) (2.5) (10.6) (4.3) (60.2)
----- ----- ----- ----- ------
Net loss.......................... (82.1)% (64.3)% (60.9)% (29.3)% (149.1)%
===== ===== ===== ===== ======
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1998
Revenue decreased $2.7 million or 61.3% from $4.4 million for the three month
period ended March 31, 1997 to $1.7 million for the three month period ended
March 31, 1998. Revenue from call-reorigination decreased $900,000 or 37.5%
from $2.4 million for the three month period ended March 31, 1997 to $1.5
million for the three month period ended March 31, 1998. This decrease resulted
primarily from GlobalTel's decision in late 1996 to relocate its primary
switching platform from Las Vegas to Los Angeles. GlobalTel experienced
technical and operational difficulties in connection with this relocation
process which resulted in service disruptions for a number of customers
resulting in declining call-reorigination revenue for the three month periods
ending March 31, June 30, September 30, and December 31, 1997 as well as the
three month period ended March 31, 1998. In addition, increased competitive
pressures encountered by some of GlobalTel's independent sales agents also
contributed to the decline in revenue. Revenue from carrier sales decreased
$1.7 million or 88.4% from the three month period ended March 31, 1997 to
$228,000 for the three month period ended March 31, 1998. This decrease was
primarily a result of GlobalTel's decision in May 1997 to temporarily de-
emphasize its carrier sales business. Due to lengthy payment cycles GlobalTel
had experienced with certain of its carrier customers and GlobalTel's
relatively low cash reserves, GlobalTel reduced its carrier sales in order to
limit its credit risk and to reduce its effective carrying costs associated
with carrier accounts receivable.
Cost of revenue decreased $2.3 million or 61.4% from $3.8 million for the
three month period ended March 31, 1997 to $1.5 million for the three month
period ended March 31, 1998. This decrease was primarily attributable to
decreased transmission costs associated with lower calling volume. As a
percentage of revenue, cost of revenue decreased from 86.9% to 86.7% for the
three month periods ended March 31, 1997 and 1998, respectively. This decrease
resulted from lower costs as a percentage of revenue attributable to
GlobalTel's call-reorigination revenue. This decrease was partially offset by
higher costs of revenue as a percentage of revenue resulting from temporary re-
routing of traffic previously carried by one of its principal long-distance
carriers after this carrier ceased providing services to GlobalTel.
Sales and marketing expense decreased $107,000 or 47.1% to $120,000 for the
three month period ended March 31, 1997 from $227,000 for the three month
period ended March 31, 1998. This decrease was primarily attributable to
decreased sales commissions as related to call-reorigination sales generated by
independent sales
47
<PAGE>
agents. As a percentage of revenue, sales and marketing expense increased from
5.2% to 7.2% for the three month period ended March 31, 1997 and 1998,
respectively, resulting in part from higher levels of call-reorigination
revenue as a percentage of total revenue requiring advertising or sales
commissions.
General and administrative expense increased $112,000 or 7.9% from $1.4
million for the three month period ended March 31, 1997 to $1.5 million for the
three month period ended March 31, 1998. This increase was primarily
attributable to $282,000 in expense that was charged to operations and
associated with GlobalTel's discontinued public offering. As a percentage of
revenue, general and administrative expense increased from 32.2% to 89.6% for
the three month period ended March 31, 1997 and 1998 respectively, resulting in
part from lower levels of revenue during the three month period ended March 31,
1998 compared to the three month period ended March 31, 1997.
Depreciation and amortization increased $62,000 or 210.0% from $29,000 for
the three month period ended March 31, 1997 to $91,000 for the three month
period ended March 31, 1998. This increase was primarily attributable to the
depreciation of capital assets acquired during 1997, including facility
improvements, fax gateway, switching platform and an electronic billing and
customer interface system.
Interest expense and amortization of debt discount increased $830,000 or
431.8% from $192,000 for the three month period ended March 31, 1997 to $1.0
million for the three month period ended March 31, 1998. This increase was
primarily attributable to an increase in GlobalTel's outstanding indebtedness,
together with financing costs associated with the incurrence of additional
debt. Included in the three month period ended March 31, 1998 is the
amortization of $431,000 of debt issue costs associated with an obligation to
issue common stock resulting from the issuance of full coverage bridge notes in
December 1997.
GlobalTel did not record a provision for income taxes for the three month
periods ended March 31, 1997 and 1998 respectively, as a full valuation
allowance was recorded for periods to offset net deferred tax assets due to the
uncertainty of the ultimate realization of the net operating loss
carryforwards.
GlobalTel had a net loss of $1.3 million for the three month period ended
March 31, 1997 and $2.5 million for the three month period ended March 31,
1998. This increase in net loss was due primarily to increases in general and
administrative expense and debt financing costs.
GlobalTel had basic loss per share of $1.28 for the three month period ended
March 31, 1997 and basic loss per share of $1.46 for the three month period
ended March 31, 1998. The increase in basic loss per share was due primarily to
an increase in net loss, offset by an increase in weighted average shares
outstanding.
GlobalTel had negative EBITDA of $1.1 million for the three month period
ended March 31, 1997 compared to negative EBITDA of $1.4 million for the three
month period ended March 31, 1998. The increase in negative EBITDA was
primarily due to the increase in general and administrative expense.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1997
Revenue increased $3.7 million or 40.8% from $9.1 million in 1996 to $12.9
million in 1997. Revenue from call-reorigination increased $300,000 or 3.6%
from $8.3 million in 1996 to $8.6 million in 1997. This increase resulted from
higher usage by existing customers, the addition of new customers and the
expansion of GlobalTel's agent network. Following the relocation of GlobalTel's
primary switching platform to Los Angeles in late 1996, GlobalTel also
commenced selling international long-distance minutes on a wholesale basis to
several carriers. Revenue from carriers, which commenced in October 1996,
increased to $4.3 million in 1997. Call-reorigination and carrier revenue
represented 66.9% and 33.1% of GlobalTel's revenue, respectively, in 1997.
Cost of revenue increased $2.9 million or 35.7% from $8.2 million in 1996 to
$11.2 million in 1997. This increase is primarily attributable to increased
transmission costs associated with greater calling volume. As a
48
<PAGE>
percentage of revenue, cost of revenue decreased from 90.1% to 86.9% in 1996
and 1997, respectively. This decrease in percentage of revenue is primarily
attributable to a decrease in the costs associated with implementation of
least-cost call routing in late 1996. This decrease was offset, in part, by
higher cost of revenue as a percentage of revenue attributable to GlobalTel's
carrier revenue.
Sales and marketing expense increased $106,000 or 15.5% from $682,000 in 1996
to $788,000 in 1997. This increase is primarily attributable to increased sales
commissions and a higher effective commission rate. Substantially all of
GlobalTel's sales commissions are related to call-reorigination sales generated
by independent sales agents. As a percentage of revenue, sales and marketing
expense declined from 7.5% to 6.1% in 1996 and 1997, respectively, resulting in
part from higher levels of carrier sales not requiring advertising or sales
commissions.
General and administrative expense increased $1.3 million or 23.3% from $5.8
million in 1996 to $7.1 million in 1997. This increase is primarily
attributable to $670,000 in expense that was charged to operations and
associated with GlobalTel's discontinued public offering and $447,000 of non-
cash compensation costs. General and administrative expense also increased due
to compensation costs resulting from increased staffing levels. As a percentage
of revenue, general and administrative expense declined from 63.1% to 55.3% in
1996 and 1997, respectively. This decrease is primarily attributable to
economies of scale associated with GlobalTel's ability to spread general and
administrative expense across a broader revenue base.
Depreciation and amortization increased $155,000 or 157.7% from $98,000 in
1996 to $253,000 in 1997. This increase is primarily attributable to the
depreciation of capital assets acquired in late 1996 and in 1997, including a
new voice switching platform, facility improvements, fax gateway switching
platform and an electronic billing and customer interface system.
Interest expense and amortization of debt discount increased $1.1 million or
508.0% from $225,000 in 1996 to $1.4 million in 1997. This increase is
primarily attributable to an increase in GlobalTel's outstanding indebtedness,
together with financing costs associated with the incurrence of additional
debt. Also included in 1997 is $440,000 of additional amortized debt expense as
a result of the conversion of a portion of GlobalTel's indebtedness to common
stock, issuance of certain GlobalTel notes, and amendment of certain stock
warrant agreements.
GlobalTel did not record a provision for income taxes for either 1996 or 1997
as a full valuation allowance was recorded for both periods to offset net
deferred tax assets due to the uncertainty of the ultimate realization of the
net operating loss carryforwards.
GlobalTel had a net loss of $5.9 million for 1996 and $7.9 million for 1997.
The increase in net loss was due primarily to the significant increase in
general and administrative expense and debt financing costs.
GlobalTel had basic loss per share of $5.88 for 1996 and basic loss per share
of $6.48 for 1997. The increase in basic loss per share was due primarily to an
increase in net loss, offset by an increase in weighted average shares
outstanding.
GlobalTel had negative EBITDA of $5.5 million for 1996 compared to negative
EBITDA of $6.2 million for 1997. The increase in negative EBITDA was primarily
due to the increase in general and administrative expense.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1996
Revenue increased $7.0 million or 329.2% from $2.1 million in 1995 to $9.1
million in 1996 . Revenue from call-reorigination increased $6.2 million or
295.2% from $2.1 million in 1995 to $8.3 million in 1996. The increase in call-
reorigination revenue was primarily due to increased usage by existing
customers and the addition of new customers. Revenue in 1996 also included
$793,000 of sales to carriers commencing in October 1996. GlobalTel's revenue
from call-reorigination and carrier sales represented approximately 91.3% and
8.7%, respectively, of GlobalTel's revenue in 1996.
49
<PAGE>
Cost of revenue increased $6.3 million or 326.8% from $1.9 million in 1995 to
$8.2 million in 1996. This increase is primarily attributable to increased
transmission costs associated with greater calling volume. As a percentage of
revenue, these costs decreased from 91.3% to 90.1% in 1995 and 1996,
respectively, primarily as a result of better network utilization offset in
part by carrier revenue.
Sales and marketing expense increased $444,000 or 186.5% from $238,000 in
1995 to $682,000 in 1996. This increase was primarily attributable to higher
sales commissions and advertising costs. The increase in sales commissions is
attributable to increased levels of sales generated by agents as well as an
increase in the effective commission rate. As a percentage of revenue, sales
and marketing expense decreased from 11.3% to 7.5% in 1996, respectively. This
decrease is primarily attributable to economies of scale associated with
GlobalTel's ability to spread costs of operations across a broader revenue
base.
General and administrative expense increased $4.2 million or 275.8% from $1.5
million in 1995 to $5.8 million in 1996. This increase is primarily
attributable to the costs, including wages, travel and facilities, associated
with the addition of administrative, technical and customer support personnel
as GlobalTel developed its management team and network. During this period
GlobalTel also incurred professional, consulting and facilities expense
associated with the establishment of its relationship with Equant and the
development of GlobalTel's enhanced services. General and administrative
expense declined as a percentage of revenue from 72.7% to 63.1% in 1995 and
1996, respectively. This decrease is primarily attributable to economies of
scale associated with GlobalTel's ability to spread general and administrative
expense across a broader revenue base.
Depreciation and amortization decreased $13,000 or 11.5% from $111,000 in
1995 to $98,000 in 1996. This decrease resulted from a one-time write-off in
1995 of certain organizational costs.
Interest expense increased $191,000 or 567.9% from $34,000 in 1995 to
$225,000 in 1996. This increase is primarily attributable to an increase in
GlobalTel's outstanding indebtedness, together with the amortization of debt
issuance costs.
GlobalTel did not record a provision for income taxes for either 1996 or 1995
as a full valuation allowance was recorded for both periods to offset net
deferred tax assets due to the uncertainty of the ultimate realization of net
operating loss carryforwards.
GlobalTel had a net loss of $1.7 million for 1995 and a net loss of $5.9
million for 1996. The increase in net loss was due primarily to the significant
increase in general and administrative expenses and increased debt financing
costs.
GlobalTel had basic loss per share of $2.75 for 1995 compared to basic loss
per share of $5.88 for 1996. The change in basic loss per share was due
primarily to an increase in net loss.
GlobalTel had negative EBITDA of $1.6 million for 1995 compared to negative
EBITDA of $5.5 million for 1996. The increase in negative EBITDA was primarily
due to the increase in general and administrative expense.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain quarterly financial data for the eight
quarters ended December 31, 1997. This quarterly information has been derived
from unaudited consolidated financial statements which, in the opinion of
GlobalTel's management, reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the information for
the periods presented. Operating results for any one quarter are not
necessarily indicative of the results that may be expected in any future
period.
GlobalTel's quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future as a result of a variety of factors, some
of which are outside GlobalTel's control. These factors include
50
<PAGE>
demand for international telecommunications services, capital expenditures and
other costs relating to the expansion of operations, the timing of new product
introductions by GlobalTel or its competitors, market availability and
acceptance of new and enhanced versions of GlobalTel's or its competitors'
services, changes in the mix of revenue, customer acquisition and retention and
general economic conditions.
<TABLE>
<CAPTION>
1996 QUARTER ENDED 1997 QUARTER ENDED 1998
------------------------------------ ------------------------------------ --------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31
-------- ------- -------- ------- -------- ------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 1,507 $ 2,048 $ 2,275 $ 3,306 $ 4,385 $ 3,589 $ 2,665 $ 2,223 $ 1,698
Cost of revenue......... 1,520 1,753 1,882 3,075 3,811 2,992 2,204 2,164 1,473
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross margin............ (13) 295 393 231 574 597 461 59 225
Operating expenses:
Sales and marketing.... 122 199 173 188 227 229 208 124 120
General and
administrative........ 1,087 1,538 1,470 1,678 1,411 1,497 1,750 2,461 1,523
Depreciation and
amortization.......... 22 24 40 12 29 48 65 111 91
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 1,231 1,761 1,683 1,878 1,667 1,774 2,023 2,696 1,734
------- ------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (1,244) (1,466) (1,290) (1,647) (1,093) (1,177) (1,562) (2,637) (1,509)
Interest expense,
including amortization
of debt discount....... (20) (21) (62) (122) (192) (216) (179) (781) (1,023)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss................ $(1,264) $(1,487) $(1,352) $(1,769) $(1,285) $(1,393) $(1,741) $(3,418) $(2,532)
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Following the relocation of GlobalTel's switch to Los Angeles in the fourth
quarter of 1996, GlobalTel commenced reselling long-distance minutes to certain
carriers. Sales to carriers accounted for a major portion of the 45.3% and
32.6% increase in total revenue for the fourth quarter of 1996 and the first
quarter of 1997, respectively. Revenue from carrier sales increased $1.2
million or 152.2% to $2.0 million in the first quarter of 1997 from $793,000 in
the fourth quarter of 1996. As a percentage of revenue, GlobalTel's cost of
revenue increased as a percentage of revenue in the third and fourth quarters
of 1996 due to lower margins associated with carrier sales. In the first
quarter of 1997, GlobalTel raised prices on sales to carrier customers, while
cost of revenue as a percentage of revenue declined to 86.9% despite the
increasing proportion of carrier sales.
GlobalTel experienced declining revenue in the quarters ended June 30, 1997,
September 30, 1997, December 31, 1997, and March 31, 1998. This decline was
primarily a result of GlobalTel's decision in May 1997 to temporarily de-
emphasize its carrier sales business. Due to the lengthy payment cycles
GlobalTel had experienced with certain of its carrier customers and GlobalTel's
relatively low cash reserves, GlobalTel reduced its carrier sales in order to
limit its credit risk and to reduce its effective carrying costs associated
with carrier accounts receivable. Specifically, GlobalTel ceased doing business
with two carriers and reduced its level of business with several others,
resulting in a decline in carrier revenue from $2.0 million in the quarter
ended March 31, 1997 to $228,000 in the quarter ended March 31, 1998. In order
to continue to capitalize on the benefits of greater network utilization and
increased buying power, GlobalTel anticipates increasing the level of carrier
sales in the next 12 months as GlobalTel seeks to develop business
relationships with additional carriers.
Additionally, call-reorigination revenue declined moderately during the
second, third, and fourth quarters of 1997 and the first quarter of 1998. Due
to anticipated capacity constraints and limited access to multiple carriers,
GlobalTel relocated its primary switching platform from Las Vegas to Los
Angeles in late 1996. GlobalTel experienced technical and operational
difficulties in connection with this relocation process which resulted in
service disruptions for a number of customers. Although GlobalTel's sales were
adversely affected during this period, GlobalTel believes that it resolved
these difficulties by June 1997. Increased competitive pressures encountered by
some of GlobalTel's independent sales agents also contributed to the decline in
revenue during
51
<PAGE>
these quarters. During the second half of 1997 GlobalTel installed a new
switching platform which became fully operational on November 1, 1997,
enabling GlobalTel to offer a wider variety and more competitive package of
services to its independent sales agents and customers.
GlobalTel also experienced an increase in cost of revenue as a percentage of
revenue in the quarters ending December 31, 1997. This increase was primarily
due to an increase in transmission costs resulting from the temporary re-
routing of traffic previously carried by one of its principal long-distance
carriers after this carrier ceased providing services to GlobalTel during the
quarter ended March 31, 1998, cost of revenue as a percentage of revenue
increased as least cost routing was reestablished. General and administrative
expense increased in the quarter ending December 31, 1997 and quarter ended
March 31, 1998 primarily due to professional fees charged to operations and
relating to GlobalTel's discontinued public offering. In addition, interest
expense increased significantly in the quarter ending December 31, 1997 and
quarter ended March 31, 1998, resulting primarily from non-cash financing
activities in the quarter.
LIQUIDITY AND CAPITAL RESOURCES
GlobalTel's capital resources have been used to fund operating losses, debt
service and capital expenditures associated with development of its customer
base and the establishment and upgrade of its network infrastructure. Since
its inception, GlobalTel has experienced net losses and negative cash flow
from operations. As of March 31, 1998, GlobalTel had a working capital deficit
of approximately $9.1 million. Through March 31, 1998, GlobalTel had met these
capital requirements largely through financing activities that included $2.7
million in net proceeds from the sale of Common Stock, $1.0 million in net
proceeds from the sale of Preferred Stock, $7.9 million in net borrowings from
shareholders and others represented by promissory notes (the "Notes"), as well
as revenue from operations. See "Certain Transactions." At March 31, 1998,
Notes aggregating approximately $7.2 million remained outstanding, of which
$5.2 million will mature prior to March 31, 1999. Substantially all of the
Notes accrue interest at the rate of 10% per annum, increasing to 12% when the
Notes become past due. Warrants to purchase an aggregate of 295,399 shares of
Common Stock were issued in connection with the issuance of the Notes, all of
which remained outstanding at March 31, 1998. Also, in September 1997,
deferred salaries aggregating $1.2 million were converted into warrants to
purchase 215,428 shares of Common Stock. In October 1997, GlobalTel obtained
an additional $550,000 in connection with the issuance of notes to four
individuals. These notes bear interest at a rate of 10% per annum, are due in
full on March 1, 1999, and are convertible at any time prior to maturity at
the fair market value per share of Common Stock in effect as of the date of
conversion. Warrants exercisable for an aggregate of 11,000 shares of Common
Stock at an exercise price of $5.50 per share were granted in this round of
financing.
In July 1998, GlobalTel amended certain promissory notes such that
approximately $1.4 million of debt including accrued interest currently
maturing in January 1999 will convert into approximately 237,059 shares of
Common Stock of the Combined Company upon the closing of this offering, based
on an assumed initial offering price of $7.00 per share. Also, approximately
$700,000 of promissory notes due in January 1999 were extended until August
1999 and the related interest rate was increased to 14%.
In November 1997 GlobalTel obtained an additional $325,000 in connection
with the issuance of notes to three individuals. These notes bore interest at
10% per annum and were repaid in full from the proceeds of certain notes
issued in November and December 1997. In addition, each holder of these notes
will receive, following the closing of this offering, shares of Common Stock
equal to one-half of the principal amount of such holder's note divided by the
initial public offering price of the Common Stock.
In November and December 1997 GlobalTel obtained approximately $3.0 million
in connection with the issuance of additional notes. These GlobalTel Full
Coverage Notes bear interest at the rate of 10% per annum and will be repaid
from proceeds of this offering.
As a result of GlobalTel's operating losses, available working capital has
not always been sufficient to satisfy GlobalTel's obligations and GlobalTel
from time to time has been in arrears on payment obligations to
52
<PAGE>
its carriers. In October 1997, GlobalTel failed to pay amounts due to one of
its principal long-distance carriers within the time period that this carrier
customarily had required payment. As a result, this carrier ceased providing
services to GlobalTel and, under the terms of its agreement with GlobalTel,
could demand a termination payment of up to $1.2 million. GlobalTel was able to
re-route traffic that previously had been carried by this carrier without any
interruption in service to GlobalTel's customers. In December 1997, after
GlobalTel paid this carrier a substantial portion of the amounts past due,
services were restored. GlobalTel has negotiated the payment terms of the
remaining balance owed and does not believe that it will be required to pay an
amount in excess of that owed for carrier services provided. As of March 31,
1998, GlobalTel was in arrears on approximately $641,000 due to this carrier.
There can be no assurance that GlobalTel will not be required to pay a penalty
to this or any other carrier or that GlobalTel will not be in default of its
obligations to its carriers in the future.
Net cash used in operating activities was $795,000 for the three month period
ended March 31, 1998 compared to net cash used in operating activities of
$601,000 for the three month period ended March 31, 1997. The increase in net
cash used in operating activities was due primarily to a $1.2 million increase
in net loss as well as a $421,000 decrease in accounts payable, accrued
liabilities, notes payables and customer deposits which was partially offset by
a $935,000 increase in depreciation and amortization, amortization of bridge
loan costs and debt discount, and compensation and consulting expenses paid in
common stock and warrants as well as a $538,000 decrease in accounts
receivable. Net cash used in investing activities was $66,000 for the three
month period ended March 31, 1998, compared to $274,000 for the three month
period ended March 31, 1997. Investing activities for the three month periods
ended 1998 and 1997 primarily represent capital expenditures for hardware and
software. Net cash provided by financial activities was $111,000 for the three
month period ended March 31, 1998 compared to $621,000 for the three month
period ended March 31, 1997. Financial activities for the three month periods
ended March 31, 1998 and 1997 primarily represent proceeds from issuance of
bridge loans.
Net cash used in operating activities was $5.1 million for 1997, as compared
to net cash used in operating activities of $2.6 million for 1996. The increase
in net cash used in operating activities was due primarily to a $2.0 million
increase in net loss as well as a $3.3 million decrease in trade accounts
payable, accrued liabilities and notes payable. Net cash used in investing
activities was $667,000 for 1997, compared to net cash used in investing
activities of $688,000 for 1996. Investing activities for 1997 and 1996
primarily represent capital expenditures for hardware and software. Net cash
provided by financing activities was $6.2 million for 1997, compared to net
cash provided by financing activities of $3.0 million for 1996. Financing
activities in 1997 and 1996 primarily represent proceeds from the issuance of
bridge loans and Series A Convertible Preferred Stock in 1997.
Net cash used in operating activities was $2.6 million for 1996, as compared
to net cash used in operating activities of $1.0 million for 1995. The increase
in net cash used in operating activities was due primarily to a $4.1 million
increase in net loss which was partially offset by a $3.2 million increase in
trade accounts payable, accrued liabilities and notes payable. Net cash used in
investing activities was $688,000 for 1996, compared to net cash used in
investing activities of $522,000 for 1995. Investing activities for 1996
primarily represent capital expenditures for hardware and software while
investing activities for 1995 includes $260,000 in capital equipment and
$262,000 in capitalized organization costs. Net cash provided by financing
activities was $3.0 million for 1996, compared to net cash provided by
financing activities of $2.0 million for 1995. Financing activities in 1996
primarily represent proceeds from the issuance of bridge loans while investing
activities in 1995 primarily represent proceeds from the issuance of common
stock.
53
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
RESULTS OF OPERATIONS
Due to the pendency of the ITC Acquisition, ITC's financial statements are
being presented for the period ending October 31, 1997. The statement of
operations data for the ten months ended October 31, 1997 is therefore not
directly comparable to the statement of operations data for the year ended
December 31, 1996. The results of operations for the ten-month period ended
October 31, 1997 may also not be reflective of results achieved in the 12
months ended December 31, 1997. The following table sets forth, for the periods
indicated, the percentage relationship to revenue of certain items in ITC's
statements of operations:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31
------------------------ TEN MONTHS ENDED --------------
1995 1996 OCTOBER 31, 1997 1997 1998
----------- ----------- ---------------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue............... 65.9 66.7 84.3 79.9 75.8
----------- ----------- ----- ----- -----
Gross margin.................. 34.1 33.3 15.7 20.1 24.2
Operating expenses:
Sales and marketing......... 14.9 14.5 8.9 9.9 9.7
General and administrative.. 14.0 19.0 17.2 19.5 16.1
Depreciation................ 0.7 0.9 0.9 .8 1.1
----------- ----------- ----- ----- -----
Total operating expenses...... 29.6 34.4 27.0 30.2 26.9
----------- ----------- ----- ----- -----
Income (loss) from opera-
tions........................ 4.5 (1.1) (11.3) (10.1) (2.7)
Interest and other income
(expense).................... -- 1.2 0.7 (1.0) --
----------- ----------- ----- ----- -----
Income (loss) before taxes.... 4.5 0.1 (10.6) (11.0) (2.7)
Income tax expense............ 0.3 -- -- -- --
----------- ----------- ----- ----- -----
Net income (loss)............. 4.2% 0.1% (10.6)% (11.0)% (2.7)%
=========== =========== ===== ===== =====
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1998
Revenue increased $484,000 or 22.8% from approximately $2.1 million for the
three months ended March 31, 1997 to approximately $2.6 million for the three
months ended March 31, 1998. The increase is due primarily to an increase in
customers and customer usage. During this period of time, the number of
customers increased due to additions in ITC's independent sale agent base as
well as the improved performance of the existing independent sales agent base.
Cost of revenue increased $280,000 or 16.5% from approximately $1.7 million
for the three months ended March 31, 1997 to approximately $2.0 million for the
three months ended March 31, 1998. As a percentage of revenue, these costs
decreased from 79.9% to 75.8% for the periods ended March 31, 1997 and 1998,
respectively. The increase in cost of revenue is due to an increase in
transmission costs directly related to usage. The decreased cost of revenue as
a percentage of total revenue was due to a decrease in revenue from sales to
carriers and resellers, which has lower gross margins.
Sales and marketing expense increased $41,000 or 19.4% from approximately
$211,000 for the three months ended March 31, 1997 to approximately $252,000
for the three months ended March 31, 1998. As a percentage of revenue, sales
and marketing expense decreased from 9.9% to 9.7% for the periods ended March
31, 1997 and 1998, respectively. The decrease was due primarily to higher
levels of carrier and reseller sales not requiring advertising and sales
commissions.
54
<PAGE>
General and administrative expense increased $7,000 or 1.7% from $414,000 for
the three months ended March 31, 1997 to $421,000 for the three months ended
March 31, 1998. The increase in these costs was due primarily to additional
operating costs.
Depreciation expense increased $14,000 or 87.5% from approximately $16,000
for the three months ended March 31, 1997 to approximately $30,000 for the
three months ended March 31, 1998. These costs increased primarily as a result
of ITC's higher fixed asset base during the three months ended March 31, 1998.
Interest and other expense decreased $20,000 or 100% from approximately
$20,000 for the three months ended March 31, 1997 to approximately zero for the
three months ended March 31, 1998. The decrease in interest and other expense
was due primarily to a loss on sale of equipment in 1997.
ITC did not record an income tax benefit for the three months ended March 31,
1997 or 1998 but recorded valuation allowances to offset the deferred tax asset
due to the uncertainty of the ultimate realization of the net operating loss
carryforwards.
ITC reported a net loss of approximately $233,000 for the three months ended
March 31, 1997 compared to net loss of approximately $71,000 for the three
months ended March 31, 1998.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO THE TEN MONTHS ENDED OCTOBER 31,
1997
Revenue increased $451,000 or 5.9% from approximately $7.6 million for the
year ended December 31, 1996 to approximately $8.1 million for the ten months
ended October 31, 1997. The increase is due primarily to an increase in
customers and customer usage. During this period of time, the number of
customers increased due to additions in ITC's independent sale agent base as
well as the improved performance of the existing independent sales agent base.
Cost of revenue increased $1.7 million or 33.9% from approximately $5.1
million for the year ended December 31, 1996 to approximately $6.8 million for
the ten months ended October 31, 1997. As a percentage of revenue, these costs
increased from 66.7% to 84.3% for the periods ended December 31, 1996 and
October 31, 1997, respectively. The increase in cost of revenue is due to an
increase in transmission costs directly related to usage as well as a dispute
with a carrier. The increased cost of revenue as a percentage of total revenue
was due to an increase in revenue from sales to carriers and resellers, which
has lower gross margin percentages, and an increase in costs associated with
the carrier dispute. See "Business--Legal Proceedings."
Sales and marketing expense decreased $384,000 or 34.9% from approximately
$1.1 million for the year ended December 31, 1996 to approximately $715,000 for
the ten months ended October 31, 1997. As a percentage of revenue, sales and
marketing expense decreased from 14.5% to 8.9% for the periods ended December
31, 1996 and October 31, 1997, respectively. The decrease was due primarily to
higher levels of carrier and reseller sales not requiring advertising and sales
commissions.
General and administrative expense remained relatively constant at $1.4
million for the year ended December 31, 1996 and $1.4 million for the ten
months ended October 31, 1997. The similarity in these costs was due primarily
to the different length of the time periods presented.
Depreciation expense increased $4,000 or 5.8% from approximately $69,000 for
the year ended December 31, 1996 to approximately $73,000 for the ten months
ended October 31, 1997. These costs increased primarily as a result of ITC's
higher fixed asset base during the ten months ended October 31, 1997 as
compared with the year ended December 31, 1996.
Interest and other income decreased $26,000 or 29.5% from approximately
$88,000 for the year ended December 31, 1996 to approximately $62,000 for the
ten months ended October 31, 1997. The decrease in
55
<PAGE>
interest and other income was due primarily to an increase in other expenses
related to a loss on the sale of equipment and an increase in interest expense
related to a capital lease obligation. ITC had consulting fees totaling
approximately $113,000, net of related consulting expenses, which it received
from CSI for assistance in the settlement of a dispute with a carrier.
ITC did not record an income tax benefit for the ten months ended October 31,
1997 but recorded valuation allowances to offset the deferred tax asset due to
the uncertainty of the ultimate realization of the net operating loss
carryforwards. ITC recorded an income tax expense of $4,000 for the year ended
December 31, 1996.
ITC reported a net loss of approximately $850,000 for the ten months ended
October 31, 1997 compared to net income of approximately $7,000 for the year
ended December 31, 1996. The net loss includes a $1.1 million claim against ITC
by a carrier for usage charges, a portion of which ITC is disputing.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND 1996
Revenue decreased $594,000 or 7.3% from approximately $8.2 million for 1995
to approximately $7.6 million for 1996. The decrease is due primarily to a
decrease in customers resulting from the loss of a significant independent
sales agent.
Cost of revenue decreased $337,000 or 6.2% from approximately $5.4 million
for 1995 to approximately $5.1 million for 1996. As a percentage of revenue,
these costs increased from 65.9% to 66.7% for 1995 and 1996, respectively. The
decrease in cost of revenue is due to a decrease in transmission costs directly
related to usage resulting from a decrease in customer base. The increased cost
of revenue as a percentage of total revenue was due to an increase in revenue
from sales to carriers and resellers.
Sales and marketing expense decreased $121,000 or 9.9% from approximately
$1.2 million for 1995 to approximately $1.1 million for 1996. As a percentage
of revenue, sales and marketing expense decreased from 14.9% to 14.5% for 1995
and 1996, respectively. This decrease was due primarily to higher levels of
carrier and reseller sales not requiring advertising and sales commissions.
General and administrative expense increased $297,000 or 25.8% from $1.1
million for 1995 to $1.4 million for 1996. The increase in this expense was due
primarily to an increase in officers' compensation.
Depreciation expense increased $16,000 or 30.2% from approximately $53,000
for 1995 to approximately $69,000 for 1996. This expense increased primarily as
a result of ITC's higher fixed asset base during 1996 as compared with 1995.
Interest and other income/expense increased $112,000 from a net expense of
approximately $24,000 for 1995 to net other income of approximately $88,000 for
1996. The increase in interest and other income was due primarily to the
receipt of consulting fees totaling approximately $113,000, net of related
consulting expenses.
ITC recorded valuation allowances to offset the deferred tax asset due to the
uncertainty of the ultimate realization of the net operating loss
carryforwards. ITC recorded an income tax expense of $21,000 and $4,000 for
1995 and 1996, respectively.
ITC reported net income of approximately $344,000 for 1995 compared to net
income of approximately $7,000 for 1996. The decrease in net income is due
primarily to a decrease in gross margin, the loss of a significant independent
sales agent and an increase in general and administrative expense related to
officers' compensation.
56
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $183,000 for the
three months ended March 31, 1998, compared to cash used in operating
activities of approximately $513,000 for the three months ended March 31, 1997.
The increase in cash provided by operating activities was due primarily to the
increase in accounts payable, net of an increase in trade receivables related
primarily to an increase in revenue from the comparable period in 1996 and a
payable due to CSI under the Reciprocal Telecommunications Agreement. Net cash
used in investing activities totaling $29,000 during the three months ended
March 31, 1998 was due primarily to additional equipment purchases compared to
net cash provided by investing activities totaling $256,000 which was due to
proceeds from the sale of telecommunications equipment. Net cash used in
financing activities totaling $79,000 during the three months ended March 31,
1998 was due to payments on capital lease obligations compared to net cash
provided by financing activities totaling $127,000 which was due primarily to
proceeds from a loan payable.
Net cash provided by operating activities was approximately $626,000 for the
ten months ended October 31, 1997, compared to cash provided by operating
activities of approximately $286,000 for the year ended December 31, 1996. The
increase in cash provided by operating activities was primarily due to a net
loss of $850,000 offset by an increase in accounts payable of $1.2 million and
a decrease in accounts receivable of $180,000. Net cash provided by investing
activities was approximately $242,000 for the ten months ended October 31,
1997, compared to cash used in investing activities of approximately $29,000
for the year ended December 31, 1996. The increase was primarily due to
proceeds received from the sale of telecommunications equipment. Net cash used
in financing activities was approximately $238,000 for the ten months ended
October 31, 1997, compared to cash used in financing activities of
approximately $186,000 for the year ended December 31, 1996. The change was due
primarily to an increase in capital lease payments related to the acquisition
of telecommunications equipment.
Net cash provided by operating activities was approximately $286,000 for
1996, compared to cash provided by operating activities of approximately
$533,000 for 1995. The decrease in cash provided by operating activities was
primarily due to a decrease in net income. Net cash used in investing
activities was approximately $29,000 for 1996, compared to cash used in
investing activities of approximately $152,000 for 1995. The decrease was
primarily due to fewer equipment purchases in 1996. Net cash used in financing
activities was approximately $186,000 for 1996, compared to cash used in
financing activities of approximately $291,000 for 1995. The decrease was due
primarily to proceeds from loan payable.
57
<PAGE>
BUSINESS
OVERVIEW
The Combined Company is a growing provider of international
telecommunications services offering long distance, calling cards and enhanced
voice and data services. With more than 16,700 customers in over 170
countries, the Combined Company primarily serves markets that have been
historically underserved by large telecommunications providers and ITOs. The
Combined Company presently focuses on international call-reorigination,
capitalizing on the arbitrage opportunity created by differences between U.S.
and international long-distance rates. Going forward, the Combined Company
intends to leverage the expertise derived from, and capitalize on the
established customer base generated by, its call-reorigination business to
provide higher margin telecommunications services such as call-through,
enhanced fax and business grade Internet services.
The Combined Company's telecommunications services are marketed and sold
through a network of independent sales agents, strategic relationships and in-
house direct marketing. The Combined Company relies primarily on over 170
independent sales agents that cover over 170 countries. GlobalTel has an
exclusive agreement with the International Business Network for World Commerce
and Industry, Ltd. ("IBNET"), the managing member of the Consortium of Global
Commerce, under which IBNET will market the services of GlobalTel, and
ultimately the Combined Company, through several thousand individual chambers
of commerce located in over 200 countries. In addition, GlobalTel has a
strategic relationship with Novell that provides it with a distribution
channel for its services, and ultimately those of the Combined Company,
through a select number of Novell's network of over 25,000 value-added
resellers. The Combined Company intends to pursue additional strategic
relationships and to expand its sales channels. The Combined Company's also
markets and sells through its small in-house sales staff, which is responsible
for call-reorigination sales and carrier resales.
The Combined Company has a broad customer base including foreign offices of
multinational corporations, including Microsoft Corporation, Mitsubishi
Corporation and Chrysler Corporation; major international hotels, including
the Inter-Continental Hotel and the Copacabana Palace in Rio de Janeiro,
Brazil and Southern Sun Group's Holiday Inn Hotels in South Africa; and
embassies and international agencies, including the United States embassies in
Korea and Australia and the United Nations consulate in South Africa.
The GlobalTel Merger and the ITC Acquisition will enable the Combined
Company to rapidly obtain access to complementary infrastructure, personnel,
customer bases, sales and marketing resources and strategic relationships. The
integration of GlobalTel and ITC with CSI will afford the Combined Company a
greater opportunity to enter new markets, acquire new infrastructure, improve
its rate structure with carriers, and resell excess international capacity to
other carriers and resellers. The Combined Company intends to actively pursue
additional acquisitions of complementary international customer bases,
products and infrastructure.
The Combined Company provides its telecommunications services through its
(i) voice switching and global fax messaging infrastructure in Los Angeles,
California; (ii) voice switching and billing center in Ft. Lauderdale,
Florida; (iii) access to third party infrastructure through international
telecommunications carriers and through Equant, a global data network services
provider; and (iv) enhanced fax nodes in Hong Kong and Mexico City. The
Combined Company uses both off-the-shelf technologies, which provide
flexibility to adapt to the rapidly changing telecommunications environment,
and proprietary automated call processing technologies (DIAL and LINK-US),
which enhance the Combined Company's competitive position in serving larger,
high-volume customers.
INDUSTRY AND MARKET OPPORTUNITY
Historically, telephone service within individual countries has been
monopolized by large, typically government-owned or protected entities, often
referred to as incumbent telephone operators ("ITOs"). As a result,
international callers have had little choice but to use the services provided
by and pay the prices charged by local ITOs. Deregulation, together with
decreases in the cost of providing services, and the introduction of more
sophisticated enhanced services has made it possible for new entrants to
compete with the ITOs in
58
<PAGE>
providing international telecommunications services. The resulting decrease in
non-regulated rates has produced a resale market for long-distance
telecommunications services permitting companies to obtain favorable volume-
based rates from third party providers and to resell services at competitive
rates to other providers and users. These and other factors have contributed to
an increase in telecommunications usage and a proliferation of enhanced
telecommunications services in these markets. The combination of a continually
expanding global telecommunications market, demand for lower prices and
improved quality, and ongoing deregulation has created competitive
opportunities for new telecommunications companies in many countries. According
to the ITU, the international telecommunications industry accounted for $52.8
billion in revenue and 61.9 billion minutes of long distance international
telephone calls worldwide in 1995. Based upon trends in revenue growth from
1991 through 1995 measured by the ITU, the Combined Company believes that
international long distance telecommunications revenue will surpass $76 billion
by the year 2000. The projected revenue and growth rates, as reported by the
ITU, should not be relied upon as an indication of the Combined Company's
financial future.
Emerging Telecommunications Markets. The world's larger telecommunications
carriers (AT&T, Sprint, MCI, WorldCom, Deutsche Telecom AG, France Telecom)
have focused on developed telecommunications markets that are characterized by
high teledensity (ratio of telephone lines to inhabitants), an advanced stage
of deregulation, a large volume of international telecommunications traffic and
a concentration of large multinational corporations. These markets include the
United States, the United Kingdom, Germany, France and Japan. The Combined
Company focuses on what it characterizes as emerging telecommunications
markets, which are (i) smaller developed countries such as Argentina, Austria,
Brazil, Switzerland, Ireland, Singapore and South Africa, and (ii) markets that
typically have less developed telecommunications infrastructures, are in an
earlier stage of deregulation and have more monopolistic distribution profiles.
Based on data from the ITU, the Combined Company has calculated that the
approximately 145 countries that the Combined Company targets as emerging
telecommunications markets generated approximately 23.0 billion minutes in
outgoing international telecommunications traffic in 1995.
Convergence of Technology. Deregulation and evolving price competition have
coincided with technological innovation in the telecommunications industry. New
technologies such as fiber optic cable and improvements in digital compression,
computer software and call processing technology have contributed to
improvements in telecommunications quality and speed, increased transmission
capacities, and decreased transmission costs. For example, fiber optic cable
has dramatically increased the capacity and speed of telephone lines and has
eliminated capacity constraints as a technical barrier to entry for new
international telecommunications providers. The improved quality of these new
telephone lines also has facilitated the development of global voice-mail and
fax services and has enhanced data communication. Improvements in computer
software and processing technology have laid a foundation for services such as
itemized and multi-currency billing. In addition, international debit and
credit networks now permit customers to pay for long-distance calls made from
any telephone using a single home account. The convergence of conventional
telephony and computing technologies also has created the opportunity for data
networks, and computers in general, to become primary telecommunications tools.
Private Networks and Emergence of the Internet. Until recently, the data
communications services offered by public carriers had limited security
features, were expensive and did not adequately ensure accurate and reliable
transmission. As a result, many corporations established private networks to
provide network-based services, such as transaction processing, to their
customers and to coordinate operations between employees, suppliers and
business partners. These private networks were frequently customized and thus
had the capability of providing organizations and users with tailored
performance, security, reliability and private-label branding. As the demand
for private networks has grown, there has been an increase in intranet services
and virtual private networks ("VPNs"), which combine the security of a private
network and the cost efficiencies of a public network.
Despite the benefits of private networks, they still have limitations that
reduce their effectiveness. These networks require leased telephone lines,
dedicated bandwidth and vendor-specific networking equipment. As a
59
<PAGE>
result, such networks are inherently expensive. The Combined Company believes
that the costs of maintaining a private network infrastructure and the risks of
investing in new technologies have precluded many small- and medium-sized
businesses from utilizing private networks, VPNs and intranet infrastructures.
The emergence of the Internet and the widespread adoption of internet
protocol ("IP") as a data transmission standard, combined with deregulation of
the telecommunications industry and advances in telecommunications technology,
have significantly increased the attractiveness of providing data
communications over a public network. At the same time, the growth in
client/server computing, multimedia personal computers, on-line computing
services and network technologies has resulted in a large and growing group of
people who are accustomed to using networked computers for a variety of
purposes, including e-mail, electronic file transfers, on-line computing and
electronic financial transactions. These trends increasingly have led
businesses to explore opportunities to provide IP-based applications and
services within their organizations and to customers and business partners
outside the enterprise. The ubiquitous nature and relatively low cost of the
Internet have resulted in its widespread usage for certain applications, most
notably Internet access and electronic mail. However, use of the Internet for
mission-critical business applications has been impeded by the limited security
and unreliable performance inherent in the structure and management of the
Internet. Therefore, there is a market opportunity to offer a service combining
the best features of the Internet with the security of private networks. The
Combined Company intends to address this need with its business grade Internet
services.
Industry analysts expect the market size for both enhanced IP data services
and Internet access to continue to grow rapidly as businesses and consumers
increase their use of the Internet, intranets, and privately managed IP
networks. Industry sources project total Internet service provider ("ISP")
enhanced services revenue alone to grow from $197.8 million in 1996 to
approximately $11.4 billion in the year 2000, reaching average annual growth of
approximately 175.6% during that period.
Regulatory Environment. In a deregulated telecommunications market such as
the United States, carriers have multiple options for providing
telecommunications access to their customers. Carriers can establish switching
facilities, own or lease fiber optic cable or enter into operating agreements
with foreign carriers. In markets that have not deregulated or are slowly
deregulating, international long-distance carriers have used advances in
technology to develop innovative alternative access methods, such as call-
reorigination and other less regulated enhanced voice and data services. In
other countries, such as Japan and most European Union ("EU") member states,
where the deregulation process is more advanced but not complete, carriers
often are permitted to offer facilities-based data and facsimile services, as
well as limited voice services. As countries deregulate telecommunications
services, the market for alternative access methods typically becomes more
competitive as ITO's and other providers are permitted to offer a wider range
of facilities-based services on a more cost-competitive basis.
Call-reorigination, which is the most common form of alternative
international access, avoids the high international rates charged by the ITO in
a particular regulated country by providing a dial tone from a deregulated
country, typically the United States. To place a call using traditional call-
reorigination, a user dials a unique phone number to an international carrier's
switching center and then hangs up. The user then receives an automated call
back providing a dial tone from the United States, which enables the user to
complete the call using U.S. telecommunications infrastructure. Technical
innovations such as inexpensive dialers have enabled telecommunications
carriers to offer a newer, more advanced form of call-reorigination (referred
to as "transparent call-reorigination") that makes the call-reorigination
mechanics transparent to the customer. In addition, in-country switching
platforms have enabled carriers to offer "call-through" services, allowing the
customer direct access to a provider's network without the need to reoriginate
the call in the U.S.
The Combined Company believes that as deregulation occurs and competition
increases in markets around the world, the pricing advantage of call-
reorigination to most destinations will diminish relative to call-through
international long-distance service. The Combined Company also believes that
deregulation will continue to create opportunities for new entrants in
telecommunications services, particularly companies capable of meeting the
challenges presented by emerging telecommunications markets.
60
<PAGE>
World Trade Organization Agreement. On February 15, 1997, pursuant to the WTO
Agreement, which became effective on February 5, 1998, 69 members of the WTO,
including the United States, agreed to open their respective telecommunications
markets to competition and foreign ownership, and to protect market entrants
against anticompetitive behavior by dominant telecommunications providers. By
eroding the traditional monopolies held by ITOs, many of which are wholly or
partially government owned, implementation of the WTO Agreement will allow
U.S.-based providers the opportunity to negotiate more favorable agreements
with both ITOs and other providers in emerging telecommunications markets. In
addition, deregulation in certain foreign countries will enable U.S.-based
providers to establish local switching and transmission facilities in order to
terminate their own traffic and carry international long distance traffic
originating in those countries.
BUSINESS STRATEGY
The Combined Company's objective is to become a leading provider of enhanced
telecommunications services in markets that historically have been underserved
by large telecommunications providers and ITOs. The Combined Company's strategy
to accomplish this objective includes the following key elements:
Increase Penetration of Emerging Telecommunications Markets. The Combined
Company markets its services in emerging telecommunications markets that
typically have less developed telecommunications infrastructures, are in an
earlier stage of deregulation and have historically faced less competition from
larger telecommunications providers. The Combined Company believes that, due to
the more monopolistic distribution profile of these markets, customers
traditionally have been underserved and consequently are more receptive to
higher quality, competitively priced services. The Combined Company believes
that its experience in offering call-reorigination, combined with its strategic
marketing relationships and proprietary technologies, will enable the Combined
Company to more effectively penetrate these markets and provide more
sophisticated and higher margin telecommunications services.
Pursue and Implement Strategic Acquisitions. The Combined Company intends to
actively pursue and execute strategic acquisitions of complementary
international customer bases, products and infrastructure. GlobalTel and ITC
are its first significant acquisitions. Management believes the worldwide
telecommunications industry will continue to undergo a period of strong
consolidation activity due to the savings associated with larger operations.
The Combined Company intends to actively pursue those customer bases, products
and infrastructure that fit its strategy of providing high quality, state-of-
the-art telecommunications services. Except for the GlobalTel Merger and the
ITC Acquisition agreements in principle, the Combined Company has no
agreements, arrangements or understandings for any acquisitions as of the date
of this Prospectus.
Exploit Strategic Marketing Relationships and Sales Channels. In addition to
its over 170 independent sales agents, the Combined Company has access to
channels of distribution through its strategic marketing relationships.
Management expects that its relationships with IBNET and Novell will enhance
the Combined Company's ability to expand its customer base as well as establish
new relationships with independent ISPs and other network providers in its
target markets. The Combined Company believes that it can most effectively
increase its customer base and revenue by recruiting independent sales agents.
The Combined Company will be able to recruit independent sales agents because
of its advanced technology, its focus on high volume customers and its emphasis
on quality service.
Leverage Customer Base Through Enhanced Service Offerings. The Combined
Company has developed and is introducing additional telecommunications
services. To retain existing customers and attract new customers, the Combined
Company plans to increase its range of services to include enhanced voice and
data services and a suite of business grade Internet services. Most of these
services can be provided under the existing regulatory frameworks in the
Combined Company's markets. In addition, as regulatory and competitive
environments evolve and the availability of capital permits, the Combined
Company intends to migrate its call-reorigination customers, including its
enhanced service customer base, to a more cost effective call-through service.
61
<PAGE>
Employ Flexible, Open Architecture and Proprietary Technology. By using off-
the-shelf technology that is modular, scalable and allows for the integration
of a variety of technologies, the Combined Company expects to provide its
customers with enhanced services in a timely and cost-efficient manner. The
Combined Company is committed to continue to invest in improvements in its
electronic billing, customer interface and network management systems, all of
which are critical to its delivery of services. The Combined Company also uses
proprietary call processing technologies that enable it to provide quality
telecommunications services to high volume customers. The Combined Company
intends to expand its offering of CSI's proprietary DIAL and LINK-US
transparent call processing systems and to market such systems to customers of
GlobalTel and ITC.
Increase Sales to Carriers and Resellers; Reduce Transmission Costs.
Utilizing its enhanced telecommunications infrastructure and combined carrier
transmission rates, the Combined Company intends to substantially increase its
carrier and reseller business. In expanding this business, the Combined Company
intends to leverage its extensive relationships and contacts among
telecommunications carriers and resellers. In addition to expected increases in
revenue, the related growth in transmission volume should also improve the
Combined Company's ability to negotiate preferential rates with its carriers.
The Combined Company also intends to utilize additional point-to-point private
lines, access IP and other data networks to process compressed voice and data
telecommunications traffic, and employ alternate telecommunications solutions
such as "call-through" to further reduce its overall transmission costs.
Capitalize on GlobalTel and ITC Synergies. The Combined Company anticipates
that the GlobalTel Merger and the ITC Acquisition will provide operating
synergies and efficiencies. In addition to integrating networks of independent
sales agents and infrastructure and increasing sales to carriers and resellers,
the Combined Company will seek to introduce new enhanced services such as call-
through, enhanced fax and business-grade Internet services. The Combined
Company also will have the opportunity to cross-market CSI's proprietary DIAL
and LINK-US systems to the 11,500 existing customers of GlobalTel and ITC and
to take advantage of the new business opportunities provided by GlobalTel's
strategic relationships and business grade Internet services.
SERVICES
The Combined Company seeks to address the evolving telecommunications needs
of customers located in emerging telecommunications markets. Currently, the
Combined Company offers international long-distance services, calling cards,
and enhanced voice and data services such as voice-mail, conference calling and
enhanced fax services. As changes in regulatory environments and the
availability of capital permits, the Combined Company intends to migrate its
call-reorigination customers and its enhanced service customer base to a more
cost effective call-through service.
The Combined Company believes that the growing globalization of business has
increased the mobility of business people and led to the proliferation of
multi-office enterprises, creating greater demand for convenient access to
electronic information from remote locations worldwide. As a result, the
Combined Company is designing and implementing a range of business grade
Internet services. The Combined Company expects these services to include
business quality messaging, global enhanced VPNs and other enhanced services.
GlobalTel also is designing a comprehensive "Turnkey Business ISP" solution
that incorporates all of the Combined Company's business grade Internet
services. "Turnkey Business ISP" is designed for independent ISPs and other
network providers in the Combined Company's target markets. These service
offerings are being designed to emphasize authentication, security and
notification. The following tabulates the Combined Company's current services
and services under development:
<TABLE>
<CAPTION>
CURRENT SERVICES SERVICES UNDER DEVELOPMENT
---------------- --------------------------
<S> <C>
International Call-Reorigination Call-Through
(Transparent and Non-transparent) Enhanced Fax
Carrier Reselling Global Enhanced VPN
Prepaid Calling Cards Business Quality Messaging
Enhanced Voice Services Global Desktop
Hotel Operator Services and Other "Turnkey Business ISP"
Hotel Services
Facsimile Services
</TABLE>
62
<PAGE>
Current Services
International Call-Reorigination. The largest segment of the Combined
Company's business is call-reorigination services. Call-reorigination service
involves connecting international customers to the U.S. telephone system via
computer triggering, which makes each international customer's call originate
in the U.S. As a result, the customer's call cost structure is based on the
lower charges of the U.S. telecommunications marketplace rather than the
charges of the ITO. The Combined Company believes that the quality of the calls
made using the Combined Company's call-reorigination system is as good as, if
not better than, the quality obtained by using the ITO. The Combined Company
provides two basic types of call-reorigination: non-transparent and
transparent. To place a call using non-transparent call-reorigination, a
customer dials a unique phone number to an international carrier's switching
center and then hangs up. The customer then receives an automated call back
providing a dial tone from the United States, which enables the customer to
complete the call using U.S. telecommunications infrastructure. As of the date
of this Prospectus, approximately 89.1% of the Combined Company's customers use
non-transparent call-reorigination services. Customers who use non-transparent
call-reorigination typically are individuals or smaller businesses that do not
require the convenience and speed of transparent call-reorigination.
Transparent call-reorigination involves the transmission of an international
call via a processor at the customer's site and one of the Combined Company's
switches in Ft. Lauderdale, Florida or Los Angeles, California. The switch
automatically connects the call to the caller's dialed destination. When
customers use the Combined Company's transparent call-reorigination service,
the call-reorigination mechanics are transparent to the customer. CSI has
developed advanced proprietary call processors called "DIAL" and "LINK-US."
When used with standard triggering methods and commercially available call
processing devices, DIAL and LINK-US provide transparent access to the Combined
Company's call-reorigination system. These systems are more expensive than non-
transparent call-reorigination systems and are typically installed in hotels
and businesses that have PBX telephone systems and require fast, reliable,
high-volume service. Less expensive systems are available for small businesses
and other customers desiring transparent call-reorigination. These systems
initiate all reorigination through global data networks, such as X.25, Internet
and frame relay, and local network digital services such as Integrated Services
Digital Networks (ISDN). The Combined Company currently utilizes the X.25
network in Brazil and Argentina and the Internet in Brazil, Argentina,
Venezuela, South Africa and Lebanon to facilitate the call-reorigination
process. The Combined Company plans to have Internet triggering installed in
Singapore, Hong Kong and New Zealand in the near future. The Combined Company
is able to quickly adapt its call processors to virtually any type of customer
requirement, providing extremely fast and reliable service.
CSI estimates that approximately 10.9% of the Combined Company's traffic is
currently routed through transparent call processors. The Combined Company has
installed approximately 200 DIAL and five LINK-US as well as approximately 200
other transparent call processors at various hotels and businesses. Transparent
call processors are proposed to be installed in several additional hotels and
businesses in Brazil, Argentina, South Africa and Hong Kong. The Combined
Company intends to focus its future sales and marketing efforts toward
recruitment of hotels and businesses that will use the Combined Company's
transparent call-reorigination service.
Carrier Reselling. The Combined Company resells its international long-
distance services to other telecommunications carriers on a wholesale basis.
The Combined Company intends to expand such services and anticipates that the
additional traffic from carrier resale customers will enable it to negotiate
more favorable rates with its carriers.
Prepaid Calling Cards. The Combined Company recently launched prepaid card
services to its customers worldwide. The Combined Company's prepaid domestic
and international calling cards may be used by customers for international
telephone calls from more than 70 countries. Calling card customers also have
access to 24-hour multi-lingual customer service and certain customization
options.
63
<PAGE>
Enhanced Voice Services. The Combined Company offers enhanced voice services,
consisting of voice-mail and conference calling. Conference calling enables
customers to set up "meet me" dial-in conference calls as well as add-on
conference calls, with or without operator intervention. Conference calling has
a higher margin than the Combined Company's basic voice services. The Combined
Company's services also enable customers to originate international voice calls
over the Internet by allowing call-reorigination service to be activated from
their PCs.
Hotel Operator Services and Other Hotel Services. The Combined Company plans
to introduce operator services for hotel customers. With operator services in
place, a hotel guest seeking to use a credit card to "dial around" the hotel
system is routed via the Combined Company's call-reorigination system to an
international operator. The call is billed on the guest's credit card once the
card is validated. The hotel normally would not receive any international long-
distance revenue from such "dial around" calls. In order to market and expand
its hotel operator services, the Combined Company intends to share a percentage
of its revenue from operator services with the hotel. The Combined Company also
intends to offer a variety of other services to hotel customers, including
transparent call-reorigination, facsimile, Internet access, voice-mail and
debit card services.
Facsimile Services. The Combined Company offers its customers the ability to
send high-speed international facsimiles over its network. The Combined Company
also intends to offer transmission of facsimiles via the Internet or private
data networks. The Combined Company has redundant, dedicated T-1 access to the
Internet to enhance this service. The Combined Company intends to use a portion
of the proceeds of this offering to implement and expand these services.
Services Under Development
The Combined Company is developing the following new services:
Call-Through. The Combined Company will offer call-through or "direct access"
service to customers in selected markets where current regulations and local
market access charges make call-reorigination less competitive than call-
through. Call-through service involves the installation of an access point in
the local market that is connected to one of the Combined Company's switches by
a dedicated long-distance line that is leased from a carrier or other network
operator. The international customer accesses this connection to the Combined
Company's switch either by dialing a local telephone number or, in markets
where the regulatory environment permits, through an interconnection with the
ITO.
Enhanced Fax. The Combined Company's enhanced fax service, currently being
tested in Hong Kong and Mexico City, uses advanced technology to provide
customers with a higher quality and less expensive method to send facsimile
messages than conventional analog fax. Unlike conventional analog fax service,
enhanced fax service: (i) results in significantly fewer transmission errors,
particularly with international transmissions, because it is transmitted over a
digital data network; (ii) is easier to use than conventional fax, with a
feature that will retransmit the fax until it is successfully received at its
destination; and (iii) is much less expensive because it can be sent as a
digital packet in a shorter period of time. A recent study conducted by Pitney
Bowes/Gallup found that international faxes transmitted over analog phone lines
are transmitted twice on average due to interruptions and quality problems,
creating a hidden cost for users. Other features of the enhanced fax offering
include commercial-grade broadcast fax, fax on demand (or "fax catalog") and
timed delivery.
In the first half of 1998, the Combined Company plans to install an Internet-
based fax service to its fax gateway in Los Angeles, California. This service
will allow customers with Internet access to send faxes to any fax machine
worldwide and to any Internet-based e-mail address.
Business Grade Internet Services. The Combined Company is developing a suite
of enhanced services that will permit business-grade communications utilizing
Internet technologies. The Combined Company expects these business grade
Internet services to include: (i) Global Enhanced VPN, (ii) Business Quality
Messaging, (iii) Global Desktop and (iv) "Turnkey Business ISP." These services
will combine the best features of the
64
<PAGE>
Internet, such as openness, easy access and low cost, with the advantages of a
private network, such as high security and customized features. The Combined
Company believes its services will overcome many of the perceived
inefficiencies of today's Internet and will allow its customers to conduct
business quality transactions via the Combined Company's network
infrastructure.
The Combined Company, in conjunction with Novell and other technology
providers, is developing business grade Internet services. In addition,
GlobalTel has become a Novell Business Internet Services ("BIS") partner, an
affiliation that the Combined Company believes will further enhance its service
delivery strategy and provide it access to certain key networking technologies.
Other BIS partners include AT&T, Bell Atlantic Corporation, Nippon Telegraph
and Telephone Corporation, Deutsche Telecom AG, Singapore Telecommunications
Limited Corporation and Korea Telecom. See "--Network and Operations" and "--
Sales and Marketing."
Global Enhanced VPN. The Combined Company's Global Enhanced VPN service
enables customers to establish a wide area network among several locations
by using the Combined Company's network infrastructure, thereby eliminating
the cost associated with establishing and maintaining a dedicated private
network. For example, a U.S.-based user in Hong Kong would dial a local
number to access his or her wide area network in the United States and
could then work on the network in the United States in accordance with the
user's normal access privileges. The Combined Company's VPN service will be
enhanced through the use of a commercial-grade directory infrastructure and
certain certification and security mechanisms. Global Enhanced VPN enables
electronic commerce by providing the user with controlled, managed and
secure access to its VPN for customers, vendors and business partners.
Business Quality Messaging. The Combined Company's Business Quality
Messaging ("BQM") service will enable customers to exchange messages,
faxes, e-mail or voice-mail in a secure
and reliable manner via the Combined Company's network infrastructure. BQM
also will allow companies to connect dissimilar mail systems. These
features can be customized to enable the Combined Company to provide
different levels of service based on customer requirements and to price
such service levels accordingly.
Global Desktop. The Global Desktop product will combine the Global
Enhanced VPN, BQM and additional features targeting the global business
traveler. Specifically, it will permit the user to access and exchange
electronic information from public switched or wireless telephone networks
worldwide.
"Turnkey Business ISP." The Combined Company believes that the great
majority of regional ISPs need to offer additional enhanced services to
remain competitive, but have insufficient resources to develop these
services internally. According to an August 1997 report by Business
Research Group, 77% of all ISPs in the United States were regional ISPs,
83% of which lacked out-of-region access and therefore were required to
develop their own billing and tracking systems. The Combined Company is
designing a comprehensive turnkey service solution for regional ISPs that
will include its business grade Internet services. This "Turnkey Business
ISP" solution will enable regional ISPs to access the Combined Company's
suite of enhanced services and, when available, voice-over-IP.
Completion of Services Under Development. The Combined Company has not
generated significant revenue from its enhanced services to date. The new
services described above are still under development and are not scheduled for
implementation until various times in 1998 or later. Also, the completion of
development and introduction of new services will require the investment of
significant operating capital. Of the net proceeds from this offering, $300,000
have been allocated to the development and introduction of these new services.
It is not uncommon that the introduction of new telecommunications services is
delayed or is occasioned by technical problems.
SALES AND MARKETING
The Combined Company's telecommunications services are marketed and sold
through a network of independent sales agents, strategic relationships and
direct marketing efforts.
65
<PAGE>
Independent Sales Agents
In selling its retail services, the Combined Company employs a network of
over 170 independent sales agents that sell to customers located in over 170
countries, supplemented by direct marketing efforts. Independent sales agents
are recruited through advertising in the Combined Company's target markets and
by referrals from customers and industry contacts. The Combined Company's
agreements with its independent sales agents typically are non-exclusive and
require the independent sales agents to offer the Combined Company's services
at rates prescribed by the Combined Company in accordance with the Combined
Company's policies. The Combined Company's ten largest independent sales agents
accounted for 68.6% of the Combined Company's pro forma revenue for the 12
months ended December 31, 1997. See "Risk Factors--Dependence on Key
Independent Sales Agents."
Strategic Relationships
The Combined Company intends to leverage its strategic marketing
relationships to expand its customer base. In particular, the Combined Company
expects that its relationship with IBNET and its access to a select number of
Novell's network of over 25,000 VARs will facilitate additional contact with
many small- and medium-sized domestic business customers, foreign branch
offices of large multinational corporations and local ISPs.
IBNET
IBNET is the managing member of the Consortium for Global Commerce, which
represents thousands of individual chambers of commerce (the "Chambers") in
over 200 countries. The Consortium for Global Commerce was established to (i)
create a global intranet enabling the Chambers and their members to exchange
information and conduct business transactions electronically, and (ii) obtain
more favorable pricing and terms for certain products and services for such
members.
The Consortium's four member organizations are the International Chambers of
Commerce, the Paris Chamber of Commerce and Industry, the G77 (a non-
governmental organization comprised of 137 developing countries and China) and
IBNET, the managing partner of the Consortium. The Combined Company believes
that its relationship with the Consortium, through GlobalTel's agreement with
IBNET, will enhance its ability to establish relationships with regional ISPs
and expand its customer base in its target markets.
In April 1997, GlobalTel entered into a ten-year marketing agreement with
IBNET to provide the Chambers and their members with telecommunications
services including international voice, international fax, calling card
services, Internet services, intranet, VPN and messaging. The individual
Chambers may act as sales and marketing agents for GlobalTel's, and ultimately,
the Combined Company's services. IBNET has agreed to market GlobalTel's
services to the Chambers by promoting GlobalTel services in Consortium
literature, at Consortium trade shows and speaking engagements, and by listing
the Combined Company's services in the Consortium's databases. In November
1997, the Consortium launched its marketing campaign to inform the Chambers
about available products and services, including GlobalTel's services. Under
its agreement with IBNET, the Combined Company also will have the right to co-
brand its services with the Chambers' trademarks, a feature that the Combined
Company believes will enhance its marketing and sales efforts because the local
chamber brand is typically well recognized and held in high regard by local
business communities. Following execution of the agreement, Ronald P. Erickson,
who will serve as Chairman of the Board of the Combined Company, and Bruce L.
Crockett and Lyman C. Hamilton, who will serve as Directors of the Combined
Company, were invited and accepted offers to serve as Directors of IBNET.
Novell
In October 1997, GlobalTel entered into a three-year technology licensing
agreement with Novell that provides the Combined Company with access, and
support in marketing, to Novell's over 25,000 VARs. Novell VARs range from
small computer networking companies to large system integration firms. The
Combined
66
<PAGE>
Company, in conjunction with Novell, intends to create a certification program
for channel partners with respect to the Combined Company's product offerings.
In addition, GlobalTel has become a Novell BIS partner. Other BIS partners
include Deutsche Telecom AG, Bell Atlantic Corporation, Nippon Telegraph and
Telephone Corporation and Singapore Telecommunications Limited. BIS partners
have agreed upon standards for interconnecting their respective Internet
networks. The Combined Company believes that its status as a BIS partner will
allow it to benefit from any future network connections among the BIS partners.
Direct Sales
The Combined Company has a direct sales force of ten individuals. The direct
sales force is responsible for agent recruitment and development, retail and
wholesale sales and development of high volume corporate accounts. The Combined
Company plans to expand the existing direct sales force, which will enable it
to take advantage of its strategic marketing relationships, expand its carrier
resale business, and develop additional relationships with regional ISPs and
other network providers.
Customer Service
The Combined Company provides its customers, independent sales agents and
resellers with high-quality customer service. As of March 31, 1998, the
Combined Company employed ten customer service representatives in Seattle,
Washington and ten customer service representatives at the Combined Company's
switching facility in Ft. Lauderdale, Florida. The Combined Company intends
ultimately to concentrate its customer service functions in Ft. Lauderdale. The
customer service center operates 24 hours a day, seven days a week and offers
support in over five languages.
CUSTOMERS
As of March 31, 1998, the Combined Company's customer base consisted of more
than 16,700 customers in over 170 countries. The Combined Company believes that
its customers prefer its service compared to the ITO's service for the
following reasons: (i) lower international, and in some cases intra-country,
telephone rates; (ii) increased system reliability and call completion rates;
(iii) improved line quality, with less echo, static and snow; and (iv)
available and responsive customer service support.
In addition to selling directly to customers, the Combined Company also sells
its reorigination service on a wholesale basis to resellers and long-distance
carriers. The Combined Company believes that long-distance services, when sold
to resellers and other carriers, are generally a commodity product with the
purchase decision based primarily on price. Although the margins on sales to
other carriers and resellers are lower than the margins on sales to business
and government customers, these sales involve lower operating expenses and help
the Combined Company optimize the use of its network and reduce its overall
carrier transmission costs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Business and Government Customers
The Combined Company's geographically diversified business and government
customers include: foreign offices of multinational corporations, major
international hotels and embassies and international agencies. Among these
customers are:
<TABLE>
<CAPTION>
FOREIGN OFFICES OF
MULTINATIONAL CORPORATIONS INTERNATIONAL HOTELS EMBASSIES AND INTERNATIONAL AGENCIES
- -------------------------- ---------------------- ------------------------------------
<S> <C> <C>
Microsoft Corporation Holiday Inn Hotels(11) U.S. Embassy in Korea
Mitsubishi Corporation InterContinental Hotel U.S. Embassy in Australia
Chrysler International Copacabana Palace UN Consulate in South Africa
Warner-Lambert Corporation Marina Hotel
Diners Club International Caesar Park Hotel
DHL Aviation
Wal-Mart Stores, Inc.
Citibank, N.A.
Bank of Tokyo
Royal Bank of Canada
</TABLE>
67
<PAGE>
Resellers
The Combined Company sells its reorgination service to resellers on a
wholesale basis. These resellers purchase service in bulk at a discounted rate
for resale to their customers. Resellers are responsible for billing their
users and for providing customer service. Resellers may sell the Combined
Company's services to their customers under their own company's name. The
Combined Company can prepare bills for resellers or resellers can prepare their
own bills based on information provided by the Combined Company. Resellers,
rather than the Combined Company, are responsible for collecting amounts due
from the customers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Carriers
The Combined Company's carrier customers are long-distance companies that
purchase the Combined Company's excess international long distance capacity on
a wholesale basis for their own use. These carriers purchase service in bulk at
a discounted rate for resale to their customers. The carriers are responsible
for billing their customers and for providing customer service. The Combined
Company currently provides these services to four carrier customers that are
based in the United States.
NETWORK AND OPERATIONS
The Combined Company provides its telecommunication services through its (i)
voice switching and global fax messaging infrastructure in Los Angeles,
California, and Ft. Lauderdale, Florida, (ii) access to third party
infrastructure through international telecommunications carriers and through
Equant, and (iii) enhanced fax nodes in Hong Kong and Mexico City. By using
off-the-shelf technology, which is modular and scalable and allows for the
integration of a variety of technologies, the Combined Company expects to be
able to provide its customers with enhanced services in a timely and cost-
efficient manner. The Combined Company is committed to investing in
improvements in its electronic billing, customer interface and network
management systems, which the Combined Company believes are critical to its
delivery of services. The Combined Company expects these systems to provide it
with the ability to quickly upgrade its customers from a single service to
multiple services.
International Network Switching Center--Los Angeles, California. GlobalTel's
switching center is located at One Wilshire Boulevard, Los Angeles, California,
the West Coast's principal telecommunications gateway. Most major carriers have
a switching facility at this location. In 1997, GlobalTel upgraded its
switching center to provide fiber optic access for GlobalTel to all major
carriers in the facility. As a protective measure, GlobalTel has diversified
its access to long-distance providers through contracts with various local
access providers supplying redundancy in the event of single point failures.
At this facility GlobalTel uses two Summa Four voice switches that are
controlled by a real-time rating, billing and switching platform. This
switching platform provides enhanced voice telecommunications services and has
sufficient capacity to accommodate customer growth. GlobalTel also leases a
portion of a Northern Telecom DMS 250 tandem switch, which is connected to the
Summa Four switching platform to support GlobalTel's carrier traffic.
GlobalTel's switching center also houses a fax gateway switching platform with
e-mail to fax conversion capability and software for enhanced service features,
including fax broadcasting, fax on demand and fax mail.
International Network Switching Center--Ft. Lauderdale, Florida. ITC's
switching center is located in Ft. Lauderdale, Florida, which is interconnected
to the Miami gateway to the Latin American, African and European
telecommunications markets. The switching center consists of a billing and
provisioning system and two 1000 port class 4 tandem switches. The switches are
designed to handle international call-reorigination, international and domestic
long-distance and debit card traffic. The inbound and outbound traffic is
cross-connected to eight telecommunications carriers via a DS3 fiber optic
line. ITC uses NACT switches, billing platform and interactive voice response
("IVR").
68
<PAGE>
The Combined Company has recently added voice recognition, fax functions and
Internet and X.25 triggering to the switching center. These features enable the
Combined Company to offer transparent call-reorigination and call-through
services, daily agent reports via the Internet and automated credit card
debiting. An additional feature under development is customer provisioning via
the World Wide Web. The Combined Company's customers are able to access its
switches in any one of 12 languages.
Redundancy. The Combined Company's operations center will be in Ft.
Lauderdale, Florida, which has redundant computer systems and fiber optics. The
Combined Company believes that redundancy gives it enhanced service
reliability, which gives it an advantage compared to many of the Combined
Company's smaller competitors that do not have redundant systems. In addition,
the Combined Company's redundant system architecture allows the flexibility to
take individual computers off line intentionally for scheduled maintenance,
upgrades and enhancements.
Fax Nodes--Hong Kong and Mexico City. GlobalTel leases and operates two fax
nodes in Hong Kong and Mexico City that are co-located in Equant's network
facilities. The nodes are serviced and maintained by Equant on a 24-hour basis
and are interconnected to local access providers. The Combined Company intends
to deploy fax nodes in additional locations during 1998.
Carriers and Network Access. The Combined Company has resale agreements with
a number of long-distance carriers in order to obtain the best available
pricing and service on certain routes. The Combined Company's enhanced fax and
business-grade Internet services will be carried through Equant's global data
network. GlobalTel's Los Angeles switching center is connected to the Equant
network center through high-speed fiber optic circuits. The Combined Company's
switching nodes have the ability to select quality and least cost routes,
depending on the quality of service desired by the customer.
The Combined Company relies on major telecommunications carriers including
AT&T, Sprint, WorldCom Cable & Wireless and Teleglobe to provide service to its
customers. Carrier costs constitute the largest portion of the Combined
Company's variable costs. The Combined Company has entered into contracts to
purchase capacity from various domestic and foreign carriers. Pursuant to these
contracts, the Combined Company obtains rates, which are generally more
favorable than otherwise would be available. To obtain these rates, the
Combined Company commits to purchase minute minimums from such carriers. If the
Combined Company fails to meet its minute minimums under a carrier contract, it
could still be required to pay its minimum monthly commitment as a penalty or
the contracts could be canceled. The Combined Company's aggregate minimum
monthly commitments are approximately $564,000, which represent approximately
34.6% of the Combined Company's average monthly cost of revenue for the three
months ended March 31, 1998. Because of the frequent fluctuations of long
distance carriers' rates, the Combined Company believes that it is in its best
interest to have short-term carrier agreements. Most of the Combined Company's
carrier agreements will expire, or may be terminated by either party, within
one year. The Combined Company's dependence on particular carriers will vary
because the Combined Company shifts its use of carriers depending on the rates
that are offered. The Combined Company periodically attempts to renegotiate
rates with its current carriers and to establish relationships with new long
distance carriers that provide the most favorable rates.
The Combined Company's ability to obtain favorable rates from the carriers
depends, in large part, on the Combined Company's total volume of long distance
traffic. The Combined Company does not believe that the loss of any one
supplier or contract would have a material adverse impact on the Combined
Company's business, financial condition or results of operations. See "Risk
Factors--Dependence on Carriers and Other Suppliers" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
COMPETITION
General
The Combined Company faces a high level of competition for customers and
independent sales agents in all of its markets, and expects competition to
intensify in the future. There are no substantial barriers to entry in
69
<PAGE>
the call-reorigination industry. The Combined Company believes that there are
more than 150 companies engaged in the international call-reorigination
industry. Many of the Combined Company's competitors are significantly larger,
have substantially greater financial, technical and marketing resources, larger
networks and a broader portfolio of services than the Combined Company.
Additionally, many competitors have strong name recognition and brand loyalty,
long-standing relationships with their target customers, and economies of scale
resulting in a lower relative cost structure. There can be no assurance that
the Combined Company will be able to compete successfully against new or
existing competitors.
Inasmuch as the Combined Company believes that competition for customers and
independent sales agents is based primarily on price, transmission quality,
services offered and the ability of the supplier to "bundle" various
telecommunications services, the U.S.-based providers of international long
distance service typically set pricing, quality, service, and standards that
the Combined Company seeks to match or exceed. Increased competition could
force the Combined Company to reduce its prices and profit margins if the
Combined Company's competitors are able to procure rates or enter into service
agreements comparable to or better than those of the Combined Company, or if
competitors are able to offer other incentives to existing and potential
customers and independent sales agents. Similarly, the Combined Company has no
control over the prices set by its competitors in the long distance resale
market. The Combined Company is aware that its ability to market its long
distance resale services depends upon its ability to offer rates lower than
those of ITOs. A decrease in arbitrage spreads between U.S.-based international
calling rates and ITO rates could have a material adverse effect on the
Combined Company's business, financial condition and results of operations.
Other potential competitors include cable television providers, wireless
telephone providers, Internet access providers, electric and other utilities
with rights of way, railways, microwave carriers and large-end users that have
private networks. The intensity of such competition has recently increased, and
the Combined Company believes that such competition will continue to intensify
as the number of new entrants increases. If the Combined Company's competitors
devote significant additional resources to the provision of international and
national long distance telecommunications services to the Combined Company's
target customer base, the Combined Company could suffer a reduction of revenue
and profits that could have a material adverse effect on the Combined Company's
business, financial condition and results of operations.
On February 15, 1997, representatives of 69 countries, including the United
States, finalized the WTO Agreement, which addresses market access, foreign
investment and procompetitive regulatory principles for countries generating
more than 90% of worldwide telecommunications revenue. The WTO Agreement became
effective February 5, 1998. Although certain countries took specific exceptions
to the agreement, the WTO Agreement generally provides (i) market access for
United States companies to local, long distance and international service
through means of network technology on either a resale or facilities basis,
(ii) the opportunity for United States companies to hold a significant stake in
telecommunications companies in the countries that are parties to the WTO
Agreement, and (iii) the ability to take advantage of these opportunities
within a framework of pro competitive regulatory principles. The Combined
Company expects to benefit from the anticipated effects of the WTO Agreement
because of its procompetitive aspects, but it expects that it may take several
years before the principles of the agreement are implemented in many countries
and it cannot predict the extent of the opportunities that may be presented.
U.S. Based Competition
Historically, the large U.S. long distance carriers have been reluctant to
compete directly with ITOs by entering the international call-reorigination
business. AT&T and others, are beginning to enter the call-reorigination
business. The Combined Company's principal U.S.-based competitors are providers
of international call-reorigination services such as AT&T, Access Authority,
IDT Corporation, International Telecom, Ltd.(Kallback), Justice Technology
Corporation, Telegroup, Inc., USA Global Link, Inc., UTG Communications
International, Inc., Viatel, Inc. and Worldpass Communications Corp. as well as
providers of traditional long distance services such as AT&T, Cable & Wireless,
Frontier Corp., GTE Communications, LCI International, Inc., MCI, Qwest
Communications International, Inc., Sprint, WorldCom and RBOCs that provide
long distance services outside their exchange territories.
70
<PAGE>
International Based Competition
The Combined Company's principal international-based competitors include,
among others, Telekom S.A. in South Africa; Telefonica de Argentina and Telecom
Argentina in Argentina; Telebras, Telesp and Telerj in Brazil; France Telecom;
PTT Telecom B.V. in the Netherlands; ACC Corp., First Telecom plc, Oystel
Communications Ltd., Swiftcall Ltd., AT&T, British Telecommunications plc,
Cable & Wireless, Mercury Communications Ltd., Sprint and WorldCom in the
United Kingdom; Deutsche Telecom AG in Germany; Optus Communications in
Australia and Kokusan Denshin, Denwa, International Telecom Japan and
International Digital Communications in Japan. The Combined Company also
competes with non-U.S. based providers of international call-reorigination
services.
The Combined Company believes that ITOs generally have certain competitive
advantages due to their control over local connectivity and their close ties
with national regulatory authorities. The Combined Company also believes that,
in certain instances, some regulators have shown a reluctance to adopt policies
and grant regulatory approvals that would result in increased competition for
the local ITO. If an ITO were to successfully pressure national regulators to
outlaw the provision of call-reorigination services, the Combined Company could
be denied regulatory approval in certain jurisdictions in which its services
would otherwise be permitted, thereby requiring the Combined Company to seek
judicial or other legal enforcement of its right to provide services. Any delay
in obtaining approval, or failure to obtain approval, could have a material
adverse effect on the Combined Company's business, financial condition and
results of operations.
ITOs may influence regulatory authorities to outlaw the provision of certain
call-reorigination services or block access to the call-reorigination services
the Combined Company markets. The ITOs generally seek to prevent call-
reorigination companies from using uncompleted local telephone calls to trigger
international calls. In such environments, the Combined Company uses X.25 or
Internet triggering to avoid violating local laws or regulations. The Combined
Company has benefited from the high differential between the rates charged by
ITOs and the rates charged by the Combined Company. As deregulation continues
in foreign markets, this differential in rates is expected to decrease, thus
placing pricing pressure on the Combined Company. Furthermore, deregulation may
lead to additional competitors entering the international telecommunications
market. If the Combined Company encounters anti-competitive behavior in
countries in which it operates (such as an ITO attempting to block access to
call-reorigination services) or if the ITO in any country in which the Combined
Company operates uses its competitive advantages to the fullest extent, the
Combined Company's business, financial condition and results of operations
could be materially adversely affected. Deregulation and increased competition
in foreign markets could cause prices for direct-dial international calls to
decrease to such a degree that customers are no longer willing to use the
Combined Company's international call-reorigination services.
TECHNOLOGY
DIAL and LINK-US Technology. CSI utilizes proprietary DIAL and LINK-US
technologies in connection with transparent call-reorigination. These
technologies are incorporated into a switch that permits transparent call-
reorigination to occur when interconnected with PBX's of hotels, large
businesses and other high volume customers. As of December 31, 1997, CSI had
installed approximately 200 DIAL systems and five LINK-US systems.
The DIAL technology, which largely consists of proprietary programming
enhancements to third-party switching equipment, is beneficially owned entirely
by CSI and is not subject to royalty payments, restrictions or financial
penalties whatsoever regarding its deployment.
CSI supports two versions of its DIAL technology. The first version is the
Enhanced DIAL system, which is installed to facilitate transparent call-
reorigination in large hotels and business parks. Enhanced DIAL utilizes a
unique combination of X.25 and Internet triggering technologies interconnected
with commercial PBX environments. The Combined Company plans to emphasize the
installation of its Enhanced DIAL system, which can support the same volume of
traffic as 64 of the Basic DIAL systems. The Combined Company's Basic DIAL
71
<PAGE>
system is an entry-level system that is installed to facilitate transparent
call-reorigination for smaller companies. The Basic DIAL system is also capable
of utilizing X.25 and Internet triggering, but is commonly used in locations
that do not currently have X.25 or Internet access.
The LINK-US system is a PC-based automated call processing system designed to
link an internationally located PBX to the CSI switching center. Its design
includes multiple call processing redundancies to insure rapid call completion,
real time billing, and other enhanced features including voice prompts and
remote programming capability. For a description of the license agreement
relating to the LINK-US technology see "Management--Consulting Agreement."
X.25 Triggering Technology. An X.25 data network can transport data or voice
information to any network destination in the world. CSI has proprietary
software technology that uses X.25 triggering technology in its call-
reorigination system. The Combined Company provides X.25 triggering in
Argentina and Brazil and plans to provide it in any locality where it has
several high volume customers.
In countries with underdeveloped telecommunications systems, it can be
difficult and time consuming to make an international phone call. With X.25
triggering technology up to 100% of the trigger calls to the Combined Company's
switch are transmitted out of the country and nearly 100% of the call-
reorigination calls are transmitted into the country. The combination of X.25
triggering technology with a DIAL or LINK-US switch provides a highly reliable
telecommunications service that is especially appealing to hotels and business
owners. See "--Services."
By utilizing alternate call-triggering mechanisms, the ITO is removed from
the call-reorigination process. ITOs typically object to call-reorigination
because call-reorigination companies use the ITO's lines to trigger the call-
reorigination without paying the ITO for the use of its lines on the long
distance segment because that long distance call is not completed. When the
Combined Company uses X.25 or Internet triggering technology to trigger its
call-reoriginations, the ITO's long distance lines are not used. Instead, a low
cost, local call is completed as part of the call-reorigination triggering
process. See "Risk Factors--Risks Associated with International Operations."
Internet Triggering Technology. Internet triggering is a newer technology and
is less expensive than X.25 triggering technology. CSI is currently triggering
call-reoriginations via the Internet in Brazil, Argentina, Venezuela, South
Africa and Lebanon. It intends to install Internet triggering in Singapore,
Hong Kong and New Zealand. CSI has found that call-reoriginations using
Internet triggering usually take four to six seconds and are nearly 100%
effective.
INTELLECTUAL PROPERTY
GlobalTel owns U.S. Registration No. 1,944,078 for the mark PRIMECALL for
reselling long-distance telecommunications services. GlobalTel has filed
applications in the national trademark offices of Australia, Hong Kong and
Japan and in the regional European Community trademark office to register the
service mark PRIMECALL. GlobalTel filed an Intent to Use with the Patent and
Trademark Office for the mark "GLOBALTEL." There can be no assurance that the
Combined Company's trademark applications will result in any registration being
issued, or that such registration will be held valid and enforceable if
challenged. The Combined Company currently does not hold any trademark
registrations for the marks CS GLOBALTEL, GLOBALTEL, DIAL or LINK-US.
The Combined Company is aware of a pending U.S. application by Cellnet
Corporation ("Cellnet") to register the mark GLOBALTEL for providing
international wireless telephone communication services on a temporary basis.
The Combined Company believes that GlobalTel may have commenced using the mark
GLOBALTEL before Cellnet and is assessing whether to oppose Cellnet's
application. The Combined Company is also aware that Interactive Media
Technologies, Inc. is doing business in the area of international callback
services under the trade name GlobalTel. There can be no assurance that the
Combined Company's use of the
72
<PAGE>
mark GLOBALTEL will continue unimpeded or the Combined Company's measures to
protect its intellectual property will deter or prevent the unauthorized use of
the Combined Company's intellectual property. The Combined Company could incur
substantial costs and diversion of management resources relating to the
enforcement of its intellectual property rights. In addition, if the Combined
Company is unable to adequately protect its intellectual property, including
existing service marks and trademarks, there could be a material adverse effect
on the Combined Company's business, financial condition and results of
operations.
The Combined Company does not have an intellectual property protection
program and does not hold any patents or copyrights. It relies on trade secret
and contractual restrictions to establish and protect its technology. The
Combined Company's success depends in part on its ability to enforce
intellectual property rights for its proprietary software technology, both in
the United States and in other countries. The Combined Company's proprietary
software is protected by the use of confidentiality agreements that restrict
the unauthorized distribution of the Combined Company's proprietary
information.
REGULATION
The Combined Company's international call-reorigination services are subject
to the jurisdiction of many regulators. The terms and conditions under which
the Combined Company provides international communications services are subject
to government regulation. The FCC has imposed certain restrictions on
international call-reorigination providers, including the requirement that
authorized carriers provide service in a manner consistent with the laws of the
countries in which they operate. Local laws and regulations differ
significantly among the jurisdictions in which the Combined Company operates,
and the interpretation and enforcement of such laws and regulations vary. These
regulations are often based on the informal views of the local ministries
which, in some cases, are subject to influence by ITOs. In addition, since the
Combined Company's call-reorigination services effectively bypass the local
telephone system, regulators in certain countries have objected to call-
reorigination services, and 34 countries have notified the FCC that they have
declared certain call-reorigination services illegal. The Combined Company's
services in such countries comprised approximately 10.6% of its revenue for the
12 months ended December 31, 1997. The Combined Company generates a significant
portion of its revenue from customers originating calls in Europe, the Middle
East, South Africa and South America. In the event that countries in these
regions that now permit call-reorigination prohibited the Combined Company's
services or regulated the pricing or profit levels of such services, the
Combined Company's business, financial condition and results of operations
could be materially adversely affected. At this time, the Argentine government
is attempting to provide sufficient information to demonstrate to the FCC's
satisfaction that call-reorigination is unlawful in Argentina. Although the
Combined Company believes that it is unlikely that the FCC would rescind the
Combined Company's authority to provide call-reorigination, such action by the
FCC would have a material adverse effect on the Combined Company's business.
To facilitate the Combined Company's expansion plans, it may deploy
additional switching facilities to be located in a number of countries. As a
result, the Combined Company may be directly subject to regulation in an
increasing number of countries. In addition, there can be no assurance that the
Combined Company has accurately interpreted or will accurately predict the
interpretation of applicable laws and regulations or regulatory and enforcement
trends in a given jurisdiction, or that the Combined Company will be found to
be in compliance with all such laws and regulations. Failure to interpret
accurately the applicable laws and regulations and the mode of their
enforcement in particular jurisdictions could cause the Combined Company to
lose, or be unable to obtain, regulatory approvals necessary for it to be able
to provide certain services in such jurisdictions or to use certain of its
transmission methods. Such failure could result in significant monetary
penalties being imposed against the Combined Company. See "Risk Factors--
Regulation."
Federal regulations, regulatory actions and court decisions have had, and may
have in the future, an impact on the Combined Company and its ability to
compete. The FCC typically imposes obligations to file tariffs containing the
rate, terms and conditions of service. The FCC does not currently regulate the
Combined Company's profit levels, although the FCC has the authority to do so.
There can be no assurance that regulators
73
<PAGE>
will not raise material issues with regard to the Combined Company's compliance
with existing or future regulations.
The Combined Company offers service by means of call-reorigination pursuant
to an FCC authorization ("Section 214 Switched Voice Authorization") pursuant
to Section 214 of the Communications Act and certain relevant FCC decisions.
The FCC has determined that call-reorigination service using uncompleted call
signaling does not violate United States or international law, but has held
that United States companies providing such services must comply with the laws
of the countries in which they operate as a condition of such companies'
Section 214 Switched Voice Authorizations. The FCC reserves the right to
condition, modify or revoke any Section 214 Authorizations and impose fines for
violations of the Communications Act or the FCC's regulations, rules or
policies promulgated thereunder, or for violations of the clear and explicit
telecommunications laws of other countries that are unable to enforce their
laws against U.S. carriers. FCC policy provides that foreign governments that
satisfy certain conditions may request FCC assistance in enforcing their laws
against U.S. carriers. Thirty-four countries have formally notified the FCC
that certain call-reorigination services violate their laws. Only eight of
these countries have submitted copies of actual laws to the FCC that declare
certain call-reorigination services unlawful. Two of the 34 countries have
requested assistance from the FCC in enforcing their prohibitions on call-
reorigination within their respective jurisdictions. The FCC has held that it
would consider enforcement action against companies based in the United States
engaged in call-reorigination by means of uncompleted call signaling in
countries where this activity is expressly prohibited. While the Combined
Company believes that the FCC has not initiated any action to date to limit the
provisions of call-reorigination services, there can be no assurance that it
will not take action in the future. Enforcement action could include an order
to cease providing call-reorigination services in such country, the imposition
of one or more restrictions on the Combined Company, monetary fines or,
ultimately, the revocation of the Combined Company's Section 214 Switched Voice
Authorization, any of which could have a material adverse effect on the
Combined Company's business, financial condition and results of operations.
EMPLOYEES AND CONSULTANTS
As of March 31, 1998, CSI had 18 full-time employees and two consultants;
GlobalTel had 28 full-time employees and three consultants; and ITC had 18
full-time employees and two consultants. The Combined Company plans to hire
additional employees and consultants as may be required to support expansion of
the Combined Company's operations and independent sales agent network. None of
the Combined Company's employees are covered by a collective bargaining
agreement. Management believes that the Combined Company's relationship with
its employees is good.
PROPERTIES
CSI's executive offices are located at 8 South Nevada Avenue, Colorado
Springs, Colorado 80903. The Combined Company leases approximately 11,000
square feet of space under a lease that expires January 31, 1999 with respect
to 5,100 square feet, and December 31, 1999 with respect to the remainder. CSI
pays approximately $10,720 per month for such space. See "Certain
Transactions."
GlobalTel leases approximately 4,800 square feet of office space for its
headquarters and operations center at 1520 Eastlake Avenue East, Seattle,
Washington 98102 under a lease that expires on December 31, 1998 and requires
monthly payments of $5,850. In addition, GlobalTel leases approximately 1,500
square feet of space in Los Angeles, California, for switch equipment under a
lease that expires on June 30, 2006 and requires monthly payments of $5,040.
ITC leases approximately 2,310 square feet for its executive offices at 290
Pratt Road, Meriden, Connecticut 06450 at a rate of approximately $2,380 per
month. ITC leases approximately 1,027 square feet for its switching center at
110 East Broward Boulevard, Suite 610, Ft. Lauderdale, Florida 33301 at a rate
of approximately $4,225 per month.
74
<PAGE>
In the opinion of management, each of the properties is adequately covered by
insurance and is suitable for each of such properties' current and intended
future uses. Following completion of the offering, the Combined Company intends
to evaluate and may sub-lease certain properties in order to optimize operating
efficiencies.
LEGAL PROCEEDINGS
In November 1997, WorldCom commenced an action entitled "WorldCom, Inc. v.
International Telephone Company d/b/a Interglobal Telephone Company" against
ITC in Connecticut state court (Docket No. CV-970407418, Superior Court, J.D.
of New Haven) seeking damages of approximately $1.1 million for alleged past
due carrier bills. ITC believes it has meritorious defenses to the suit. ITC
intends to vigorously defend its position and will attempt to reach a
settlement with this carrier.
In addition, in the ordinary course of business, the Combined Company may
become a party to legal proceedings, the outcome of which, singly or in the
aggregate, is not expected to be material to the Combined Company's business,
financial condition and results of operations. The Combined Company intends to
aggressively pursue collection of debts, including those owed by a former
independent sales agent in Singapore.
75
<PAGE>
MANAGEMENT
OFFICERS AND DIRECTORS
The following table contains the name, age and position with the Combined
Company of each executive officer and director of the Combined Company as of
the date of this Prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMBINED COMPANY
---- --- ----------------------------------
<S> <C> <C>
Ronald P. Erickson...... 54 Chairman of the Board (upon completion of the
GlobalTel Merger)
Robert A. Spade......... 51 Chief Executive Officer and Vice
Chairman of the Board (upon completion of the
GlobalTel Merger)
Patrick R. Scanlon...... 52 President, Chief Operating Officer and
Director
Daniel R. Hudspeth...... 35 Chief Financial Officer, Secretary and Treasurer
German F. H. Burtscher.. 39 Vice President
Philip A. Thomas........ 55 Vice President and General Manager (upon completion
of the ITC Acquisition)
Dean H. Cary............ 49 Director
Richard F. Nipert....... 41 Director
Charles A. Shields...... 53 Director
Bruce L. Crockett....... 54 Director (upon completion of the GlobalTel Merger)
Lyman C. Hamilton....... 72 Director (upon completion of the GlobalTel Merger)
Michael S. Brownfield... 58 Director (upon completion of the GlobalTel Merger)
</TABLE>
Officers are appointed by and serve at the discretion of the Board of
Directors. Each director holds office until the next annual meeting of
shareholders or until a successor has been duly elected and qualified. All of
the Combined Company's officers devote full-time to the Combined Company's
business and affairs.
Ronald P. Erickson has served as Chairman of the Board, President, Chief
Executive Officer and a Director of GlobalTel since January 1996 and will serve
as Chairman of the Board of the Combined Company following the GlobalTel
Merger. From August 1994 to January 1996, he was Managing Director of
Globalvision L.L.C., an international strategic consulting firm. From September
1992 to August 1994, he served variously as Chairman and Vice Chairman of the
Board, President and Chief Executive Officer of Egghead Software, Inc., a
retailer of software and computer peripheral products. He was also the co-
founder and a director of Microrim, Inc., a database software developer from
November 1981 to May 1992. Currently, he is a director of ITEX Corporation, a
trading and financial services company, Westower Corporation, a wireless
communications infrastructure company, Intrinsyc Software, Inc., a developer of
software tools and components, IBNET and eCHARGE Corporation, an internet
billing company, where he is also Chairman of the Board. Mr. Erickson received
a B.A. degree from Central Washington University, an M.A. degree from the
University of Wyoming and a J.D. from the University of California, Davis,
School of Law.
Robert A. Spade has been the Chairman of the Board since March 1994 and CSI's
Chief Executive Officer since January 1995. Upon completion of the GlobalTel
Merger, Mr. Spade will become Vice Chairman of the Board. Mr. Spade also served
as President of CSI from April 1995 to June 1997 and as the Treasurer CSI from
April 1995 to July 1996. From 1994 to 1995, Mr. Spade was an Adjunct Professor
of International Corporate Finance with, and was a director of, the
International School of Management in Colorado Springs. In 1991, Mr.
76
<PAGE>
Spade founded Diamante Properties, Inc. ("Diamante"), a company engaged in
commercial real estate. He served as President of Diamante from inception
through 1995 and currently serves as its Chairman and Secretary. Mr. Spade is a
director of MedPlus Corporation, a company that operates a workers'
compensation medical clinic and arranges financing for patients. He was a
director of World Information Networks On The Net, Inc. ("WIN"), a company that
provides Internet access, designs web pages and broadcasts facsimiles via the
Internet, from August 1995 to March 1997. Mr. Spade received a Masters degree
from the Johns Hopkins School of Advanced International Studies and B.A. degree
from University of California, Santa Barbara in Economics and Hispanic
Civilization. Mr. Spade is fluent in Spanish and Portuguese.
Patrick R. Scanlon has been President and Chief Operating Officer of CSI
since June 1997 and a director of CSI since January 1996. He also served as
Treasurer from June 1997 to December 1997. From May 1991 to June 1996 Mr.
Scanlon served as Executive Vice President of BRC Imagination Arts, Inc., a
designer and producer of custom exhibits and attractions for world fairs,
aquariums, theme parks and visitor centers. Prior to that time, Mr. Scanlon was
with Walt Disney Imagineering, the theme park design, engineering, production,
and construction division of the Walt Disney Company, for 18 years, most
recently as Senior Vice President. Mr. Scanlon is also an owner and partner in
a number of real estate ventures, and has served on the Boards of Directors of
the Theme Entertainment Association, the Angeles Chorale, and The Learning
Company. Mr. Scanlon received an M.S. degree in Finance from the UCLA Graduate
School of Management and a B.A. degree in Economics from the University of
California, Santa Barbara.
Daniel R. Hudspeth has been Chief Financial Officer and Treasurer of CSI
since December 1997. From October 1995 to December 1997, Mr. Hudspeth served as
Chief Financial Officer and Corporate Secretary of Wireless Telecom, Inc., a
company that distributes wireless data products and services for the
telecommunications and computer industries. From January 1995 to October 1995,
he was Vice President and Corporate Controller of CWE, Inc., a publicly traded
computer retail company. From August 1992 to January 1995, Mr. Hudspeth was
Vice President of Finance and Administration and Treasurer of OfficeScapes
Business Furniture, and from July 1985 to August 1992, he was an Audit Manager
of Emerging Business Services for Deloitte & Touche LLP. Mr. Hudspeth is a
Certified Public Accountant in Colorado and a member of the Colorado Society of
Certified Public Accountants and the American Institute of Certified Public
Accountants. He received his B.S. degree in Business Administration from
Colorado State University.
German F. H. Burtscher has served as GlobalTel's Senior Vice President,
Marketing and Sales since February 1997 and served as its Vice President,
Strategic Marketing and Product Development from October 1995 to February 1997
and will serve as a Vice President of the Combined Company following the
GlobalTel Merger. In January 1995, he co-founded Ratsten International
Telecommunications, Inc., a telecommunications services provider, and served as
its President until October 1995. He also served as Regional Sales Manager and
Senior Account Executive of World Call Telecommunications, a long distance
telephone carrier, from June 1992 to January 1995. Mr. Burtscher received a
B.A. degree in Business and Sociology from the University of Austria, Innsbruck
and an M.B.A. degree in Finance and International Marketing from the University
of Austria, Graz.
Philip A. Thomas will become Vice President and General Manager of CSI upon
the closing of this offering. Mr. Thomas was a co-founder and has served as
Vice President of Operations of ITC since March 1993. From 1990 until 1993, Mr.
Thomas was a partner of Thomas Powell and Associates, a software developer for
voice mail systems, automated attendants and international call-reorigination
systems. From 1977 until 1990, Mr. Thomas was principal of Thomas Business
Systems, Inc., a computer hardware dealer. Mr. Thomas received his H.N.D.
degree in Applied Physics from the Farnborough (England) College of Technology.
Dean H. Cary has been a director of CSI since January 1997. Since November
1995 he has served as Executive Director and President of Forval International
Telecommunications, Inc., an international long distance carrier based in
Japan. From November 1993 to November 1995, he served as Executive Vice
President of Viatel, Inc., one of CSI's principal competitors. In 1992 he
formed Paragon Management Group, a business engaged in strategic and business
planning, and served as its President. From 1988 to 1992, he was the Vice
77
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Combined Company's Common Stock as of March 31, 1998 assuming
completion of the GlobalTel Merger and as adjusted to reflect the sale of the
Common Stock offered by this Prospectus, by (i) each person who is known by
the Combined Company to own beneficially more than 5% of the Combined
Company's outstanding Common Stock, (ii) each of the Combined Company's
executive officers and directors, (iii) each of the Selling Shareholders and
(iv) all executive officers and directors as a group. Common Stock not
outstanding but deemed beneficially owned by virtue of the right of an
individual to acquire shares within 60 days are treated as outstanding only
when determining the amount and percentage of Common Stock owned by such
individual. Except as noted, each person has sole voting and investment power
with respect to the shares shown. Unless otherwise indicated, the address of
each person listed is the Combined Company's address, 8 South Nevada Avenue,
Colorado Springs, Colorado 80903.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY NUMBER OF
OWNED PRIOR TO OFFERING SHARES TO BE PERCENTAGE
------------------------- SOLD IN OWNED AFTER
NAME AND ADDRESS NUMBER(1) PERCENT THE OFFERING OFFERING
---------------- -------------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS:
Ronald P. Erickson(2)...... 196,554 3.7% -- 2.1%
Robert A. Spade(3)......... 712,684 13.6 -- 7.7
Patrick R. Scanlon(4)...... 44,444 * -- *
Daniel R. Hudspeth......... -- -- -- --
Philip A. Thomas(5)........ -- -- -- --
Dean H. Cary(6)............ 53,333 1.0 -- *
71 Burnwood Lane
Upper Saddle River, NJ
07458
Richard F. Nipert(7)....... 12,000 * -- *
1140 Grant Street, Suite
100
Denver, CO 80203
Charles A. Shields(8)...... 23,333 * -- *
Bruce L. Crockett(9)....... 6,979 * -- *
Lyman C. Hamilton(10)...... 3,267 * -- *
Michael S. Brownfield(11).. 170,418 3.2 -- 1.8
All directors and executive
officers as a group
(11 persons)(12).......... 1,223,012 22.3 -- 12.9
OTHER PRINCIPAL SHAREHOLD-
ERS:
James L. Williams(13)...... 324,756 6.2 -- 3.5
123 Vientos Road
Camarillo, CA 93010
Steven S.V. Wong(14)....... 762,949 12.9 -- 7.7
20 Queen Astrid Park
Singapore 266824
DuPont Ltd.(15)............ 636,044 11.0 -- 6.5
20 Queen Astrid Park
Singapore 266824
PBIG-GTR Partners 198,884 3.7 -- 2.1
L.P.(16)..................
SELLING SHAREHOLDERS:
</TABLE>
- --------
* Less than 1%.
(1) Shares outstanding before offering include Bridge Shares to be issued
immediately prior to this offering and 1,626,489 shares of Common Stock
issued in connection with the GlobalTel Merger and the sale of 74,074
shares of Common Stock in May 1998.
(2) Includes 17,094 shares of Common Stock issuable upon conversion of
outstanding warrants, 109,846 shares of Common Stock issuable upon
exercise of options, and 44,101 shares of Common Stock held by North
78
<PAGE>
COMPENSATION OF DIRECTORS
Directors who are also employees of CSI receive no additional compensation
for serving as directors. Certain non-employee directors have each received
options to purchase 12,500 shares of Common Stock at the time they commenced
service on the Board of Directors. The options are exercisable at the bid price
of the Common Stock at the date of grant. The options vest 20% per year over
five years from the date of grant. CSI reimburses all of its directors for
travel and out-of-pocket expenses in connection with their attendance at
meetings of the Board of Directors and for carrying out various board-directed
assignments for the benefits of CSI.
LIMITATION OF LIABILITY AND INDEMNIFICATION
CSI's Articles of Incorporation eliminate the personal liability of its
directors to CSI and its shareholders for monetary damages for breach of the
directors' fiduciary duties in certain circumstances. CSI's Bylaws provide that
CSI will indemnify its officers and directors to the fullest extent permitted
by law. In addition, CSI carries officers' and directors' liability insurance
with an annual $1 million aggregate limit. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of CSI pursuant to the foregoing provisions,
or otherwise, CSI has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
KEY EMPLOYEES
Stuart Agranoff has been CSI's Director of Technical Operations since
September 1997 and a senior engineer for CSI since January 1996. From 1992 to
1996, Mr. Agranoff worked as an Associate Engineer for Kaman Sciences
Corporation. From 1984 to 1992 he served in the United States Navy where he
worked as an Aircraft Intermediate Maintenance Department Supervisor and as a
Senior Communication/Navigation Technician. Mr. Agranoff earned his degree in
Electronics Technology from the University of Phoenix.
Keith Busch has been CSI's Director of Business Development in Asia since
December 1997. Mr. Busch previously served as President of two other call-
reorigination providers. From 1996 to 1997 he founded and served as President
of American Fone Network, and from 1995 to 1996 he served as President of Rapid
Link USA. Mr. Busch also previously worked as the International Sales Manager
for Premiere Communications, an international calling card company. He earned
his B.A. Degree from the University of Washington.
Ronald Fox has served as GlobalTel's Senior Vice President since October
1997, as President of GlobalTel's subsidiary, Primecall, Inc., since September
1997, and as a Director of GlobalTel since December 1997. From January 1994 to
February 1997, he served as Vice President of Hi Rim Communications, Inc., an
international facilities-based telecommunications carrier. In April 1997,
subsequent to Mr. Fox's resignation as an officer, Hi Rim Communications, Inc.
filed a petition under the federal bankruptcy laws in the United States
Bankruptcy Court for the District of Nevada. From June 1988 to March 1994, he
served as President of Ronald B. Fox & Associates, a telecommunications
consulting firm. From 1983 to 1988, Mr. Fox served as National Sales Director
of CMI Corporation. From 1981 to 1983, he served as President of National Tel
Data Corporation. Mr. Fox received an A.S. degree in Business Marketing from
Lansing Community College.
Brian Louviere has served as GlobalTel's Chief Technology Officer since
February 1998. Until 1998, Mr. Louviere previously served as Director, Service
Delivery and Customer Care for Pacific Bell Network Integration. From 1991 to
1996, Mr. Louviere served in various positions with Pacific Bell including
Senior Product Manager. From 1979 to 1990, he served in various marketing and
product development positions at BT Tymnet. He received a B.S. degree in
computer science and mathematics from McNeese State University.
Mark Lyons has been CSI's Director of Sales and Marketing since November
1996. From 1990 to 1996 he worked for Sprint as its Senior Business Services
Representative. He previously worked as a Branch Manager for Norwest Bank and
First Interstate Bank. He received a B.S. degree in Finance from Utah State
University in 1983 and has earned graduate credits in telecommunications from
the University of Denver.
79
<PAGE>
John Spade has been CSI's Director of Technology and Development since
September 1997 and Special Projects Manager since March 1997. He has been an
employee of CSI since August 1996. From August 1995 to July 1996, Mr. Spade was
Vice President and a director of WIN, an Internet services provider. In 1994,
he received his B.A. degree from Chico State University, where he also taught
courses on Economics and the Internet. John Spade is the son of Robert A.
Spade.
Sean Thomas will become CSI's Director of Business Development in Europe upon
the closing of this Offering. Mr. Thomas was a co-founder of ITC in 1993 and
served as Vice President of Sales of ITC since November 1996. From 1991 to
1993, Mr. Thomas served as Sales Manager with Connecticut Computer
Technologies. Mr. Thomas attended Loyola University in New Orleans. Mr. Thomas
is the son of Philip A. Thomas.
CONSULTING AGREEMENT
CSI has entered into a consulting agreement with Gary Kamienski, who
developed the LINK-US technology for CSI. Pursuant to Mr. Kamienski's
agreement, dated September 19, 1996, Mr. Kamienski transferred the LINK-US
switch technology to the Combined Company. The Combined Company agreed to pay
the costs of installation and associated costs for LINK-US, and to pay Mr.
Kamienski a monthly royalty equal to 4% of the Combined Company's gross revenue
related to LINK-US. The Combined Company has the option to buy out the royalty
for an amount equal to $2.5 million. In addition, for each installation of
LINK-US, the Combined Company has agreed to pay Mr. Kamienski a flat fee of
$1,500 if such installation produces gross revenue between $10,000 and $20,000
in its first full billing month of operation, and a flat fee of $3,000 if such
revenue exceeds $20,000 in its first full billing month of operation. In
addition, Mr. Kamienski agrees to provide ongoing maintenance, support and
consulting with respect to LINK-US for as long as the system is in operation at
a rate of $5,200 per month. The agreement will remain in effect for as long as
the LINK-US technology is operational or until September 1, 2006, unless
earlier terminated. The agreement may be terminated by either party upon 30
days notice to the other of a material default or consummation of the buy out
of Mr. Kamienski's royalties. Mr. Kamienski has agreed not to develop or market
any technology similar to LINK-US which in any way might compete with the
Combined Company for the lesser of ten years or the period of time the Combined
Company is utilizing the LINK-US technology.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
compensation awarded to, earned by or paid to CSI's Chief Executive Officer
(the "Named Executive Officer"). No other executive officer of CSI received
annual salary and bonus exceeded $100,000 in the twelve months ended December
31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
CALENDAR ------------- UNDERLYING ALL OTHER
NAME AND POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
----------------- -------- ------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert A. Spade
Vice-Chairman and Chief
Executive Officer......... 1997 $90,374 -- 25,000 --
1996 67,500 -- 3,250 --
1995 41,000 -- 2,500 --
</TABLE>
Option Grants Table
The following table contains information concerning stock option grants made
to the Named Executive Officer during the eight months ended December 31, 1997.
See "--Stock Option Plan" for information relating to vesting and exercise
terms.
80
<PAGE>
OPTION GRANTS IN THE EIGHT MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------
% OF TOTAL
OPTIONS
NUMBER OF GRANTED TO POTENTIAL REALIZABLE
SECURITIES EMPLOYEES EXERCISE VALUE AT ASSUMED
UNDERLYING IN THE EIGHT PRICE ANNUAL RATES OF STOCK
OPTIONS MONTHS ENDED PER EXPIRATION PRICE APPRECIATION FOR
NAME GRANTED DECEMBER 31, 1997 SHARE DATE OPTION TERMS(1)
---- ---------- ----------------- -------- ---------- ----------------------
5% 10%
---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Spade......... 25,000 31.1% $1.78 8/29/07 $ 27,986 $ 709,221
</TABLE>
- --------
(1) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Combined Company's estimate or
projection of the future Common Stock price. Actual gains, if any, on stock
option exercises are dependent on the future financial performance of the
Combined Company, overall market conditions and the option holders'
continued employment through the vesting period.
Option Values. The following table contains information concerning options to
purchase Common Stock held by the Named Executive Officer as of December 31,
1997. The Named Executive Officer did not exercise any stock options during
1997.
1997 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997 (1)
----------------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert A. Spade......... 5,750 25,000 $5,813 $44,531
</TABLE>
- --------
(1) Options are "in the money" if the fair market value of the underlying
securities exceeds the exercise price of the options. The exercise prices
for all options granted to the Named Executive Officer was equivalent to
the fair market value of the Common Stock of the Combined Company, as
determined by the Board of Directors, as of December 31, 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee was an officer, former officer or
employee of CSI, GlobalTel, ITC or their subsidiaries or had any relationship
with such companies of the type requiring disclosure in "Certain Transactions."
No executive officer of the Combined Company serves as a member of the board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Combined Company's Board of
Directors or Compensation Committee.
EMPLOYMENT AGREEMENTS
The Combined Company has entered into employment agreements with each of
Messrs. Spade, Scanlon and Hudspeth (collectively, the "Executives") for a term
of one year. The employment agreements provide for an annual salary of
$175,000, $175,000 and $125,000 for Messrs. Spade, Scanlon and Hudspeth,
respectively. The Combined Company may terminate any Executive's employment
only for cause as defined in his respective agreement. The Executives may also
be entitled to receive bonuses pursuant to any cash bonus plan adopted by the
Board of Directors. Pursuant to their respective employment agreement, each
Executive agreed not to compete with the Combined Company for a period of three
years following termination of his employment. The Combined Company anticipates
entering into employment agreements with Messrs. Erickson, Burtscher and Fox
81
<PAGE>
effective upon completion of the GlobalTel Merger. Upon the completion of the
ITC Acquisition, CSI will enter into one year employment agreements with Philip
A. Thomas and Sean Thomas which will provide for base salaries of $115,000 and
$65,000, respectively. CSI may terminate Messrs. Thomas and Thomas only for
cause (as defined in the agreements). Messrs. Thomas and Thomas have each
agreed not to compete with the Combined Company for a period of six months
following termination of their respective agreements. CSI intends to establish
a cash bonus plan with an aggregate of less than $100,000 prior to completion
of the offering.
STOCK OPTION PLAN
In 1995, the Board of Directors adopted, and the shareholders approved, an
Incentive Stock Option Plan and a Non-qualified Stock Option Plan, which in
January 1998 the shareholders approved combining into one stock option plan
(the "Stock Option Plan"). The Stock Option Plan allows for the issuance of
stock options to officers, employees, and directors, and to consultants and
advisors who render bona fide services to CSI not in connection with the
issuance of securities in a capital-raising transaction. CSI has authorized
750,000 shares of Common Stock for issuance upon the exercise of options
granted under the Stock Option Plan. The aggregate fair market value (measured
at the time the options are granted) of all Common Stock issued pursuant to
exercise of Incentive Stock Options under the Stock Option Plan to any one
individual to be exercisable for the first time in any one calendar year may
not exceed $100,000. The Incentive Stock Options granted under the Stock Option
Plan are intended to qualify as "Incentive Stock Options" within the meaning of
Section 422 of the Internal Revenue Code. The Non-Qualified Stock Options
granted under the Stock Option Plan are not intended to meet the requirements
of Section 422 of the Internal Revenue Code. The Stock Option Plan is
administered by the Compensation Committee. As of March 31, 1998, Non-Qualified
Stock Options to purchase up to 283,625 shares of Common Stock have been
granted under the Stock Option Plan. No Incentive Stock Options have been
granted under the Stock Option Plan. Upon completion of the GlobalTel Merger,
the Combined Company will assume the stock options granted by GlobalTel
pursuant to its stock option plan. Pursuant to such obligation, the Combined
Company will reserve for issuance 618,515 shares of Common Stock.
The exercise price and period for the options granted under the plans are as
determined by the Board of Directors or committee thereof. For Incentive Stock
Options, the exercise price cannot be below the fair market value of the
underlying Common Stock at the time the options are granted, and in the case of
holders of over 10% of the combined voting power of all classes of voting stock
of CSI, the exercise price cannot be below 110% of the fair market value of the
underlying Common Stock at the time the options are granted. The exercise
period cannot exceed ten years under the Stock Option Plan. Options may not be
transferred other than by will and the laws of descent and distribution. For a
period of one year from the date of this Prospectus, the Combined Company will
refrain from granting any options or warrants at an exercise price of less than
85% of fair market value of the underlying security at the date of grant.
The exercise of such options is subject to the satisfaction of any applicable
withholding tax or other liabilities and any listing, registration, or
qualification with any regulatory authority of the shares of Common Stock to be
issued upon exercise of such options. Unless the Common Stock issuable upon
exercise of the options has been registered with the Commission and any
applicable state regulatory authorities, each optionee represents, by accepting
such shares, that such optionee is acquiring such shares for investment and not
for resale or distribution.
The Board of Directors has reserved the right to modify or terminate the
Stock Option Plan, but may not, without the affirmative vote of a majority of
shares of capital stock then entitled to vote, do any of the following: abolish
the committee then administering the Stock Option Plan, if any, change the
qualification of its members, or withdraw the Stock Option Plan from its
supervision; make any material change to the class of persons eligible to
receive options; increase the total number of shares of Common Stock reserved
for issuance under the Stock Option Plan; increase the number of shares for
which an option is exercisable to any one employee; extend the term of the
Stock Option Plan or the maximum option periods; decrease the minimum exercise
price; or materially increase the benefits accruing to participants in the
Stock Option Plan.
82
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Combined Company's Common Stock as of the date hereof assuming
completion of the GlobalTel Merger and as adjusted to reflect the sale of the
Common Stock offered by this Prospectus, by (i) each person who is known by the
Combined Company to own beneficially more than 5% of the Combined Company's
outstanding Common Stock, (ii) each of the Combined Company's executive
officers and directors, (iii) each of the Selling Shareholders and (iv) all
executive officers and directors as a group. Common Stock not outstanding but
deemed beneficially owned by virtue of the right of an individual to acquire
shares within 60 days are treated as outstanding only when determining the
amount and percentage of Common Stock owned by such individual. Except as
noted, each person has sole voting and investment power with respect to the
shares shown. Unless otherwise indicated, the business address of each
executive officer and director is the Combined Company's address, 8 South
Nevada Avenue, Colorado Springs, Colorado 80903.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY NUMBER OF
OWNED PRIOR TO OFFERING SHARES TO BE PERCENTAGE
------------------------- SOLD IN OWNED AFTER
NAME AND ADDRESS NUMBER(1) PERCENT THE OFFERING OFFERING
---------------- -------------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS:
Ronald P. Erickson(2)...... 154,028 3.1% -- 1.8%
Robert A. Spade(3)......... 534,513 11.0 -- 6.2
Patrick R. Scanlon(4)...... 33,333 * -- *
Daniel R. Hudspeth......... -- -- -- --
Philip A. Thomas(5)........ -- -- -- --
Dean H. Cary(6)............ 40,000 * -- *
71 Burnwood Lane
Upper Saddle River, NJ
07458
Richard F. Nipert(7)....... 9,000 * -- *
1140 Grant Street, Suite
100
Denver, CO 80203
Charles A. Shields(8)...... 17,500 * -- *
Bruce L. Crockett(9)....... 6,131 * -- *
Lyman C. Hamilton(10)...... 2,560 * -- *
German F.H. Burtscher 95,948 2.0 -- 1.1
(11)......................
Michael S. Brownfield(12).. 134,500 2.8 -- 1.6
All directors and executive
officers as a group
(11 persons)(13).......... 1,027,513 20.2 -- 11.6
OTHER PRINCIPAL
SHAREHOLDERS:
James L. Williams(14)...... 243,567 5.0 -- 2.8
123 Vientos Road
Camarillo, CA 93010
Steven S.V. Wong(15)....... 602,023 11.4 -- 7.0
20 Queen Astrid Park
Singapore 266824
DuPont Ltd.(16)............ 502,574 9.5 -- 5.5
20 Queen Astrid Park
Singapore 266824
ProFutures Special Equities 738,156 14.0 68,027 7.4
Fund, L.P.(17)............
1310 Highway 620 South
Austin, TX 78734
OTHER SELLING SHAREHOLDERS:
Alan Blumenfeld............ 22,555 * 5,639 *
Michael Butler............. 22,555 * 5,639 *
Shahrear Ebrahimian........ 3,308 * 827 *
Steven Freifeld............ 15,037 * 3,759 *
</TABLE>
83
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Abraham B. Goldner...................................... 7,518 * 1,880 *
Robert Klein............................................ 30,076 * 7,519 *
Lawrence Leiberman...................................... 7,518 * 1,880 *
Allan R. Lyons.......................................... 15,037 * 3,759 *
Albert Milstein......................................... 7,518 * 1,880 *
Bruce Pomper............................................ 22,555 * 5,639 *
Mark Silverman.......................................... 22,555 * 5,639 *
Howard Silverman........................................ 15,037 * 3,759 *
Carl E. Stoops.......................................... 10,376 * 2,594 *
Arnold L. Weiner........................................ 26,766 * 6,692 *
Michael Weiss........................................... 14,947 * 3,737 *
Steven Yavors........................................... 7,518 * 1,880 *
Four M International, Inc............................... 32,218 * 8,055 *
M. Sebastian Palacios, Marco A. Palacios and Beatriz A.
Palacios............................................... 6,443 * 1,611 *
Elsa Glorio, Marco Palacios and Beatriz Palacios........ 4,027 * 1,007 *
Gonzalo Vila............................................ 4,833 * 1,208 *
Ian Creese.............................................. 2,857 * 1,429 *
Donald B. Gasgarth...................................... 7,143 * 3,572 *
Richard L. Gilbert...................................... 7,143 * 3,572 *
Sloan Financial Group Inc............................... 6,071 * 3,036 *
Jeffrey K. Zwitter...................................... 7,143 * 3,572 *
Cindy Dolgin............................................ 30,076 * 7,519 *
Ken Fellus.............................................. 7,518 * 1,880 *
Abe Chu................................................. 15,037 * 3,759 *
Jeffrey Levine.......................................... 7,518 * 1,880 *
Alan Gibstein........................................... 9,023 * 2,256 *
Professional Edge Fund, L.C.C........................... 24,163 * 6,041 *
Merca Corporation....................................... 32,218 * 8,055 *
Bill Pergeson........................................... 20,000 * 10,000 *
Michael John............................................ 7,143 * 3,572 *
Ron LeClair............................................. 7,143 * 3,572 *
Tom Rooney.............................................. 3,571 * 1,786 *
Gary & Rebecca Perrine.................................. 7,143 * 3,572 *
</TABLE>
- --------
* Less than 1%.
(1) Shares outstanding before offering include 162,286 Bridge Shares to be
issued immediately prior to this offering and 1,198,779 shares of Common
Stock issued in connection with the GlobalTel Merger and 888,209 shares of
Common Stock to be issued in connection with certain promissory notes.
(2) Includes 13,396 shares of Common Stock issuable upon conversion of
outstanding warrants, 86,080 shares of Common Stock issuable upon exercise
of options, and 34,560 shares of Common Stock held by North Willow Family
L.P., a limited partnership in which Mr. Erickson and his two daughters
are partners. See "Certain Transactions."
(3) Includes 520,430 shares held of record by Mr. Spade or his spouse and
14,084 shares are issuable upon exercise of options held by Mr. Spade.
(4) Includes 13,338 shares issuable upon exercise of options.
(5) Excludes 98,571 shares Mr. Thomas will receive on the first anniversary of
the closing of this offering in connection with the ITC Acquisition.
(6) Includes 30,000 shares issuable upon exercise of options.
(7) Includes 2,500 shares issuable upon exercise of options.
(8) Includes 5,000 shares of Common Stock issuable upon exercise of warrants
and 12,500 shares issuable upon exercise of stock options.
84
<PAGE>
(9) Includes 1,280 shares of Common Stock issuable upon exercise of options
and shares of Common Stock issuable upon closing of the offering in
connection with a GlobalTel Full Coverage Note in the principal amount of
$25,000. See "Description of Securities."
(10) Includes 1,280 shares issuable upon exercise of options.
(11) Includes 9,084 shares issuable upon exercise of warrants and 41,171 shares
issuable upon exercise of options.
(12) Includes 15,188 shares of Common Stock issuable upon exercise of
outstanding warrants, 1,280 shares of Common Stock issuable upon exercise
of options, and 19,055 shares of Common Stock issuable upon conversion of
a promissory note in the principal amount of $150,000, plus accrued
interest as of June 30, 1998. See "Certain Transactions."
(13) Includes 257,402 shares issuable upon exercise or conversion of
outstanding securities.
(14) Includes 5,500 shares issuable upon exercise of warrants.
(15) Includes 1,280 shares of Common Stock issuable upon exercise of options,
1,888 shares of Common Stock issuable upon the closing of the offering in
connection with a bridge loan promissory note in the original principal
amount of $20,000 that has been repaid, 9,600 shares of Common Stock
issuable upon the exercise of outstanding warrants held by Trans-Pacific
Consultants Pte Ltd., 9,600 shares of Common Stock issuable upon the
exercise of outstanding warrants held by Gereg Capital Corporation and
76,800 shares of Common Stock held by Gereg Capital Corporation. Includes
64,000 shares of Common Stock issuable upon the exercise of outstanding
warrants and 375,411 shares of Common Stock issuable upon conversion of a
$1,000,000 in principal, plus accrued interest as of June 30, 1998,
pursuant to a promissory note held by Dupont Ltd. See "Certain
Transactions." Mr. Wong is Chairman and a 50 percent owner of Dupont Ltd.
and is Chairman and a controlling shareholder of Gereg Capital Corporation
and Trans-Pacific Consultants Pte, Ltd.
(16) Includes 64,000 shares of Common Stock issuable upon exercise of
outstanding warrants and 375,411 shares of Common Stock issuable upon
conversion of a $2,000,000 in principal, plus accrued interest as of June
30, 1998, pursuant to a promissory note held by Dupont Ltd. See "Certain
Transactions."
(17) Includes 400,000 shares of Common Stock issuable upon exercise of
outstanding warrants. The principals of such holder are ProFutures Fund
Management, Inc. and Golden Eye Asset Management, Inc.
85
<PAGE>
CERTAIN TRANSACTIONS
Unless otherwise indicated, for each transaction that involved the issuance
of securities, such issuance was exempt from registration pursuant to Section
4(2) of the Securities Act as transactions not involving a public offering.
CSI
Effective September 14, 1995, Redden Dynamics, Inc. ("Redden") was merged
with and into CSI. Shareholders of Redden received a total of 204,694 shares of
Common Stock of CSI in connection with the merger. At the time of the merger,
Redden had no operations, minimal assets and no liabilities. CSI undertook the
merger in order to enable it to have a sufficient number of shareholders to
permit CSI to commence trading of its Common Stock on the OTC Bulletin Board,
which occurred effective March 18, 1996. To acquire control of Redden in order
to facilitate the merger, Robert A. Spade purchased approximately 80% of
Redden's outstanding common stock in May 1995 from certain shareholders of
Redden for $34,500. Mr. Spade was a principal shareholder, director and
President of Redden and was a principal shareholder, Chief Executive Officer,
President and Chairman of CSI prior to the merger. In the merger, Mr. Spade
exchanged the Redden shares for 163,709 shares of Common Stock. Immediately
after the merger, Mr. Spade transferred 105,917 shares of such Common Stock to
21 persons, including Mr. Nipert (2,500 shares) and Mr. Scanlon (10,000
shares).
CSI has received periodic advances from Robert A. Spade. In April 1996, CSI
issued an unsecured note payable to Mr. Spade in the principal amount of
$160,000, payable on May 31, 1999 and bearing interest at 10% to reflect
advances made through that date. As of March 31, 1998, the total amount of
outstanding advances from Mr. Spade under the note was $149,000.
The building in which CSI has its principal executive office is owned by a
partnership, the managing general partner of which is owned by Robert A. Spade
and his wife. CSI paid the partnership $37,592, $87,259 and $80,263 in lease
expense for the fiscal years ended April 30, 1996 and 1997 and eight months
ended December 31, 1997, respectively. Minimum lease payments for the years
ending December 31, 1998 and 1999 are approximately $139,000 and $88,000
reflecting the increase in leased space from 5,100 square feet in fiscal year
1996 to 11,000 square feet commencing September 1996. See "Business--
Facilities" and the Financial Statements.
In August 1996, CSI issued 44,769 shares of Common Stock and granted options
to purchase 24,250 shares of Common Stock at $11.50 per share to certain
minority shareholders of WIN in exchange for their shares of WIN Common Stock.
As a result of this exchange, CSI became a shareholder of WIN. CSI then
transferred the WIN shares to WIN for certain technology and equipment owned by
WIN. Certain family members of Mr. Spade, who were shareholders of WIN,
received options to purchase 1,250 and 14,250 shares of Common Stock
respectively, in the WIN transaction. For each $6.50 WIN shareholders
contributed to WIN, each shareholder received one share of CSI Common Stock.
Following the WIN transaction, John Spade, who was an officer, director and a
principal shareholder of WIN, became an employee of CSI. John Spade is the son
of Robert A. Spade. Robert A. Spade was a director of WIN at the time of the
transaction and therefore this transaction may have been at terms less
favorable than one with a third party. See "Management."
In January 1997, CSI granted Dean H. Cary, a Director of CSI, options to
purchase 12,500 shares of Common Stock at $3.00 per share in connection with
consulting services provided by Mr. Cary to CSI. The options vest 20% per year
over five years from the date of grant; provided that vesting may be
accelerated if the trading price of the Common Stock exceeds certain levels
ranging from $9.00 to $25.00 per share.
In October 1997, CSI incurred an obligation to pay $50,000 and in January
1998 granted options to purchase 25,000 shares of Common Stock at an exercise
price of $1.50 per share to Mr. Cary, in each case in consideration of business
consulting services.
86
<PAGE>
In March and April 1998, CSI issued $320,000 aggregate principal amount of
10% Notes. For each $10,000 principal amount of 10% Notes, the holder received
warrants to purchase 1,000 shares of Common Stock at an exercise price equal to
the closing bid price on the date of the 10% Notes. Three CSI directors
invested in the notes, including: Richard F. Nipert, who was issued a $40,000
10% Note and granted 4,000 warrants; Charles A. Shields (and his wife Mary Jo
Shields), who was issued a $50,000 10% Note and granted 5,000 warrants; Dean H.
Cary, who was issued a $100,000 10% Note and granted 10,000 warrants. James L.
Williams, was also issued a $40,000 10% Note and granted 4,000 warrants.
In December 1997, Robert A. Spade and Patrick R. Scanlon each guaranteed up
to $750,000 of the amounts due on the Bridge Notes in connection with the
December 1997 Financing.
Richard F. Nipert, a Director of CSI, is a partner of the law firm of Bright,
Gibson and Nipert P.C., which from time to time has provided legal services to
CSI. Fees paid to the firm by CSI were less than 5% of the law firm's gross
revenue for each fiscal year in which they have represented CSI.
From May through July 1998, Robert A Spade pledged the shares of Common Stock
owned by him to secure payment of certain notes issued by CSI in the principal
amount of $1,750,000. Mr. Spade and Patrick R. Scanlon each guaranteed the
amounts due on such notes.
Other than as set forth above, the transactions described above were on terms
that CSI's Board of Directors believed to be fair to CSI and no less favorable
to CSI than terms that could have been obtained from an unrelated third party.
GLOBALTEL
In December 1995, GlobalTel acquired GFP Group. Inc. ("GFP") through the
issuance of 216,791 shares of GlobalTel common stock in a one-for-one exchange
for all of the outstanding capital stock of GFP. Pursuant to this transaction,
North Willow Family L.P., a limited partnership in which Ronald P. Erickson,
GlobalTel's Chairman, President and Chief Executive Officer, and his two
daughters are limited partners, was issued 54,000 shares of GlobalTel common
stock; and Sirius International Communications, a general partnership in which
German F. H. Burtscher, GlobalTel's Senior Vice President, Marketing and Sales,
and Frank Krentzman, a former director and former Senior Vice President of
GlobalTel, were the sole partners, was issued 95,751 shares of GlobalTel common
stock. In connection with the acquisition, GlobalTel also agreed to issue to
each of Messrs. Burtscher and Krentzman 30,000 shares of GlobalTel common
stock, and to grant Mr. Erickson an option to purchase 30,000 shares of
GlobalTel common stock, all conditioned upon GlobalTel obtaining certain
financing as determined by GlobalTel's Board of Directors. Additionally,
GlobalTel assumed GFP's obligations under employment agreements with Messrs.
Erickson and Burtscher. By mutual consent of the parties, the terms of these
employment agreements were never performed.
In December 1995, as part of GlobalTel's acquisition of GFP, GlobalTel
assumed GFP's obligations under two demand promissory notes totaling $70,000
that are payable to Michael S. Brownfield, who will become a director of the
Combined Company upon completion of the GlobalTel Merger, both bearing interest
at a rate of 10% per annum, increasing to 12% per annum when the notes are past
due. Both of these notes are secured by a pledge of certain shares of GFP stock
held by GlobalTel. In connection with the assumption of these notes, GlobalTel
also issued to Mr. Brownfield a warrant to purchase for nominal consideration
5,679 shares of GlobalTel common stock. Concurrently therewith, GlobalTel sold
to Mr. Brownfield 90,909 shares of GlobalTel common stock for a purchase price
of $5.50 per share and granted Mr. Brownfield a warrant to purchase 9,091
shares of GlobalTel common stock at an exercise price of $5.50 per share.
In November 1995, Gereg Capital Corporation ("Gereg") purchased 120,000
shares of GlobalTel common stock from GlobalTel for a purchase price of $5.50
per share. In consideration of this purchase of GlobalTel common stock,
GlobalTel granted Gereg a warrant to purchase 12,000 shares of GlobalTel common
stock. The warrant has an exercise price of $5.50 per share and expires on
December 29, 1998. Stephen S.V. Wong, a former director of GlobalTel, is
Chairman and a controlling shareholder of Gereg.
87
<PAGE>
In April 1997, GlobalTel entered into an Exclusive Services and Marketing
Agreement with IBNET. See "Business--Sales and Marketing." Pursuant to this
agreement, GlobalTel granted to IBNET a warrant to purchase 2,000 shares of
GlobalTel common stock, and will grant additional warrants if GlobalTel reaches
certain revenue targets. The warrants all have an exercise price of $5.50 per
GlobalTel share and expire three years from the date of grant. GlobalTel also
agreed to pay IBNET certain fees based upon a percentage of GlobalTel's gross
margin for services purchased by customers referred to GlobalTel by IBNET. In
return, IBNET agreed to issue to GlobalTel 100,000 shares of common stock of
IBNET. Bruce L. Crockett, Ronald P. Erickson and Lyman C. Hamilton are
directors of IBNET, and each holds options to purchase 50,000 shares of IBNET's
common stock. In addition, Mr. Hamilton owns 100,000 shares of IBNET's common
stock (or approximately 2% of IBNET's total outstanding common stock).
GlobalTel has issued convertible promissory notes and GlobalTel Full Coverage
Notes in connection with loans by several directors and executive officers of
GlobalTel, including Messrs. Erickson and Brownfield. For a description of the
terms of these notes, see "Description of Securities--Description of
Indebtedness." The following table describes promissory notes issued by
GlobalTel to persons who will become directors or executive officers of the
Combined Company and to Stephen S. V. Wong and his affiliates, which will hold
more than 5% of the Combined Company's outstanding Common Stock after
completion of the offering and the GlobalTel Merger. See "Principal
Shareholders."
<TABLE>
<CAPTION>
NAME DATE OF LOAN PRINCIPAL AMOUNT MATURITY
---- ------------ ---------------- --------
<S> <C> <C> <C>
Michael S. Brownfield............... 10/95 $ 50,000(2)(10) 1/96
11/95 20,000(2)(10) 2/96
2/96 100,000(1)(2) 2/97
4/96 300,000(1)(2) 4/97
10/97 150,000(1) 3/99
11/97 25,000(3) (4)
Ronald P. Erickson.................. 6/96 150,000(1)(5) 6/97
ITEX Corporation (/6/).............. 12/97 200,000(3) (4)
Gereg Capital Corporation........... 10/96 150,000(1)(7) 10/97
Dupont Ltd.(/8/).................... 11/96 500,000(1)(9) 5/98
4/97 2,000,000(1) 12/99
</TABLE>
- --------
(1) Convertible note. See "Description of Securities--Description of
Indebtedness--GlobalTel Convertible Notes."
(2) In November 1997, Mr. Brownfield agreed to convert $235,000 in principal
plus interest accrued thereon owed under past due promissory notes into
shares of common stock of GlobalTel. Mr. Brownfield also agreed to
reschedule an additional $235,000 in principal plus accrued interest owed
under past due promissory notes into this new note.
(3) GlobalTel Full Coverage Note. See "Description of Securities--Description
of Indebtedness--GlobalTel Full Coverage Notes."
(4) See "Description of Securities--Description of Indebtedness--GlobalTel Full
Coverage Notes." In consideration of the above loans, GlobalTel granted
warrants to purchase GlobalTel common stock or, in the case of the
GlobalTel Full Coverage Notes, the right to receive shares of GlobalTel
common stock upon closing of an initial public offering of GlobalTel's
securities.
(5) In November 1997, Mr. Erickson converted $171,805 in principal and accrued
interest under this note into shares of GlobalTel common stock.
(6) A company of which Ronald P. Erickson is a director.
(7) This note was repaid in full in April 1997.
(8) Stephen S.V. Wong is chairman and a 50% owner of this company.
(9) In September 1997, Dupont Ltd. converted the full amount of principal and
accrued interest under the note into shares of GlobalTel common stock.
(10) Demand note.
The following table describes the warrants issued or GlobalTel shares
issuable by GlobalTel to persons who will become directors or executive
officers of the Combined Company and to Stephen S.V. Wong and his affiliates,
which will hold more than 5% of the Combined Company's outstanding Common Stock
after completion of the offering and the GlobalTel Merger.
88
<PAGE>
<TABLE>
<CAPTION>
WARRANTS/GLOBALTEL
NAME SHARES ISSUE DATE EXERCISE PRICE
---- ------------------ ---------- --------------
<S> <C> <C> <C>
Michael S. Brownfield....... 90,909 12/95
2,000 10/97 $5.50(2)
11,360 4/96-2/98 $5.50(2)(3)
9,371 11/96 $5.50(2)
5,679 10/97
5,580 12/97
50,484 11/97
29,773 10/97
2,000 3/98
3,000 8/98 $5.50(2)(3)
Ronald P. Erickson.......... 31,237 11/97
19,131 8/97 $0.05(2)
134,500 12/96-3/98 $5.50(1)
1,800 6/96 $5.50(2)(3)
54,000 12/95
German F. H. Burtscher...... 71,395 12/95
14,194 8/97 $0.05(2)
64,329 6/96-3/98 $5.50(1)
ITEX Capital Corporation.... 89,286 12/97
Gereg Capital Corporation... 120,000 12/95
12,000 12/95 $5.50(2)
3,000 10/96 $5.50(2)(3)
Dupont Ltd.................. 98,693 9/97
100,000 11/96-7/97 $5.50(2)(3)
586,580 4/97 $3.85(4)
Trans-Pacific Consultants
Pte. Ltd................... 15,000 4/96 $5.50(2)(3)
</TABLE>
(1) Such options expire 10 years from date of issuance.
(2) Such warrants expire three years from date of issuance.
(3) Issued in connection with the purchase of notes from GlobalTel.
(4) Convertible note.
The following table shows the amounts outstanding under GlobalTel notes to
the foregoing persons as of March 31, 1998. See "Use of Proceeds."
<TABLE>
<CAPTION>
OUTSTANDING
PRINCIPAL
AMOUNT
--------------
NAME
----
<S> <C>
Michael S. Brownfield........................................... $ 410,000
Ronald P. Erickson.............................................. --
ITEX Corporation................................................ 200,000
Gereg Capital Corporation....................................... --
Dupont Ltd...................................................... 2,000,000
Trans-Pacific Consultants Pte. Ltd.............................. --
</TABLE>
In November 1997, Stephen S.V. Wong loaned GlobalTel $25,000 pursuant to a
promissory note bearing interest at a rate of 10% per annum, increasing to 15%
after default. This note was repaid in full in December 1997.
In May, June and July 1998, GlobalTel borrowed an aggregate of $600,000 from
CSI. Repayment of such indebtedness was guaranteed by Ronald P. Erickson.
Other than as set forth above, the transactions described above were on terms
that GlobalTel's Board of Directors believed to be fair to GlobalTel and no
less favorable to GlobalTel than terms that could have been obtained from an
unrelated party.
89
<PAGE>
ITC
In August 1997, CSI entered into a Reciprocal Telecommunications Agreement
with ITC. In April 1998, CSI entered into an agreement with ITC and its
shareholders, Lynch Family, LLC, Sean Thomas and Philip Thomas by which CSI
will purchase all of the outstanding common stock of ITC from its shareholders.
Upon consummation of this offering and the ITC Acquisition, Lynch Family, LLC
and Messrs. Thomas and Thomas will receive an aggregate of $3.3 million in cash
and 295,714 shares of Common Stock based on an assumed initial offering price
of $7.00 per share to be issued on the first anniversary of the closing of this
offering. Furthermore, John Lynch, the manager of Lynch Family, LLC, will enter
into a one year consulting agreement with the Combined Company under which he
will receive $125,000, and Philip Thomas and Sean Thomas will enter into one
year employment agreements with the Combined Company under which they will
receive annual salaries of $115,000 and $65,000, respectively. See "The
Acquisitions" and "Management."
In December 1997, CSI paid $178,000 to ITC in consideration of consulting
services provided by ITC in negotiating an agreement with a carrier on behalf
of CSI.
The Combined Company has adopted a policy that future transactions between
the Combined Company and its officers, directors and 5% or more shareholders
are subject to approval by a majority of the disinterested directors of the
Combined Company. Any such transactions will be on terms believed to be no less
favorable than could be obtained from unaffiliated parties.
TRANSACTIONS WITH PROMOTERS
CSI believes that Messrs. Robert A. Spade and James L. Williams may be
considered "founders" or "promoters" of CSI. In addition to the transactions
referenced in "Certain Transactions," Mr. Spade purchased 567,356 shares of
Common Stock from CSI at various times from April 1993 to December 1994 at
prices ranging from $.72 per share to $1.20 per share.
Mr. Williams purchased 173,843 shares of Common Stock from CSI at various
times from April 1993 to June 1995 at prices ranging from $.76 to $2.08 per
share. Mr. Williams also acquired 67,750 shares from Mr. Spade at various times
from August 1993 to December 1994. Mr. Williams has received approximately
$38,400 from CSI as compensation for services in connection with equity and
debt financings by CSI. In addition, Mr. Williams loaned $40,000 to CSI and
received a 10% convertible note in October 1996 that he converted into shares
of Common Stock in January 1997. In connection with the note, Mr. Williams
received warrants to purchase 1,000 shares of Common Stock at $5.50 per share.
In June 1997, Mr. Williams purchased an additional 10% convertible note with a
$20,000 principal amount. In connection therewith, he received a warrant to
purchase 500 shares of Common Stock at an exercise price of $2.12 per share. In
October 1997, Mr. Williams purchased 10,000 shares of Common Stock for $2.20
per share in a private placement. In March 1998, Mr. Williams loaned $40,000 to
CSI and received a note bearing interest at 10% per annum. In connection
therewith, he received a warrant to purchase 4,000 shares of common stock at an
exercise price of $3.62 per share.
CSI used the proceeds from the sales of Common Stock discussed above to fund
its operations. CSI believes that these transactions were conducted on terms
that were fair and reasonable to CSI and at prices that approximated the fair
market value of the Common Stock at the time of the transactions. See
"Principal Shareholders."
All future material affiliated transactions and loans will be made or entered
into on terms that are no less favorable to the Combined Company than those
that can be obtained from unaffiliated third parties. All future material
affiliated transactions and loans, and any forgiveness of loans, must be
approved by a majority of the Combined Company's independent directors who do
not have an interest in the transactions and who have access, at the Combined
Company's expense, to the Combined Company's or independent legal counsel.
90
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of CSI consists of 25,000,000 shares of Common
Stock, no par value per share, and 5,000,000 shares of Preferred Stock, no par
value per share.
COMMON STOCK
Upon consummation of the offering, 8,617,508 shares of Common Stock will be
issued and outstanding (assuming no options are exercised after March 31, 1998,
and assuming the Underwriters' over-allotment option is not exercised). If the
over-allotment option is exercised in full, 9,217,508 shares of Common Stock
will be issued and outstanding.
Holders of Common Stock are each entitled to cast one vote for each share
held of record on all matters presented to shareholders. Cumulative voting is
not allowed; hence, the holders of a majority of the outstanding Common Stock
can elect all directors. Holders of Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of funds legally
available therefor and, in the event of liquidation, to share pro rata in any
distribution of CSI's assets after payment of liabilities. The Board of
Directors is not obligated to declare a dividend and it is not anticipated that
dividends will be paid in the foreseeable future. See "Dividend Policy."
Holders of Common Stock do not have preemptive rights to subscribe to
additional shares if issued by CSI. Except for 17,500 shares which were
purchased with a note, which is outstanding, all of the outstanding shares of
Common Stock are fully paid and non-assessable and all of the shares of Common
Stock offered hereby will be, upon issuance, fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority, without further shareholder
approval, to issue up to 5,000,000 shares of Preferred Stock from time to time
in one or more series, to establish the number of shares to be included in each
such series, and to fix the designation, powers, preferences and rights of the
shares of each such series and the qualifications, limitations or restrictions
thereof. The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of CSI. The issuance of Preferred Stock could
decrease the amount of earnings and assets available for distribution to the
holders of Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of the Common Stock. In certain
circumstances, such issuances could have the effect of decreasing the market
price of the Common Stock. As of the closing of this offering, no shares of
Preferred Stock will be outstanding and CSI currently has no plans to issue any
shares of Preferred Stock. The Combined Company has agreed that (i) no shares
of Preferred Stock will be issued to promoters, officers or directors of the
Combined Company on terms different from which such shares will be issued
generally and (ii) the Combined Company's non-employee directors must ratify
all issuances of Preferred Stock.
DESCRIPTION OF INDEBTEDNESS
Mandatorily Redeemable Convertible Promissory Notes. In December 1997, CSI
issued Bridge Notes in an aggregate principal amount of $2.8 million. Interest
on the Bridge Notes is payable at a rate of 10% per annum, semi-annually. The
aggregate outstanding principal amount of the Bridge Notes is due five days
following the closing of this offering. Robert A. Spade, the Chairman and Chief
Executive Officer of CSI, and Patrick R. Scanlon, the President and Chief
Operating Officer of CSI, each guaranteed payment of the Bridge Notes for up to
$750,000. For each $100,000 of principal amount of the Bridge Notes, the holder
will receive 5,714 Bridge Shares upon the closing of this offering, based on a
$7.00 per share initial offering price. CSI granted to the investors a security
interest in all of the assets of CSI. The Bridge Notes require that CSI pay all
accrued interest to such investors on June 30, 1998. CSI has not made such
payment. Although as of the date of this Prospectus no investor has declared
CSI in default on the Bridges Notes, there can be no assurance an investor will
not do so. In the event of a default, the investors could declare CSI's
indebtedness to become immediately due and payable and could foreclose on all
of CSI's assets.
91
<PAGE>
10% Notes. From October 1996 through July 1997, CSI issued unsecured
convertible promissory notes (the "10% Notes") in an aggregate principal amount
of $415,000. Interest on the 10% Notes is payable at a rate of 10% per annum,
semi-annually, commencing on March 31, 1997 and continuing until the maturity
date, which is two years from the respective dates of investment. The aggregate
outstanding principal amount of the 10% Notes is due on the maturity date. The
10% Notes may be converted into shares of Common Stock at a conversion price of
90% of the average high bid and low asked price of the Common Stock on the day
before conversion. CSI may prepay any of the 10% Notes in full at any time
without penalty, and any note holders may cause CSI to repay such holder's note
at the end of each six-month period that any principal is outstanding upon 30
days written notice. As of March 31, 1998, $385,000 principal amount of 10%
Notes have been converted. For each $10,000 of principal amount of the 10%
Notes, the holder received warrants to purchase 250 shares of Common Stock of
CSI at an exercise price equal to the closing bid price of the Common Stock on
the date of the 10% Notes.
12% Notes. In May and July 1998, CSI issued secured promissory notes (the
"12% Notes") in an aggregate principal amount of $1,750,000. Interest on the
12% Notes is payable at a rate of 12% per annum and is due and payable on the
maturity date, which is the date of the completion of this offering. For each
$1,000 of principal amount of 12% Notes purchased, the holder received warrants
to purchase 200 shares of Common Stock at an exercise price of $5.60 per share.
The shares of Common Stock underlying the warrants are included among the
Registered Securityholders' Shares. In July 1998, the holder agreed to exchange
$1 million principal amount of such 12% Notes upon the closing of this offering
in consideration of 204,079 shares of Common Stock and certain registration
rights with respect to such shares.
15% Notes. From February 1997 through March 1997, CSI issued $85,000
aggregate principal amount of the 15% Notes. Interest on the 15% Notes, and the
aggregate outstanding principal amount of the 15% Notes, are payable on the
maturity date, which is six months after the date of each Note. For each
$10,000 of principal amount of 15% Notes, the holder received warrants to
purchase 250 shares of Common Stock at an exercise price equal to the closing
bid price of the Common Stock on the date of the 15% Notes. In March 1998, the
note holders agreed to extend their notes until various times between June 1998
and September 1998.
GlobalTel Full Coverage Notes. Promissory notes issued by GlobalTel in
November and December 1997 (the "GlobalTel Full Coverage Notes") in the
aggregate principal amount of $3.0 million are outstanding. These notes bear
interest at a rate of 10% per annum, increasing to 15% after default, and are
due in January 1999. In addition to repayment of principal and interest, note
holders are entitled to receive the number of shares of GlobalTel Common Stock
equal to the outstanding principal balance plus accrued interest divided by the
per share offering price in GlobalTel's initial public offering, if any. If the
offering is not completed by July 1, 1998, noteholders have the right to
receive warrants to purchase shares of GlobalTel common stock equal to the
principal amount of the note divided by $5.50, in lieu of the shares of common
stock to be issuable upon closing of the GlobalTel Merger. These warrants will
have an exercise price of $5.50 per share and will expire three years from the
date of grant. In July 1998, the holders agreed to exchange $1.4 million of
principal plus accrued interest of such GlobalTel Full Coverage Notes upon the
closing of this offering in consideration of 237,059 shares of Common Stock and
certain registration rights with respect to such shares. In July 1998, the
holders of $0.7 million principal plus accrued interest of GlobalTel Full
Coverage Notes agreed to extend the maturity date of their notes until December
31, 1999 in consideration of the Combined Company increasing the interest rate
to 14% per annum and granting enhanced registration rights with respect to the
shares to be issued in connection with the GlobalTel Full Coverage Notes.
REGISTRATION RIGHTS
CSI has agreed to grant to two holders of 15,000 shares of the Common Stock
(the "Rights Holders") certain "piggy-back" registration rights under the
Securities Act with respect to such shares. Under the terms of agreements
between CSI and these Rights Holders, if CSI proposes to register any of its
Common Stock under the Securities Act for its own account or for the account of
other security holders (other than pursuant to this offering and certain
excluded registration forms), the Rights Holders are entitled to notice of such
registration
92
<PAGE>
and to include in such registration shares of Common Stock that they hold,
subject to cutback limitations that may be imposed by the underwriter of any
underwritten public offering of the Common Stock. The Rights Holders are not
required to bear any expenses incurred by CSI in connection with registering
the Rights Holders' shares, but underwriting fees, discounts, or commissions
relating to the sale of each Rights Holder's shares are borne by the applicable
Rights Holder. CSI is not required to include any of the shares with
registration rights in a registration if the holders of such shares would be
able to sell such shares without registration pursuant to Rule 144 of the
Securities Act or otherwise. None of the Rights Holders will participate in
this offering.
CSI has agreed to grant to Lynch Family, LLC, Philip Thomas and Sean Thomas
(collectively, the "Former ITC Shareholders") certain "demand" registration
rights under the Securities Act with respect to the Common Stock (the "ITC
Acquisition Stock") they will receive in connection with the ITC Acquisition.
Under the terms of the Stock Purchase Agreement, CSI is obligated, after the
first anniversary of the completion of the ITC Acquisition, upon the demand of
the Former ITC Shareholders, to file within 30 days of such demand (subject to
an extension in the event CSI is then involved in certain transactions not in
the ordinary course of business) a registration statement on Form S-3 covering
the ITC Acquisition Stock. The Former ITC Shareholders are not required to bear
any expenses incurred by CSI in connection with registering the ITC Acquisition
Stock.
CSI has agreed to grant to the holders of GlobalTel's outstanding securities
certain "piggyback" registration rights under the Securities Act. CSI is
obligated to include such holders' shares of Common Stock in any registration
statement filed during the one year period beginning on the first anniversary
of the closing of the GlobalTel Merger. The holders are not required to bear
any expenses in connection with registering such shares.
TRANSFER AGENT
The transfer agent and registrar for CSI's Common Stock is American
Securities Transfer & Trust, Inc.
93
<PAGE>
RESCISSION OFFER
On July 20, 1998, the Combined Company completed the Rescission Offer in
accordance with the Washington Securities Act with respect to the following
securities which were issued or sold by GlobalTel from 1995 through 1997 to
approximately 40 individuals and entities who GlobalTel believes at the time of
purchase were residents of the State of Washington:
(i) an aggregate of 239,112 shares of GlobalTel Common Stock, of which 96,748
and 142,364 shares were issued at $2.65 and $5.50 per share, respectively
(the "Cash Rescission Stock");
(ii) an aggregate of 90,909 shares of GlobalTel Common Stock (the "1995
Rescission Stock") which were issued to one individual at $5.50 per share,
together with a warrant to purchase approximately 9,091 shares of Common
Stock;
(iii) an aggregate of 166,446 shares of GlobalTel Common Stock (the "Converted
Note Rescission Stock") issued upon conversion of promissory notes,
together with warrants to purchase an aggregate of approximately 23,632
shares of GlobalTel Common Stock delivered in conjunction with the
issuance of such promissory notes; and
(iv) $805,000 in aggregate principal amount of promissory notes (the
"Rescission Notes"), together with warrants to purchase an aggregate of
approximately 19,320 shares of GlobalTel Common Stock.
The Cash Rescission Stock, 1995 Rescission Stock, and Converted Warrants
Rescission Stock are hereinafter collectively referred to as the "Rescission
Stock." The warrants delivered in connection with the 1995 Rescission Stock and
Rescission Notes are hereinafter collectively referred to as the "Rescission
Warrants." The Rescission Notes, the Rescission Stock and the Rescission
Warrants are hereinafter collectively referred to as the "Rescission
Securities."
The Combined Company believes that the Rescission Securities may have been
issued or sold in violation of the registration requirements of the Washington
Securities Act. As a precaution against potential claims by holders of
Rescission Securities, and without admitting non-compliance with the Washington
Securities Act, the Combined Company offered to rescind such prior issuances
and sales by offering to repurchase the Rescission Securities at the price paid
therefor plus interest at the statutory rate of 8% per annum from the date of
purchase to the expiration of the Rescission Offer. The Rescission Offer is
contingent on the completion of this offering and the GlobalTel Merger.
Accordingly, if such conditions are not satisfied, the Rescission Offer will by
its terms terminate without any obligation for the Combined Company to act upon
acceptances of the Rescission Offer. The price paid will be based upon the
price paid for the original security purchased by the purchaser from GlobalTel,
regardless of the type of Rescission Security currently held by the purchaser.
The Combined Company is obligated to pay approximately $740,000 upon the
closing of this offering to holders of Rescission Securities who have elected
rescission. See "Use of Proceeds."
The Rescission Offer was made in order to limit, so far as may be permitted
under applicable federal and state securities laws, the potential liability of
the Combined Company with respect to the offer and sale of the Rescission
Securities. Although the Combined Company believes that the offer and sale of
the Rescission Securities were made in compliance with an exemption from
registration under federal securities laws, if a holder of the Rescission
Securities were to assert a claim that the Rescission Securities were sold in
violation thereof, the position of the Securities and Exchange Commission is
that liabilities under the federal securities laws are not terminated by making
a rescission offer. Furthermore, notwithstanding the Rescission Offer, there
can be no assurance that the Combined Company will not be subject to penalties
or fines relating to past securities issuances or that other holders of the
Combined Company's securities will not assert or prevail in claims against the
Combined Company for rescission or damages under state or federal securities
laws.
94
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, CSI will have 8,617,508 shares of Common
Stock outstanding, assuming no options are exercised after March 31, 1998 and
assuming the Underwriters' over-allotment option is not exercised. If the
Underwriters' over-allotment option is exercised in full, 9,217,508 shares of
Common Stock will be outstanding. Of these shares, the 4,000,000 shares sold in
this offering (and any shares sold by CSI upon exercise of the Underwriters'
over-allotment option) will be freely transferable by persons other than
"affiliates" of CSI (as that term is defined under the Securities Act) without
restriction or further registration under the Securities Act.
Of the remaining shares, 1,676,702 outstanding shares of Common Stock are
"restricted securities" within the meaning of Rule 144 under the Securities Act
and may not be sold in the absence of registration under the Securities Act
unless an exemption from registration is available, including the exemption
contained in Rule 144. All of such shares are eligible for sale under Rule 144
commencing on or after 90 days from the date of this Prospectus. Pursuant to
the terms of the Underwriting Agreement, the Representative has required that
the Common Stock owned by officers, directors and holders of 2% or greater of
the Common Stock may not be sold until 12 months from the date of this
Prospectus (other than the shares to be sold by the Selling Shareholders and
the Registered Securityholders) without the prior written consent of the
Representative.
In general, under Rule 144 as currently in effect, a shareholder who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period, a number of "restricted" shares that does not exceed the
greater of 1% of the then outstanding shares of Common Stock or the average
weekly trading volume during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain manner of sale limitations, notice
requirements and the availability of current public information about CSI. Rule
144(k) provides that a shareholder who is not deemed to be an "affiliate" and
who has beneficially owned shares for at least two years is entitled to sell
such shares at any time under Rule 144(k) without regard to the limitations
described above.
In addition to the shares of Common Stock that are currently outstanding, a
total of 1,184,000 shares of Common Stock have been reserved for issuance upon
exercise of options granted under the Combined Company's Option Plan, under
which options to acquire 862,265 shares of Common Stock have been granted.
Shares purchased pursuant to options will be freely tradeable without
restriction under the Securities Act, except for shares held by an "affiliate"
of the Combined Company, which shares will remain subject to certain
restrictions. See "Management--Stock Option Plan."
The Combined Company is unable to estimate the number of shares that may be
sold in the future by the existing shareholders or holders of options or the
effect, if any, that sales of shares by the existing shareholders or option
holders will have on the market price of the Common Stock prevailing from time
to time. Sales of substantial amounts of Common Stock by the existing
shareholders or holders of options could adversely affect then prevailing
market prices.
95
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for which Cruttenden Roth Incorporated, Ferris, Baker
Watts Incorporated, John G. Kinnard and Company, Incorporated and Kaufman
Bros., L.P. are acting as the representatives (the "Representatives"), have
severally agreed to purchase from CSI and the Selling Shareholders the shares
of Common Stock offered hereby. Neither the Combined Company nor the
Underwriters have any plans, proposals arrangements or understandings to engage
in transactions with the Registered Securityholders. Each Underwriter will
purchase the number of shares set forth opposite its name below, and will
purchase the shares at the price to public less underwriting discounts and
commissions set forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Cruttenden Roth Incorporated......................................
Ferris, Baker Watts Incorporated..................................
John G. Kinnard and Company, Incorporated.........................
Kaufman Bros., L.P................................................
----
Total.............................................................
====
</TABLE>
The Underwriting Agreement provides that the Underwriters' obligations are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all shares of Common Stock offered hereby (other than those covered
by the over-allotment option described below) if the Underwriters purchase any
shares.
The Representatives have advised CSI that the several Underwriters propose to
offer the shares of Common Stock in part directly to the public at the price to
public set forth on the cover page of this Prospectus, and in part to certain
dealers at the price to public less a concession not exceeding $ per share.
The Underwriters may allow, and such dealers may reallow, a concession not
exceeding $ per share to other dealers. After the distribution of the
Common Stock is completed, the Representatives may change the initial price to
public and other selling terms. No change in such terms shall change the amount
of proceeds to be received by CSI and the Selling Shareholders as set forth on
the cover page of this Prospectus. The Representatives will also receive a
nonaccountable expense allowance equal to 2.5% of the gross proceeds of the
offering including the over-allotment option, if exercised, of which $75,000
has been paid.
CSI has granted the Underwriters an option, exercisable for 45 days after the
date of this Prospectus, to purchase up to 600,000 additional shares of Common
Stock at the initial price to public. The Underwriters may purchase these
shares solely to cover over-allotments, if any, in connection with the sale of
the shares of Common Stock offered hereby. If the Underwriters exercise the
over-allotment option, the Underwriters will purchase additional shares in
approximately the same proportions as those in the above table.
Certain of the Underwriters that currently act as market markers for the
CSI's Common Stock may engage in "passive market making" in the Common Stock on
Nasdaq in accordance with Rule 103 of Regulation M under the Exchange Act.
Subject to certain conditions, Rule 103 permits underwriters participating in a
distribution to engage in limited market making transactions during the period
when Regulation M would otherwise prohibit such activity. Rule 103 generally
prohibits underwriters engaged in passive market making activities from
entering a bid or effecting a purchase at a price which exceeds the highest bid
by a market maker not participating in the distribution. Rule 103 also limits
the volume of purchases which may be made by an underwriter in passive market
making activities. Subject to these limitations, certain Underwriters and other
members of the selling group may engage in passive market making in CSI's
Common Stock.
96
<PAGE>
The Representatives have informed CSI and the Selling Shareholders that they
do not expect any sales of the shares of Common Stock offered hereby to be made
to discretionary accounts by the Underwriters.
The Underwriting Agreement provides that CSI and the Underwriters will
indemnify each other against certain liabilities under the Securities Act.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Exchange Act. Over-allotment involves syndicate sales in excess of
the offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Common Stock to be higher than it would
otherwise be in the absence of such transactions.
Neither CSI nor the Underwriters makes any representation or prediction as to
the direction or magnitude of any effect that the transactions described above
may have on the price of the Common Stock. In addition, neither the Company nor
any of the Underwriters makes any representation that the Underwriters will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
CSI's officers and directors and beneficial owners of greater than 2% of
CSI's outstanding Common Stock (excepting those offered to the Selling
Shareholders), holding in the aggregate 774,099 shares of Common Stock, have
agreed not to offer, sell or otherwise dispose of any shares of Common Stock
for a period of 12 months after the date of this Prospectus without the prior
written consent of the Representatives.
CSI has also agreed to sell to the Representatives, for nominal
consideration, warrants (the "Representatives' Warrants") to purchase 400,000
shares of Common Stock. The Representatives' Warrants will be exercisable, at a
price per share equal to 120% of the initial price to public, commencing one
year from the date hereof and for a period of four years thereafter. During the
exercise period, holders of the Representatives' Warrants are entitled to
certain demand and incidental registration rights with respect to the
securities issuable upon exercise of the Representatives' Warrants. The Common
Stock issuable upon exercise of the Representatives' Warrants is subject to
adjustment in certain events to prevent dilution. The Representatives' Warrants
cannot be transferred, assigned or hypothecated for a period of one year from
the date of issuance except to Underwriters, selling group members and their
officers or partners.
Cruttenden Roth Incorporated ("Cruttenden Roth"), one of the Representatives,
provided GlobalTel with consulting, advisory and valuation services throughout
1997 and agreed to continue to provide such services throughout 1998 for a fee
of $125,000. The fee is represented by a promissory note due on the earlier of
completion of this offering or July 1, 1999. The note bears interest at the
rate of 7% per annum. Following the completion of the GlobalTel Merger,
Cruttenden Roth will provide consulting, advisory and valuation services to the
Combined Company pursuant to the prior understanding with GlobalTel.
In January 1998, GlobalTel entered into a letter agreement with Cruttenden
Roth (as amended, the "Letter Agreement") pursuant to which Cruttenden Roth
agreed to perform various investment banking services. The Letter Agreement
provides that, upon a change in control of GlobalTel, Cruttenden Roth will
receive a transaction fee equal to 5% of the consideration received by
GlobalTel or its shareholders (the "Transaction Fee"). Consideration is defined
by the Letter Agreement to include the cash or securities received, the face
amount of debt assumed by a purchaser, change of control compensation and any
distributions in contemplation of the change of control. Cruttenden Roth will
receive a Transaction Fee equal to $1,050,000 on consummation of the GlobalTel
Merger. Other than $10,000 received as an advance, Cruttenden Roth has not
received any payments under the Letter Agreement.
97
<PAGE>
The Common Stock is traded infrequently in limited quantities on the OTC
Bulletin Board under the symbol CSYG. The public offering price of the Common
Stock has been determined by arms-length negotiation among CSI, the Selling
Shareholders and the Representatives. There is no direct relation between the
offering price of the Common Stock and the assets, book value or net worth of
CSI. Among the factors considered by CSI and the Representatives in pricing the
Common Stock were the results of operations, the current financial condition
and future prospects of the Combined Company, the experience of management, the
amount of ownership to be retained by the existing shareholders, the general
condition of the economy and the securities markets, and the demand for
securities of companies considered comparable to CSI.
98
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon by
Parcel, Mauro & Spaanstra, P.C., Denver, Colorado. Parcel, Mauro & Spaanstra,
P.C. has represented Cruttenden Roth Incorporated from time to time in other
matters. Certain legal matters will be passed upon for the Underwriters by
Berliner Zisser Walter & Gallegos, P.C., Denver, Colorado.
EXPERTS
The financial statements of CSI as of April 30, 1996 and 1997 and for each of
the three years in the period ended April 30, 1997 and as of and for the eight
months ended December 31, 1997 included in this prospectus, have been audited
by Stockman Kast Ryan & Scruggs, P.C., independent auditors, as stated in their
report appearing herein (which report expresses an unqualified opinion and
includes an explanatory paragraph referring to matters that raise substantial
doubt about CSI's ability to continue as a going concern), and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The consolidated financial statements of GlobalTel as of December 31, 1996
and 1997 and for each of the three years in the period ended December 31, 1997
included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, (which report includes an explanatory paragraph concerning matters
that raise substantial doubt about GlobalTel's ability to continue as a going
concern) and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said report.
The financial statements of ITC as of December 31, 1996 and October 31, 1997
and for the years ended December 31, 1995 and 1996 and the ten months ended
October 31, 1997 included in this prospectus, have been audited by Richard A.
Eisner & Company, LLP, independent auditors, as stated in their report
appearing herein, and have been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
99
<PAGE>
REPORTS TO SECURITYHOLDERS
On the effective date of the Registration Statement of which this Prospectus
forms a part, the Combined Company will become a "reporting company" under the
Exchange Act. The Combined Company intends to register the Common Stock under
the Exchange Act as of the effective date of the Registration Statement. The
Combined Company intends to furnish its security holders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each year containing unaudited interim financial information.
ADDITIONAL INFORMATION
CSI has filed with the Commission, a registration statement (together with
all amendments thereto, the "Registration Statement") under the Securities Act
with respect to the Common Stock of CSI offered hereby. This Prospectus, filed
as part of the Registration Statement, omits certain information contained in
the Registration Statement in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement and to the exhibits filed therewith, which may be
inspected without charge at the principal office of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of the material contained
therein may be obtained from the Commission upon payment of applicable copying
charges. Statements contained in this Prospectus as to the contents of any
contract or other document referred to herein 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.
Upon completion of this offering, CSI will be subject to the reporting and
other informational requirements of the Exchange Act and, in accordance
therewith, will file reports and other information with the Commission. Such
reports, proxy statements and other information, once filed by CSI, can be
inspected and copied at the public reference facilities maintained by the
Commission at the offices of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and 7 World Trade Center, New York, New York
10048. The Commission also maintains a Web site on the Internet that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission. The address of such site
is http://www.sec.gov. Copies of such materials can also be obtained by written
request to the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
100
<PAGE>
GLOSSARY OF TERMS
access point--A location where a long-distance carrier has installed
transmission equipment in a service area that serves as, or relays calls to, a
network switching center of that long-distance carrier.
business grade Internet--An Internet network offering private network-like
security and reliability.
call-reorigination (or "call-back")--A form of dial-up access that allows a
user to access a telecommunications company's network by placing a telephone
call, hanging up, and waiting for an automated callback. The callback then
provides the user with dial tone which enables the user to initiate and
complete a call.
call-through--The provision of international long distance service through
the conventional long distance network or via an in-country switch allowing the
customer direct access to a long distance carrier's network without the need to
reoriginate the call in the United States.
co-location--The Combined Company's ability to locate the Combined Company's
network equipment at the facility of another telecommunications provider.
dedicated or direct access--A means of accessing a network through the use of
a permanent point-to-point circuit typically leased from a facilities-based
carrier. The advantage of dedicated access is simplified premises-to-anywhere
calling, faster call set-up times and potentially lower access and transmission
costs (provided there is sufficient traffic over the circuit to generate
economies of scale).
dial-up access--A form of service whereby access to a network is obtained by
dialing an international toll-free number or a paid local access number.
Equant--Equant Network Services International Corporation (formerly known as
Scitor International Telecommunications Services, Inc.), a global data network
service provider.
facilities-based carrier--A carrier which transmits a significant portion of
its traffic over its own transmission facilities.
fiber optic--A transmission medium consisting of high-grade glass fibers
through which light beams are transmitted carrying a high volume of
telecommunications traffic.
Global Enhanced VPN (Virtual Private Network)--The Combined Company's
enhanced VPN service.
IBNET--International Business Network for World Commerce and Industry, Ltd.,
the managing member of the Consortium of Global Commerce.
IDC--International Data Corporation.
intranet--A company's internal wide area network utilizing Internet
technologies.
IP--Internet Protocol.
ISP--Internet services provider.
ITO (Incumbent Telephone Operator)--The dominant carrier or carriers in each
country, often, but not always, government-owned or protected.
101
<PAGE>
ITU--International Telecommunications Union.
LAN--Local area network. A data communications network designed to
interconnect PCS, workstations, minicomputer, file servers and other
communications and computing devices within a localized environment.
least cost routing--A method of routing long distance telephone call via the
carrier networks that offer the lowest rates.
node--A specially configured piece of telecommunications equipment which
provides the interface between the local ITO where the node is located and the
Combined Company's gateway switch. A node collects and concentrates call
traffic from its local area and transfers it to Combined Company's switch via
private line for call processing. Nodes permit the Combined Company to extend
its network into a new geographic location by accessing the local ITO without
requiring the deployment of a switch.
private line--A dedicated telecommunications connection between end user
locations.
resale--Resale by a provider of telecommunications services of services sold
to it by other providers or carriers on a wholesale basis.
switching facility--A device that opens or closes circuits or selects the
paths or circuits to be used for transmission of information. Switching is a
process of interconnecting circuits to form a transmission path between users.
VAR--Value-Added Reseller.
Value-Added Tax (VAT)--A consumption tax levied on end-consumers of goods and
services in applicable jurisdictions.
VPN--Virtual Private Network. A network capable of providing the tailored
services of private network (i.e., low latency, high throughput security and
customization) while maintaining the benefits of a public network (i.e.,
ubiquity and economies of scale).
WTO--World Trade Organization.
102
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED).......... F-2
Pro Forma Condensed Combined Balance Sheet as of March 31, 1998........ F-3
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1997..................................................... F-5
Pro Forma Condensed Combined Statement of Operations for the three
months ended March 31, 1998........................................... F-6
Notes to Pro Forma Condensed Combined Financial Statements............. F-7
HISTORICAL FINANCIAL STATEMENTS
Independent Auditors' Report........................................... F-9
Balance Sheets as of April 30, 1996 and 1997, December 31, 1997, and
March 31, 1998 (unaudited)............................................ F-10
Statements of Operations for the years ended April 30, 1995, 1996 and
1997, eight months ended December 31, 1997, and three months ended
April 30, 1997 and March 31, 1998 (unaudited)......................... F-11
Statements of Shareholders' Deficit for the years ended April 30, 1995,
1996 and 1997, eight months ended December 31, 1997, and three months
ended March 31, 1998 (unaudited)...................................... F-12
Statements of Cash Flows for the years ended April 30, 1995, 1996 and
1997, eight months ended December 31, 1997, and three months ended
April 30, 1997 and March 31, 1998 (unaudited)......................... F-13
Notes to Financial Statements.......................................... F-15
GLOBALTEL RESOURCES, INC.
HISTORICAL FINANCIAL STATEMENTS
Report of Independent Public Accountants............................... F-25
Consolidated Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited).................................................. F-26
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997 and three months ended March 31, 1997 and 1998
(unaudited)........................................................... F-27
Consolidated Statements of Common Stock Subject to Rescission and
Shareholders' Deficit for the years ended December 31, 1995, 1996 and
1997 and three months ended March 31, 1998 (unaudited)................ F-28
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 and three months ended March 31, 1997 and 1998
(unaudited)........................................................... F-29
Notes to Consolidated Financial Statements............................. F-30
INTERNATIONAL TELEPHONE COMPANY
HISTORICAL FINANCIAL STATEMENTS
Report of Independent Auditors......................................... F-43
Balance Sheets as of December 31, 1996, October 31, 1997 and March 31,
1998 (unaudited)...................................................... F-44
Statements of Operations for the years ended December 31, 1995 and
1996, ten months ended October 31, 1997, three months ended March 31,
1997 and 1998 (unaudited), and five months ended March 31, 1998 (unau-
dited)................................................................ F-45
Statements of Changes in Shareholders' Equity (Capital Deficiency) for
the years ended December 31, 1995 and 1996, ten months ended October
31, 1997, and five months ended March 31, 1998 (unaudited)............ F-46
Statements of Cash Flows for the years ended December 31, 1995 and
1996, ten months ended October 31, 1997, three months ended March 31,
1997 and 1998 (unaudited), and five months ended March 31, 1998 (unau-
dited)................................................................ F-47
Notes to Financial Statements.......................................... F-48
</TABLE>
F-1
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma condensed combined financial statements of
Communications Systems International, Inc. (CSI) have been prepared to give
effect to the completion of the proposed public offering (the Offering), the
proposed acquisitions of GlobalTel Resources, Inc. (GlobalTel) (the Merger)
and International Telephone Company (ITC) (the Acquisition), and bridge
financing, described below.
CSI has entered into an agreement and plan of merger with GlobalTel pursuant
to which GlobalTel will merge with CSI and CSI will issue an estimated
1,882,909 shares of its Common Stock for all outstanding shares of GlobalTel's
preferred and common stock, including shares issued in satisfaction of certain
GlobalTel debt immediately prior to the Offering. In addition, outstanding
options and warrants to purchase 1,183,573 shares of GlobalTel's common stock
will be exchanged for options and warrants to purchase 757,487 shares of CSI's
Common Stock. The actual number of shares of CSI's Common Stock to be issued
will be determined by the actual number of shares of CSI's and GlobalTel's
preferred and common stock outstanding at the date of the Merger. The pro
forma condensed combined balance sheet as of March 31, 1998 assumes the Merger
was consummated on March 31, 1998. The pro forma condensed combined statements
of operations for the year ended December 31, 1997 and the three months ended
March 31, 1998 assume the Merger was consummated on January 1, 1997.
CSI has entered into an agreement to acquire all of the stock of ITC for
$3,300,000 cash and the issuance of 295,714 shares of CSI's Common Stock
valued at $2,070,000, based on the public offering per share price. The pro
forma condensed combined balance sheet as of March 31, 1998 assumes the
Acquisition was consummated on March 31, 1998. The pro forma condensed
combined statements of operations for the year ended December 31, 1997 and the
three months ended March 31, 1998 assume the Acquisition was consummated on
January 1, 1997.
Subsequent to March 31, 1998, CSI issued 74,074 shares of its Common Stock
for $250,000 and issued promissory notes for $1,750,000. The holder of notes
has agreed to accept 204,079 shares of CSI Common Stock in cancellation of
promissory notes upon the completion of the Offering. The pro forma condensed
combined balance sheet as of March 31, 1998 assumes these transactions were
consummated on March 31, 1998.
In management's opinion, all material adjustments necessary to reflect the
transactions are presented in the pro forma adjustments as of and for the
three months ended March 31, 1998 and the year ended December 31, 1997 which
are based upon available information and the currently agreed upon terms of
the Merger and Acquisition. The financial statements of CSI for the twelve
months ended December 31, 1997 are unaudited and are not derived from the
audited financial statements of CSI as of and for the year ended April 30,
1997 or the eight months ended December 31, 1997. The financial statements of
ITC as of and for the twelve months ended December 31, 1997 are unaudited and
are not derived from the audited financial statements of ITC as of and for the
ten months ended October 31, 1997. The pro forma condensed combined financial
statements do not purport to present CSI's financial position or results of
operations that would have occurred had the transactions, to which pro forma
effect is given, been consummated as of the dates or for the periods indicated
and do not purport to project CSI's financial position or results of
operations at any future date or for any future period, and should be read in
conjunction with the separate financial statements of CSI, GlobalTel, and ITC.
F-2
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
BRIDGE
GLOBALTEL ITC FINANCING
HISTORICAL HISTORICAL HISTORICAL PURCHASE PURCHASE AND RECAPITALIZATION PRO FORMA OFFERING
CSI GLOBALTEL ITC ADJUSTMENTS(A) ADJUSTMENTS(C) ADJUSTMENTS COMBINED ADJUSTMENTS
---------- ---------- ---------- -------------- -------------- -------------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash............ $ 236 $ 98 $ 980 $ -- $ -- $1,760 (g) $ 3,074 $22,256 (h)
(2,840)(i)
(94)(k)
(2,765)(j)
(70)(i)
(750)(i)
(133)(k)
Restricted
cash............ -- -- -- -- -- -- -- 385 (h)
Receivables--
net............. 627 741 1,458 -- -- -- 2,826 --
Prepaid expenses
and other....... 54 127 138 -- -- -- 319 --
------- ------- ------- ------- ------ ------ ------- -------
Total current
assets 917 966 2,576 -- -- 1,760 6,219 15,989
Property and
equipment--net.. 501 1,357 628 -- -- -- 2,486 --
Deferred financ-
ing costs....... 225 435 -- (435) -- 210 (g) 315 (225)(i)
(120)(g) (90)(i)
Deposits........ 483 -- 130 -- (250) -- 363 --
Other assets.... 486 755 -- (223) -- -- 1,018 (486)(h)
Distribution
channels and
customer lists.. -- -- -- 14,250 5,093 -- 19,343 --
Intellectual
property and li-
cense agree-
ment............ -- -- -- 4,000 -- -- 4,000 --
Goodwill........ -- -- -- 282 -- -- 282 --
------- ------- ------- ------- ------ ------ ------- -------
TOTAL ASSETS.... $ 2,612 $ 3,513 $ 3,334 $17,874 $4,843 $1,850 $34,026 $15,188
======= ======= ======= ======= ====== ====== ======= =======
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
ASSETS
Current assets:
Cash............ $18,678
Restricted
cash............ 385
Receivables--
net............. 2,826
Prepaid expenses
and other....... 319
-----------
Total current
assets 22,208
Property and
equipment--net.. 2,486
Deferred financ-
ing costs....... --
Deposits........ 363
Other assets.... 532
Distribution
channels and
customer lists.. 19,343
Intellectual
property and li-
cense agree-
ment............ 4,000
Goodwill........ 282
-----------
TOTAL ASSETS.... $49,214
===========
</TABLE>
See notes to pro forma condensed combined financial statements.
F-3
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
BRIDGE
GLOBALTEL ITC FINANCING AND
HISTORICAL HISTORICAL HISTORICAL PURCHASE PURCHASE RECAPITALIZATION PRO FORMA OFFERING
CSI GLOBALTEL ITC ADJUSTMENTS(A) ADJUSTMENTS(C) ADJUSTMENTS COMBINED ADJUSTMENTS
---------- ---------- ---------- -------------- -------------- ---------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQ-
UITY (DEFICIT)
Current liabili-
ties:
Accounts payable.. $ 1,348 $ 3,151 $ 3,228 $ -- $ -- $ -- $ 7,727 $ --
Accrued expenses.. 499 1,194 311 1,050(b) -- -- 3,054 (70)(i)
Customer deposits
and prepayments... -- 990 175 -- -- -- 1,165 --
ITC acquisition
consideration..... -- -- -- -- 2,765 -- 2,765 (2,765)(j)
Payable to related
parties........... 133 132 -- -- -- -- 265 (133)(k)
Debt to sharehold-
ers............... 243 -- 47 -- -- -- 290 (94)(k)
Capitalized lease
obligations....... -- -- 238 -- -- -- 238 --
Note payable...... 175 16 -- -- -- -- 191 --
Bridge notes pay-
able--net......... 2,442 4,577 -- (725) -- 1,750 (g) 7,044 (2,840)(i)
(1,000)(g) 398 (i)
(750)(i)
------- -------- ------- ------- ------ ------ ------- -------
Total current
liabilities..... 4,840 10,060 3,999 325 2,765 750 22,739 (6,254)
------- -------- ------- ------- ------ ------ ------- -------
Long-term debt--
net............... -- 2,000 234 -- -- -- 2,234 --
------- -------- ------- ------- ------ ------ ------- -------
Deferred income
taxes............. -- -- -- 252 -- -- 252 --
------- -------- ------- ------- ------ ------ ------- -------
Common stock sub-
ject to rescis-
sion.............. -- 2,455 -- (1,715) -- -- 740 --
------- -------- ------- ------- ------ ------ ------- -------
Shareholders' eq-
uity (deficit):
Series A convert-
ible preferred
stock............. -- 1,070 -- (1,070) -- -- -- --
Common stock:
CSI.............. 2,651 -- -- 9,311 -- 795 (f) 13,977 22,155 (h)
1,000 (g) (133)(k)
220 (g)
GlobalTel........ -- 2,904 -- (2,904) -- -- -- --
ITC.............. -- -- -- -- -- -- -- --
Additional paid in
capital........... -- -- 1 -- (1) -- -- --
Common stock op-
tions............. 37 -- -- 534 -- -- 571 --
Obligation to is-
sue common stock.. 795 1,012 -- (1,012) 1,179 (795)(f) 1,179 --
Warrants.......... -- 2,118 -- (1,153) -- -- 965 --
Note receivable
from shareholder.. (35) -- -- -- -- -- (35) --
Accumulated defi-
cit............... (5,543) (18,106) (900) 18,106 900 (120)(g) (8,463) (225)(i)
(2,800)(b) (398)(i)
(90)(i)
Treasury stock, at
cost.............. (133) -- -- -- -- -- (133) 133 (k)
------- -------- ------- ------- ------ ------ ------- -------
Total sharehold-
ers' equity
(deficit)....... (2,228) (11,002) (899) 19,012 2,078 1,100 8,061 21,442
------- -------- ------- ------- ------ ------ ------- -------
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY (DEFICIT).. $ 2,612 $ 3,513 $ 3,334 $17,874 $4,843 $1,850 $34,026 $15,188
======= ======== ======= ======= ====== ====== ======= =======
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
LIABILITIES AND
SHAREHOLDERS' EQ-
UITY (DEFICIT)
Current liabili-
ties:
Accounts payable.. $ 7,727
Accrued expenses.. 2,984
Customer deposits
and prepayments... 1,165
ITC acquisition
consideration..... --
Payable to related
parties........... 132
Debt to sharehold-
ers............... 196
Capitalized lease
obligations....... 238
Note payable...... 191
Bridge notes pay-
able--net......... 3,852
-----------
Total current
liabilities..... 16,485
-----------
Long-term debt--
net............... 2,234
-----------
Deferred income
taxes............. 252
-----------
Common stock sub-
ject to rescis-
sion.............. 740
-----------
Shareholders' eq-
uity (deficit):
Series A convert-
ible preferred
stock............. --
Common stock:
CSI.............. 35,999
GlobalTel........ --
ITC.............. --
Additional paid in
capital........... --
Common stock op-
tions............. 571
Obligation to is-
sue common stock.. 1,179
Warrants.......... 965
Note receivable
from shareholder.. (35)
Accumulated defi-
cit............... (9,176)
Treasury stock, at
cost.............. --
-----------
Total sharehold-
ers' equity
(deficit)....... 29,503
-----------
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY (DEFICIT).. $49,214
===========
</TABLE>
See notes to pro forma condensed combined financial statements.
F-4
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
BRIDGE
GLOBALTEL ITC FINANCING AND
HISTORICAL HISTORICAL HISTORICAL PURCHASE PURCHASE RECAPITALIZATION PRO FORMA OFFERING
CSI GLOBALTEL ITC ADJUSTMENTS(B) ADJUSTMENTS ADJUSTMENTS COMBINED ADJUSTMENTS
---------- ---------- ---------- -------------- ----------- ---------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE.......... $ 12,437 $12,862 $9,962 $ -- $ -- $ -- $ 35,261 $--
COST OF REVENUE.. 7,639 11,171 8,240 -- -- -- 27,050 --
--------- ------- ------ -------- ------- -------- --------- ----
GROSS MARGIN..... 4,798 1,691 1,722 -- -- -- 8,211 --
--------- ------- ------ -------- ------- -------- --------- ----
OPERATING EX-
PENSES:
Sales and market-
ing.............. 2,802 788 878 -- -- -- 4,468 --
General and ad-
ministrative..... 2,954 7,119 1,664 1,050 -- -- 12,787 --
Depreciation and
amortization..... 134 253 93 -- -- -- 480 --
Amortization of
acquisition
intangibles...... -- -- -- 6,492 1,653 (d) -- 8,145 --
--------- ------- ------ -------- ------- -------- --------- ----
Total operating
expenses........ 5,890 8,160 2,635 7,542 1,653 -- 25,880 --
--------- ------- ------ -------- ------- -------- --------- ----
LOSS FROM OPERA-
TIONS............ (1,092) (6,469) (913) (7,542) (1,653) -- (17,669) --
OTHER INCOME (EX-
PENSE)--Net...... (259) (1,368) (3) 742 (178)(e) -- (1,001) --
65 (e)
--------- ------- ------ -------- ------- -------- --------- ----
LOSS BEFORE
INCOME TAXES AND
EXTRAORDINARY
ITEM............. (1,351) (7,837) (916) (6,800) (1,766) -- (18,670) --
INCOME TAX
BENEFIT.......... -- -- -- -- -- -- -- --
--------- ------- ------ -------- ------- -------- --------- ----
LOSS BEFORE
EXTRAORDINARY
ITEM............. $ (1,351) $(7,837) $ (916) $ (6,800) $(1,766) $ -- $ (18,670) $--
========= ======= ====== ======== ======= ======== ========= ====
BASIC LOSS PER
SHARE BEFORE
EXTRAORDINARY
ITEM ............ $ (.56) $ (3.92)
========= =========
WEIGHTED AVERAGE
SHARES OUTSTAND-
ING.............. 2,433,334 4,756,682
========= =========
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
REVENUE.......... $ 35,261
COST OF REVENUE.. 27,050
-----------
GROSS MARGIN..... 8,211
-----------
OPERATING EX-
PENSES:
Sales and market-
ing.............. 4,468
General and ad-
ministrative..... 12,787
Depreciation and
amortization..... 480
Amortization of
acquisition
intangibles...... 8,145
-----------
Total operating
expenses........ 25,880
-----------
LOSS FROM OPERA-
TIONS............ (17,669)
OTHER INCOME (EX-
PENSE)--Net...... (1,001)
-----------
LOSS BEFORE
INCOME TAXES AND
EXTRAORDINARY
ITEM............. (18,670)
INCOME TAX
BENEFIT..........
-----------
LOSS BEFORE
EXTRAORDINARY
ITEM............. $ (18,670)
===========
BASIC LOSS PER
SHARE BEFORE
EXTRAORDINARY
ITEM ............ $ (2.19)
===========
WEIGHTED AVERAGE
SHARES OUTSTAND-
ING.............. 8,536,024
===========
</TABLE>
See notes to pro forma condensed combined financial statements.
F-5
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
BRIDGE
GLOBALTEL ITC FINANCING AND
HISTORICAL HISTORICAL HISTORICAL PURCHASE PURCHASE RECAPITALIZATION PRO FORMA OFFERING
CSI GLOBALTEL ITC ADJUSTMENTS(B) ADJUSTMENTS ADJUSTMENTS COMBINED ADJUSTMENTS
---------- ---------- ---------- -------------- ----------- ---------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE.......... $ 2,279 $ 1,698 $2,610 $ -- $ -- $ -- $ 6,587 $--
COST OF REVENUE.. 1,424 1,473 1,978 -- -- -- 4,875 --
--------- ------- ------ -------- ----- -------- --------- ----
GROSS MARGIN..... 855 225 632 -- -- -- 1,712 --
--------- ------- ------ -------- ----- -------- --------- ----
OPERATING EX-
PENSES:
Sales and market-
ing.............. 557 120 252 -- -- -- 929 --
General and ad-
ministrative..... 684 1,523 421 -- -- -- 2,628 --
Depreciation and
amortization..... 42 91 30 -- -- -- 163 --
Amortization of
acquisition
intangibles...... -- -- -- 1,611 413 (d) -- 2,024 --
--------- ------- ------ -------- ----- -------- --------- ----
Total operating
expenses........ 1,283 1,734 703 1,611 413 -- 5,744 --
--------- ------- ------ -------- ----- -------- --------- ----
LOSS FROM OPERA-
TIONS............ (428) (1,509) (71) (1,611) (413) -- (4,032) --
OTHER INCOME (EX-
PENSE)--Net...... (698) (1,023) -- 772 -- -- (949) --
--------- ------- ------ -------- ----- -------- --------- ----
LOSS BEFORE
INCOME TAXES AND
EXTRAORDINARY
ITEM............. (1,126) (2,532) (71) (839) (413) -- (4,981) --
INCOME TAX
BENEFIT.......... -- -- -- -- -- -- -- --
--------- ------- ------ -------- ----- -------- --------- ----
LOSS BEFORE
EXTRAORDINARY
ITEM............. $ (1,126) $(2,532) $ (71) $ (839) $(413) $ -- $ (4,981) $--
========= ======= ====== ======== ===== ======== ========= ====
BASIC LOSS PER
SHARE BEFORE
EXTRAORDINARY
ITEM ............ $ (.45) $ (1.03)
========= =========
WEIGHTED AVERAGE
SHARES OUTSTAND-
ING.............. 2,514,389 4,837,737
========= =========
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
REVENUE.......... $ 6,587
COST OF REVENUE.. 4,875
-----------
GROSS MARGIN..... 1,712
-----------
OPERATING EX-
PENSES:
Sales and market-
ing.............. 929
General and ad-
ministrative..... 2,628
Depreciation and
amortization..... 163
Amortization of
acquisition
intangibles...... 2,024
-----------
Total operating
expenses........ 5,744
-----------
LOSS FROM OPERA-
TIONS............ (4,032)
OTHER INCOME (EX-
PENSE)--Net...... (949)
-----------
LOSS BEFORE
INCOME TAXES AND
EXTRAORDINARY
ITEM............. (4,981)
INCOME TAX
BENEFIT.......... --
-----------
LOSS BEFORE
EXTRAORDINARY
ITEM............. $ (4,981)
===========
BASIC LOSS PER
SHARE BEFORE
EXTRAORDINARY
ITEM ............ $ (.58)
===========
WEIGHTED AVERAGE
SHARES OUTSTAND-
ING.............. 8,617,079
===========
</TABLE>
See notes to pro forma condensed combined financial statements.
F-6
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The following pro forma adjustments give effect to (i) the completion of the
GlobalTel Merger, the ITC Acquisition, bridge financing and the Offering as of
March 31, 1998 for the balance sheet and (ii) the Merger, the Acquisition and
the Offering as of January 1, 1997 for the statements of operations:
PURCHASE ADJUSTMENTS
(a) Reflects the proposed acquisition of GlobalTel through the issuance of
1,882,909 shares of CSI's Common Stock for all outstanding preferred
and common stock of GlobalTel, including GlobalTel's common stock
subject to rescission. CSI will also deliver options and warrants to
purchase 757,487 shares of its Common Stock in cancellation of
1,183,573 outstanding options and warrants to purchase GlobalTel's
common stock. The CSI securities to be issued to GlobalTel's
securityholders have been valued at an assumed public offering price of
$7.00 per common share, discounted by 30% due to trading restrictions
and other limitations on their transferability. Reflects approximately
$1.4 million of bridge loans converting to 237,059 shares of CSI Common
Stock, as well as an additional issuance of 447,070 shares of CSI
Common Stock to the GlobalTel Full Coverage Note holders. The
adjustment made to GlobalTel's common stock subject to rescission
reflects the amount of said stock that is no longer subject to
rescission due to the close of the Rescission Offer. A deferred tax
liability has been recognized to reflect the net book and tax bases
differences resulting from the GlobalTel Merger, which have been
reduced by a deferred income tax benefit resulting from the generation
of net operating losses by GlobalTel. The number of CSI's common shares
to be issued to GlobalTel's preferred shareholders has been determined
based on the liquidation value of such preferred shares. Adjustments
made to GlobalTel's assets and liabilities are based on estimates of
their fair values.
(b) Reflects the increase in amortization expense due to the amortization
of the intangible assets and the $2.8 million write-off of in-process
research and development recorded in the acquisition of GlobalTel. Such
intangible asset amortization assumes the following useful lives:
distribution channels and customer lists--2 to 3 years; intellectual
property and license agreement--5 to 7 years; goodwill--5 years.
Interest expense, which includes the amortization of debt issuance
costs and debt discounts, has been reduced as a result of the
adjustment of GlobalTel's debt to its fair value at the date of the
Merger. Reflects amounts totalling $1,050,000 to be paid by GlobalTel
for merger and acquisition fees in conjunction with GlobalTel Merger.
(c) Reflects the proposed acquisition of ITC for $5,470,000 based on
currently agreed upon terms which include: estimated cash payments of
$2,765,000 (excluding deposits of $250,000 made prior to March 31,
1998) due to the ITC shareholders prior to or at the completion of the
Offering; the commitment to issue up to 295,714 shares of CSI Common
Stock valued at $1,449,000 to the ITC shareholders, which value is
based on the public offering price and discounted by 30% as a result of
the timing of the issuance of such stock and the limitations on its
transferability; reclassification of deposits given to ITC of $250,000;
and the elimination of ITC's historical equity balances in connection
with purchase accounting. The recorded values of ITC's assets and
liabilities are believed to be reasonable estimates of their fair
values.
The number of shares to be issued to, and the amount of cash to be paid
from escrow to, ITC shareholders, is ultimately dependent upon the
resolution of certain ITC liabilities; the acquisition cost, however, is
not expected to be affected. The number of shares to be issued may be
decreased to a minimum of 240,653 shares, which shares would have an
estimated value, when discounted by 30%, of $1,179,200; the amount of
cash to be paid may be reduced by an amount not greater than $385,430.
(d) Reflects the increase in amortization expense due to the amortization
of the distribution channels and customer lists recorded in the
acquisition of ITC which are amortized over a three-year period.
(e) Reflects the elimination of intercompany transactions and balances
between CSI and ITC.
F-7
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
BRIDGE FINANCING AND RECAPITALIZATION ADJUSTMENTS
(f) Reflects the issuance of the CSI Common Stock valued at $795,200 to the
holders of the bridge debt issued by CSI in December 1997. Such amount
is the estimated value of the equity features of the debt.
(g) Reflects the May and July 1998 issuances of promissory notes totalling
$1,750,000 and 74,074 shares of CSI Common Stock for $250,000, and the
net proceeds (net of debt issuance costs of $210,000 and stock offering
costs of $30,000) therefrom totalling $1,760,000. Reflects the
conversion of $1,000,000 of CSI's May 1998 bridge debt into 204,079
shares of CSI Common Stock upon the successful completion of the
Offering, and the related write-off of $120,000 of debt issuance costs.
OFFERING ADJUSTMENTS
(h) Reflects the estimated net proceeds of the Offering of $22,641,000, of
which $385,000 is to be placed in escrow to satisfy the terms of the
ITC acquisition agreement. Reflects deferred offering costs of $486,000
incurred as of March 31,1998, which have been added back in determining
the estimated net cash received upon completion of the Offering.
(i) Reflects the repayment of CSI's December 1997 bridge debt of $2,840,000
and accrued interest of $70,000 which are payable upon successful
completion of the Offering. Reflects the write-offs to accumulated
deficit totalling $622,512 of the unamortized debt issuance costs of
$224,912 and the unamortized discount on such debt of $397,600. Also
reflects the repayment of CSI's May and July 1998 bridge debt of
$750,000, which is payable upon successful completion of the Offering,
and the write-off to accumulated deficit of the related unamortized
debt issuance costs of $90,000.
(j) Reflects the cash payment of $2,765,000 (which includes a $100,000
standstill payment which is expected to be paid prior to the date of
acquisition and will not be applied against cash to be paid upon
closing) due to the shareholders of ITC upon the successful completion
of the Offering in accordance with the terms of the acquisition (this
pro forma adjustment does not take into consideration any additional
deposits which would have been made subsequent to March 31, 1998 and
would be applied against the cash to be paid upon closing).
(k) Reflects payment amounts of $94,000 due to a former officer of CSI
pursuant to a settlement agreement and $133,000 due to shareholders to
complete the repurchase and retirement of their shares of CSI's Common
Stock.
F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
Communications Systems International, Inc.
Colorado Springs, Colorado
We have audited the accompanying balance sheets of Communications Systems
International, Inc. as of April 30, 1996 and 1997 and December 31, 1997, and
the related statements of operations, shareholders' deficit and cash flows for
each of the three years in the period ended April 30, 1997 and the eight
months ended December 31, 1997. These financial statements are the
responsibility of CSI's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Communications Systems International, Inc.
as of April 30, 1996 and 1997 and December 31, 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
April 30, 1997 and the eight months ended December 31, 1997 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that CSI
will continue as a going concern. As discussed in Note 1 to the financial
statements, CSI's substantial losses since inception and working capital
deficit at December 31, 1997 raise substantial doubt about CSI's ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Stockman Kast Ryan & Scruggs, P.C.
Colorado Springs, Colorado
May 28, 1998 (July 20, 1998 as to Note 14
and the last paragraph of Note 3)
F-9
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30,
------------------------ DECEMBER 31, MARCH 31,
1996 1997 1997 1998
----------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS (Note 3)
Cash..................... $ 57,394 $ 146,686 $ 429,373 $ 235,643
Accounts receivable--
net..................... 1,104,606 1,053,233 1,027,217 626,798
Prepaid expenses and
other current assets.... 60,893 83,962 19,370 54,030
----------- ----------- ----------- -----------
Total current assets... 1,222,893 1,283,881 1,475,960 916,471
PROPERTY AND EQUIPMENT--
Net
(Notes 2 and 3)......... 271,499 457,791 483,635 501,218
DEFERRED OFFERING COSTS
(Note 12)............... -- 83,939 117,719 486,207
DEBT ISSUANCE COSTS (Note
3)...................... -- -- 449,926 224,912
DEPOSITS (Notes 10 and
13)..................... 25,000 120,880 448,065 483,065
----------- ----------- ----------- -----------
TOTAL ASSETS........... $ 1,519,392 $ 1,946,491 $ 2,975,305 $ 2,611,873
=========== =========== =========== ===========
LIABILITIES AND SHARE-
HOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable......... $ 965,646 $ 1,287,187 $ 939,773 $ 1,348,353
Accrued commissions...... 254,224 145,352 337,563 278,884
Accrued expenses and cus-
tomer deposits.......... 129,007 88,940 123,982 220,220
Payables to former share-
holders (Note 4)........ -- -- 242,619 132,619
Debt to related parties
(Note 8)................ 159,915 148,761 273,761 242,511
Notes payable (Note 3)... 1,866,697 1,944,896 2,169,800 2,617,400
----------- ----------- ----------- -----------
Total current liabili-
ties.................. 3,375,489 3,615,136 4,087,498 4,839,987
----------- ----------- ----------- -----------
COMMITMENTS AND CONTIN-
GENCIES
(Notes 8 and 10)
SHAREHOLDERS' DEFICIT
(Notes 4, 5, 6 and 11)
Preferred stock, no par
value--5,000,000 shares
authorized, none issued
or outstanding..........
Common stock, no par
value--25,000,000 shares
authorized; 2,249,748,
2,441,399, 2,511,774 and
2,516,134 shares issued
and outstanding......... 1,889,141 2,366,066 2,750,285 2,650,585
Obligation to issue com-
mon stock............... -- -- 795,200 795,200
Common stock options..... -- -- 37,000 37,000
Notes receivable from
shareholder............. (5,000) (35,000) (35,000) (35,000)
Accumulated deficit...... (3,740,238) (3,999,711) (4,417,059) (5,543,280)
Treasury stock, at cost.. -- -- (242,619) (132,619)
----------- ----------- ----------- -----------
Total shareholders'
deficit............... (1,856,097) (1,668,645) (1,112,193) (2,228,114)
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS'
DEFICIT............... $ 1,519,392 $ 1,946,491 $ 2,975,305 $ 2,611,873
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-10
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
EIGHT THREE THREE
MONTHS MONTHS MONTHS
YEAR ENDED APRIL 30, ENDED ENDED ENDED
------------------------------------ DECEMBER 31, APRIL 30, MARCH 31,
1995 1996 1997 1997 1997 1998
---------- ----------- ----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUE................. $1,837,580 $ 6,741,022 $11,865,412 $ 8,114,737 $3,205,888 $ 2,279,373
COST OF REVENUE......... 1,297,861 5,962,609 7,754,897 4,878,478 2,060,003 1,423,915
---------- ----------- ----------- ----------- ---------- -----------
GROSS MARGIN............ 539,719 778,413 4,110,515 3,236,259 1,145,885 855,458
---------- ----------- ----------- ----------- ---------- -----------
OPERATING EXPENSES
Sales and marketing..... 529,161 1,572,747 2,080,020 2,006,727 589,215 557,246
General and
administrative (Note
8)..................... 624,585 1,652,374 2,024,383 2,103,622 628,082 684,166
Depreciation and
amortization........... 19,107 57,843 102,983 91,729 32,475 41,950
---------- ----------- ----------- ----------- ---------- -----------
Total operating
expenses............. 1,172,853 3,282,964 4,207,386 4,202,078 1,249,772 1,283,362
---------- ----------- ----------- ----------- ---------- -----------
LOSS FROM OPERATIONS.... (633,134) (2,504,551) (96,871) (965,819) (103,887) (427,904)
INTEREST EXPENSE--
Net.................... 139 (19,389) (162,602) (113,529) (48,688) (698,317)
OTHER EXPENSE........... -- -- -- (85,000) -- --
---------- ----------- ----------- ----------- ---------- -----------
LOSS BEFORE
EXTRAORDINARY ITEM..... (632,995) (2,523,940) (259,473) (1,164,348) (152,575) (1,126,221)
EXTRAORDINARY ITEM--
Gain on extinguishment
of debt (Note 3)....... -- -- -- 747,000 -- --
---------- ----------- ----------- ----------- ---------- -----------
NET LOSS................ $ (632,995) $(2,523,940) $ (259,473) $ (417,348) $ (152,575) $(1,126,221)
========== =========== =========== =========== ========== ===========
BASIC PER SHARE AMOUNTS:
Loss before
extraordinary item... $ (.43) $ (1.27) $ (.11) $ (.47) $ (.06) $ (.45)
Extraordinary item.... -- -- -- .30 -- --
---------- ----------- ----------- ----------- ---------- -----------
Net loss.............. $ (.43) $ (1.27) $ (.11) $ (.17) $ (.06) $ (.45)
========== =========== =========== =========== ========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING............ 1,484,405 1,990,394 2,320,795 2,472,342 2,408,123 2,514,389
========== =========== =========== =========== ========== ===========
</TABLE>
See notes to financial statements.
F-11
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
OBLIGATION NOTES
COMMON STOCK TO ISSUE COMMON RECEIVABLE TREASURY STOCK
--------------------- COMMON STOCK FROM ACCUMULATED -------------------
SHARES AMOUNT STOCK OPTIONS SHAREHOLDER DEFICIT SHARES AMOUNT TOTAL
--------- ---------- ---------- ------- ----------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
May 1, 1994........ 1,225,260 $ 530,929 $ 10,412 $ -- $ -- $ (583,303) -- $ -- $ (41,962)
Common stock
subscribed......... -- -- 493,025 -- -- -- -- -- 493,025
Net loss............ -- -- -- -- -- (632,995) -- -- (632,995)
--------- ---------- --------- ------- -------- ----------- -------- --------- -----------
BALANCES,
April 30, 1995..... 1,225,260 530,929 503,437 -- -- (1,216,298) -- -- (181,932)
Issuance of
subscribed stock... 421,816 503,437 (503,437) -- -- -- -- --
Sale of stock for
cash and note...... 233,500 542,000 -- -- (5,000) -- -- -- 537,000
Stock issued for
services........... 164,478 312,775 -- -- -- -- -- -- 312,775
Stock issued in
acquisition........ 204,694 -- -- -- -- -- -- -- --
Net loss............ -- -- -- -- -- (2,523,940) -- -- (2,523,940)
--------- ---------- --------- ------- -------- ----------- -------- --------- -----------
BALANCES,
April 30, 1996..... 2,249,748 1,889,141 -- -- (5,000) (3,740,238) -- -- (1,856,097)
Sale of stock for
cash............... 15,375 111,200 -- -- -- -- -- -- 111,200
Stock issued in
exchange for note.. 15,000 30,000 -- -- (30,000) -- -- -- --
Stock issued for
services........... 35,000 34,224 -- -- -- -- -- -- 34,224
Stock issued in
acquisition of
affiliate.......... 44,769 49,993 -- -- -- -- -- -- 49,993
Conversion of notes
and accrued
interest to stock.. 81,507 251,508 -- -- -- -- -- -- 251,508
Net loss............ -- -- -- -- -- (259,473) -- -- (259,473)
--------- ---------- --------- ------- -------- ----------- -------- --------- -----------
BALANCES,
April 30, 1997..... 2,441,399 2,366,066 -- -- (35,000) (3,999,711) -- -- (1,668,645)
Conversion of notes
and accrued
interest to stock.. 53,497 104,467 -- -- -- -- -- -- 104,467
Sale of stock for
cash............... 227,160 499,752 -- -- -- -- -- -- 499,752
Issuance of debt
with stock rights.. -- -- 795,200 -- -- -- -- -- 795,200
Stock options
granted............ -- -- -- 37,000 -- -- -- -- 37,000
Purchase of common
stock.............. -- -- -- -- -- -- (210,282) (462,619) (462,619)
Retirement of
treasury stock..... (100,000) (220,000) -- -- -- -- 100,000 220,000 --
Net loss............ -- -- -- -- -- (417,348) -- -- (417,348)
--------- ---------- --------- ------- -------- ----------- -------- --------- -----------
BALANCES,
December 31, 1997.. 2,622,056 2,750,285 795,200 37,000 (35,000) (4,417,059) (110,282) (242,619) (1,112,193)
Unaudited:
Conversion of notes
and accrued
interest to stock.. 4,360 10,300 -- -- -- -- -- -- 10,300
Retirement of
treasury stock..... (50,000) (110,000) -- -- -- -- 50,000 110,000 --
Net loss............ -- -- -- -- -- (1,126,221) -- -- (1,126,221)
--------- ---------- --------- ------- -------- ----------- -------- --------- -----------
BALANCES,
March 31, 1998
(unaudited)....... 2,576,416 $2,650,585 $ 795,200 $37,000 $(35,000) $(5,543,280) (60,282) $(132,619) $(2,228,114)
========= ========== ========= ======= ======== =========== ======== ========= ===========
</TABLE>
See notes to financial statements.
F-12
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT THREE THREE
MONTHS MONTHS MONTHS
YEAR ENDED APRIL 30, ENDED ENDED ENDED
--------------------------------- DECEMBER 31, APRIL 30, MARCH 31,
1995 1996 1997 1997 1997 1998
--------- ----------- --------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................ $(632,995) $(2,523,940) $(259,473) $ (417,348) $(152,575) $(1,126,221)
Adjustments to reconcile
net loss to cash
provided by (used in)
operating activities:
Gain on extinguishment
of debt.............. -- -- -- (747,000) -- --
Amortization of debt
issuance costs and
debt discount........ -- -- -- -- -- 622,614
Stock and options
issued or subscribed
for services and
interest............. 32,000 312,775 38,566 37,000 -- --
Depreciation and
amortization......... 19,107 57,843 102,983 91,729 32,475 41,950
Changes in operating
assets and
liabilities:
Accounts
receivable......... (123,644) (904,447) 52,565 26,016 (30,111) 400,419
Other assets........ (65,000) (15,393) (115,833) (63,301) (61,099) (44,660)
Accounts payable and
accrued expenses... 372,697 2,711,390 911,463 (56,278) 411,481 446,439
--------- ----------- --------- ----------- --------- -----------
Net cash provided by
(used in) operating
activities............. (397,835) (361,772) 730,271 (1,129,182) 200,171 340,541
--------- ----------- --------- ----------- --------- -----------
INVESTING ACTIVITIES
Purchases of property
and equipment.......... (53,987) (222,813) (218,668) (117,573) (51,245) (59,533)
Increase in deposits for
acquisition............ -- -- (25,000) (200,000) -- (25,000)
--------- ----------- --------- ----------- --------- -----------
Net cash used in
investing activities... (53,987) (222,813) (243,668) (317,573) (51,245) (84,533)
--------- ----------- --------- ----------- --------- -----------
FINANCING ACTIVITIES
Proceeds from issuance
of notes............... -- 7,000 405,000 2,485,074 205,000 60,000
Proceeds from the
issuance of stock or
stock subscriptions.... 461,025 537,000 111,200 499,752 -- --
Repayment of notes...... -- (78,530) (818,418) (1,001,604) (192,835) --
Increase in deferred
offering costs......... -- -- (83,939) (33,780) (51,847) (368,488)
Payment for treasury
stock.................. -- -- -- (220,000) -- (110,000)
Net proceeds from
issuances (repayments)
of debt to related
parties................ 65,000 94,915 (11,154) -- (11,966) (31,250)
--------- ----------- --------- ----------- --------- -----------
Net cash provided by
(used in) financing
activities............. 526,025 560,385 (397,311) 1,729,442 (51,648) (449,738)
--------- ----------- --------- ----------- --------- -----------
NET INCREASE (DECREASE)
IN CASH................ 74,203 (24,200) 89,292 282,687 97,278 (193,730)
CASH, Beginning of
period................. 7,391 81,594 57,394 146,686 49,408 429,373
--------- ----------- --------- ----------- --------- -----------
CASH, End of period..... $ 81,594 $ 57,394 $ 146,686 $ 429,373 $ 146,686 $ 235,643
========= =========== ========= =========== ========= ===========
</TABLE>
(continued)
See notes to financial statements.
F-13
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT THREE THREE
MONTHS MONTHS MONTHS
YEAR ENDED APRIL 30, ENDED ENDED ENDED
--------------------------- DECEMBER 31, APRIL 30, MARCH 31,
1995 1996 1997 1997 1997 1998
------- ---------- -------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest paid......... $ -- $ 7,879 $126,066 $ 29,435 $ 51,021 $ 2,454
SUPPLEMENTAL NONCASH
INVESTING AND FINANCING
ACTIVITIES
Stock and options
issued or subscribed
for services and
interest............. $32,000 $ 312,775 $ 38,566 $ 37,000 $ -- $ --
Conversion of accounts
payable to notes
payable.............. -- 1,938,227 761,617 -- 761,617 --
Issuance of stock in
exchange for note
receivable........... -- 5,000 30,000 -- -- --
Stock issued in
acquisition of
affiliate............ -- -- 49,993 -- -- --
Conversion of notes
and accrued interest
to stock............. -- -- 274,342 104,467 202,894 10,300
Purchase of treasury
stock................ -- -- -- 242,619 -- --
</TABLE>
(concluded)
See notes to financial statements.
F-14
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED APRIL 30,
1997 AND MARCH 31, 1998 IS UNAUDITED)
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Communications Systems International, Inc. (CSI) is a provider of
international telecommunications services principally in South America,
Europe, the Pacific Rim, Central America and South Africa. CSI purchases long
distance time increments from established international telecommunication
carriers and derives its revenue by providing competitively priced
international telecommunications services combined with enhanced technical
capabilities and services in markets that are underserved by large
telecommunications providers and incumbent telephone operators.
In April 1998, CSI changed its fiscal year from April 30 to December 31.
Basis of Presentation--The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles, which
contemplates continuation of CSI as a going concern. CSI has sustained
substantial operating losses since inception through December 31, 1997. In
addition, CSI has used substantial amounts of working capital in its
operations. At December 31, 1997, current liabilities exceeded current assets
by $2,611,538 and total liabilities exceeded total assets by $1,112,193.
Beginning in fiscal 1997, CSI's management took actions to increase its
revenue through increased calling volume and, as a result, CSI has been able
to negotiate more favorable rates with its long distance telephone carriers
enabling CSI to reduce its cost of revenues per unit of service sold. These
steps have enabled CSI to significantly improve its gross margins during the
year ended April 30, 1997 and the eight months ended December 31, 1997.
In December 1997, in order to raise additional working capital and satisfy
certain obligations, CSI issued mandatorily redeemable convertible promissory
notes (see Note 3) in a private offering. Also in 1998, management believes it
will be successful in raising a significant amount of equity capital in a
public offering (see Note 12) and intends to use the proceeds for repayment of
the mandatorily redeemable convertible promissory notes and to complete the
pending acquisitions (see Note 13) as well as repay existing obligations,
working capital, development of new service offerings and enhancement and
expansion of existing services.
Management believes that these actions and others presently being taken will
allow CSI to successfully meet its obligations and achieve and sustain
profitable levels of operations.
Accounts Receivable--Accounts receivable are presented net of an allowance
for doubtful accounts which is based on management's estimate of uncollectible
accounts. At April 30, 1996 and 1997, December 31, 1997 and March 31, 1998,
the allowance for doubtful accounts was $164,245, $186,489, $342,276 and
$316,067, respectively.
Property and Equipment--Property and equipment are recorded at cost.
Depreciation is provided on a straight-line method over the estimated useful
lives of the respective assets (generally five to seven years).
Use of Estimates--The preparation of CSI's financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Stock-Based Compensation--Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," encourages, but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. CSI has elected to continue to account for
stock-based
F-15
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Accordingly, compensation cost for stock options
is measured as the excess, if any, of the quoted market price of CSI's stock
at the date of the grant over the amount an employee must pay to acquire the
stock. See Note 5.
Per Share Amounts--The net loss per share is based upon the weighted average
of common shares outstanding during the period; the effect of outstanding
stock options and warrants is antidilutive.
Interim Financial Statements--The financial statements of CSI for the three
months ended April 30, 1997 and March 31, 1998 are unaudited. In management's
opinion, the financial statements reflect all adjustments necessary for a fair
presentation of the results for these periods, all adjustments being of a
normal and recurring nature. CSI's interim financial statements may not be
indicative of the results of operations for a full year.
2.PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 30, DECEMBER 31, MARCH 31,
1996 1997 1997 1998
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Equipment....................... $311,446 $574,966 $690,803 $743,163
Furniture and fixtures.......... 44,259 61,601 61,601 62,131
Leasehold improvements.......... 5,238 13,651 15,387 22,030
-------- -------- -------- --------
Total......................... 360,943 650,218 767,791 827,324
Less accumulated depreciation
and amortization............... 89,444 192,427 284,156 326,106
-------- -------- -------- --------
Property and equipment--net..... $271,499 $457,791 $483,635 $501,218
======== ======== ======== ========
</TABLE>
F-16
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3.NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 30, DECEMBER 31, MARCH 31,
1996 1997 1997 1998
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Mandatorily redeemable convert-
ible promissory notes bearing
interest at 10% which is pay-
able semiannually (see below),
due December 29, 1998 or 5 days
after the closing of the pro-
posed public offering (see Note
12), whichever is earlier...... $ -- $ -- $2,840,000 $2,840,000
Unsecured notes payable, bearing
interest at 15%, principal and
interest due September 1998.... -- 85,000 85,000 85,000
Unsecured convertible notes
payable bearing interest at
10%, the outstanding principal
and unpaid accrued interest are
due in March 1999.............. -- -- -- 60,000
Unsecured convertible notes pay-
able bearing interest at 10%
which is payable semi-annually
on March 31 and September 30;
the outstanding principal is
due in 1998, however, the notes
are callable at the option of
the noteholders at any interest
payment date................... -- 50,000 40,000 30,000
Unsecured notes payable to long
distance carriers, bearing
interest at 10% and 12%, repaid
December 1997; see below....... 1,859,697 1,809,896 -- --
Other........................... 7,000 -- -- --
---------- ---------- ---------- ----------
1,866,697 1,944,896 2,965,000 3,015,000
Less discount on mandatorily re-
deemable convertible promissory
notes.......................... -- -- 795,200 397,600
---------- ---------- ---------- ----------
Total......................... $1,866,697 $1,944,896 $2,169,800 $2,617,400
========== ========== ========== ==========
</TABLE>
On October 9, 1997, CSI entered into an agreement with one of its long
distance carriers to which CSI had a note payable with an outstanding
principal balance of $1,458,292 and accrued and unpaid interest of $116,755.
The agreement provided that the carrier would accept a payment of $650,000 in
full satisfaction of CSI's obligation to such carrier. CSI was also obligated
to pay a fee of $178,047 to one of the companies which CSI intends to acquire
(see Note 13) for assistance in obtaining this agreement. CSI recognized a
gain of $747,000 in December 1997 upon the payment of the $650,000 liability.
CSI issued mandatorily redeemable convertible promissory notes totalling
$2,840,000 on December 30, 1997 in a private placement offering,
collateralized by a first security interest on all unpledged assets of CSI and
a second security interest on all assets subject to a prior lien. The notes
are personally guaranteed as to $1,500,000 of principal and interest by two of
CSI's officers and directors ($750,000 guaranteed by each, severally). The
notes are convertible into CSI's Common Stock after nine months at a 50%
discount to the average of the closing bid price for the immediately preceding
20 trading days. The holders of the converted shares have certain registration
rights. As additional consideration for purchasing the notes, if the public
offering is (a) not completed within nine months of the closing of the
offering, the noteholder is to receive 7,500 shares of CSI's Common Stock for
each $100,000 of principal or (b) completed, the noteholder will receive a
certain number of shares valued at $40,000 based on the proposed public
offering price per share. As a result of these stock rights, CSI has recorded
a discount on the notes and recognized an obligation to issue Common Stock of
F-17
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
$795,200. The discount is being amortized over six months since management
believes CSI will complete its offering around June 30, 1998. At March 31,
1998, the unamortized portion of the discount was $397,600. In connection with
the placement of the notes, CSI incurred debt issuance costs of $449,926,
which are also being amortized over a six-month period. At March 31, 1998, the
unamortized portion of the debt issuance costs was $224,912.
CSI did not make the June 30, 1998 interest payments on the mandatorily
redeemable convertible promissory notes as required by the terms of the notes.
Under the terms of the notes, the noteholders have the right to declare an
event of default and demand immediate payment of all outstanding principal and
interest; however, as of July 20, 1998, no noteholders have declared an event
of default.
4.SHAREHOLDERS' EQUITY
During the year ended April 30, 1995, CSI accepted deposits for purchase of
421,816 shares of its Common Stock in excess of the number of shares
authorized. In September 1995, CSI's shareholders voted to increase the number
of authorized shares of Common Stock to 25,000,000 shares and the subscribed
shares were issued.
CSI offered up to 250,000 shares of its no par Common Stock at a purchase
price of $1.50 per share under a private placement memorandum dated January
31, 1995. At April 30, 1995, 46,250 shares had been subscribed. During the
year ended April 30, 1996, the offering was fully subscribed.
In September 1995, in an effort to increase the number of shareholders of
CSI's Common Stock, CSI's shareholders approved a plan of merger to acquire
all of the outstanding shares of Redden Dynamics Corporation (Redden) for
$34,500 cash and 204,694 shares of CSI's Common Stock. Under the plan of
merger, the shareholders of Redden received one share of CSI's Common Stock in
exchange for each 54 shares of Redden stock. Effective as of the date of the
merger, all shares of Redden were cancelled, the assets of Redden became
assets of CSI and Redden ceased to exist. Redden's only recorded asset
consisted of $11,050 of organizational costs. Redden had no liabilities and
had no revenues or expenses since inception. Subsequent to the merger, CSI
determined that Redden's assets were of no value to CSI. Accordingly, no
amounts have been recognized for the issuance of the CSI Common Stock in
connection with the merger of Redden.
During the year ended April 30, 1996, CSI issued 164,478 shares of its
Common Stock in exchange for financial and technological consulting services.
The cost of the services provided of $312,775 has been charged to operations.
During the year ended April 30, 1997, CSI sold 15,375 shares of Common Stock
for $8.00 per share and received $111,200 after offering costs of $11,800.
In August 1996, CSI acquired the net assets of an affiliated company through
the issuance of 44,769 shares of CSI's Common Stock to certain shareholders of
the affiliate and granted options to purchase 24,250 shares of CSI's Common
Stock (see Note 5) to certain other shareholders of the affiliate. The assets
acquired totalling $72,749 and liabilities assumed totalling $22,756 were
recorded by CSI at the affiliate's net book value. Pro forma information
combining the results of operations of CSI and the affiliate as if the
acquisition had occurred at May 1, 1995 or 1996 has not been presented as such
information would not differ significantly from the reported amounts.
During the year ended April 30, 1997, CSI sold convertible notes totalling
$320,000, of which $190,000 of such notes were issued to three current
directors of CSI. The notes, bearing interest at 10%, are convertible into
shares of CSI's Common Stock at a conversion price equal to 90% of the average
of the bid and ask price on the day prior to conversion. As of April 30, 1997,
the holders of notes totalling $270,000 principal amount had converted their
notes and accrued interest of $4,342 into 81,507 shares of stock; upon
conversion, CSI charged
F-18
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the remaining unamortized deferred financing costs of $22,834 relating to such
notes against the recorded amount of Common Stock. During the eight months
ended December 31, 1997, CSI sold an additional $95,000 principal amount of
the convertible notes, and noteholders converted notes totalling $105,000
principal amount and accrued interest of $175 into 53,496 shares of stock.
Upon conversion, CSI charged unamortized deferred financing costs of $708
relating to such notes against the recorded amount of Common Stock. During the
three months ended March 31, 1998, a noteholder converted an additional
$10,000 note and accrued interest of $300 into 4,360 shares of stock.
During the year ended April 30, 1997, CSI issued 35,000 shares of its Common
Stock in exchange for financial and technological consulting services. The
cost of the services provided of $34,224 has been charged to operations.
In August 1997, CSI entered into settlement agreements with two former
employees who were also CSI shareholders to repurchase 210,282 shares of its
Common Stock from such individuals for $2.20 per share, or a total price of
$462,619. The agreements require payments by CSI of $220,000 no later than
September 12, 1997, $110,000 no later than February 11, 1998, and $132,619 no
later than August 11, 1998. During the periods ended December 31, 1997 and
March 31, 1998, CSI has made payments totalling $220,000 and $110,000,
respectively, to these individuals and received 100,000 and 50,000 shares,
respectively, of its Common Stock which have been retired. As of December 31,
1997 and March 31, 1998, CSI has recorded a liability for the remaining
payments totalling $242,619 and $132,619, respectively, and treasury stock for
the shares that it is committed to purchase.
In a private placement in September and October 1997, CSI sold 227,160
shares of its Common Stock for $499,752, or $2.20 per share, the proceeds of
which were partially used to repurchase the shares described in the preceding
paragraph.
CSI has notes receivable from a shareholder totalling $35,000 which resulted
from the issuance of stock, bear interest at 10% and are payable on demand.
5.STOCK OPTIONS
Under the terms of CSI's nonqualified stock option plan, options to purchase
shares of CSI's Common Stock are to be granted at prices to be determined by
the Board of Directors. The options' expiration date may not be more than 10
years from the date of the grant. The aggregate number of shares of CSI's
Common Stock which may be issued upon the exercise of options granted under
the plan shall not exceed 750,000. CSI has granted the following stock
options:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
OPTIONS PRICE PER EXPIRATION
OUTSTANDING SHARE DATE
----------- ------------- ----------
<S> <C> <C> <C>
April 30, 1996.......................... 224,788 $2.00--$8.00 1998--2006
April 30, 1997.......................... 221,051 $2.00--$11.52 1998--2007
December 31, 1997....................... 277,201 $.80--$11.52 1998--2007
March 31, 1998.......................... 283,625 $.80--$11.52 1998--2008
</TABLE>
F-19
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Information with respect to options granted under the plan is as follows:
<TABLE>
<S> <C>
Outstanding at May 1, 1995.......................................... --
Granted........................................................... 224,788
Exercised......................................................... --
Expired or cancelled.............................................. --
-------
Outstanding at April 30, 1996....................................... 224,788
Granted........................................................... 110,163
Exercised......................................................... (15,000)
Expired or cancelled.............................................. (98,900)
-------
Outstanding at April 30, 1997....................................... 221,051
Granted........................................................... 117,925
Exercised......................................................... --
Expired or cancelled.............................................. (61,775)
-------
Outstanding at December 31, 1997.................................... 277,201
Granted........................................................... 6,424
Exercised......................................................... --
Expired or cancelled.............................................. --
-------
Outstanding at March 31, 1998....................................... 283,625
=======
</TABLE>
CSI has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for CSI's stock option plans been determined
based on the fair value at the grant date for awards in the years ended April
30, 1996 and 1997 and the eight months ended December 31, 1997 consistent with
the provisions of SFAS No.123, CSI's net loss and net loss per share would
have increased to the pro forma amounts indicated below. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the weighted-average assumptions used for grants in
the years ended April 30, 1996 and 1997 and the eight months ended December
31, 1997 also indicated below.
<TABLE>
<CAPTION>
APRIL 30, APRIL 30, DECEMBER 31,
1996 1997 1997
----------- --------- ------------
<S> <C> <C> <C>
Net loss--as reported................... $(2,524,000) $(259,000) $(417,000)
Net loss--pro forma..................... (2,724,000) (575,000) (564,000)
Net loss per share--as reported......... (1.27) (.11) (.17)
Net loss per share--pro forma........... (1.37) (.25) (.23)
Risk-free interest rate................. 6.0% 6.0% 6.1%
Expected lives (in years)............... 3-10 3-10 3-10
</TABLE>
6.WARRANTS
During the year ended April 30, 1996, CSI issued warrants in connection with
Common Stock in exchange for financial services. The warrants provide for the
purchase of 37,500 shares of CSI's Common Stock at prices ranging from $6.00
to $14.00, and expire in 2000 and 2001.
In connection with the issuance of the convertible and 15% promissory notes
(see Note 3), CSI also is committed to deliver to the noteholders 15,688
warrants to purchase shares of CSI's Common Stock. The exercise price of the
warrants is equal to the bid price of such stock on the date the note was
executed and ranges from $1.06 to $5.50 per share; the warrants expire in 1998
and 1999.
F-20
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In connection with the placement of the mandatorily redeemable convertible
promissory notes, CSI issued to the placement agent 71,000 warrants to
purchase shares of CSI's Common Stock. The warrants are exercisable at 125% of
proposed public offering price per share; if no offering occurs within one
year from the closing of the offering of the notes, the exercise price is
reduced to 50% of the closing bid price, as defined in Note 3.
In connection with the issuance of the convertible promissory notes due
March 1999, CSI issued to the noteholders 6,000 warrants to purchase shares of
CSI's Common Stock at prices ranging from $3.63 to $3.75, which warrants
expire in March 1999.
7.INCOME TAXES
The tax effects of temporary differences to significant portions of deferred
taxes are as follows:
<TABLE>
<CAPTION>
APRIL 30, APRIL 30, DECEMBER 31,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.. $ 1,064,000 $ 1,198,000 $ 1,192,000
Allowance for doubtful accounts... 60,000 69,000 116,000
Other............................. 146,000 63,000 62,000
Less valuation allowance............ (1,270,000) (1,330,000) $(1,370,000)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
As of December 31, 1997, CSI's net operating loss carryforwards of
approximately $3,500,000 will begin expiring in the year 2009. The
carryforwards will be available for the reduction of future income tax
liabilities. As of April 30, 1996 and 1997 and December 31, 1997, CSI has
recorded valuation allowances to reduce the existing deferred tax asset to an
amount that is more likely than not to be realized. The valuation allowance
increased by $210,000, $860,000, $60,000 and $40,000 during the years ended
April 30, 1995, 1996 and 1997 and eight months ended December 31, 1997,
respectively. The utilization of approximately $540,000 of tax loss
carryforwards is limited to approximately $80,000 each year as a result of an
ownership change in CSI (as defined by Section 382 of the Internal Revenue
Code of 1986, as amended), which occurred in 1995. The amount of the remaining
carryforwards that can be used in any given year may be limited in the event
of additional future changes in the ownership of CSI, including the proposed
public offering (see Note 12).
8.RELATED PARTY TRANSACTIONS
CSI leases office space from a partnership in which CSI's principal
shareholder owns a general partnership interest. Rental expense under such
leases totalled $17,346, $37,592, $87,259, $80,263 and $30,092 for the years
ended April 30, 1995, 1996 and 1997, eight months ended December 31, 1997 and
three months ended March 31, 1998, respectively. Future annual minimum lease
payments required under such leases are as follows as of December 31, 1997:
<TABLE>
<S> <C>
Year ending December 31:
1998.............................................................. $138,619
1999.............................................................. 88,452
--------
Total........................................................... $227,071
========
</TABLE>
CSI receives periodic advances from its principal shareholder. At April 30,
1996 and 1997, December 31, 1997 and March 31, 1998, CSI had an unsecured note
payable of $159,915, $148,761, $148,761 and $148,761, respectively, to its
principal shareholder, payable May 31, 1999 and bearing interest at 10%.
In September 1997, CSI entered into a settlement agreement with one of its
former officers which provided for payments totalling $63,000 through December
1997 and a promissory note for $125,000 requiring twelve monthly payments of
$10,417 beginning January 1998. If the proposed public offering (see Note 12)
is completed
F-21
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
prior to full payment of the note, the remaining balance is due. Such amount
has been reflected as a general and administrative expense for the eight
months ended December 31, 1997.
9.CONCENTRATIONS OF RISK
Certain financial instruments which potentially subject CSI to
concentrations of risk consist primarily of cash, agent receivables, and
carrier payables.
CSI's major markets are currently in Argentina, Brazil, Europe and South
Africa. As a result, CSI's operations may be adversely affected by significant
fluctuations in the value of the U.S. dollar against certain foreign
currencies, the enactment of exchange controls, or foreign governmental or
regulatory restrictions on the transfer of funds. CSI currently prices its
products and services in terms of U.S. dollars. Significant fluctuations in
the value of the U.S. dollar in relation to currencies in countries where CSI
conducts operations can greatly affect the competitive price position of CSI's
products and services. CSI's independent sales agents in Argentina and Brazil
generated revenues (as a percentage of CSI's total revenues) as indicated
below. In addition, CSI is represented by one independent sales agent in both
Argentina and Brazil.
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS
APRIL 30, ENDED
---------------- DECEMBER 31,
1995 1996 1997 1997
---- ---- ---- ------------
<S> <C> <C> <C> <C>
Argentina........................................ -- 49% 56% 57%
Brazil........................................... 34% 14 10 12
</TABLE>
CSI's ability to provide its telephone services is heavily dependent upon
the agreements CSI has with its long distance telephone carriers. CSI's long
distance services were provided by various carriers as follows:
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS
APRIL 30, ENDED
---------------- DECEMBER 31,
1995 1996 1997 1997
---- ---- ---- ------------
<S> <C> <C> <C> <C>
Carrier A........................................ 59% 39% 59% 87%
Carrier B........................................ 22 49 23 --
Carrier C........................................ -- -- -- 11
Other carriers................................... 19 12 18 2
</TABLE>
CSI's cash is deposited with high credit quality financial institutions.
10.COMMITMENTS AND CONTINGENCIES
In September 1996, CSI entered into a consulting and royalty agreement to
acquire the rights to a switching system which is installed at customer
locations. Under the terms of the agreement, CSI is required to pay the
developer a monthly royalty equal to 4% of CSI's gross collected revenue
related to the system. In addition, CSI is also required to provide monthly
funding for the installation of two systems. In the event that CSI fails to
provide such funds and installation is prevented or delayed by more than sixty
days, the royalty payment to the developer is increased to 6%. CSI has the
option to buy out the royalty obligation for the greater of $2,500,000 or an
amount equal to three times the aggregate royalty payments for the first
twelve months of the agreement. In addition, for each installation, CSI agrees
to pay the developer $1,500 if such installation produces gross revenue
between $10,000 and $20,000 in the first full billing month, and $3,000 if
such revenue exceeds $20,000. The developer has agreed to provide ongoing
maintenance, support and consulting while the system is in operation at a rate
of $4,000 per month through September 1, 1997, and $5,200 thereafter. The
agreement is in effect for as long as the system is operational until
September 1, 2006, unless earlier terminated upon the occurrence of certain
events.
CSI has employment agreements with certain of its officers which provide for
annual salaries totalling $400,000 and expire in 1999 and 2000. One of the
agreements requires annual increases of 4%.
F-22
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
CSI has agreements with certain of its carriers which provide for guaranteed
rates and minimum annual usage. Certain agreements require CSI to make
deposits with the carriers; such deposits totalled $25,000, $95,000, $220,000
and $230,000 at April 30, 1996 and 1997, December 31, 1997 and March 31, 1998,
respectively. The agreements expire through 1999 and require minimum annual
usage as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998............................................................ $3,025,000
1999............................................................ 1,500,000
----------
Total......................................................... $4,525,000
==========
</TABLE>
11.STOCK SPLIT
In December 1997, CSI's Board of Directors authorized a reverse split of
CSI's Common Stock (not to exceed 1-for-30) whereby CSI will issue one share
of Common Stock in exchange for a number of shares yet to be determined. The
authorization for the reverse split was approved by CSI's shareholders in
January 1998. In July 1998, management of CSI approved a 1-for-4 reverse stock
split; all references to numbers of shares, options and warrants and per share
amounts, including exercise prices, in the accompanying financial statements
and related notes have been restated to reflect the 1-for-4 reverse stock
split.
12.PROPOSED PUBLIC OFFERING
CSI is planning a public offering of its Common Stock in 1998, the net
proceeds from which are expected to be used to complete the acquisition and
merger described in Note 13, to repay the mandatorily redeemable promissory
notes described in Note 3, for working capital, development of new service
offerings, and enhancement and expansion of existing services. CSI has
incurred offering costs related to this offering which have been deferred in
the accompanying financial statements and will be recorded as a reduction in
the proceeds from the offering; if the offering is unsuccessful, costs which
have been deferred will be charged to current year's operations.
13.PENDING ACQUISITION AND MERGER
CSI has entered into an agreement (the Acquisition Agreement) to acquire all
of the outstanding stock of International Telephone Company (ITC), another
telecommunications company that provides services similar to that of CSI. The
purchase price of $5,370,000 is to be satisfied by the payment of $3,300,000
cash and the issuance of 295,714 shares of CSI's Common Stock valued at
$2,070,000 (before any discount) based on the public offering per share price
in CSI's proposed public offering (see Note 12). The Acquisition Agreement
provides that $385,430 of the cash payment will be placed into an escrow
account to satisfy, if necessary, a contingent liability of ITC relating to a
disputed claim with one of ITC's carriers. The Acquisition Agreement also
provides for the shares of CSI's Common Stock to be issued to the selling
shareholders one year after the acquisition is completed to ensure compliance
with certain provisions of the Acquisition Agreement. Included in deposits in
the accompanying balance sheets at April 30, 1997, December 31, 1997 and March
31, 1998 are deposits totalling $25,000, $225,000 and $250,000, respectively,
which are nonrefundable and to be credited against the purchase price. The
Acquisition Agreement also requires additional standstill deposits to be made
prior to the expected acquisition date. The acquisition is expected to occur
upon closing of CSI's proposed public offering.
On May 29, 1998, CSI entered into an agreement and plan of merger (the
Merger Agreement) with GlobalTel Resources, Inc. (GlobalTel), another
telecommunications company which also provides services similar to that of
CSI. The Merger Agreement provides for CSI to exchange 1,882,909 shares of its
Common Stock for all outstanding shares of GlobalTel's preferred and common
stock, which includes shares to be issued in satisfaction of certain GlobalTel
debt. The Merger Agreement also provides for CSI to issue shares of its Common
Stock to the holders of certain GlobalTel options and warrants.
F-23
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
CSI's acquisitions of GlobalTel and ITC will be accounted for using the
purchase method.
14.SUBSEQUENT EVENTS
In April 1998, CSI issued 10% unsecured convertible promissory notes for
$210,000 cash. The notes and unpaid accrued interest are due in March 1999. In
connection with the issuance of such notes, CSI issued to the noteholders
21,000 warrants to purchase shares of CSI's Common Stock at prices ranging
from $3.63 to $3.75, which warrants expire in March 1999.
On May 1, 1998, CSI issued 12% secured promissory notes and 250,000 warrants
for $1,250,000 cash. On July 20, 1998, CSI issued additional notes and 100,000
warrants for $500,000 cash. The holder of the notes has agreed to exchange
$1,000,000 of the notes' principal for 204,079 shares of CSI's Common Stock
upon the closing of the public offering. Any remaining notes and accrued
unpaid interest are due one year after issuance or five days after the closing
of a public offering with gross proceeds of greater than $10,000,000. The
notes and interest are collateralized by all shares of CSI's Common Stock
owned by CSI's Chief Executive Officer. The notes are also personally
guaranteed by CSI's Chief Executive Officer and Chief Operating Officer. Each
warrant entitles the holder to purchase one share of CSI's Common Stock at an
exercise price equal to 80% of the public offering per share price, which
shares are subject to certain lock-up provisions. CSI also agreed to issue
52,500 warrants to the placement agent which warrants have an exercise price
of 120% of the public offering per share price.
On May 19, 1998, CSI sold 74,074 shares of its Common Stock pursuant to a
subscription agreement for $250,000, or $3.375 per share. The shares are
subject to certain lock-up provisions. If CSI is unable to obtain an effective
registration statement by August 20, 1998, the holder of such shares is
entitled to receive an additional 889 shares of CSI's Common Stock for every
seven calendar days after such date until an effective registration is
obtained. CSI also agreed to issue 7,500 warrants to the placement agent which
warrants have an exercise price of 120% of the public offering per share
price.
From May through July 1998, CSI loaned $600,000 from the proceeds of the
above transactions to GlobalTel. The loans, which bear interest at 20%, are
due May 1999, collateralized by certain GlobalTel assets, and personally
guaranteed by GlobalTel's Chief Executive Officer.
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GlobalTel Resources, Inc.:
We have audited the accompanying consolidated balance sheets of GlobalTel
Resources, Inc. (a Washington corporation) and subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of operations, common
stock subject to rescission and shareholders' deficit and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of GlobalTel's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GlobalTel Resources, Inc.
and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that GlobalTel will continue as a going concern. As discussed in
Notes 1 and 5, a significant portion of GlobalTel's bridge loans call for
principal repayment during 1998. In addition, as discussed in Note 6,
GlobalTel plans to commence an offer to rescind a significant portion of
GlobalTel's common stock and bridge loans. Management's current projections
indicate that there will not be sufficient cash flows from operations to fund
these obligations. These matters raise substantial doubt about GlobalTel's
ability to continue as a going concern. Management's plans in regard to these
matters are discussed in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Seattle, Washington,
April 10, 1998 (except with
respect to the matters
discussed in Notes 1, 6 and
9, as to which the date is
July 21, 1998)
F-25
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS AS OF MARCH 31, 1998 ARE UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash................................ $ 446,257 $ 848,668 $ 98,467
Receivables:
Trade accounts, net of allowance
for doubtful accounts of
$207,000, $180,000 and $180,000.. 1,288,047 622,154 636,154
Related party..................... -- 35,500 35,500
Other ............................ 333,181 54,859 69,359
Deposits and other.................. 149,178 105,814 126,910
----------- ------------ ------------
Total current assets.............. 2,216,663 1,666,995 966,390
Property and equipment, net........... 670,712 1,372,154 1,356,655
Other assets:
License agreement and customer list,
net................................ 163,573 151,749 223,167
Organizational costs, net........... 110,114 75,381 --
Bridge loan issue costs, net........ 107,356 567,804 434,585
Equipment to be placed in service... 374,075 519,688 532,188
Other............................... 58,994 -- --
----------- ------------ ------------
Total assets...................... $ 3,701,487 $ 4,353,771 $ 3,512,985
=========== ============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable.................... $ 2,570,745 $ 2,278,611 $ 3,150,924
Accounts payable to related
parties............................ -- 247,270 132,011
Accrued liabilities................. 1,937,154 1,212,881 1,194,100
Bridge loans, net of unamortized
discount of $574,572 in 1998....... 1,840,000 1,995,000 4,576,928
Notes payable....................... 92,310 21,542 15,890
Customer deposits and prepayments... 1,024,743 845,474 990,225
----------- ------------ ------------
Total current liabilities......... 7,464,952 6,600,778 10,060,078
Bridge loans, net of unamortized
discount of $1,208,511 in 1997....... 2,282,500 3,832,289 2,000,000
----------- ------------ ------------
Total liabilities................. 9,747,452 10,433,067 12,060,078
----------- ------------ ------------
Commitments and contingencies (see
Notes 6 and 8)
Common stock subject to rescission;
par value $0.05; 326,385, 496,466 and
496,466 shares issued and
outstanding.......................... 1,519,387 2,454,829 2,454,829
----------- ------------ ------------
Shareholders' deficit:
Series A convertible preferred
stock; par value $0.01; 5,000,000
shares authorized; 0, 275,000 and
275,000 shares issued and
outstanding; liquidation preference
of $0, $1,138,666 and $1,154,395... -- 1,054,689 1,070,418
Common stock; par value $0.05;
50,000,000 shares authorized;
675,447, 1,233,432 and 1,251,432
shares issued and outstanding...... 56,383 2,804,709 2,903,709
Obligation to issue common stock.... 8,400 1,012,309 1,012,309
Common stock warrants............... 52,306 2,152,460 2,117,502
Accumulated deficit................. (7,682,441) (15,558,292) (18,105,860)
----------- ------------ ------------
Total shareholders' deficit....... (7,565,352) (8,534,125) (11,001,922)
----------- ------------ ------------
Total liabilities and
shareholders' deficit............ $ 3,701,487 $ 4,353,771 $ 3,512,985
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-26
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 ARE
UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue................. $ 2,113,047 $ 9,135,935 $12,862,629 $ 4,385,392 $ 1,697,625
Operating expenses:
Cost of revenue....... 1,928,396 8,229,546 11,171,220 3,811,258 1,472,901
Sales and marketing... 238,168 682,332 788,191 226,558 119,769
General and
administrative....... 1,536,215 5,773,133 7,119,335 1,411,481 1,523,191
Depreciation and
amortization......... 111,062 98,288 253,320 29,446 91,160
----------- ----------- ----------- ----------- -----------
Total operating
expenses............... 3,813,841 14,783,299 19,332,066 5,478,743 3,207,021
----------- ----------- ----------- ----------- -----------
Operating loss.......... (1,700,794) (5,647,364) (6,469,437) (1,093,351) (1,509,396)
Interest expense
($1,291, $61,350,
$288,962, $41,734 and
$61,891 to related
parties) and other,
including amortization
of debt discount....... (33,681) (224,964) (1,367,748) (192,248) (1,022,443)
----------- ----------- ----------- ----------- -----------
Net loss before income
taxes.................. (1,734,475) (5,872,328) (7,837,185) (1,285,599) (2,531,839)
Provision for income
taxes.................. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss................ $(1,734,475) $(5,872,328) $(7,837,185) $(1,285,599) $(2,531,839)
=========== =========== =========== =========== ===========
Series A convertible
preferred stock
dividends.............. -- -- (38,666) -- (15,729)
----------- ----------- ----------- ----------- -----------
Net loss applicable to
common shareholders.... $(1,734,475) $(5,872,328) $(7,875,851) $(1,285,599) $(2,547,568)
=========== =========== =========== =========== ===========
Basic loss per share.... $ (2.75) $ (5.88) $ (6.48) $ (1.28) $ (1.46)
=========== =========== =========== =========== ===========
Weighted average number
of common shares
outstanding (includes
common shares subject
to rescission)......... 629,776 998,735 1,214,797 1,001,832 1,745,498
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-27
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION AND
SHAREHOLDERS' DEFICIT
(AMOUNTS FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1998 ARE UNAUDITED)
<TABLE>
<CAPTION>
SERIES A
COMMON STOCK SUBJECT CONVERTIBLE
TO RESCISSION PREFERRED STOCK COMMON STOCK OBLIGATION
-------------------- -------------------- ---------------------- TO ISSUE
NUMBER DOLLAR NUMBER DOLLAR NUMBER OF DOLLAR COMMON
OF SHARES AMOUNT OF SHARES AMOUNT SHARES AMOUNT STOCK
--------- ---------- --------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1994............ -- $ -- -- $ -- 421,760 $ 330,000 $ --
Issuance of common stock to
founders..................... -- -- -- -- 23,499 -- --
Issuance of common stock
($0.42 per share) and
obligation to issue 60,000
shares ($0.14 per share) to
acquire GFP (see
Notes 1 and 7)............... -- -- -- -- 216,791 91,600 8,400
Sale of common stock ($2.665
per share)................... 96,748 256,382 -- -- 110,910 297,344 --
Sale of common stock
($5.50 per share)........... 214,137 1,177,755 -- -- 180,560 993,078 --
Cost of common stock
issuances.................... -- -- -- -- -- (126,236) --
Issuance of common stock
warrants..................... -- -- -- -- -- -- --
Repurchase of common stock
($5.50 per share)............ -- -- -- -- (262,573) (1,444,153) --
Net loss..................... -- -- -- -- -- -- --
------- ---------- ------- ---------- --------- ----------- ----------
BALANCE, December 31, 1995... 310,885 1,434,137 -- -- 690,947 141,633 8,400
Repurchase of common stock
($5.50 per share)............ -- -- -- -- (18,000) (99,000) --
Sale of common stock to
employees ($5.50 per share).. 15,500 85,250 -- -- -- -- --
Sale of common stock to third
party ($5.50 per share)...... -- -- -- -- 2,500 13,750 --
Issuance of common stock
warrants..................... -- -- -- -- -- -- --
Net loss..................... -- -- -- -- -- -- --
------- ---------- ------- ---------- --------- ----------- ----------
BALANCE, December 31, 1996... 326,385 1,519,387 -- -- 675,447 56,383 8,400
Issuance of Series A
convertible preferred stock.. -- -- 275,000 1,100,000 -- -- --
Cost of Series A preferred
stock issuances.............. -- -- -- (83,977) -- -- --
Preferred stock dividends.... -- -- -- 38,666 -- -- --
Partial settlement of 1995
obligation................... -- -- -- -- 30,000 4,200 (4,200)
Severance contract paid in
common stock ($5.50 per
share)....................... -- -- -- -- 24,242 133,333 --
Deferred salary converted to
common stock warrants........ -- -- -- -- -- -- --
Issuance of common stock
warrants..................... -- -- -- -- -- -- --
Bridge loans converted to
common stock ($5.50 per
share)....................... 166,447 915,442 -- -- 408,540 2,218,681 --
Trade payables converted to
common stock ($5.50 per
share)....................... 3,634 20,000 -- -- 34,131 187,705 --
Issuance of common stock
($5.50 per share) to
certain related parties...... -- -- -- -- 14,000 77,000 --
Issuance of common stock
($5.50 per share) in
consideration of bridge loan
issue costs incurred......... -- -- -- -- 23,165 127,407 --
Obligation to issue common
stock in connection with
certain bridge loan
issuances.................... -- -- -- -- -- -- 1,008,109
Exercise of common stock
warrants..................... -- -- -- -- 23,907 -- --
Net loss..................... -- -- -- -- -- -- --
------- ---------- ------- ---------- --------- ----------- ----------
BALANCE, December 31, 1997... 496,466 2,454,829 275,000 1,054,689 1,233,432 2,804,709 1,012,309
Issuance of common stock
warrants..................... -- -- -- -- -- -- --
Exercise of common stock
warrants..................... -- -- -- -- 18,000 99,000 --
Preferred stock dividends.... -- -- -- 15,729 -- -- --
Net loss..................... -- -- -- -- -- -- --
------- ---------- ------- ---------- --------- ----------- ----------
BALANCE, March 31, 1998
(unaudited).................. 496,466 $2,454,829 275,000 $1,070,418 1,251,432 $2,903,709 $1,012,309
======= ========== ======= ========== ========= =========== ==========
<CAPTION>
COMMON TOTAL
STOCK ACCUMULATED SHAREHOLDERS'
WARRANTS DEFICIT DEFICIT
----------- ------------- --------------
<S> <C> <C> <C>
BALANCE,
December 31, 1994............ $ -- $ (75,638) $ 254,362
Issuance of common stock to
founders..................... -- -- --
Issuance of common stock
($0.42 per share) and
obligation to issue 60,000
shares ($0.14 per share) to
acquire GFP (see
Notes 1 and 7)............... -- -- 100,000
Sale of common stock ($2.665
per share)................... -- -- 297,344
Sale of common stock
($5.50 per share)........... -- -- 993,078
Cost of common stock
issuances.................... -- -- (126,236)
Issuance of common stock
warrants..................... 10,751 -- 10,751
Repurchase of common stock
($5.50 per share)............ -- -- (1,444,153)
Net loss..................... -- (1,734,475) (1,734,475)
----------- ------------- --------------
BALANCE, December 31, 1995... 10,751 (1,810,113) (1,649,329)
Repurchase of common stock
($5.50 per share)............ -- -- (99,000)
Sale of common stock to
employees ($5.50 per share).. -- -- --
Sale of common stock to third
party ($5.50 per share)...... -- -- 13,750
Issuance of common stock
warrants..................... 41,555 -- 41,555
Net loss..................... -- (5,872,328) (5,872,328)
----------- ------------- --------------
BALANCE, December 31, 1996... 52,306 (7,682,441) (7,565,352)
Issuance of Series A
convertible preferred stock.. -- -- 1,100,000
Cost of Series A preferred
stock issuances.............. -- -- (83,977)
Preferred stock dividends.... -- (38,666) --
Partial settlement of 1995
obligation................... -- -- --
Severance contract paid in
common stock ($5.50 per
share)....................... -- -- 133,333
Deferred salary converted to
common stock warrants........ 1,184,856 -- 1,184,856
Issuance of common stock
warrants..................... 915,298 -- 915,298
Bridge loans converted to
common stock ($5.50 per
share)....................... -- -- 2,218,681
Trade payables converted to
common stock ($5.50 per
share)....................... -- -- 187,705
Issuance of common stock
($5.50 per share) to
certain related parties...... -- -- 77,000
Issuance of common stock
($5.50 per share) in
consideration of bridge loan
issue costs incurred......... -- -- 127,407
Obligation to issue common
stock in connection with
certain bridge loan
issuances.................... -- -- 1,008,109
Exercise of common stock
warrants..................... -- -- --
Net loss..................... -- (7,837,185) (7,837,185)
----------- ------------- --------------
BALANCE, December 31, 1997... 2,152,460 (15,558,292) (8,534,125)
Issuance of common stock
warrants..................... 63,142 -- 63,142
Exercise of common stock
warrants..................... (98,100) -- 900
Preferred stock dividends.... -- (15,729) --
Net loss..................... -- (2,531,839) (2,531,839)
----------- ------------- --------------
BALANCE, March 31, 1998
(unaudited).................. $2,117,502 $(18,105,860) $(11,001,922)
=========== ============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-28
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 ARE
UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss................ $(1,734,475) $(5,872,328) $(7,837,185) $(1,285,599) $(2,531,839)
Adjustments to reconcile
net loss to net cash
used in operating
activities--
Depreciation and
amortization......... 111,062 98,288 253,320 29,446 91,160
Amortization of bridge
loan issue costs and
debt discount........ 7,904 28,999 741,669 23,396 771,658
Other................. -- 12,538 49,800 -- 66,699
Compensation and
consulting expenses
paid in common stock
and warrants......... -- -- 398,326 -- 58,642
Changes in certain
assets and
liabilities:
Trade and related
party accounts
receivable.......... (376,118) (911,929) 630,393 (780,285) (99,000)
Other receivables and
other current
assets.............. (160,061) (315,045) 322,592 107,898 (35,596)
Trade and related
party accounts
payable, accrued
liabilities and
notes payable....... 658,421 3,807,276 514,199 1,480,135 738,273
Customer deposits and
prepayments......... 493,908 530,835 (179,269) (176,349) 144,751
----------- ----------- ----------- ----------- -----------
Net cash used in
operating activities... (999,359) (2,621,366) (5,106,155) (601,358) (795,252)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of property
and equipment.......... (260,449) (329,390) (649,963) (273,593) (53,397)
Proceeds from
disposition of assets.. -- 15,000 -- -- --
Organizational costs
incurred............... (162,929) -- -- -- --
Acquisition of business,
net of cash acquired... (99,003) -- -- -- --
Purchases of equipment
to be placed in
service................ -- (374,075) (16,773) -- (12,500)
----------- ----------- ----------- ----------- -----------
Net cash used in
investing activities... (522,381) (688,465) (666,736) (273,593) (65,897)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of bridge loans........ 265,000 3,857,500 6,397,508 651,708 115,700
Payments made on bridge
loans.................. -- -- (649,000) -- --
Payments made on due to
shareholders........... (707,956) (649,015) -- -- --
Payments on notes
payable................ -- (33,342) (70,768) (28,860) (5,652)
Cash paid for bridge
loan issue costs
incurred............... -- (76,954) (518,461) (2,100) --
Proceeds from issuance
of common stock, net... 2,598,323 99,000 -- -- 900
Repurchase of common
stock.................. (200,000) (99,000) -- -- --
Proceeds from issuance
of Series A convertible
preferred stock, net... -- (58,088) 1,016,023 -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities... 1,955,367 3,040,101 6,175,302 620,748 110,948
----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash................ 433,627 (269,730) 402,411 (254,203) (750,201)
Cash, beginning of
period................. 282,360 715,987 446,257 446,257 848,668
----------- ----------- ----------- ----------- -----------
Cash, end of period..... $ 715,987 $ 446,257 $ 848,668 $ 192,054 $ 98,467
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid during the
period for--
Interest.............. $ 26,585 $ 17,446 $ 33,099 $ -- $ --
Income taxes ......... -- -- -- -- --
SUPPLEMENTAL DISCLOSURE
OF SIGNIFICANT NONCASH
INVESTING AND FINANCING
ACTIVITIES:
Issuance of common stock
warrants............... $ 10,751 $ 41,555 $ 915,298 $ 31,274 $ 63,142
Trade accounts
receivable converted to
customer list.......... -- -- -- -- 85,000
Bridge loans and accrued
interest converted to
common stock, net...... -- -- 3,134,123 -- --
Deferred salaries
converted to common
stock warrants......... -- -- 1,184,856 -- --
Issuance of notes
payable to finance
common stock
repurchase............. 1,244,153 -- -- -- --
Issuance of notes
payable to finance
equipment purchases.... -- 125,652 -- -- --
Trade payables converted
to common stock........ -- -- 207,705 -- --
Issuance of common stock
in consideration of
bridge loan issue costs
incurred............... -- -- 127,407 -- --
Obligation to issue
common stock........... 8,400 -- 1,008,109 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-29
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1997 AND 1998 AND IS UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
GlobalTel Resources, Inc. ("GlobalTel"), a Washington corporation, was
formed on November 17, 1994, to provide international telecommunications
services. GlobalTel began operations in 1995 with its entry into the
international call-reorigination business. GlobalTel also markets long-
distance calling cards and enhanced voice services including voice mail and
conference calling.
On December 29, 1995, GlobalTel acquired GFP Group, Inc. ("GFP"), a
Washington corporation formed on September 15, 1995. GFP was formed primarily
for the purpose of acquiring Ratsten International Telecommunications, Inc.
d/b/a Netstar Telecommunications, Inc. ("Ratsten") and was thereafter acquired
by GlobalTel. Ratsten held certain license rights critical to GlobalTel's
mission of providing global telecommunications services.
GlobalTel provides global long-distance call-reorigination services through
Primecall, Inc., ("Primecall") a wholly owned subsidiary. GlobalTel began
generating revenue in March 1995. Prior to January 1, 1995, GlobalTel's sole
operations consisted of general and administrative activities, which amounted
to $75,638 for the period ended December 31, 1994.
GlobalTel has generated substantial operating losses and has a limited
operating history. GlobalTel must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of operations. Losses may continue until such time, if ever, that
GlobalTel is able to generate a level of revenue sufficient to offset its cost
structure. There can be no assurance that GlobalTel will achieve increased
revenue or profitable operations. To date, GlobalTel's losses have been
principally funded by a combination of common and preferred stock sales and
bridge loans, which mature in 1998 and 1999 (see Notes 3 and 5). As of July
21, 1998, approximately $1.1 million in bridge loans were in default. In
addition, GlobalTel will require additional capital to effect the Recission
Offer (see Note 6), to bring current approximately $3.1 million of certain
past due trade accounts payable as of June 19, 1998, and to finance its short-
and long-term growth strategies. To meet these obligations, management's plans
include merging (the "Merger") with Communications Systems International, Inc.
("CSI"), a communications company located in Colorado Springs, Colorado, which
has filed a registration statement for a public offering ("the CSI Offering")
of its common stock. However, there is no assurance that the CSI Offering or
Merger (which is contingent upon successful completion of the CSI Offering)
will be completed or that GlobalTel will operate profitably or will be
successful in capitalizing on perceived synergies of the Merger. These matters
raise substantial doubt about GlobalTel's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated Financial Statements
The accompanying consolidated financial statements include the financial
accounts of GlobalTel and its wholly owned subsidiaries, Primecall and GFP.
All intercompany transactions have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from those estimates.
F-30
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
Interim Results
The accompanying consolidated balance sheet as of March 31, 1998, and the
consolidated statements of operations, common stock subject to rescission and
shareholders' deficit and cash flows for the three-month periods ended March
31, 1997 and 1998 are unaudited. In the opinion of management, the interim
unaudited consolidated statements have been prepared on the same basis as the
historical audited consolidated financial statements and include all
adjustments, consisting of normal recurring adjustments necessary for the fair
statement of interim periods. The data disclosed in these notes to the
consolidated financial statements for these interim periods is also unaudited.
Recently Issued Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
(the "SOP") which requires costs of start-up activities and organization costs
to be expensed as incurred. Management adopted the SOP during the first
quarter of 1998, which did not have a material impact on GlobalTel's financial
position or results of operations.
During June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new
standards by which derivative financial instruments must be recognized in an
entity's financial statements. Besides bringing derivatives on balance sheets
at fair value, SFAS 133 generally requires that gains and losses from later
changes in a derivative's fair value be recognized currently in earnings. SFAS
133 also unifies qualifying criteria for hedges involving all kinds of
derivatives, requiring that a company document, designate and assess the
effectiveness of its hedges. SFAS 133 is required to be adopted by GlobalTel
in 2000. Management, however, does not expect the impact from this statement
to have a material impact on the consolidated financial statement
presentation, financial position or results of operations.
Cash
For purposes of the consolidated statements of cash flows, cash includes all
amounts on deposit with financial institutions. GlobalTel has no short-term
investments.
Property and Equipment
Property and equipment consist primarily of office furniture, computer and
telecommunications equipment. Property and equipment are recorded at cost and
are depreciated using the straight-line method over the estimated useful lives
of the related assets, which range from 5 to 10 years. Repairs, maintenance
and minor renewals are charged to expense as incurred. Major renewals and
betterments which substantially extend the useful life of the assets are
capitalized. Upon sale or other disposition of assets, the cost and the
related accumulated depreciation are removed from the accounts and a gain or
loss, if any, is reflected in the consolidated statements of operations.
Property and equipment is composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Telecommunications equipment.......... $ 336,466 $1,018,292 $1,071,688
Furniture, computers, fixtures and
other................................ 457,716 672,598 672,598
--------- ---------- ----------
794,182 1,690,890 1,744,286
Less--Accumulated depreciation........ (123,470) (318,736) (387,631)
--------- ---------- ----------
Property and equipment, net........... $ 670,712 $1,372,154 $1,356,655
========= ========== ==========
</TABLE>
F-31
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
GlobalTel recorded depreciation expense of $55,272, $76,884, $206,763,
$17,806 and $68,895 for the years ended December 31, 1995, 1996 and 1997 and
for the three-month periods ended March 31, 1997 and 1998, respectively.
Other Assets
Other assets consist primarily of a license agreement, customer list,
organizational costs, bridge loan issue costs and telecommunications equipment
to be placed in service. The license agreement purchased by GlobalTel (see
Note 7) is being amortized on a straight-line basis over 15 years. GlobalTel
recorded amortization expense related to the license agreement of $1,970,
$11,825, $11,825, $2,957 and $2,957 for the years ended December 31, 1995,
1996 and 1997 and for the three-month periods ended March 31, 1997 and 1998,
respectively.
In January 1998, the Company acquired a customer list from one of its
wholesale carriers in lieu of payment of accounts receivable owed to the
Company of approximately $85,000. The Company is amortizing this intangible
asset over a two-year period, and therefore recognized $10,625 in amortization
expense for the period ended March 31, 1998.
Bridge loan issue costs incurred in connection with obtaining bridge loans
have been deferred and are being amortized into interest expense on a
straight-line basis (which approximates the effective interest method) over
the terms of the loans. GlobalTel recognized $7,904, $28,999, $214,666,
$23,396 and $138,019 for the years ended December 31, 1995, 1996 and 1997, and
for the three-month periods ended March 31, 1997 and 1998, respectively, in
additional interest expense from amortization of the bridge loan issue costs.
For the years ended December 31, 1996 and 1997 and for the period ended
March 31, 1998, GlobalTel held telecommunications equipment to be placed in
service of $374,075, $519,688 and $532,188, respectively. GlobalTel had not
yet placed this equipment into service as certain components necessary to
complete the installation had not yet been acquired.
Certain organizational costs (primarily legal expenses) incurred in
connection with establishing and organizing GlobalTel and its subsidiaries had
been amortized on a straight-line basis over a period of five years. GlobalTel
recorded amortization expense related to these organizational costs of
$53,820, $9,579, $34,732, $8,683 and $8,683 for the years ended December 31,
1995, 1996 and 1997 and for the three-month periods ended March 31, 1997 and
1998, respectively. The remaining amount of organizational costs at March 31,
1998 were written off in accordance with GlobalTel's early adoption of the SOP
discussed above.
Accrued Liabilities
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Telecommunications costs.............. $ 511,550 $ 215,649 $ 365,646
Deferred salaries..................... 667,000 -- --
Accrued interest...................... 203,456 386,077 572,028
Other................................. 555,148 611,155 256,426
---------- ---------- ----------
$1,937,154 $1,212,881 $1,194,100
========== ========== ==========
</TABLE>
As of December 31, 1996, GlobalTel had deferred salaries payable to certain
members of GlobalTel's management. Interest accrued on the deferred balances
at an annual rate of 10%. During 1997, an additional $517,856 of deferred
salaries was accrued. During the year ended December 31, 1997, these deferred
salaries were converted to common stock warrants (see Note 3).
F-32
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
Equity-Based Compensation
GlobalTel accounts for employee equity-based compensation following the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." In accordance with the provisions
of APB 25, GlobalTel has not recognized deferred compensation or compensation
expense in connection with its equity-based plans as the exercise price of the
options granted was equal to the fair value of the underlying equity
instrument at the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires expanded
disclosures of equity-based compensation arrangements with employees and does
not require, but encourages, compensation cost to be measured based on the
fair value of equity instruments when awarded. GlobalTel, as allowed, intends
to continue to measure employee equity-based compensation under APB 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded.
Revenue Recognition and Cost of Revenue
Revenue and related cost of revenue are recognized in the period services
are provided. The related accruals for revenue, cost of revenue and customer
prepayments are included in the accompanying consolidated balance sheets.
Research and Development
Research and development costs are expensed as incurred, and are included in
general and administrative expense in the accompanying consolidated statements
of operations.
Income Taxes
GlobalTel accounts for income taxes using the asset and liability method. To
date, GlobalTel has fully reserved all net deferred tax assets.
Concentrations of Risk
During October 1996, GlobalTel began reselling international long-distance
service to other telecommunications carriers on a wholesale basis. As of
December 31, 1996, $793,000 of GlobalTel's accounts receivable was due from a
single telecommunications carrier. This receivable was fully collected during
the first quarter of 1997.
The geographic origin of revenue including domestic carrier resale revenue
of approximately $0, $793,000, and $4,298,000 for the years ended 1995, 1996
and 1997, respectively, and of approximately $1,970,000 and $228,000 for the
periods ended March 31, 1997 and 1998, respectively, approximates the
following:
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- ---------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Africa.................. $ 731,000 $3,180,000 $ 2,477,000 $ 738,000 $ 570,000
Asia.................... 361,000 1,550,000 1,345,000 355,000 158,000
Australia............... 130,000 557,000 1,352,000 424,000 101,000
Europe.................. 230,000 987,000 593,000 178,000 106,000
North America--United
States (includes
domestic wholesale
carrier revenue)....... 366,000 1,612,000 5,043,000 2,192,000 365,000
North America--other.... 5,000 17,000 285,000 2,000 29,000
South America........... 290,000 1,233,000 1,768,000 496,000 369,000
---------- ---------- ----------- ---------- ----------
$2,113,000 $9,136,000 $12,863,000 $4,385,000 $1,698,000
========== ========== =========== ========== ==========
</TABLE>
F-33
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
Cost of revenue as a percentage of revenue does not vary significantly from
region to region. There are no other direct costs incurred outside the United
States, nor does GlobalTel own material assets located outside of the United
States. The continued legality and competitive advantage of call-reorigination
businesses in certain foreign countries is uncertain due to changing
regulatory environments.
GlobalTel's call-reorigination business is facilitated by a single switch
located in Los Angeles, California.
Basic Loss Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," ("SFAS 128") which revises the calculation and
presentation of earnings per share. SFAS 128 is effective for GlobalTel's
fiscal year ending December 31, 1997, and retroactive application is required.
Basic loss per share for all periods presented in the accompanying
consolidated statements of operations has been computed under the provisions
of SFAS 128. As such, the anti-dilutive effects of convertible securities have
been excluded.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current period presentation.
3. SHAREHOLDERS' DEFICIT
Series A Convertible Preferred Stock
Each share of Series A convertible preferred stock is entitled to a dividend
at an annual rate of 6% of the issuance price, deferrable at the election of
GlobalTel but payable in preference to dividends on any other securities
issued by GlobalTel. All accrued and unpaid dividends on a share must be paid
before dividends on other securities. Each share is also entitled, in
liquidation, to a preferred distribution of the initial issuance price plus
all accrued but unpaid dividends. Each share is subject to automatic
conversion to common stock upon the sale of all or substantially all of the
assets of GlobalTel, an election to convert by two-thirds of the holders of
such shares, or upon the closing of an initial public offering ("IPO") of
GlobalTel, the net proceeds of which exceed $15 million if certain other
conditions are satisfied. Any unpaid cumulative dividends at the time of
conversion may be paid at the option of GlobalTel in cash, common stock, or as
notes payable to the preferred shareholders. Each share of Series A preferred
stock has a voting right based upon the number of shares of common stock into
which the Series A preferred stock would then be convertible, in addition to
certain demand and piggyback registration rights.
During 1996, GlobalTel incurred $58,088 in connection with its issuance of
Series A convertible preferred stock. These costs were capitalized as other
long-term assets in the accompanying December 31, 1996 consolidated balance
sheet and were subsequently reclassified as a charge to equity in connection
with GlobalTel's private placement of Series A convertible preferred stock.
Common Stock
During 1995, GlobalTel executed a stock purchase agreement with certain
common shareholders to buy back 262,573 shares of GlobalTel's common stock at
a price of $5.50 per share. GlobalTel paid $200,000 in cash and issued
$1,244,153 in promissory notes bearing interest at 8% to finance the
repurchase. These promissory notes were paid in full as of December 31, 1996.
During 1997, several bridge loan holders accepted an offer from GlobalTel to
convert their bridge loans in the amount of $2,835,208, and related unpaid
interest of $327,218 into 574,987 shares of common stock at a value equal to
$5.50 per share. The net amount of bridge loans converted to common stock
included a charge of approximately $28,000 relating to the unamortized bridge
loan issue costs that were simultaneously written off.
During September 1997, GlobalTel issued 24,242 shares of common stock with a
value of $133,333 to a former employee in satisfaction of GlobalTel's
obligations under the employee's severance agreement. The value
F-34
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE THREE-MONTH PERIOD
ENDED MARCH 31, 1998 IS UNAUDITED)
of the common stock issued was charged to compensation expense in the
accompanying consolidated statement of operations for the year ended December
31, 1997.
In November 1997, the Board of Directors ("the Board") approved a reverse
common stock split and increased the authorized number of common shares from
20 million to 50 million. The ratio of the reverse common stock split is 1:5.
All share and per share amounts have been retroactively adjusted in these
consolidated financial statements to reflect the reverse common stock split.
During 1997, an aggregate of $207,705 in trade payables due to certain
vendors were converted into 37,765 shares of common stock. Also during 1997,
GlobalTel issued 14,000 shares of common stock to certain Board members and
others in recognition of past services rendered to GlobalTel. GlobalTel
recognized consulting expense of $77,000 in connection with these stock
issuances.
During the first quarter of 1998, 18,000 shares of common stock were issued
upon the exercise of common stock warrants at an exercise price of $0.05 per
share.
Equity-Based Compensation
During 1996, GlobalTel approved the 1996 Stock Option Plan ("the Plan")
which provides for the granting of qualified and nonqualified stock options.
GlobalTel has reserved 520,000 shares of common stock for granting of stock
options under the Plan. During February 1998, GlobalTel's shareholders
approved an amendment to the Plan to increase the shares available for grants
to 700,000 shares of common stock. GlobalTel's Board has the authority to
determine all matters relating to options to be granted under the Plan,
including the selection of individuals to be granted options, the number of
shares to be subject to each option, the exercise price and the term and
vesting period, if any.
The following table summarizes activity related to stock options granted to
certain executives and employees of GlobalTel:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PRICE PER
SHARES SHARE
--------- ---------
<S> <C> <C>
Balance at December 31, 1994........................... -- $ --
Grants............................................... 73,100 5.50
Exercised............................................ -- --
Canceled............................................. -- --
-------
Balance at December 31, 1995........................... 73,100 5.50
Grants............................................... 128,926 5.50
Exercised............................................ -- --
Canceled............................................. (30,000) 5.50
-------
Balance at December 31, 1996........................... 172,026 5.50
Grants............................................... 143,600 5.50
Exercised............................................ -- --
Canceled............................................. (97,200) 5.50
-------
Balance at December 31, 1997........................... 218,426 5.50
Grants............................................... 259,000 5.50
Exercised............................................ -- --
Canceled............................................. -- --
-------
Balance at March 31, 1998.............................. 477,426 5.50
=======
</TABLE>
F-35
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
There were 63,609, 162,546 and 601,413 options exercisable as of December
31, 1996, 1997 and March 31, 1998 respectively. The outstanding options at
March 31, 1998 have a weighted average remaining contractual life of 8.9
years. As of March 31, 1998, there were 222,574 shares available for future
option grants.
Pro forma information regarding results of operations and loss per share is
required by SFAS 123 for awards granted after December 31, 1994 as if
GlobalTel had accounted for its stock-based awards to employees under a
valuation method permitted by SFAS 123. The value of GlobalTel's stock-based
awards to employees in 1996 and 1997 was estimated using the minimum value
method, which does not consider stock price volatility. Had compensation cost
for the Plan been determined consistent with SFAS 123, GlobalTel's net loss
for the years ended December 31, 1995, 1996 and 1997 would have been increased
to $1,748,144, $5,918,197 and $7,930,158, respectively. Also under SFAS 123,
GlobalTel's basic loss per share would have been increased to $2.78, $5.93 and
$6.53, respectively. Pro forma information has not been calculated for interim
unaudited periods.
The weighted average fair value per option of GlobalTel's stock-based awards
granted to employees was $1.05, $0.91 and $0.90 for the years ended December
31, 1995, 1996 and 1997, respectively, and was estimated assuming no expected
dividends and the following weighted average assumptions:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate............................ 5.4% 6.2% 6.1%
Expected life...................................... 4 years 3 years 3 years
</TABLE>
Common Stock Warrants
The following table summarizes activity related to warrants granted to
purchase GlobalTel's common stock (1995 activity was not significant):
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
YEAR ENDED 1996 YEAR ENDED 1997 ENDED 1998
---------------------- ----------------------- -----------------------
NUMBER NUMBER NUMBER
OF EXERCISE PRICE OF EXERCISE PRICE OF EXERCISE PRICE
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance....... 23,907 $0.00 158,617 $0.00-$5.50 640,342 $0.05-$5.50
Grants in connection
with certain bridge
loan issuances......... 78,910 5.50 209,489 3.50-5.50 7,000 5.50
Grants to consultants... 55,800 5.50 80,715 0.05-5.50 10,760 0.05
Deferred salaries
converted to warrants.. -- -- 215,428 0.05 -- --
Exercise of warrants.... -- -- (23,907) 0.00 (18,000) 0.05
------- ------- -------
Ending balance.......... 158,617 0.00-5.50 640,342 0.05-5.50 640,102 0.05-5.50
======= ======= =======
</TABLE>
In connection with the bridge loans issued by GlobalTel, warrants to
purchase 78,910, 209,489 and 7,000 shares of GlobalTel's common stock were
issued in 1996, 1997 and 1998, respectively. These warrants generally provide
for increases in the number of shares of common stock issuable if GlobalTel
has not closed a major financing transaction within specified periods. All of
these warrants were exercisable immediately upon issuance. GlobalTel estimated
the value of these warrants to be $41,555, $197,584 and $4,500 in 1996, 1997
and 1998 respectively.
GlobalTel also issued warrants to various individuals in consideration for
consulting and other services received. With respect to the 1996 warrants,
30,000 vest upon the earlier of two years or the filing of a registration
statement in connection with a public offering. The remaining 25,800 warrants
were exercisable
F-36
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE THREE-MONTH PERIOD
ENDED MARCH 31, 1998 IS UNAUDITED)
immediately upon issuance. The 1997 and 1998 warrants were also immediately
exercisable upon issuance. The fair market value of the 1996 warrants when
issued were not considered to be material. GlobalTel recognized consulting
expense of $187,993 and $58,642 with respect to the 1997 and 1998 grants,
respectively.
During 1997, certain former and current employees accepted common stock
warrants in lieu of salaries owed to them. Accordingly, deferred salaries of
$1,184,856 were converted into warrants to purchase 215,428 shares of common
stock with an exercise price of $0.05 per share. These warrants were
immediately exercisable upon issuance and have a three-year term.
During 1997, the Board amended certain common stock warrant agreements
whereby certain warrant holders could exercise their warrants at a price of
$3.50 per share in a cashless conversion to common stock rather than at the
original exercise price of $5.50 per share upon GlobalTel successfully
completing an IPO by April 30, 1998, at which time the amendments expired.
Warrant holders representing 264,760 shares of common stock had indicated
their intention to exercise their warrants under these amended terms. As a
result of the amendment to these warrant agreements, GlobalTel recognized
$529,521 of additional debt discount, of which $296,985 and $174,402 resulted
in additional interest expense in 1997 and for the first quarter of 1998,
respectively. The debt discount is being amortized on a straight line basis to
April 30, 1998.
4. INCOME TAXES
Significant components of GlobalTel's deferred tax assets and liabilities
(which have not been calculated for interim unaudited periods) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward................ $ 1,422,000 $ 3,330,000
Start-up costs................................. 813,000 1,618,000
Deferred compensation.......................... 227,000 152,000
Other deferred tax assets...................... 146,000 137,000
Valuation allowance............................ (2,528,000) (5,175,000)
----------- -----------
Total deferred tax assets.................... 80,000 62,000
Deferred tax liabilities:
Depreciation of furniture and equipment........ (24,000) (9,000)
Amortization of other long-term assets......... (56,000) (53,000)
----------- -----------
Net deferred taxes........................... $ -- $ --
=========== ===========
</TABLE>
GlobalTel's net operating loss carryforward of approximately $9,794,000 as
of December 31, 1997 is subject to limitations and expires in 2012. GlobalTel
has determined that its deferred tax assets do not satisfy the recognition
criteria set forth under the provisions of SFAS No. 109, "Accounting for
Income Taxes." Accordingly, a valuation allowance has been recorded against
the applicable deferred tax assets. Therefore, no tax benefits have been
recorded in the accompanying consolidated statements of operations. The
valuation allowance increased by $538,000, $1,990,000 and $2,647,000 during
1995, 1996 and 1997, respectively.
The difference between the statutory tax rate of approximately 34% and the
tax benefit of zero recorded by GlobalTel is primarily due to GlobalTel's full
valuation allowance against its net deferred tax assets.
F-37
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. BRIDGE LOANS
To fund operations and capital expenditures, GlobalTel obtained bridge loans
from certain investors, some of whom are shareholders or management of
GlobalTel. All bridge loans bear interest at 10% annually and in certain cases
increase to 12% to 18% if the loans are past due. In addition, stock warrants
were granted to certain of these investors as discussed in Note 3. Bridge
loans outstanding were:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Payable to shareholders and management:
Maturing through March 1996, due upon demand
after maturity date........................ $ 210,000 $ -- $ --
Maturing through January 1999, or upon
closing of an IPO, whichever is earlier.... 1,105,000 530,000 530,000
Maturing March 1999, payable in full or
convertible at the option of the holder to
common stock upon closing of additional
equity financing at the price per share
paid by investors in the equity financing.. -- 150,000 150,000
Maturing December 1999 or, upon closing of
an IPO, $1 million plus accrued interest
will be payable out of the proceeds of an
IPO and $1 million plus accrued interest
will be converted to common stock at a
price of $3.85 per share................... -- 2,000,000 2,000,000
Principal and accrued interest converted to
common stock in 1997....................... 500,000 -- --
Payable to third parties:
Maturing through March 1996, due upon demand
after maturity date........................ 55,000 -- --
Due upon demand............................. 150,000 -- --
Maturing through January 1999, or upon
closing of an IPO, whichever is earlier
($25,000 in default as of January 15,
1998)...................................... 1,202,500 45,000 45,000
Maturing June 1998 (in default as of June 5,
1998), convertible in whole or in part at
the option of the holder to: (i) common
stock upon closing of additional equity
financing over $15 million, at the price
per share paid by investors in the equity
financing or, (ii) at a conversion price to
common stock of the ratio of 1.5 times
annualized revenue over the number of
common shares outstanding.................. 900,000 1,070,000 1,070,000
Maturing March 1999, payable in full or
convertible at the option of the holder to
common stock upon closing of additional
equity financing at the price per share
paid by investors in the equity financing.. -- 400,000 400,000
Maturing January 1999, or upon closing of an
IPO, whichever is earlier.................. -- 2,840,800 2,956,500
---------- ---------- ----------
Total bridge loans............................ 4,122,500 7,035,800 7,151,500
Less:
Current portion (see Note 6)................ 1,840,000 1,995,000 4,576,928
Debt discount............................... -- 1,208,511 574,572
---------- ---------- ----------
Long-term bridge loans........................ $2,282,500 $3,832,289 $2,000,000
========== ========== ==========
</TABLE>
During November and December 1997, GlobalTel obtained additional bridge note
financing of $2,865,800, $25,000 of which was from a related party. During the
first quarter of 1998, an additional $115,700 was raised. These notes bear
interest at an annual rate of 10% and are due in full at the earlier of the
closing of an IPO or January 1999. In addition, following the closing of an
IPO, each holder of these notes will receive shares of
F-38
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE THREE-MONTH PERIOD
ENDED MARCH 31, 1998 IS UNAUDITED)
common stock equal to the initial principal amount of the note divided by the
IPO price per share. This obligation to issue stock was valued at $1,008,109
and is included as a component of shareholders' deficit in the accompanying
December 31, 1997 consolidated balance sheet. The offsetting charge was
recorded as debt discount and will be amortized to June 30, 1998. As of
December 31, 1997 and March 31, 1998 GlobalTel had recognized $146,838 and
$430,636, respectively, of additional interest expense from amortization of
the debt discount. If an IPO has not closed by July 1, 1998, these bridge note
holders will have the right to receive warrants to purchase shares of common
stock in lieu of the GlobalTel common stock issuable on closing of an IPO
equal to the initial principal amount of the note divided by $5.50. The
warrants associated with these bridge loans will have an exercise price of
$5.50 per share. Closing costs incurred associated with these notes included
approximately $280,000 in cash and 23,165 shares of common stock at $5.50 per
share. The total amount of this consideration was recorded as bridge loan
issue costs to be amortized over the life of the loan. GlobalTel's legal
counsel has advised management that the CSI Offering would not qualify as "an
IPO" as described above.
6. SECURITIES SUBJECT TO RESCISSION
GlobalTel believes that certain of its outstanding shares of common stock
("Rescission Stock") and bridge loans and warrants to purchase shares of
common stock (collectively, the "Rescission Securities") may have been issued
in violation of certain state securities laws. As a result, in June 1998,
GlobalTel executed an offer to rescind such prior sales by offering to
repurchase the Rescission Securities (the "Rescission Offer") at the price
originally paid plus interest at the annual statutory rate of eight percent
from the date of purchase to the expiration of the Rescission Offer. However,
completion of the Rescission Offer is conditioned upon the successful
completion of the proposed Merger and CSI Offering. Accordingly, if such
conditions are not satisfied, the Rescission Offer will by its terms terminate
without any future obligation to the GlobalTel. Due to the nature of the
Rescission Offer, the shares of common stock and bridge loans making up the
Rescission Securities have been classified as common stock subject to
rescission and current liabilities, respectively, in the accompanying
consolidated financial statements. As of March 31, 1998, there were 496,466
shares of common stock, $805,000 in aggregate principal amounts of bridge
loans and warrants to purchase an aggregate of approximately 31,000 shares of
common stock identified for possible rescission.
On July 20, 1998, GlobalTel completed the Rescission Offer. As a result,
security holders representing approximately $740,000 including statutory
interest of Rescission Securities indicated their acceptance of the Rescission
Offer. However, payment for the Rescission Securities tendered pursuant to the
Rescission Offer is conditioned upon completion of the CSI Offering and the
Merger. A portion of the net proceeds of the CSI Offering will be used to fund
these payments pursuant to the repurchase of the Rescission Securities. There
can be no assurance that the proposed Merger and CSI Offering will be
successfully completed. The consolidated financial statements do not include
any adjustments that might result from the outcome of the Rescission Offer.
Furthermore, notwithstanding the Rescission Offer, there can be no assurance
that GlobalTel will not be subject to penalties or fines relating to past
issuances or that other holders of securities from GlobalTel will not assert
or prevail in claims against GlobalTel for rescission or damages under state
or federal securities laws. Because of the contingent nature of this
liability, the potential interest liability with respect to respect to
Rescission Stock has not been accrued in the accompanying consolidated
financial statements, but will be recorded as an expense and a liability if
and when the Merger and CSI Offering are completed. The statutory rate of
interest with respect to the bridge loans covered by the Rescission Offer is
less than the interest that has already been accrued by GlobalTel under the
original terms of the bridge loans.
F-39
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
7. ACQUISITIONS
Ratsten International Telecommunications, Inc.
On October 18, 1995, GFP purchased 50% of the outstanding common stock of
Ratsten for $100,000 and the other 50% for 108,791 shares of GFP's common
stock in a business acquisition accounted for using the purchase method of
accounting, the purpose of which was to acquire certain licensing rights held
by Ratsten. Prior to the Ratsten acquisition, GFP had issued 108,000 shares of
common stock to its founders. In total, GFP's common stock issued was valued
at approximately $91,600. Of the total purchase price, including the
obligation to issue shares described below, $177,368 was assigned to the
license agreement, with the remainder assigned to certain assets acquired and
liabilities assumed. No goodwill was recognized from the purchase. The sellers
of Ratsten made certain warranties to GlobalTel, primarily that the license
agreement was valid and fully transferable to GFP after the purchase.
The acquisition agreement included an obligation for the issuance of an
additional 60,000 shares of GlobalTel's common stock to the sellers of one-
half of Ratsten, contingent upon GlobalTel obtaining additional financing
(other than bridge funding) in excess of a certain amount. This contingent
obligation was valued at approximately $8,400 as of the date of the agreement.
During the year ended December 31, 1997, 30,000 of these shares had been
issued.
GFP
On December 29, 1995, pursuant to a share exchange agreement and statutory
share exchange, GlobalTel issued 216,791 of voting common stock on a one-for-
one basis for all of GFP's issued and outstanding common stock. GFP's only
significant asset was the license agreement which had been acquired from
Ratsten in anticipation of the share exchange agreement. GFP did not have any
material operations during the period from its inception through December 29,
1995.
8. COMMITMENTS AND CONTINGENCIES
Leases
GlobalTel has entered into noncancelable operating lease agreements
involving office space and equipment, certain telecommunications equipment and
licensing agreements with lease terms extending through 2006.
F-40
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
Minimum lease payments are subject to change as provided for in the lease
agreements. GlobalTel's future minimum noncancelable lease payments as of
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1998........................................................ $ 577,958
1999........................................................ 329,259
2000........................................................ 276,931
2001........................................................ 61,181
2002........................................................ 60,482
Thereafter.................................................. 216,726
----------
$1,522,537
==========
</TABLE>
Lease expense for the years ended December 31, 1995, 1996 and 1997 was
$125,413, $442,292, and $883,421, respectively, and was $103,339 and $195,619
for the three-month periods ended March 31, 1997 and 1998, respectively.
Employment Agreements
In March 1998, GlobalTel executed employment agreements with certain of its
officers which provide for annual salaries totalling approximately $630,000
and expire in 1999. GlobalTel also issued options pursuant to these agreements
to purchase 240,000 shares of common stock under the Plan at an exercise price
of $5.50 per share.
9. SUBSEQUENT EVENTS
Merger and CSI Offering
On April 22, 1998, GlobalTel entered into a letter of intent with CSI
whereby CSI will acquire all of the outstanding common stock of GlobalTel
through the issuance of CSI's common stock in the Merger based on a conversion
formula to be determined. The Merger is contingent on successful completion of
the CSI Offering, which must gross at least $20 million of net proceeds. This
letter of intent was finalized on May 29, 1998 and was approved by the
GlobalTel shareholders on June 26, 1998. On July 21, 1998, CSI filed an
amended registration statement with the Securities and Exchange Commission
related to the CSI Offering.
Conversion of Series A Convertible Preferred Stock
On May 29, 1998, the Board approved a conversion agreement whereby
GlobalTel's Series A preferred stock would be converted into common stock
prior to the Merger at a conversion ratio of .727 preferred shares exchanged
for one share of common stock. The conversion agreement was approved by the
preferred shareholders on June 24, 1998.
CSI Loan
As of May 11, 1998, CSI had loaned GlobalTel $500,000 at 20% interest to be
repaid by May 1999, for which CSI obtained a security interest in certain
assets of GlobalTel. In addition, CSI obtained a personal guaranty of the loan
by GlobalTel's chief executive officer (CEO). In return, GlobalTel's CEO
received a second position security interest behind CSI in certain assets of
GlobalTel, as well as a guarantor's fee equal to 10% of the amount loaned by
CSI to GlobalTel, which was paid in cash out of the proceeds loaned to
GlobalTel.
F-41
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
Bridge Loan Amendments
In July 1998, GlobalTel amended certain bridge loan agreements such that
approximately $1.4 million including accrued interest currently maturing in
January 1999 will convert to CSI stock upon closing of the CSI Offering. Also,
approximately $0.7 million of bridge loans currently due January 1999 were
extended to August 1999 and the related interest rate was increased to 14%
beginning July 18, 1998. In addition, the obligation to issue common stock
discussed in Note 5 was amended such that CSI shares rather than GlobalTel
shares of common stock will be issued upon completion of the CSI Offering in
an amount equal to the initial principal amount of the notes divided by the
CSI Offering price per share, subject to certain transfer restrictions. With
respect to the holders of $1.4 million in bridge loans discussed above, the
amount of CSI stock issued will be calculated at an 85% discount of the CSI
Offering price per share. These bridge loan amendments are contingent upon
successful completion of the CSI Offering, which must be completed no later
than December 31, 1998, after which the amended terms will expire.
F-42
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
International Telephone Company
Meriden, Connecticut
We have audited the accompanying balance sheets of International Telephone
Company (ITC) as of December 31, 1996 and October 31, 1997 and the related
statements of operations, changes in shareholders' equity (capital deficiency)
and cash flows for the years ended December 31, 1995 and December 31, 1996 and
the ten months ended October 31, 1997. These financial statements are the
responsibility of ITC's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements enumerated above present fairly, in
all material respects, the financial position of International Telephone
Company, at December 31, 1996 and October 31, 1997 and the results of its
operations and its cash flows for the years ended December 31, 1995 and
December 31, 1996 and the ten months ended October 31, 1997, in accordance
with generally accepted accounting principles.
As discussed in Note G[2], one of ITC's carriers has initiated litigation
against ITC for collection of approximately $1.1 million.
Richard A. Eisner & Company, LLP
New York, New York
December 12, 1997
F-43
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER
31, OCTOBER 31, MARCH 31,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Notes B[1]
and D)............................... $ 218,000 $ 848,000 $ 980,000
Accounts receivable (net of allowance
for doubtful accounts of $25,000,
$57,000 and $35,000)................. 1,250,000 1,045,000 1,374,000
Due from CSI (Note K)................. 84,000
Other current assets.................. 15,000 57,000 138,000
----------- ----------- -----------
Total current assets................ 1,483,000 1,950,000 2,576,000
Furniture and equipment (net of accumu-
lated depreciation of $130,000,
$87,000, and $134,000) (Notes B[4] and
C)..................................... 343,000 640,000 628,000
Security deposits....................... 130,000 130,000 130,000
----------- ----------- -----------
$ 1,956,000 $ 2,720,000 $ 3,334,000
=========== =========== ===========
LIABILITIES
Current liabilities:
Loan payable (Note D)................. $ 66,000 $ 3,000
Accounts payable (Note G)............. 1,224,000 2,463,000 $3,228,000
Accrued expenses...................... 142,000 67,000 111,000
Accrued commissions................... 165,000 145,000 200,000
Customer advances..................... 170,000 150,000 175,000
Due to shareholders................... 100,000 47,000
Deferred taxes........................ 6,000
Equipment lease obligations--current
portion (Note E)..................... 93,000 281,000 238,000
----------- ----------- -----------
Total current liabilities........... 1,866,000 3,209,000 3,999,000
Equipment lease obligations, less cur-
rent portion (Note E).................. 21,000 292,000 234,000
----------- ----------- -----------
1,887,000 3,501,000 4,233,000
----------- ----------- -----------
Commitments and contingencies (Note G)
SHAREHOLDERS' EQUITY (CAPITAL
DEFICIENCY)
Common stock--$.01 par value, 1,200
shares authorized, 1,200 shares issued
and outstanding........................
Additional paid-in capital.............. 1,000 1,000 1,000
Accumulated deficit..................... 68,000 (782,000) (900,000)
----------- ----------- -----------
Total shareholders' equity (capital
deficiency)........................ 69,000 (781,000) (899,000)
----------- ----------- -----------
$ 1,956,000 $ 2,720,000 $ 3,334,000
=========== =========== ===========
</TABLE>
See notes to financial statements
F-44
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TEN MONTHS THREE MONTHS ENDED FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED ---------------------- ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 31, MARCH 31, MARCH 31, MARCH 31,
1995 1996 1997 1997 1998 1998
------------ ------------ ----------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating revenue:
Telecommunication
services (Notes B[2]
and H)............... $8,197,000 $ 7,603,000 $ 8,054,000 $2,126,000 $2,610,000 $4,563,000
---------- ----------- ----------- ---------- ---------- ----------
Operating expenses:
Cost of telecommunica-
tion services (Note
B[3])................ 5,407,000 5,070,000 6,790,000 1,698,000 1,978,000 3,499,000
Selling expenses (Note
B[3])................ 1,220,000 1,099,000 715,000 211,000 252,000 412,000
General and adminis-
trative expenses..... 870,000 1,022,000 1,205,000 353,000 382,000 672,000
Officers salaries..... 332,000 493,000 256,000 77,000 69,000 94,000
---------- ----------- ----------- ---------- ---------- ----------
7,829,000 7,684,000 8,966,000 2,339,000 2,681,000 4,677,000
---------- ----------- ----------- ---------- ---------- ----------
Income (loss) from oper-
ations before other in-
come (expense)......... 368,000 (81,000) (912,000) (213,000) (71,000) (114,000)
Other income (expense):
Miscellaneous......... 101,000
Consulting fee........ 113,000
Loss on sale of equip-
ment................. (22,000) (22,000)
Interest income....... 8,000 12,000 28,000 5,000 12,000 20,000
Interest expense...... (11,000) (21,000) (57,000) (3,000) (12,000) (24,000)
---------- ----------- ----------- ---------- ---------- ----------
Income (loss) before
income tax provision... 365,000 11,000 (850,000) (233,000) (71,000) (118,000)
Income tax provision
(Note F)............... 21,000 4,000 0 0 0 0
---------- ----------- ----------- ---------- ---------- ----------
Net income (loss)....... $ 344,000 $ 7,000 $ (850,000) $ (233,000) $ (71,000) $ (118,000)
========== =========== =========== ========== ========== ==========
</TABLE>
See notes to financial statements
F-45
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
COMMON STOCK
1,200 SHARES
AUTHORIZED
---------------- RETAINED SHAREHOLDERS'
NUMBER OF ADDITIONAL EARNINGS EQUITY
SHARES PAID-IN (ACCUMULATED (CAPITAL
ISSUED AMOUNT CAPITAL DEFICIT) DEFICIENCY)
--------- ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance--January 1,
1995................... 1,200 $ 0 $1,000 $(283,000) $(282,000)
Net income for the year
ended December 31,
1995................... 344,000 344,000
----- --- ------ --------- ---------
Balance--December 31,
1995................... 1,200 0 1,000 61,000 62,000
Net income for the year
ended December 31,
1996................... 7,000 7,000
----- --- ------ --------- ---------
Balance--December 31,
1996................... 1,200 0 1,000 68,000 69,000
Net loss for the ten
months ended October
31, 1997............... (850,000) (850,000)
----- --- ------ --------- ---------
Balance--October 31,
1997................... 1,200 0 1,000 (782,000) (781,000)
Net loss for the five
months ended March 31,
1998 (unaudited)....... (118,000) (118,000)
----- --- ------ --------- ---------
Balance--March 31, 1998
(unaudited)............ 1,200 $ 0 $1,000 $(900,000) $(899,000)
===== === ====== ========= =========
</TABLE>
See notes to financial statements
F-46
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TEN MONTHS THREE MONTHS ENDED FIVE MONTHS
YEAR ENDED DECEMBER 31, ENDED --------------------- ENDED
------------------------ OCTOBER 31, MARCH 31, MARCH 31, MARCH 31,
1995 1996 1997 1997 1998 1998
----------- ----------- ----------- ---------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)..... $ 344,000 $ 7,000 $ (850,000) $ (233,000) $(71,000) $(118,000)
Adjustments to recon-
cile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation......... 53,000 69,000 73,000 16,000 30,000 50,000
Provision for doubt-
ful accounts........ 195,000 43,000 25,000 32,000 10,000
Loss on sale of
equipment........... 22,000 22,000
Deferred taxes....... 4,000 2,000 (6,000)
Changes in:
Accounts receiv-
able............... (1,206,000) (33,000) 180,000 8,000 (108,000) (339,000)
Other assets........ 13,000 1,000 (42,000) (29,000) (17,000) (81,000)
Security deposits... (107,000)
Customer advance
payments........... 129,000 38,000 (20,000) 25,000
Commissions pay-
able............... 140,000 (24,000) (20,000) (15,000) 22,000 55,000
Accrued expenses.... 50,000 91,000 (74,000) (98,000) 110,000 44,000
Accounts payable.... 901,000 108,000 1,239,000 142,000 595,000 765,000
Income taxes pay-
able............... 17,000 (16,000) (1,000)
Due to CSI.......... (344,000) (84,000)
Due to Sharehold-
ers................ 100,000 104,000 (34,000) (53,000)
----------- ----------- ---------- ---------- -------- ---------
Net cash provided
by (used in)
operating activi-
ties............. 533,000 286,000 626,000 (51,000) 183,000 274,000
----------- ----------- ---------- ---------- -------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of furniture
and equipment........ (152,000) (29,000) (17,000) (3,000) (29,000) (38,000)
Proceeds from sale of
equipment............ 259,000 259,000
----------- ----------- ---------- ---------- -------- ---------
Net cash provided
by (used in)
investing activi-
ties............. (152,000) (29,000) 242,000 256,000 (29,000) (38,000)
----------- ----------- ---------- ---------- -------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from (repay-
ments of) loan pay-
able................. 66,000 (63,000) 149,000 (3,000) (3,000)
Payments under capital
leases............... (41,000) (112,000) (175,000) (22,000) (76,000) (101,000)
Repayment of loan from
shareholder.......... (180,000)
Repayment of note pay-
able................. (70,000) (140,000)
----------- ----------- ---------- ---------- -------- ---------
Net cash provided
by (used in)
financing activi-
ties............. (291,000) (186,000) (238,000) 127,000 (79,000) (104,000)
----------- ----------- ---------- ---------- -------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS....... 90,000 71,000 630,000 332,000 75,000 132,000
Cash and cash equiva-
lents--beginning of pe-
riod................... 57,000 147,000 218,000 218,000 905,000 848,000
----------- ----------- ---------- ---------- -------- ---------
CASH AND CASH
EQUIVALENTS--END OF
PERIOD................. $ 147,000 $ 218,000 $ 848,000 $ 550,000 $980,000 $ 980,000
=========== =========== ========== ========== ======== =========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid during the
period for:
Interest............ $ 11,000 $ 21,000 $ 57,000 $ 3,000 $ 12,000 $ 24,000
Income taxes........ 26,000
SUPPLEMENTAL DISCLOSURE
OF NONCASH FINANCING
ACTIVITIES:
Equipment acquired under
capital lease obliga-
tions (Note E)......... 267,000 634,000 634,000
Note payable issued as
full settlement of
telecommunication costs
previously incurred.... 246,000
</TABLE>
See notes to financial statements
F-47
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO DATA AS OF MARCH 31, 1998 AND FOR THE PERIODS ENDED
MARCH 31, 1997 AND MARCH 31, 1998)
NOTE A--ORGANIZATION AND BUSINESS
International Telephone Company ( "ITC") was organized in the State of
Delaware on March 3, 1993. ITC operates an international telecommunications
system offering long distance telephone service to corporations and
individuals located outside the United States.
ITC incurred a loss of $850,000 during the ten months ended October 31,
1997, including a $1.1 million claim against ITC by a carrier for usage
charges that ITC is disputing (see Note G[2]). ITC intends to vigorously
defend such claim and is attempting to settle with the carrier. If ITC is not
successful in its defense or in reaching a settlement, ITC believes that by
reducing its administrative expenses, including officers' compensation, the
cash flow from operations will be sufficient for ITC to pay such claim and to
operate as a going concern. In addition, ITC believes that it will be able to
obtain financing, if necessary.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) Cash equivalents:
ITC considers money-market funds to be cash equivalents.
(2) Revenue recognition:
Telecommunication revenue is recognized at the time services are provided.
(3) Cost of telecommunication revenue and selling expenses:
Cost of telecommunication services are recorded as incurred and consist
principally of charges from carriers for long distance services. Selling
expenses includes commissions to agents, which are recorded net of chargebacks
for amounts deemed uncollectible in the period the related services were
provided.
(4) Depreciable assets:
Depreciable assets, consisting principally of telecommunication related
equipment such as switches and computer equipment, are stated at cost.
Equipment acquired under capital leases is stated at the present value of the
future minimum lease payments.
Depreciation is provided for using the straight-line method over the
estimated useful lives of the assets which range from five to seven years.
Equipment under capital leases is depreciated over the estimated useful life
of the equipment, which is generally longer than the terms of the leases since
the leases generally contain bargain purchase options which ITC intends to
exercise.
(5) Use of estimates in the preparation of financial statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-48
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO DATA AS OF MARCH 31, 1998 AND FOR THE PERIODS ENDED
MARCH 31, 1997 AND MARCH 31, 1998)
(6) Deferred income taxes:
ITC provides for income taxes using the asset and liability method under
which deferred income taxes are recognized for the estimated future tax
consequences attributable to net operating loss carryforwards and temporary
differences between the basis of assets and liabilities for financial and tax
reporting purposes. Such differences relate primarily to depreciation and
equipment acquired under capital leases.
(7) Interim Financial Statements:
In the opinion of management, the unaudited balance sheet as of March 31,
1998, and the unaudited statements of operations and cash flows for the three-
month periods ended March 31, 1997 and March 31, 1998, and for the five-month
period ended March 31, 1998 reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the information set forth
therein. The results of operations for interim periods are not necessarily
indicative of results for the full year.
NOTE C--FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31, MARCH 31,
1996 1997 1998
------------ ----------- ---------
<S> <C> <C> <C>
Telecommunications equipment............... $398,000 $634,000 $634,000
Furniture and fixtures..................... 6,000 6,000 8,000
Office equipment........................... 69,000 87,000 120,000
-------- -------- --------
473,000 727,000 762,000
Less accumulated depreciation and amortiza-
tion...................................... 130,000 87,000 134,000
-------- -------- --------
$343,000 $640,000 $628,000
======== ======== ========
</TABLE>
NOTE D--LOAN PAYABLE
ITC has a $250,000 line of credit, which expires on September 30, 1998, with
a financial institution. At October 31, 1997 the balance due under this line
of credit was $3,000, which is collateralized by the assets of ITC, including
cash on deposit with such institution. At March 31, 1998 this balance was
paid. Amounts due under the line of credit bear interest at prime plus 1.5%.
NOTE E--CAPITAL LEASE OBLIGATIONS
ITC leases equipment under agreements with original terms of thirty-six
months, which are accounted for as capital leases. During the ten months ended
October 31, 1997, ITC acquired telecommunications equipment with a cost of
$634,000 under a capital lease. Simultaneously, ITC exchanged
telecommunications equipment with a book value of $281,000 and received
proceeds of $259,000, resulting in a loss on the exchange of $22,000. The net
book value of equipment held under capital lease was $196,000, $609,000 and
$544,000, respectively, at December 31, 1996, October 31, 1997 and March 31,
1998.
Future annual lease payments at October 31, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................................... $288,000
1999............................................................... 247,000
2000............................................................... 111,000
--------
646,000
Less amounts representing interest................................. 73,000
--------
Present value of future lease payments at October 31, 1997......... 573,000
Less amounts due within one year................................... 281,000
--------
Amounts due after one year......................................... $292,000
========
</TABLE>
F-49
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO DATA AS OF MARCH 31, 1998 AND FOR THE PERIODS ENDED
MARCH 31, 1997 AND MARCH 31, 1998)
NOTE F--INCOME TAXES
The provision for federal and state income taxes is comprised of the
following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1995 1996
------- ------
<S> <C> <C>
Current:
Federal........................................................ $11,000 $1,000
State.......................................................... 6,000 0
------- ------
17,000 1,000
------- ------
Deferred:
Federal........................................................ 3,000 2,000
State.......................................................... 1,000 1,000
------- ------
4,000 3,000
------- ------
$21,000 $4,000
======= ======
</TABLE>
At October 31, 1997 and March 31, 1998, ITC has a net operating loss
carryforward of approximately $1,000,000 and $1,100,000, respectively,
resulting principally from its loss for income tax purposes for the ten months
ended October 31, 1997 and March 31, 1998. As a result, ITC has a deferred tax
asset of approximately $400,000 at October 31, 1997 and March 31, 1998. ITC
has provided a valuation allowance, which increased by approximately $300,000
and during the ten months ended October 31, 1997, against the entire deferred
tax asset. Accordingly, there is no provision for federal and state income
taxes for the ten months ended October 31, 1997 and the three months ended
January 31, 1998.
The deferred tax liability of approximately $100,000 at October 31, 1997 and
March 31, 1998, respectively, represents the anticipated future tax
consequences attributable to temporary differences between the basis of assets
and liabilities for financial and tax reporting purposes. Such differences
relate to depreciation and the acquisition of equipment under a capital lease.
The difference between the tax provision (benefit) and the amount that would
be computed by applying the statutory federal income tax rate to income before
taxes is attributable to the following:
<TABLE>
<CAPTION>
TEN MONTHS THREE MONTHS ENDED FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED -------------------- ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 31, MARCH 31, MARCH 31, MARCH 31,
1995 1996 1997 1997 1998 1998
------------ ------------ ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax pro-
vision (benefit) at
statutory rate......... $ 124,000 $ 3,000 $(289,000) $(79,000) $(24,000) $(40,000)
Provision (benefit) for
state income
taxes--net of U.S. fed-
eral taxes............. 4,000 1,000 (34,000) (10,000) (3,000) (5,000)
Valuation allowance..... (107,000) 323,000 89,000 27,000 45,000
--------- -------- --------- -------- -------- --------
$ 21,000 $ 4,000 $ 0 $ 0 $ 0 $ 0
========= ======== ========= ======== ======== ========
</TABLE>
F-50
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO DATA AS OF MARCH 31, 1998 AND FOR THE PERIODS ENDED
MARCH 31, 1997 AND MARCH 31, 1998)
NOTE G--COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
[1] Operating leases:
ITC is subject to operating leases for its office space in Florida and
Connecticut, which include escalation clauses for increases in real estate
taxes and certain operating expenses. Rent expense for the years ended
December 31, 1995 and 1996, for the ten months ended October 31, 1997, and the
three months and five months ended March 31, 1998 totaled $51,000, $69,000,
$73,000, $16,000 and $26,000, respectively.
Future minimum lease payments at October 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
OCTOBER 31,
-----------
<S> <C>
1998................................................................. $50,000
1999................................................................. 26,000
2000................................................................. 21,000
-------
$97,000
=======
</TABLE>
In March 1998 the Company entered into an amendment of its Florida lease,
which provides for additional space, an increase in rent of approximately
$22,000 per year and an extension of the lease term from August 1998 to July
2001.
[2] Carrier payables:
Pursuant to an agreement, ITC was committed to purchase transmission
capacity from a certain carrier. ITC has requested credits from the carrier
for minimum usage charges and losses incurred in connection with the
unavailability of sufficient capacity. As a result a significant balance due
to the carrier became past due. The carrier has initiated litigation against
ITC for collection of approximately $1.1 million, which is included in
accounts payable at October 31, 1997. ITC intends to vigorously defend its
position and will continue to try to reach a settlement with the carrier.
In May 1997, a carrier agreed to issue a credit for $210,000 in connection
with the settlement of charges disputed by ITC and ITC agreed to pay the
outstanding balance by December 1, 1997. The carrier subsequently presented an
invoice to ITC which did not reflect such credit and ITC believes that such
statement does not acknowledge a $100,000 payment made in January 1997. As a
result, ITC has not made the scheduled payments and accounts payable at
October 31, 1997 includes $400,000 due to this carrier.
[3] Concentration of carriers:
ITC purchases transmissions capacity from a limited number of domestic
telephone carriers. ITC purchased 75% of such capacity from 3 telephone
carriers and 85% of such capacity from 3 carriers during the year ended
December 31, 1996 and the ten months ended October 31, 1997, respectively. ITC
purchased substantially all of such capacity from 5 carriers during the five
months ended March 31, 1998, including approximately 40% from one carrier.
[4] Concentration of agents:
During the years ended December 31, 1995 and 1996, the ten months ended
October 31, 1997 and the five months ended March 31, 1998, 3 agents were
responsible for 65%, 3 agents were responsible for 66%, 3 agents were
responsible for 53%, and 5 agents were responsible for 77%, of ITC's
telecommunications revenue, respectively.
F-51
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO DATA AS OF MARCH 31, 1998 AND FOR THE PERIODS ENDED
MARCH 31, 1997 AND MARCH 31, 1998)
NOTE H--TELECOMMUNICATION REVENUE:
The information below summarizes telecommunication revenue by geographic
area:
<TABLE>
<CAPTION>
TEN MONTHS FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 31, MARCH 31,
1995 1996 1997 1998
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Europe........................ $ 3,429,000 $ 2,742,000 $2,416,000 $ 972,000
Africa........................ 2,525,000 2,508,000 2,511,000 1,425,000
Middle East................... 1,403,000 1,095,000 1,593,000 1,223,000
Latin America................. 614,000 626,000 1,110,000 722,000
Asia.......................... 88,000 529,000 74,000 11,000
Other......................... 138,000 103,000 350,000 210,000
----------- ----------- ---------- ----------
$ 8,197,000 $ 7,603,000 $8,054,000 $4,563,000
=========== =========== ========== ==========
</TABLE>
NOTE I--OTHER INCOME
During the year ended December 31, 1996, ITC recognized $100,000 of income
from a nonrefundable deposit received in connection with a potential
transaction which did not close by the agreed upon date.
During the ten months ended October 31, 1997, ITC recognized $113,000 of
consulting fees in connection with assisting another telecommunications
company in settling its charges with a carrier.
NOTE J--REGULATORY MATTERS
In June 1993, the Federal Communications Commission (the "FCC") granted the
ITC's Application for Authority under Section 214 of the Communications Act of
1934, as amended. Pursuant to such action, ITC is authorized to resell the
public switched telecommunications services of other U.S. carriers.
ITC is subject to regulation in other countries in which it does business.
ITC believes that an adverse determination as to the permissibility of the
ITC's services under the laws and regulations of any such country would not
have a material adverse long-term effect on its business.
NOTE K--PROPOSED SALE OF ITC
ITC and its stockholders have signed an agreement relating to the purchase
by Communications Systems International, Inc. ("CSI"), another
telecommunications company, of all of the outstanding shares of common stock
of ITC, pursuant to certain conditions. ITC's stockholders have received
$150,000 from CSI in connection with such anticipated sale. ITC and CSI
utilize each others' transmission capacity. During the three months and five
months ended March 31, 1998, ITC incurred telecommunications charges
aggregating approximately $179,000 and $294,000 and recognized
telecommunications revenue of approximately $203,000 and $246,000 from CSI.
There were no significant telecommunications charges incurred or
telecommunications revenue earned from CSI during the year ended December 31,
1996 or the ten months ended October 31, 1997.
F-52
<PAGE>
[Inside back cover containing a map of the world with the phrases,
"International Long Distance," "Calling Cards," "Enhanced Voice Services,"
"Voice Mail," "Conference Calling," "Global Fax Messaging" and "Business
Internet Services." Above the map is the name, "CS International."]
1
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY DISTRIBUTIONS MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THE PRO-
SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY CSI OR THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTI-
TUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURI-
TIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICA-
TION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSE-
QUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 3
Risk Factors............................................................. 7
The Acquisitions......................................................... 23
Use of Proceeds.......................................................... 25
Dividend Policy.......................................................... 26
Price Range of Common Stock.............................................. 27
Dilution................................................................. 28
Capitalization........................................................... 29
Selected Financial Data.................................................. 30
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 32
Business................................................................. 55
Management............................................................... 73
Principal and Selling Shareholders....................................... 80
Certain Transactions..................................................... 82
Description of Securities................................................ 87
Rescission Offer......................................................... 89
Shares Eligible for Future Sale.......................................... 91
Underwriting............................................................. 92
Legal Matters............................................................ 95
Experts.................................................................. 95
Reports to Securityholders .............................................. 96
Additional Information................................................... 96
Glossary of Terms........................................................ 97
Index to Financial Statements............................................ F-1
</TABLE>
--------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,000,000 SHARES
[LOGO OF COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. APPEARS HERE]
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
COMMON STOCK
----------------------
P R O S P E C T U S
----------------------
CRUTTENDEN ROTH
INCORPORATED
FERRIS, BAKER WATTS
INCORPORATED
JOHN G. KINNARD AND COMPANY,
INCORPORATED
KAUFMAN BROS., L.P.
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO A TIME THE REGISTRATION STATEMENT BECOMES +
+EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE +
+SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALES OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE LAWS OF ANY SUCH +
+STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE FOR REGISTERED SECURITYHOLDERS' PROSPECTUS]
SUBJECT TO COMPLETION, DATED JULY 21, 1998
PROSPECTUS
1,191,145 SHARES
[LOGO OF COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. APPEARS HERE]
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
COMMON STOCK
This Prospectus relates to the offer and sale by certain Securityholders
(collectively, the "Registered Securityholders") of a maximum of 1,191,145
shares of Common Stock of Communications Systems International, Inc. and shares
underlying warrants that were issued in private placements (collectively, the
"Registered Securityholders' Shares"). The Registered Securityholders' Shares
are not part of the concurrent underwritten offering and may not be offered or
sold for periods ranging from 180 days to one year from the date of this
Prospectus without the consent of Representatives. The Company will not receive
any proceeds from the sale of the Registered Securityholders' Shares. See
"Registered Securityholders and Plan of Distribution."
Prior to this Offering, the Common Stock was traded sporadically in limited
amounts on the OTC Bulletin Board under the symbol CSYG. On July 17, 1998, the
last reported closing high bid price of the Common Stock was $6.75 per share.
The Company has applied to have the Common Stock quoted on the Nasdaq SmallCap
Market under the symbol "CSGL". Upon listing on the Nasdaq SmallCap Market, the
Company's Common Stock will no longer be listed on the OTC Bulletin Board. See
"Price Range of Common Stock."
The distribution of shares of Common Stock offered hereby by the Registered
Securityholders may be effected in one or more transactions that may take place
on the over-the-counter market, including ordinary broker's transactions,
privately negotiated transactions or through sales to one or more dealers for
sale of such securities as principals, at market prices prevailing at the time
of sale, at prices relating to such prevailing market prices or at negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Registered Securityholders.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING
ON PAGE 8.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Registered Securityholders and intermediaries through whom such
securities are sold may be deemed "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act") with respect to the
securities offered, and any profits realized or commission received may be
deemed underwriting compensation.
On the date of this Prospectus, a registration statement including a
prospectus of even date filed under the Securities Act with respect to an
underwritten public offering by the Company and certain selling shareholders of
4,000,000 shares of Common Stock and up to an additional 600,000 shares of
Common Stock to cover over-allotments, if any, was declared effective by the
Securities and Exchange Commission (the "Commission"). The Company will receive
net proceeds of approximately $22.2 million from the sale of the shares of
Common Stock included in the underwritten public offering, and will receive
approximately $26.0 million in additional net proceeds if the over-allotment
option is exercised in full after payment of underwriting discounts and
commission and estimated expenses of the underwritten public offering. See
"Concurrent Offering."
<PAGE>
[ALTERNATE PAGE FOR REGISTERED SECURITYHOLDERS' PROSPECTUS]
THE OFFERING
Common Stock offered.............. 1,191,145 shares
Common Stock outstanding after
the offering..................... 5,054,784 shares (1)
Use of Proceeds................... The Combined Company will receive no
proceeds from the sale of the
Registered Securityholders' Shares.
Upon exercise of warrants underlying
certain Registered Security-holders'
Shares, the Company will receive the
applicable exercise price.
Risk Factors...................... The Common Stock offered hereby is
speculative and involves a high degree
of risk and immediate and substantial
dilution and should not be purchased
by investors, who cannot afford the
loss of their entire investment. See
"Risk Factors" and "Dilution."
Proposed Nasdaq SmallCap symbol... CSGL
- --------
(1) Includes 4,000,000 shares of Common Stock to be issued in connection with
an underwritten public offering by the Combined Company and certain
selling shareholders and 162,286 shares of Common Stock (the "Bridge
Shares") to be issued in connection with the notes (the "Bridge Notes")
issued by CSI in December 1997 (the "December 1997 Financing") immediately
prior to the closing of this Offering based on an assumed offering price
of $7.00 per share of Common Stock in the Combined Company's underwritten
public offering, 1,198,779 shares of Common Stock issuable to GlobalTel
shareholders in connection with the GlobalTel Merger and 888,209 shares to
be issued in connection with certain promissory notes. Does not include
(i) up to 1,040,094 shares of Common Stock issuable upon exercise of
outstanding options, (ii) up to 1,184,973 shares of Common Stock issuable
upon the exercise of outstanding warrants, (iii) an indeterminate number
of shares of Common Stock issuable upon conversion of outstanding
promissory notes in the aggregate principal amount of $30,000, which have
a conversion price per share equal to 90% of the average bid and ask price
of the Common Stock on the day before conversion, (iv) up to 400,000
shares of Common Stock issuable upon exercise of the Representatives'
Warrants and, (v) up to 295,714 shares issuable in connection with the ITC
Acquisition (collectively referred to herein as "Additional Securities").
See "Management," "Description of Securities" and "Selling
Securityholders' and Plan of Distribution."
A-4
<PAGE>
[ALTERNATE PAGE FOR REGISTERED SECURITYHOLDERS' PROSPECTUS]
CONCURRENT OFFERING
On the date of this Prospectus, a registration statement including a
prospectus of even date filed under the Securities Act with respect to an
underwritten public offering by the Combined Company and certain selling
shareholders of an aggregate of 4,000,000 shares of Common Stock and up to an
additional 600,000 shares of Common Stock to cover over-allotments, if any,
was declared effective by the Commission. The Combined Company will receive
net proceeds of approximately $22.2 million from the sale of the shares of
Common Stock included in the underwritten public offering, and will receive
approximately $26.0 million in additional net proceeds if the over-allotment
option is exercised in full after payment of underwriting discounts and
commissions and estimated expenses of the underwritten public offering.
A-5
<PAGE>
[ALTERNATE PAGE FOR REGISTERED SECURITYHOLDERS' PROSPECTUS]
REGISTERED SECURITYHOLDERS AND PLAN OF DISTRIBUTION
Up to 1,191,145 Registered Securityholders' Shares, comprised of
approximately 162,286 Bridge Shares, 591,359 shares of Common Stock and
437,500 Registered Securityholders' Warrant Shares, may be offered and sold
pursuant to this Prospectus by the Registered Securityholders. The Combined
Company has agreed to register the public offering of the Registered
Securityholders' Shares under the Securities Act concurrently with this
offering and to pay all expenses in connection therewith. The Registered
Securityholders' Shares have been included in the Registration Statement of
which this Prospectus forms a part. Except as set forth below, none of the
Registered Securityholders nor their affiliates has ever held any position or
office with the Combined Company or had any other material relationship with
the Combined Company. The Combined Company will not receive any of the
proceeds from the sale of the Registered Securityholders' Shares by the
Registered Securityholders. The following table sets forth certain information
with respect to the Registered Securityholders:
<TABLE>
<CAPTION>
AMOUNT OF BENEFICIAL
REGISTERED OWNERSHIP OF
SECURITYHOLDERS' COMMON STOCK
SELLING SECURITY HOLDERS SHARES OFFERED AFTER SALE (1)
- ------------------------ ---------------- --------------
<S> <C> <C>
Lee E. Schlessman............................ 11,429(2) -0-
Swedbank Luxembourg S.A. .................... 22,857(2) -0-
Lee Schlessman, POA Sandra Garnett........... 5,714(2) -0-
Susan M. Duncan.............................. 5,714(2) -0-
Susan M. Duncan Irrevocable Gift Trust....... 5,714(2) -0-
The Schlessman Family Foundation............. 5,714(2) -0-
Lee Schlessman, POA Gary Schlessman.......... 5,714(2) -0-
Lee Schlessman, POA Cheryl Bennett........... 5,714(2) -0-
Cal J. Rickel & Amanda Mae Rickel............ 5,714(2) -0-
Arab Commerce Bank Ltd. ..................... 5,714(2) -0-
Dr. Thomas R. Phelps, M.D. .................. 5,143(2) -0-
Todd & Tom Rafalovich........................ 2,857(2) -0-
First Mortgage Income Trust.................. 5,714(2) -0-
Adams 1977 Family Trust...................... 2,857(2) -0-
Ted Rafalovich Living Trust.................. 2,857(2) -0-
Germaine Robineau O'Hare Trust............... 2,857(2) -0-
ProFutures Special Equities Fund, L.P........ 670,129(3)(4) -0-
Network 1 Financial Securities, Inc. ........ 22,500(4) -0-
National Financial Services Group, Inc. ..... 7,500(4) 37,500
Richard Sullivan............................. 7,500(4) 7,500
Alan Blumenfeld.............................. 16,916(5) -0-
Michael Butler............................... 16,916(5) 34,406
Shahear Ebrahimian........................... 2,481(5) -0-
Steven Freifeld.............................. 11,278(5) -0-
Abraham B. Goldner........................... 5,638(5) -0-
Robert Klein................................. 22,557(5) -0-
Lawrence Leiberman........................... 5,638(5) -0-
Allan R. Lyons............................... 11,278(5) -0-
Albert Milstein.............................. 5,638(5) -0-
Bruce Pomper................................. 16,916(5) -0-
Mark Silverman............................... 16,916(5) -0-
Howard Silverman............................. 11,278(5) -0-
Carl E. Stoops............................... 7,782(5) -0-
Arnold L. Weiner............................. 20,074(5) -0-
</TABLE>
A-6
<PAGE>
[ALTERNATE PAGE FOR REGISTERED SECURITYHOLDERS' PROSPECTUS]
<TABLE>
<CAPTION>
AMOUNT OF BENEFICIAL
REGISTERED OWNERSHIP OF
SECURITYHOLDERS' COMMON STOCK
SELLING SECURITY HOLDERS SHARES OFFERED AFTER SALE (1)
- ------------------------ ---------------- --------------
<S> <C> <C>
Michael Weiss................................. 11,210(5) -0-
Steven Yavors................................. 5,638(5) -0-
Four M International, Inc. ................... 24,163(5) -0-
M. Sebastian Palacios, Marco A. Palacios and
Beatriz A. Palacios.......................... 4,832(5) -0-
Elsa Glorio, Marco A. Palacios and Beatriz
Palacios..................................... 3,020(5) -0-
Gonzalo Vila.................................. 3,625(5) -0-
Ian Creese.................................... 1,428(5) -0-
Donald B. Gasgarth............................ 3,571(5) -0-
Richard L. Gilbert............................ 3,571(5) -0-
Sloan Financial Group Inc..................... 3,035(5) -0-
Jeffrey K. Zwitter............................ 3,571(5) -0-
Cindy Dolgin.................................. 22,557(5) -0-
Ken Fellus.................................... 3,638(5) -0-
Abe Chu....................................... 11,278(5) -0-
Jeffery Levine................................ 3,638(5) -0-
Alan Gibstein................................. 6,767(5) -0-
Professional Edge Fund, L.L.C................. 18,122(5) -0-
Merca Corporation............................. 24,163(5) -0-
Bill Pergeson................................. 10,000(5) -0-
Michael John.................................. 3,571(5) -0-
Ron LeClair................................... 3,571(5) -0-
Tom Rooney.................................... 1,785(5) -0-
Gary & Rebecca Perrine........................ 3,571(5) -0-
</TABLE>
- --------
(1) Assumes all of the Registered Securityholders' Shares are sold.
(2) Such shares may not be sold prior to one year after the date of this
Prospectus pursuant to an agreement with Cohig & Associates, Inc. and CSI.
(3) 534,074 of such shares may not be sold prior to one year after the date of
this Prospectus. The remainding 136,055 shares will be issued in
consideration of the exchange of $1 million principal amount 12% Note and
may not be sold prior to six months after the date of this Prospectus
pursuant to an agreement with CSI.
(4) Includes Registered Securityholders' Warrant Shares issuable upon exercise
of the Selling Securityholders' Warrants.
(5) One-third of such shares may not be sold prior to 180, 270 and 360 days,
respectively, after the date of this Prospectus.
No Registered Securityholder other than Richard Sullivan ("Sullivan") and
National Financial Services Group, Inc. ("National") currently owns any shares
other than those being offered hereby. Accordingly, upon the sale of all the
Registered Securityholders' Shares registered concurrently herewith, no
Registered Securityholder other than Sullivan and National will own any of the
Combined Company's outstanding shares of Common Stock.
The Registered Securityholders' Shares may be offered and sold from time to
time as market conditions permit in the over-the-counter market, or otherwise,
at prices and terms then prevailing or at prices related to the then-current
market price, or in negotiated transactions. The Registered Securityholders'
Shares may be sold by one or more of the following methods, without
limitations: (a) a block trade in which a broker or dealer so engaged will
attempt to sell the Shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction; (b) purchases by a
broker or dealer as principal and resale by such broker or dealer for
A-7
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of the Securities offered
hereby.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 14,791
NASD filing fee.................................................. 5,514
Blue Sky filing fees............................................. 20,000*
Nasdaq Stock Market application fee.............................. 10,000
Legal fees and expenses.......................................... 200,000*
Blue Sky legal fees.............................................. 20,000*
Accounting fees and expenses..................................... 200,000*
Registrar and transfer agent fees................................ 8,000
Printing and engraving........................................... 300,000*
Representatives' nonaccountable expense allowance................ 500,000
Miscellaneous.................................................... 221,695*
----------
TOTAL.......................................................... $1,500,000
==========
</TABLE>
- --------
* Estimated.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Registrant's Bylaws require the Registrant to indemnify all of its
present and former officers and directors, or any person who may have served
at the Registrant's request as an officer or a director of another corporation
in which the Registrant owns shares of capital stock or of which the
Registrant is a creditor, and the personal representatives of all such
persons, against expenses actually and necessarily incurred in connection with
the defense of any legal proceeding in which any such person was made a party
by reason of having served in such capacity, unless such person is adjudged to
be liable for negligence or misconduct in the performance of any duty owed to
the Registrant.
The Registrant's Articles of Incorporation provide that no director of the
Registrant shall be liable to the Registrant or any of its shareholders for
damages caused by a breach of a fiduciary duty by such director except for the
breach of the duty of loyalty, acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of the law, acts as
specified in the Colorado Business Corporation Act, or any transaction from
which such director received an improper personal benefit.
Section 7-109-102 of the Colorado Business Corporation Act authorizes the
indemnification against reasonable expenses of current and former directors
made party to a proceeding if the director conducted himself in good faith, in
the case of conduct in his official capacity with the corporation, the
director reasonably believed that his conduct was in the best interests of the
corporation, in the case of a criminal proceeding, the director had no
reasonable cause to believe that his conduct was unlawful, and in all other
cases, the director reasonably believed that his conduct was at least not
opposed to the corporation's best interest. A corporation may not indemnify a
director in connection with a proceeding (1) in which a director was adjudged
liable to the corporation or, (2) charging that the director derived an
improper personal benefit in which the director was adjudged liable. Section
7-109-107 provides that a corporation may indemnify an officer to the same
extent that it may indemnify a director.
The above discussion of the Registrant's Bylaws, Articles of Incorporation
and the Colorado Business Corporation Act is only a summary and is qualified
in its entirety by the full text of each of the foregoing.
II-1
<PAGE>
Reference is made to the Underwriting Agreement, the proposed form of which
is filed as Exhibit 1.1, in which the Underwriters agree, under certain
circumstances, to indemnify the directors and officers of the Registrant and
certain other persons against certain civil liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant made the following sales of securities within the past three
years without registering such securities under the Securities Act. Except as
otherwise stated, the Registrant believes that the issuance of such securities
was exempt from registration pursuant to Section 4(2) of the Securities Act as
transactions not involving a public offering. The purchasers in such private
offerings represented their intention to acquire the securities for investment
only and not with a view to the distribution thereof and appropriate legends
were affixed to the stock certificates issued in such transactions. All
purchasers had adequate access, through their employment or other
relationships, to sufficient information about the Registrant to make an
informed investment decision. No underwriter was employed with respect to any
such sales.
Unless otherwise stated, no underwriters or placement agents were used in
connection with any of the issuances of securities described below.
During 1995, the Registrant issued 43,750 shares of Common Stock to certain
directors, officers and key employees of the Registrant and consultants and
advisors who have rendered bona fide services to the Registrant not in
connection with the issuance of securities in a capital-raising transaction,
pursuant to its Stock Bonus Plan. The Combined Company believes that such
issuances were exempt from Registration pursuant to Rule 701 and Section 3(b)
of the Securities Act.
From 1995 to the present, the Registrant has granted options to purchase
277,200 shares of Common Stock to certain directors, officers and key
employees of the Registrant and consultants and advisors who have rendered
bona fide services to the Registrant not in connection with the issuance of
securities in a capital-raising transaction, pursuant to its Non-Qualified
Stock Option Plan (the "Plan"). The Combined Company believes that such
issuances were exempt from Registration pursuant to Rule 701 and Section 3(b)
of the Securities Act.
From March 1995 through June 1995, the Registrant issued an aggregate of
272,875 shares of Common Stock to accredited investors as defined under
Regulation D of the Securities Act ("Accredited Investors") at a price of
$2.00 per share.
On July 1, 1995, the Registrant granted options for 150,000 shares to two
employees who rendered bona fide services to the Registrant not in connection
with the issuance of securities in a capital-raising transaction. The
Registrant believes that such issuances were exempt from Registration pursuant
to Rule 701 and Section 3(b) of the Securities Act.
On September 14, 1995, the Registrant issued 204,694 shares of the Common
Stock to Redden Dynamics Corporation ("Redden") pursuant to a plan of merger
to acquire all of the outstanding shares of capital stock of Redden.
On September 26, 1995, the Registrant issued 7,500 shares of Common Stock to
Elmo D. Murphy for $12.00 per share.
From December 1995 through March 1996, the Registrant issued 45,000 shares
of Common Stock and warrants to purchase 37,500 shares of the Registrant's
Common Stock to three persons in exchange for financial consulting services.
Warrants to purchase 12,500 shares of Common Stock are exercisable at $6.00
per share, warrants to purchase 12,500 shares of Common Stock are exercisable
at $10.00 per share, and warrants to purchase 12,500 shares of Common Stock
are exercisable at $14.00 per share. As of the date hereof, no warrants have
been exercised.
II-2
<PAGE>
From June 1996 through September 1996, the Registrant issued 15,375 shares
of Common Stock to 11 Accredited Investors at a price of $8.00 per share.
Jason Harmon received a commission of $11,800 for acting as placement agent.
In July 1996, the Registrant issued 44,769 shares of Common Stock to 37
shareholders of WIN in exchange for shares of common stock of WIN held by
them.
In October 1996, the Registrant issued 35,000 shares of Common Stock to Gary
Kamienski in consideration for technological consulting services rendered
between February 1994 and July 1995.
From October 1996 to July 1997, the Registrant issued 10% convertible
promissory notes in the original aggregate principal amount of $415,000 and
warrants to purchase up to 10,375 shares of Common Stock to 23 financially
sophisticated investors. The notes are convertible into shares of Common Stock
at the option of the holder, at a conversion price equal to 90% of the average
between the bid and asked prices of the Registrant's Common Stock on the day
prior to the conversion date. Warrants to purchase 375 shares of Common Stock
are exercisable at $1.08 per share, warrants to purchase 1,000 shares of
Common Stock are exercisable at $2.08 per share, warrants to purchase 1,000
shares of Common Stock are exercisable at $2.12 per share, warrants to
purchase 500 shares of Common Stock are exercisable at $2.52 per share,
warrants to purchase 1,750 shares of Common Stock are exercisable at $3.00 per
share, warrants to purchase 2,250 shares of Common Stock are exercisable at
$3.24 per share, warrants to purchase 1,750 shares of Common Stock are
exercisable at $3.52 per share and warrants to purchase 1,750 shares of Common
Stock are exercisable at $5.52 per share. From January 1997 through January
1998, 139,363 shares of Common Stock were issued upon conversion of
approximately $389,817 principal amount of the notes, and no warrants have
been exercised.
In February and March 1997, the Registrant issued 15% promissory notes in
the aggregate principal amount of $85,000 and warrants to purchase up to 4,250
shares of Common Stock to three financially sophisticated investors. Warrants
to acquire 1,625 shares of Common Stock are exercisable at $1.52 per share,
warrants to purchase 1,750 shares of Common Stock are exercisable at $2.52 per
share and warrants to purchase 875 shares of Common Stock are exercisable at
$3.00 per share. As of the date hereof, no shares of Common Stock have been
issued upon conversion of the notes and no warrants have been exercised.
From September through December 1997, the Registrant issued 227,160 shares
of Common Stock to 30 investors (29 of whom were Accredited Investors) for
$2.20 per share.
In December 1997, the Registrant issued Bridge Notes in the aggregate
principal amount of $2,840,000 to 17 Accredited Investors. Upon the closing of
this Offering, each investor will receive 5,714 shares of Common Stock for
every $100,000 invested in the Bridge Notes based on an initial offering price
of $7.00 per share. Cohig and Associates, Inc. acted as placement agent in the
December 1997 private placement for which it received $312,400 and warrants to
purchase 71,000 shares of Common Stock at a price equal to 125% of the price
to public of the shares in this offering.
In March and April 1998, the Registrant issued $270,000 aggregate principal
amount of notes bearing interest at 10% per annum to seven financially
sophisticated investors, including three directors and a principal shareholder
of the Registrant. The investors also received warrants to purchase shares of
Common Stock.
In May and July 1998, the Registrant issued (a) $1,750,000 principal amount
of notes bearing interest at 12% per annum and (b) 74,074 shares of Common
Stock for a $3.375 per share together with 400,000 warrants to purchase shares
of Common Stock to ProFutures Special Equities Fund, L.P., a financially
sophisticated, institutional Accredited Investor. Eastbrokers International,
Inc. acted as placement agent for which it received $240,000 and warrants to
purchase 60,000 shares of Common Stock at a price equal to 120% of the price
to public of the shares in this offering.
II-3
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement between CSI and the Representatives of
the Underwriters
2.1* Plan and Articles of Merger dated September 14, 1995 between CSI and
Redden Dynamics, Inc.
2.2* Stock Purchase Agreement, dated April 23, 1998, among the Registrant,
ITC and its Shareholders
2.3* Agreement and Plan of Merger, dated May 29, 1998, between CSI and
GlobalTel
3.1* Articles of Incorporation of CSI
3.2* Bylaws of CSI
4.2* Form of Warrant Agreement, including Form of Representatives' Warrant
5.1 Opinion of Parcel, Mauro & Spaanstra, P.C.
10.1* Form of 10% Convertible Promissory Note from to Registrant to various
investors
10.2* Form of Warrant and Terms of Warrant between Registrant and various
investors
10.3* Agreement between Registrant and Cable and Wireless
10.4* Promissory Note from CSI to Robert A. Spade
10.5* Stock Option Plan of CSI
10.6* Lease Agreement dated January 1, 1994 between CSI and The Mining
Exchange Partners Limited
10.7* LINK-US/PC Agreement dated September 19, 1996 between CSI and Gary
Kamienski
10.8* Form of Distributor Agreement between CSI and certain of its
distributors
10.9* Form of Branch Office Agency Agreement between the Registrant and
certain of its distributors
10.10* Agreement and Tariff Order dated November 1997 between the Registrant
and AT&T Communications.
10.11* Employment Agreement with Robert A. Spade
10.12* Employment Agreement with Patrick R. Scanlon
10.13* Employment Agreement with Daniel R. Hudspeth
10.14* Agreement between ITC and AIT
10.15* Agreement between ITC and Trescom
10.16* Agreement between ITC and Cable & Wireless
10.17* Agreement between ITC and Teleglobe
10.18* Promissory Note from CSI to Robert A. Spade, dated April 30, 1996
10.19* Office lease dated as of June 10, 1996 by and between GlobalTel, as
Lessee, and One Wilshire Arcade Imperial, Ltd., as Lessor, together
with First Amendment thereto dated June 24, 1997.
10.20+* Carrier Agreement dated as of August 20, 1996 by and between
Primecall, Inc. and Cable & Wireless, Inc.
10.21+* Reciprocal Telecommunications Agreement dated as of December 3, 1996
by and between STAR Vending, Inc. and Primecall, Inc.
10.22+* Switch Port Lease and Service Agreement dated as of August 7, 1996 by
and between Primecall, Inc. and World Touch, Inc.
10.23+* Trilogy Telemanagement Service Agreement dated as of April 2, 1997 by
and between Trilogy Telemanagement, L.L.C. and Primecall, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.24+* Agreement for Managed Data Network Services dated April 28, 1995 (the
"Equant Agreement") by and between NetStar International
Telecommunications, Inc. ("NetStar") and Equant Network Services
International Corporation (f/k/a Scitor International
Telecommunications Services, Inc.) ("Equant"), together with Amendment
No. 1 to the Scitor ITS Agreement dated February 21, 1996 between
NetStar, Equant and GFP Group, Inc.
10.25+* Exclusive Services and Marketing Agreement dated as of April 15, 1997
between GlobalTel and International Business Network for World
Commerce & Industry, Ltd.
10.26+* Master Task Agreement dated as of September 19, 1997 by and between
GFP Group, Inc. and Novell, Inc.
10.27+* Novell Business Internet Services Affiliate Service Platform Statement
of Work to Agreement No. 97-GlobalTel-001 dated October 21, 1997
between Novell, Inc. and GFP Group, Inc.
10.28* Share Exchange Agreement dated as of December 29, 1995 by and among
GlobalTel and certain holders of shares of capital stock of GFP Group,
Inc.
10.29* Letter of Intent dated June 16, 1997 by and among Primecall, Inc.,
Netlink International Inc. and Kunmung Dayu Biological Engineering Co.
Ltd.
10.30* Letter Agreement dated November 6, 1997 by and among GlobalTel, Alan
H. Chin and Curtis E. Lew
21* List of Subsidiaries
23.1 Consent of Parcel, Mauro & Spaanstra, P.C. (contained in Exhibit 5.1)
23.2 Consent of Stockman Kast Ryan & Scruggs, P.C.
23.3 Consent of Richard A. Eisner & Company, LLP
23.4 Consent of Arthur Andersen LLP
24* Power of Attorney (included on page II-6 hereof)
27* Financial Data Schedule
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
+ Portions of this exhibit have been omitted pursuant to an application for
an order granting confidential treatment. The omitted portions have been
separately filed with the Commission.
ITEM 17. UNDERTAKINGS.
(a) Rule 415 Offering. The Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
Registration Statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-5
<PAGE>
(d) Prompt Delivery. The Registrant undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(e) Indemnification. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(f) Rule 430A.
The Registrant hereby undertakes that it will:
(i) For determining any liability under the Securities Act, treat the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the
time the Commission declared it effective.
(ii) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of Prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
II-6
<PAGE>
SIGNATURES
PURSUANT WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON THEIR BEHALF BY THE UNDERSIGNED IN COLORADO SPRINGS, COLORADO, ON
JULY 21, 1998.
Communications Systems
International, Inc.
/s/ Robert A. Spade
By: _________________________________
Name: Robert A. Spade
Title: Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to the registration statement has been signed by the following
persons in the capacities and on the dates stated.
* Chairman of the
- ------------------------------------- Board designee July 21, 1998
RONALD P. ERICKSON
* Chief Executive
- ------------------------------------- Officer and Vice July 21, 1998
ROBERT A. SPADE Chairman of the
Board (Principal
Executive Officer)
* President, Chief
- ------------------------------------- Operating Officer July 21, 1998
PATRICK R. SCANLON and Director
* Chief Financial
- ------------------------------------- Officer, Secretary July 21, 1998
DANIEL R. HUDSPETH and Treasurer
(Principal
Financial and
Accounting Officer)
* Director
- ------------------------------------- July 21, 1998
DEAN H. CARY
* Director
- ------------------------------------- July 21, 1998
RICHARD F. NIPERT
II-7
<PAGE>
* Director
- ------------------------------------- July 21, 1998
CHARLES A. SHIELDS
* Director designee
- ------------------------------------- July 21, 1998
BRUCE L. CROCKETT
* Director designee
- ------------------------------------- July 21, 1998
LYMAN C. HAMILTON
* Director designee
- ------------------------------------- July 21, 1998
MICHAEL S. BROWNFIELD
/s/ Robert A. Spade
*By: ________________________________
Attorney-in-Fact
II-8
<PAGE>
Exhibit 5.1
PARCEL, MAURO & SPAANSTRA, P.C.
1801 CALIFORNIA ST., STE. 3600
DENVER, CO 80202
(303) 292-6400
July 21, 1998
Communications Systems International, Inc.
8 South Nevada Avenue, Suite 200
Colorado Springs, Colorado 80903
Re: Registration Statement on Form S-1
Covering the Registration of
Shares of Common Stock of
Communications Systems International, Inc.
Ladies and Gentlemen:
We have acted as counsel for Communications Systems International, Inc., a
Colorado corporation (the "Company"), in connection with the registration for
sale of shares of the Company's Common Stock (the "Shares") in accordance with
the registration provisions of the Securities Act of 1933, as amended.
In such capacity we have examined, among other documents, the Registration
Statement No. 333-47045 (the "Registration Statement"), covering the
registration of the Shares.
Based upon the foregoing and upon such further examinations as we have
deemed relevant and necessary, we are of the opinion that:
1. The Company is a corporation duly organized and validly existing under
the laws of the State of Colorado.
2. The Shares have been legally and validly authorized under the
Company's Articles of Incorporation, as amended, and, when issued and paid for
in accordance with the terms of the underwriting agreement, will constitute duly
and validly issued and outstanding and fully paid and nonassessable shares of
the Company.
<PAGE>
Communications Systems International, Inc.
July 21, 1998
Page 2
We hereby consent to the use of our name beneath the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement and to
the filing of a copy of this opinion as Exhibit 5.1 thereto.
Very truly yours,
PARCEL, MAURO & SPAANSTRA, P.C.
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No. 333-
47045 of Communications Systems International, Inc. of our report dated May 28,
1998 and July 20, 1998 appearing in the Prospectus, which is a part of such
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
STOCKMAN KAST RYAN & SCRUGGS, P.C.
Colorado Springs, Colorado
July 21, 1998
<PAGE>
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to inclusion of our report dated December 12, 1997 on our audits of
the balance sheets of International Telephone Company as of October 31, 1997
and December 31, 1996 and the related statements of operations, changes in
shareholders' equity (capital deficiency) and cash flows for the ten month
period ended October 31, 1997 and the years ended December 31, 1996 and 1995
in this Registration Statement on Amendment No. 3 to Form SB-2 on Form S-1 and
related Prospectus. We also consent to the reference to our firm under the
caption "Experts" in the Prospectus.
Richard A. Eisner & Company, LLP
New York, New York
July 20, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington
July 21, 1998
