<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1998.
REGISTRATION NO. 333-47045.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2 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
COLORADO SPRINGS, COLORADO 80903
(ADDRESS, INLUDING ZIP CODE, (719) 471-3332
AND TELEPHONE NUMBER, INCLUDING
AREA 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,
PARCEL, MAURO & SPAANSTRA, P.C. P.C.
1801 CALIFORNIA STREET, SUITE 3600 1700 LINCOLN
DENVER, COLORADO 80202 SUITE 4700
(303) 292-6400 DENVER, COLORADO 80203
(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 PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY OFFERING PRICE FEE (1)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock(2)......... 4,140,000 $ 8.00 $33,120,000 $ 9,770.40
- ----------------------------------------------------------------------------------------
Common Stock(3)......... 369,693 $ 8.00 $ 2,957,544 $ 872.48
- ----------------------------------------------------------------------------------------
Representatives'
Warrants(4)............ 360,000 $ -- $ -- $ -- (5)
- ----------------------------------------------------------------------------------------
Common Stock Underlying
Representatives'
Warrants(6)............ 360,000 $ 9.60 $ 3,456,000 $ 1,019.52
- ----------------------------------------------------------------------------------------
TOTAL................................................... $39,533,544 $11,622.40
- ----------------------------------------------------------------------------------------
AMOUNT PREVIOUSLY PAID.................................................. $13,218.83
- ----------------------------------------------------------------------------------------
AMOUNT OWED............................................................. $ --
</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 369,693 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 19, 1998
PROSPECTUS
4,000,000 SHARES
[LOGO]
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
COMMON STOCK
---------
Of the shares of Common Stock offered hereby, 4,000,000 shares are being sold
by Communications Systems International, Inc. ("CSI") and shares are being
sold by certain shareholders of CSI (the "Selling Shareholders"). See
"Principal and Selling Shareholders." The Combined Company 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 June 17, 1998, the closing bid price of the Common Stock was $3.75 per
share. See "Price Range of Common Stock." It is currently estimated that the
public offering price will be between $6.00 and $8.00 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, 369,693 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 319,693 shares of Common Stock and shares underlying warrants that were
issued in private placements completed in December 1997, May 1998 and June 1998
and 50,000 shares issuable upon the exercise of certain warrants (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 the Representatives not to sell or
transfer the Registered Securityholders' Shares for a period of 180 days
following the date of this Prospectus.
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 5 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
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 OF
THE COMBINED COMPANY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING BIDS, THE
IMPOSITION OF PENALTY BIDS, THE PURCHASE OF SECURITIES TO COVER SYNDICATE
SHORT POSITIONS AND OVER-ALLOTMENTS 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."
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.
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.
<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 25,500 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 call-
reorigination 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.
1
<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 3 reverse stock split that will be completed prior to the date
of this Prospectus. CSI has entered into an agreement to merge (the "GlobalTel
Merger") with GlobalTel, CSI has entered into an agreement to acquire all of
the outstanding stock of ITC (the "ITC Acquisition"), which is 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.
2
<PAGE>
THE OFFERING
Common Stock offered
4,000,000 shares
By CSI................
By the Selling
Shareholders........... shares
Common Stock outstanding
after the offering.........
9,217,693 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") and
$1,626,489 shares of Common Stock issuable in connection with the GlobalTel
Merger. Excludes (i) up to 1,040,094 shares of Common Stock issuable upon
exercise of outstanding options, (ii) up to 1,551,612 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."
3
<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 EIGHT THREE 12 MONTHS THREE
ENDED MONTHS MONTHS ENDED MONTHS
APRIL 30, ENDED ENDED DECEMBER 31, ENDED
---------------- DECEMBER MARCH 31, ---------------- MARCH 31,
1996 1997 31, 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
Acquired in-
process
research and
development.... -- -- -- -- -- -- --
------- ------- ------ -------- ------- ------- -------
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).......... $ (.90) $ (.08) $ (.35) $ (.34) $ (5.88) $ (6.48) $ (1.46)
Weighted average
number of
shares
outstanding.... 2,798 3,138 3,296 3,353 999 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> <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 8,719 2,211
Acquired in-
process
research and
development.... -- -- 2,800 --
----------- --------- ------------ ---------
Total operating
expenses....... 2,176 703 28,774 5,768
----------- --------- ------------ ---------
Loss from
operations..... (912) (71) (20,563) (4,056)
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) (21,564) (5,005)
Income tax
(benefit)...... -- -- -- --
----------- --------- ------------ ---------
Loss before
extraordinary
item........... (850) (71) (21,564) (5,005)
Extraordinary
item--gain on
extinguishment
of debt........ -- -- -- --
----------- --------- ------------ ---------
Net loss........ $ (850) $ (71) $ (21,564) $(5,005)
=========== ========= ============ =========
Series A
convertible
preferred stock
dividends...... -- -- -- --
----------- --------- ------------ ---------
Net loss
applicable to
common
shareholders... $ (850) $ (71) $ (21,564) $(5,005)
=========== ========= ============ =========
EBITDA(1)....... $ (839) $ (41) $ (11,844) $(1,845)
Basic loss per
share(excluding
extraordinary
item).......... $ (708) $ (59) $ (2.47) $ (.57)
Weighted average
number of
shares
outstanding.... 1 1 8,724 8,815
</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 $19,283
Working capital
(deficit).............. (2,612) (3,923) (4,934) (9,094) (1,259) (1,423) (5,028)
Total assets............ 2,975 2,612 4,354 3,513 2,720 3,334 50,147
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 -- -- 2,455
Total shareholders'
equity (deficit)....... (1,112) (2,228) (8,534) (11,002) (781) (899) 27,332
</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.
4
<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 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
5
<PAGE>
basis. 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. 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."
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
6
<PAGE>
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.
Although independent sales agents are 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."
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
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
7
<PAGE>
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."
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.
8
<PAGE>
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 purchasing minutes 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 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
9
<PAGE>
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 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
10
<PAGE>
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 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,
11
<PAGE>
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."
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."
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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.
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 approximately June 19, 1998, the Combined Company intends to commence a
rescission offer (the "Rescission Offer") in accordance with the federal
securities laws and the securities laws of the State of Washington (the
"Washington Securities Act") with respect to an aggregate of 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 plans to offer to rescind such
prior issuances and sales by offering to repurchase the Rescission Securities
at the price paid therefor plus interest at the statutory rate of 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 weighted average price paid for the
Rescission Stock is $4.66 per share. The aggregate price paid for the
Rescission Notes, which are to be repaid from the proceeds of this offering,
is $805,000. See "Use of Proceeds." Each of the Rescission Warrants was issued
in conjunction with Rescission Stock or Rescission
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Notes and for no separate consideration. Accordingly, the Rescission Warrants
must be surrendered for no separate consideration if the holder of the related
Rescission Securities elects to accept the Rescission Offer with respect to
its Rescission Securities. The aggregate accrued interest with respect to all
of the Rescission Securities as of June 30, 1998 will be approximately
$397,000. If all holders of Rescission Securities were to accept the
Rescission Offer, the Combined Company would be required to make payments
aggregating approximately $3.7 million, plus the aggregate amount of any
additional interest thereon that accrues after June 30, 1998. The Rescission
Offer will expire 20 business days after the offer is transmitted. The
Combined Company currently expects to use a portion of the proceeds from this
offering to make payments under the Rescission Offer, if any are required.
Offerees who do not accept the Rescission Offer will thereafter hold
registered Rescission Securities under the Securities Act which, in the case
of the Rescission Stock, will be freely tradeable by non-affiliates in the
public market as of the effective date of the Rescission Offer Registration
Statement.
As of the date hereof, GlobalTel is not aware of any claims for rescission
against GlobalTel. Also, current and former officers and directors of
GlobalTel holding an aggregate of $1.4 million (including statutory interest
accrued thereon as of June 30, 1998) of the Rescission Securities have
indicated their intent not to accept the Rescission Offer, although no formal
Rescission Offer has been made to them and they have not and may not agree to
reject the Rescission Offer until the Rescission Offer has commenced. There
can be no assurance that all or a substantial portion of the Rescission
Securities will not be tendered in response to the Rescission Offer. Use of a
portion of the proceeds of this offering in connection with the Rescission
Offer will reduce the amount of working capital available to the Combined
Company and require it to seek additional capital sooner than otherwise might
be required. The Rescission Offer is being made in order to limit, so far as
may be permitted under applicable federal and state securities laws, the
potential liability of the 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 the
registration requirements of federal securities laws, if a holder of the
Rescission Securities were to assert a claim that the Rescission Securities
were sold in violation thereof, the position of the Securities and Exchange
Commission is that liabilities under the federal securities laws are not
terminated by making a rescission offer. Furthermore, notwithstanding the
Rescission Offer, there can be no assurance that the 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.
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
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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."
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
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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 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
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on the life of Mr. Spade in the amount of $2 million, and has applied for key-
person life insurance on the life of Mr. 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
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, 4,024,378 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
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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
2,161,529 shares of restricted stock that are presently outstanding,
approximately 231,550 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
June 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) 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 a period of 180 days following the date of this Prospectus. 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
395,667 shares of Common Stock, which have a weighted average exercise price
of $2.70 per share, (ii) warrants to purchase up to 105,717 shares of Common
Stock, which have a weighted average exercise price of $4.86 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 174,437 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 $5.50 per share. At the completion of this
offering, the Representatives will receive warrants (the "Representatives'
Warrants") to purchase up to 360,000 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."
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 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 $16.8 million,
or 70.9% of the net proceeds of the offering to the Combined Company, to repay
certain indebtedness of the Combined Company. See "Use of Proceeds."
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ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND STATUTORY PROVISIONS
The Combined Company'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 $6.63 (94.7%)
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."
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.
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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."
20
<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 8,500 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.
21
<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 .82
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 $3.3 million in cash ($300,000 of which has already been paid
through May 31, 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 272,925 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 40.5 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."
22
<PAGE>
USE OF PROCEEDS
Based on an assumed offering price of $7.00 per share, the net proceeds from
the sale of the shares of Common Stock offered hereby are estimated to be
approximately $23.7 million ($27.5 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 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 14.8%
Completion of ITC Acquisition (2)................. 3,100,000 13.1
Repayment of GlobalTel Full Coverage Notes (3).... 3,100,000 13.1
Repayment of Bridge Notes (4)..................... 3,000,000 12.7
Repayment of GlobalTel notes (5).................. 2,300,000 9.7
Repayment of 12% Notes (6)........................ 1,300,000 5.5
Merger and acquisition fee (7).................... 1,050,000 4.4
Repayment of short term debt (8).................. 500,000 2.1
Working capital, capital expenditures and general
corporate purposes (9)........................... 5,850,000 24.6
----------- -----
$23,700,000 100.0%
=========== =====
</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 May 31, 1998, the
Combined Company has paid $300,000 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 $2,981,500
principal amount of GlobalTel Full Coverage Notes and estimated accrued
interest thereon. The GlobalTel Full Coverage Notes bear interest 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. See "Description of Securities--
Description of Indebtedness."
(4) 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. See "Description of Securities--Description
of Indebtedness."
(5) 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 note bears interest at a rate of 10% per annum, and are
repayable in June 1998 through March 1999. Amounts include notes totaling
$805,000 subject to the rescission offer. The proceeds from the issuance
of such notes were for working capital and general corporate purposes.
(6) Represents amounts to used for the repayment of the entire $1,250,000
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 and to advance $500,000 to
GlobalTel in May 1998. See "Description of Securities--Description of
Indebtedness."
23
<PAGE>
(7) Represents amounts to be paid to Cruttenden Roth Incorporated as a fee in
conjunction with the GlobalTel Merger.
(8) 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.
(9) 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.
In addition to the notes subject to the Rescission Offer described above, a
portion of the proceeds will be used to fund the repurchase of Rescission
Stock tendered in connection with the Rescission Offer in an approximate
amount of up to $2.5 million, plus approximately $376,000 of statutory
interest (as of June 30, 1998), of which up to approximately $1.4 million may
be paid to officers and directors of the Combined Company and their affiliates
if they accept the Rescission Offer. See "Rescission Offer."
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.
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.
24
<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. 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 assumed 1 for
3 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)................... 9.75 4.50
1997
July 31, 1996................................................ 9.75 4.875
October 31, 1996............................................. 10.50 3.75
January 31, 1997............................................. 3.00 1.313
April 30, 1997............................................... 2.625 .563
1998
July 31, 1997................................................ 2.44 .609
October 31, 1997............................................. 1.875 .609
January 31, 1998............................................. 4.875 .939
April 30, 1998............................................... 5.91 1.75
1999
July 31, 1998 (through June 17, 1998)........................ 5.81 3.56
</TABLE>
On June 17, 1998, the closing bid price of the Common Stock as reported on
the OTC Bulletin Board was $3.75 per share. CSI had approximately 632 holders
of record of Common Stock as of June 17, 1998. While CSI is aware that a
number of beneficial owners of its Common Stock hold shares in street name, no
estimate has been made as to the number of shareholders owning stock of CSI in
street name.
25
<PAGE>
DILUTION
As of March 31, 1998, CSI's net tangible book value was a $2.2 million
deficit or $(0.66) per share of Common Stock. After giving effect to the
issuance of the 12% Notes, the issuance of 162,286 Bridge Shares, the issuance
of 74,074 shares of Common Stock for $250,000 in May 1998, the GlobalTel
Merger and the ITC Acquisition (the "Pro Forma Combined adjustments"), and the
sale by the Combined Company of 4.0 million 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 $3.4 million or
$0.37 per share. This represents an immediate increase in pro forma net
tangible book value of $4.12 per share to existing shareholders and an
immediate dilution of $6.63 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...................................................... $(0.66)
Decrease per share of Common Stock attributable to the Pro
Forma
Combined adjustments ..................................... (3.09)
Increase per share of Common Stock attributable to new in-
vestors................................................... 4.12
------
Net tangible book value per share after the offering......... 0.37
-----
Dilution per share of Common Stock to new investors.......... $6.63
=====
Dilution as a percentage of assumed offering price........... 94.7%
=====
</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).............. 5,217,693 56.6% $ 9,144,652 24.6% $1.75
New shareholders(2)..... 4,000,000 43.4 28,000,000 75.4 7.00
--------- ----- ----------- -----
Total................... 9,217,693 100.0% $37,144,652 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Includes 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 1,626,489 shares of Common Stock to be issued in connection with the
GlobalTel Merger, and 74,074 shares of Common Stock issued in May 1998.
(2) The sale of 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 , or % of the total share of Common Stock outstanding,
and will increase the number of shares held by new investors to , or %
of the total shares of Common Stock outstanding after the offering. 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.
26
<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 December 1997 Financing, the issuance of 74,074 shares
of Common Stock for $250,000 in May 1998, the GlobalTel Merger and ITC
Acquisition and (iii) the Pro Forma As Adjusted capitalization to reflect the
sale of 4.0 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 $ 2,634 $ 19,283
====== ======= ========
Long-term debt, including current maturi-
ties of notes payable, bridge loans and
capital leases(3)......................... $2,993 $12,062 $ 8,143
Common stock subject to rescission, 405,475
issued and outstanding.................... -- 2,455 2,455
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; 3,354,844, 5,217,693
and 9,217,693 shares issued and
outstanding, respectively(1)(2)......... 2,651 9,145 32,712
Obligation to issue common stock......... 795 1,179 1,179
Common stock options..................... 37 719 719
Common stock warrants.................... -- 1,873 1,873
Notes receivable from shareholder........ (35) (35) (35)
Accumulated deficit...................... (5,543) (8,343) (9,116)
Treasury stock, at cost.................. (133) (133) --
------ ------- --------
Total shareholders' (deficit) equity .... (2,228) 4,405 27,332
------ ------- --------
Total capitalization..................... $ 765 $18,922 $ 37,930
====== ======= ========
</TABLE>
- --------
(1) Reflects 1,626,489 shares of CSI Common Stock issued to effect the
GlobalTel Merger, 162,286 Bridge Shares, 74,074 shares of Common Stock
issued in May 1998 on a Pro Forma Combined basis, and the issuance of
4,000,000 shares of Common Stock in the offering at an assumed offering
price of $7.00 per share on a Pro Forma As Adjusted basis.
(2) Excludes the Additional Securities
(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."
27
<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.
28
<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
Acquired in-
process
research and
development.... -- -- -- -- -- -- --
----- ------ ------- ------- ------ ------ --------
Total operating
expenses....... 503 1,173 3,283 4,207 4,202 1,250 1,283
----- ------ ------- ------- ------ ------ --------
Income
(loss) from (557) (633) (2,505) (97) (966) (104) (428)
operations..
Interest expense,
including
amortization of
debt
discounted..... -- -- (19) (162) (113) (49) (698)
Other income
(expense)...... -- 139 -- -- (85) -- --
----- ------ ------- ------- ------ ------ --------
Income (loss)
before income
taxes and
extraordinary
item........... (557) (494) (2,524) (259) (1,164) (153) (1,126)
Income tax
provision
(benefit)...... -- -- -- -- -- -- --
----- ------ ------- ------- ------ ------ --------
Income (loss)
before
extraordinary
item........... (557) (494) (2,524) (259) (1,164) (153) (1,126)
Extraordinary
item--gain on
extinguishment of
debt........... -- -- -- -- 747 -- --
----- ------ ------- ------- ------ ------ --------
Net income
(loss)......... $(557) $ (494) $(2,524) $ (259) $ (417) $ (153) $ (1,126)
===== ====== ======= ======= ====== ====== ========
Series A
convertible
preferred stock
dividends...... -- -- -- -- -- -- --
----- ------ ------- ------- ------ ------ --------
Net income
(loss)
applicable to
common
shareholders... $(557) $ (494) $(2,524) $ (259) $ (417) $ (153) $ (1,126)
===== ====== ======= ======= ====== ====== ========
EBITDA.......... $(544) $ (614) $(2,447) $ 6 $ (874) $ (71) $ (386)
===== ====== ======= ======= ====== ====== ========
Basic loss per
share (excluding
extraordinary
item).......... $(.53) $(.39) $(.90) $(.08) $(.35) $(.05) $(.34)
===== ====== ======= ======= ====== ====== ========
Weighted average
number of
shares
outstanding.... 1,051 1,634 2,798 3,138 3,296 3,180 3,353
===== ====== ======= ======= ====== ====== ========
<CAPTION>
PRO FORMA
HISTORICAL--GLOBALTEL HISTORICAL--ITC AS ADJUSTED
-------------------------------------------- ------------------------------------------- --------------------
THREE THREE
12 MONTHS MONTHS 12 MONTHS MONTHS
ENDED ENDED ENDED 10 MONTHS ENDED THREE
DEC. 31, MARCH 31, DEC. 31, ENDED MARCH 31, 12 MONTHS MONTHS
-------------------------- ----------------- --------------- OCTOBER 31, --------------- ENDED ENDED
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 8,719 2,211
Acquired in-
process
research and
development.... -- -- -- -- -- -- -- -- -- -- 2,800 --
-------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- ---------
Total operating
expenses....... 1,885 6,553 8,160 1,668 1,734 2,422 2,614 2,176 641 703 28,774 5,768
-------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- ---------
Income
(loss) from
operations.. (1,700) (5,647) (6,469) (1,094) (1,509) 368 (81) (912) (213) (71) (20,563) (4,056)
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) (21,564) (5,005)
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) (21,564) (5,005)
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) $(21,564) $(5,005)
======== ======== ======== ======== ======== ======= ======= =========== ======= ======= ========== =========
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) $(21,564) (5,005)
======== ======== ======== ======== ======== ======= ======= =========== ======= ======= ========== =========
EBITDA.......... $(1,589) $(5,549) $(6,216) $(1,065) $(1,418) $ 429 $ 101 $ (839) $ (197) $ (41) $(11,844) $(1,845)
======== ======== ======== ======== ======== ======= ======= =========== ======= ======= ========== =========
Basic loss per
share (excluding
extraordinary
item).......... $(2.75) $(5.88) $(6.48) $(1.28) $(1.46) $287 $5.83 $(708) $194 $(59) $ (2.47) $ (.57)
======== ======== ======== ======== ======== ======= ======= =========== ======= ======= ========== =========
Weighted average
number of
shares
outstanding.... 630 999 1,215 1,002 1,745 1 1 1 1 1 8,724 8,815
======== ======== ======== ======== ======== ======= ======= =========== ======= ======= ========== =========
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL--CSI HISTORICAL--GLOBALTEL HISTORICAL--ITC
-------------------------------------------------- ------------------------- ----------------------------------
APRIL 30, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, OCTOBER 31, MARCH 31,
-------------------------- ------------ --------- -------------- --------- ------------ ----------- ---------
1994 1995 1996 1997 1997 1998 1996 1997 1998 1996 1997 1998
---- ---- ------ ------ ------------ --------- ------ ------ --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA:
Cash............ $ 7 $ 82 $ 57 $ 147 $ 429 $ 236 $ 446 $ 849 $ 98 $ 218 $ 848 $ 980
Working capital
(deficit)....... (114) (288) (2,152) (2,331) (2,612) (3,923) (5,248) (4,934) (9,094) (383) (1,259) (1,423)
Total assets.... 161 459 1,519 1,946 2,975 2,612 3,701 4,354 3,513 1,956 2,720 3,334
Long-term debt,
net of current
maturities and
debt discount... -- -- -- -- -- -- 2,283 3,832 2,000 21 292 234
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) 69 (781) (899)
<CAPTION>
PRO FORMA
AS ADJUSTED
------------
MARCH 31,
------------
1998
------------
<S> <C>
BALANCE SHEET
DATA:
Cash............ $19,283
Working capital
(deficit)....... (5,028)
Total assets.... 50,147
Long-term debt,
net of current
maturities and
debt discount... 2,234
Common stock
subject to
rescission...... 2,455
Total
shareholders'
equity
(deficit)....... 27,332
</TABLE>
29
<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 25,500 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 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."
30
<PAGE>
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 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.
31
<PAGE>
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.
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
32
<PAGE>
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 $16.4
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.
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
33
<PAGE>
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 of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("Statement 132"), 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.
The Combined Company has not determined what additional disclosures, if any,
may be required by the provisions of Statements 131 and 132, but does not
expect adoption of either statement to have a material effect on its results
of operations.
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.
34
<PAGE>
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 18.3 24.4
General and adminis-
trative.............. 34.0 24.5 17.0 25.9 20.2 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 39.5 56.2
----- ----- ----- ----- ----- -----
Income (loss) from oper-
ations................. (34.4) (37.2) (0.8) (11.8) (3.8) (18.7)
Interest expense, in-
cluding amortization of
debt discount.......... -- (0.3) (1.4) (1.4) (1.5) (30.6)
Other expense........... -- -- -- (1.0) -- --
----- ----- ----- ----- ----- -----
Net income (loss) before
extraordinary item..... (34.4) (37.5) (2.2) (14.2) (5.3) (49.3)
Extraordinary item...... -- -- -- 9.2 -- --
----- ----- ----- ----- ----- -----
Net income (loss)....... (34.4)% (37.5)% (2.2)% (5.0)% (5.3)% (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 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 in 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.
35
<PAGE>
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 anticipation of debt discount expense 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 $.05 for the three months ended April 30,
1997 compared to basic loss per share of $.34 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.
COMPARISON OF TWELVE MONTHS ENDED APRIL 30, 1997 TO EIGHT MONTHS ENDED DECEMBER
31, 1997
Revenue decreased $3.7 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
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 expense 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 increased from 1.4% to 1.4% for the twelve months ended April 30, 1997
and the eight months ended December 31, 1997, respectively.
36
<PAGE>
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 $.08 for the
twelve months ended April 30, 1997 compared to basic loss per share of $.35
for the eight months ended December 31, 1997. The decrease in basic loss per
share was due primarily to an increase in net loss and 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.
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 $.90 for fiscal 1996 compared to basic loss
per share of $.08 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.
37
<PAGE>
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 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 $494,000 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 $.31 for fiscal 1995 compared to basic loss
per share of $.90 for fiscal 1996. The increase in basic loss per share was
due primarily to an increase in CSI's net loss as well as 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.
38
<PAGE>
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.
<TABLE>
<CAPTION>
FISCAL 1997 QUARTER ENDED QUARTER ENDED
------------------------------------------ --------------------
TWO
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> <C>
Revenue................. $2,579 $2,952 $3,129 $3,206 $3,370 $3,002 $1,743 $ 2,279
Cost of revenue......... 1,675 1,933 2,086 2,060 2,023 1,784 1,072 1,424
------ ------ ------ ------ ------ ------ ------ -------
Gross margin............ 904 1,019 1,043 1,146 1,347 1,218 671 855
------ ------ ------ ------ ------ ------ ------ -------
Operating expenses:
Sales and marketing.... 447 496 548 589 654 616 737 557
General and
administrative........ 388 455 484 628 798 918 387 684
Depreciation and
amortization.......... 19 23 28 33 33 35 24 42
------ ------ ------ ------ ------ ------ ------ -------
Total operating
expenses............... 854 974 1,060 1,250 1,485 1,569 1,148 1,283
------ ------ ------ ------ ------ ------ ------ -------
Income (loss) from
operations............. 50 45 (17) (104) (138) (351) (477) (428)
Interest expense........ (40) (36) (38) (49) (47) (42) (24) (698)
Other income (expense).. -- -- -- -- -- -- (85) --
------ ------ ------ ------ ------ ------ ------ -------
Net income (loss) before
extraordinary item..... 10 9 (55) (152) (185) (393) (586) (1,126)
Extraordinary item...... -- -- -- -- -- -- 747 --
------ ------ ------ ------ ------ ------ ------ -------
Net income (loss)....... $ 10 $ 9 $ (55) $ (152) $ (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.
39
<PAGE>
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 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.
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 $4.2 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 and $42,000 in
depreciation and amortization. The increase in cash provided by operating
activities was primarily due to a $733,000 increase in accounts payable and a
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. The decrease in cash provided from operating
activities was primarily due to a $733,000 increase in net loss for such
period partially offset by an increase in accounts payable and accrued
expenses. 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
40
<PAGE>
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.
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.
41
<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 months period 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
42
<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
43
<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.
44
<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 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.
45
<PAGE>
<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 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.
46
<PAGE>
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 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 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.
47
<PAGE>
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.
48
<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
ENDED MARCH
YEAR ENDED DECEMBER 31, 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.
49
<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
50
<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.
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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.
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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 25,500 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
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more sophisticated enhanced services has made it possible for new entrants to
compete with the ITOs in 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
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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.
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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.
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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 17,000 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 Hotel Serv- "Turnkey Business ISP"
ices
Facsimile Services
</TABLE>
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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.
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
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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 Internet, such as openness,
easy access and low cost, with the advantages of a private network, such
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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.
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
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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 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.
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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 25,500 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 Corpora-
tion Holiday Inn Hotels(11) U.S. Embassy in Korea
Mitsubishi Corpo-
ration InterContinental Hotel U.S. Embassy in Australia
Chrysler Interna-
tional Copacabana Palace UN Consulate in South Africa
Warner-Lambert
Corporation Marina Hotel
Diners Club Inter-
national Caesar Park Hotel
DHL Aviation
Wal-Mart Stores,
Inc.
Citibank, N.A.
Bank of Tokyo
Royal Bank of Can-
ada
</TABLE>
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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").
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-
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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 the
call-reorigination industry. The Combined Company believes that there are more
than 150 companies
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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.
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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
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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
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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
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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.
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<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.
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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....... 53 Director (upon completion of the GlobalTel Merger)
Lyman C. Hamilton....... 71 Director (upon completion of the GlobalTel Merger)
Michael S. Brownfield... 57 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 company, Intrinsyc Software, Inc., a developer of
software tools and components and IBNET. 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. 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
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<PAGE>
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
President/General Manager of Metromedia Communications Corp., a U.S.-based
long distance carrier. He received a B.A. degree in Business, Education and
Psychology from the University of Minnesota.
Richard F. Nipert has been a director of CSI since November 1996. Since
January 1993, Mr. Nipert has been a partner in the law firm of Bright, Gibson
and Nipert, P.C. in Denver, Colorado. Mr. Nipert previously
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practiced law with three other law firms located in Denver. Mr. Nipert
practices law primarily in the fields of business and commercial real estate.
He received a J.D. degree from the University of Southern California and a
B.A. degree in Social Ecology from the University of California at Irvine.
Charles A. Shields has been a director of CSI since April 1998. Since March
1996, Mr. Shields has served as President of Charles A. Shields and
Associates, Inc., a human resources consulting firm. From October 1989 until
March 1996, he served as Senior Vice President of Human Resources and
Administration for Manor Care, Inc., a holding company for Choice Hotels,
International and Manor Care Health Services. From 1965 until 1987, Mr.
Shields held various positions for the Walt Disney Company including Vice
President of Administration and Human Resources for Walt Disney Imagineering,
Inc. He received a B.S. degree in Business and Marketing from California State
University at Long Beach.
Bruce L. Crockett has served as a Director of GlobalTel since September 1997
and will serve as a Director of the Combined Company following the GlobalTel
Merger. From February 1992 to July 1996, he served as President, Chief
Executive Officer and a Director of COMSAT Corporation, a global
telecommunications company. He is also a director, chairman of the
compensation committee and member of the audit committee of ACE Limited, a
multi-link insurance company, a director and trustee of mutual funds managed
by AIM Management Group Inc., a mutual fund company and a director of IBNET.
Mr. Crockett received an A.B. degree in Geography from the University of
Rochester, a B.S. degree in Accounting from the University of Maryland and an
M.B.A. degree in Finance from Columbia University.
Lyman C. Hamilton has served as a Director of GlobalTel since November 1997
and will serve as a Director of the Combined Company following the GlobalTel
Merger. He also served as President and Chief Executive Officer of
Interdigital Communications Corporation from 1994 to 1995. Prior to that, Mr.
Hamilton served as Chairman of the Board from 1993 to 1994, and as President
and Chief Executive Officer from 1991 to 1993, of Alpine Polyvision, Inc., a
developer of flat panel displays. Mr. Hamilton was employed by ITT Corporation
from 1962 to 1979 where he served as President from 1977 to 1979 and as Chief
Executive Officer in 1978 and 1979. Currently, he is a director of Marine
Management Systems, Inc., a provider of shipboard hardware and software
management systems, Scan-Optics, Inc., a provider of optical character
recognition equipment, Polyvision Inc., a provider of visual display equipment
and developer of flat panel displays and IBNET. Mr. Hamilton received a B.A.
degree from Principia College and an M.P.A. degree from Harvard University.
Michael S. Brownfield has served as a Director of the GlobalTel since
January 1996 and will serve as a Director of the Combined Company following
the GlobalTel Merger. Mr. Brownfield, a private investor, is also a director
of NW Cascade Inc., a construction service and supply company, Cutter & Buck,
Inc. a men's apparel company, and Accurate Molded Plastics Inc., a plastics
manufacturer. Mr. Brownfield received a B.S. degree from the University of
Oregon.
BOARD COMMITTEES
The Board of Directors maintains a Compensation Committee and an Audit
Committee. The Compensation Committee, consisting of Messrs. Shields, Nipert
and Hamilton, reviews compensation and option matters and makes
recommendations to the Board regarding changes in executive compensation. The
Audit Committee, consists of Messrs. Crockett, Nipert and Cary. The function
of the Audit Committee is to review and approve financial policies and
practices and the scope of audit procedures employed by the Combined Company's
independent auditors, review and approve the audit reports rendered by the
Combined Company's independent auditors and approve the audit fee charged by
the independent auditors. The Audit Committee reports to the Board of
Directors with respect to such matters and recommends the selection of the
independent auditors.
COMPENSATION OF DIRECTORS
Directors who are also employees of CSI receive no additional compensation
for serving as directors. Non-employee directors have received options to
purchase 16,667 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.
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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.
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.
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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 the greater of $2.5 million or three times the
aggregate royalty payments for the first 12 months of the agreement. 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 year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION ALL OTHER
COMPENSATION AWARDS COMPENSATION
------------- ------------ ------------
SECURITIES
UNDERLYING
NAME AND POSITION YEAR SALARY BONUS OPTIONS
----------------- ---- ------- ----- ------------
<S> <C> <C> <C> <C> <C>
Robert A. Spade
Vice-Chairman and Chief Executive
Officer.......................... 1997 $90,374 -- 33,333 --
1996 67,500 -- 4,333 --
1995 41,000 -- 3,333 --
</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.
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......... 33,333 31.1% 1.335 8/29/07 27,986 709,221
</TABLE>
- --------
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(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......... 7,666 33,333 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 will 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 the Executives employment
only for cause (as defined in the related agreement). The Executives may also
be entitled to receive bonuses pursuant to any cash bonus plan adopted by the
Board of Directors. Pursuant to the employment agreements, each Executive will
agree 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
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 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 the respective agreements. The Combined Company
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
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<PAGE>
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 1,000,000 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 395,667 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 389,925 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.
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.
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<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>
Willow Family L.P., a limited partnership in which Mr. Erickson and his two
daughters are partners. See "Certain Transactions."
(3) Includes 693,907 shares held of record by Mr. Spade or his spouse and
18,778 shares are issuable upon exercise of options held by Mr. Spade.
(4) Includes 17,778 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 40,000 shares issuable upon exercise of options.
(7) Includes 3,333 shares issuable upon exercise of options.
(8) Includes 6,667 shares of Common Stock issuable upon exercise of warrants.
(9) Includes 5,345 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 1,633 shares issuable upon exercise of options.
(11) Includes 23,093 shares of Common Stock issuable upon exercise of
outstanding warrants, 1,633 shares of Common Stock issuable upon exercise
of options, and 23,944 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."
(12) Includes 260,844 shares issuable upon exercise or conversion of
outstanding securities.
(13) Includes 7,333 shares issuable upon exercise of warrants.
(14) Includes 1,633 shares of Common Stock issuable upon exercise of options,
1,134 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, 12,250 shares of Common Stock
issuable upon the exercise of outstanding warrants held by Trans-Pacific
Consultants Pte Ltd., 12,250 shares of Common Stock issuable upon the
exercise of outstanding warrants held by Gereg Capital Corporation and
98,004 shares of Common Stock held by Gereg Capital Corporation. Includes
81,670 shares of Common Stock issuable upon the exercise of outstanding
warrants and 473,771 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.
(15) Includes 81,760 shares of Common Stock issuable upon exercise of
outstanding warrants and 473,771 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."
(16) Includes 42,468 shares of Common Stock issuable upon exercise of
outstanding warrants and 120,323 shares of Common Stock issuable upon
conversion of two outstanding promissory notes in the aggregate principal
amount of $1,070,000, plus accrued interest as of June 30, 1998. See
"Certain Transactions." PBIG-GTR Partners is controlled by Kenneth Huang.
Mr. Huang's address is 20987 Fairwoods Drive, Cupertino, CA 90541.
79
<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 272,925 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 218,279 shares of Common
Stock. Immediately after the merger, Mr. Spade transferred 141,222 shares of
such Common Stock to 21 persons, including Mr. Nipert (3,333 shares) and Mr.
Scanlon (13,333 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 and $87,259 in lease expense
for the fiscal years ended April 30, 1996 and 1997, respectively. Minimum
lease payments for the fiscal years ended April 30, 1998, 1999 and 2000 are
approximately $137,000, $118,000 and $55,000 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 59,692 shares of Common Stock and granted options
to purchase 32,333 shares of Common Stock at $8.625 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 1,667 and 19,000 shares of Common Stock
respectively, in the WIN transaction. The Common Stock was valued at $4.875
per share in the WIN transaction. 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 16,667 shares of Common Stock at $2.25 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 $6.75 to $18.75 per share.
In October 1997, CSI incurred an obligation to pay $50,000 and in January
1998 granted options to purchase 33,333 shares of Common Stock at an exercise
price of $1.125 per share to Mr. Cary, in each case in consideration of
business consulting services.
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 1,333 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 5,333 warrants; Charles A.
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<PAGE>
Shields (and his wife Mary Jo Shields), who was issued a $50,000 10% Note and
granted 6,667 warrants; Dean H. Cary, who was issued a $100,000 10% Note and
granted 13,333 warrants. James L. Williams, was also issued a $40,000 10% Note
and granted 5,333 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.
In May and June 1998, Robert A Spade pledged the shares of Common Stock
owned by him to secure payment of certain notes issued by CSI as principal
amount of $1,250,000. 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
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.
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
81
<PAGE>
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 and PBIG-
GTR Partners L.P., each of 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)(11) 1/96
11/95 20,000(2)(11) 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
PBIG-GTR Partners, L.P.............. 12/96 900,000(1)(10) 6/98
3/97 400,000(10) 6/98
</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) In September 1997, PBIG-GTR Partners, L.P. converted a $30,000 principal
amount of the $900,000 note and $200,000 principal amount of the $400,000
note into shares of GlobalTel common stock.
(11) Demand note.
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<PAGE>
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
and PBIG-GTR Partners L.P., each of which will hold more than 5% of the
Combined Company's outstanding Common Stock after completion of the offering
and the GlobalTel Merger.
<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(1)
11,360 4/96-2/98 $5.50(2)(3)
9,371 11/96 $5.50(2)
5,679 10/97
4,545 12/97 $5.50(2)(3)
50,484 11/97
29,318 10/97 $5.50(4)
2,000 3/98
Ronald P. Erickson........... 31,237 11/97
19,131 8/97 $0.05(2)
134,500 6/96-3/98 $5.50(1)
1,800 6/96 $5.50(2)(3)
54,000 12/95
ITEX Capital Corporation..... 72,727 12/97 $5.50(2)(3)
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)
580,104 4/97 $3.85(4)
Trans-Pacific Consultants
Pte. Ltd.................... 15,000 4/96 $5.50(2)(3)
PBIG-GTR Partners, L.P....... 44,194 9/97
18,000 12/96 $5.50(2)(3)
147,328 9/97 $8.11(4)
34,000 3/97 $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.............................. --
PBIG-GTR Partners, L.P.......................................... 1,070,000
</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.
83
<PAGE>
In May 1998, GlobalTel borrowed $500,000 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.
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 756,475 shares of
Common Stock from CSI at various times from April 1993 to December 1994 at
prices ranging from $.54 per share to $.90 per share.
Mr. Williams purchased 231,791 shares of Common Stock from CSI at various
times from April 1993 to June 1995 at prices ranging from $.57 to $1.56 per
share. Mr. Williams also acquired 90,332 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 1,333 shares of Common Stock at $4.125
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 667 shares of Common Stock at an exercise price of $1.59
per share. In October 1997, Mr. Williams purchased 13,333 shares of Common
Stock for $1.65 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 March 1998, Mr. Williams purchased a 10% promissory note with a $40,000
principal amount. In connection therewith, he received a warrant to purchase
5,333 shares of common stock at an exercise price of $2.719 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."
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<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, 9,217,693 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, 9,817,693 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 20,000 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.
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. Such Bridge Shares are offered by this
Registration Statement.
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
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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 333 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 June 1998, CSI issued secured promissory notes (the
"12% Notes") in an aggregate principal amount of $1,250,000. 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 67 shares of Common Stock. The shares of Common Stock underlying
the warrants are included among the Registered Securityholders' 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 333 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.
REGISTRATION RIGHTS
CSI has agreed to grant to two holders of 20,000 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 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
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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.
RESCISSION OFFER
On approximately June 19, 1998, the Combined Company intends to commence the
Rescission Offer in accordance with the federal securities laws and the
Washington Securities Act with respect to the following securities which were
issued or sold by 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 plans to offer to rescind such
prior issuances and sales by offering to repurchase the Rescission Securities
at the price paid therefor plus interest at the statutory rate of 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
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price paid for the Cash Rescission Stock is $2.65 per share with respect to
96,748 shares and $5.50 per share with respect to 142,364 shares, for an
aggregate price of $1.0 million. The price paid for the 1995 Rescission Stock
is $5.50 per share for an aggregate price of approximately $500,000. The price
paid for the Converted Note Rescission Stock is equal to the principal amount
of the original promissory notes related thereto for an aggregate price of
$791,000. The aggregate price paid for the Rescission Notes is $805,000. There
is no separate price for the Converted Warrants Rescission Stock because by the
terms and conditions of the Rescission Offer, the Converted Warrants Rescission
Stock must be surrendered if the holder of the related Converted Note
Rescission Stock elects to accept the Rescission Offer with respect to its
Converted Note Rescission Stock. The aggregate accrued interest with respect to
all of the Rescission Securities as of June 30, 1998 will be approximately
$397,000. If all holders of Rescission Securities were to accept the Rescission
Offer, the Combined Company would be required to make payments aggregating
approximately $3.7 million, plus the aggregate amount of any additional
interest thereon that accrues after June 30, 1998. The Rescission Offer will
expire 20 business days after the offer is transmitted. The Combined Company
currently expects to use a portion of the proceeds from this offering to make
payments under the Rescission Offer, if any are required. Offerees who do not
accept the Rescission Offer will thereafter hold registered Rescission
Securities under the Securities Act which, in the case of the Rescission Stock,
will be freely tradeable by non-affiliates in the public market as of the
effective date of the Rescission Offer Registration Statement.
As of the date hereof, management is not aware of any claims for rescission
against GlobalTel or the Combined Company. Also, current and former officers
and directors of GlobalTel holding an aggregate of $1.4 million (including
statutory interest accrued thereon as of February 28, 1998) of the Rescission
Securities have indicated their intent not to accept the Rescission Offer,
although no formal Rescission Offer has been made to them and they have not and
may not agree to reject the Rescission Offer until the Rescission Offer has
commenced. There can be no assurance that all or a substantial portion of the
Rescission Securities will not be tendered in response to the Rescission Offer.
Use of a portion of the proceeds of this offering in connection with the
Rescission Offer will reduce the amount of working capital available to the
Combined Company and may require it to seek additional capital sooner than
otherwise might be required. The Rescission Offer is being made in order to
limit, so far as may be permitted under applicable federal and state securities
laws, the potential liability of the 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 the registration requirements of federal securities laws, if a holder of
the Rescission Securities were to assert a claim that the Rescission Securities
were sold in violation thereof, the position of the Securities and Exchange
Commission is that liabilities under the federal securities laws are not
terminated by making a rescission offer. Furthermore, notwithstanding the
Rescission Offer, there can be no assurance that the 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.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, CSI will have 9,217,693 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, 9,817,693 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, 4,024,378 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 (180 days with respect to the
Selling Securityholders' Shares) from the date of this Prospectus 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 1,000,000 shares of Common Stock have been reserved for issuance upon
exercise of options granted under the Option Plan, under which options to
acquire 415,667 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.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for which Cruttenden Roth 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......................................
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 shares of
Common Stock are released for sale to the public, 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.
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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 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.
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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.
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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.
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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.
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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.
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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.
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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-42
Balance Sheets as of December 31, 1996, October 31, 1997 and March 31,
1998 (unaudited)...................................................... F-43
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-44
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-45
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-46
Notes to Financial Statements.......................................... F-47
</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) and
the proposed acquisitions of GlobalTel Resources, Inc. (GlobalTel) (the
Merger) and International Telephone Company (ITC) (the Acquisition), 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
1,626,489 shares of its Common Stock for all outstanding shares of GlobalTel's
preferred and common stock. In addition, outstanding options and warrants to
purchase 1,740,983 shares of GlobalTel's common stock will be exchanged for
options and warrants to purchase 1,421,902 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 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.
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 $ -- $ -- $1,320(g) $ 2,634 $23,801 (h)
(2,840)(i)
(94)(k)
(2,765)(j)
(70)(i)
(1,250)(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 -- -- 1,320 5,779 17,034
Property and
equipment--net.. 501 1,357 628 -- -- -- 2,486 --
Deferred financ-
ing costs....... 225 435 -- (435) -- 150(g) 375 (225)(i)
(150)(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............ -- -- -- 3,100 -- -- 3,100 --
Goodwill........ -- -- -- 1,510 -- -- 1,510 --
------- ------- ------- ------- ------ ------ ------- -------
TOTAL ASSETS.... $ 2,612 $ 3,513 $ 3,334 $18,202 $4,843 $1,470 $33,974 $16,173
======= ======= ======= ======= ====== ====== ======= =======
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
ASSETS
Current assets:
Cash............ $19,283
Restricted
cash............ 385
Receivables--
net............. 2,826
Prepaid expenses
and other....... 319
-----------
Total current
assets 22,813
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............ 3,100
Goodwill........ 1,510
-----------
TOTAL ASSETS.... $50,147
===========
</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 -- -- 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 -- 575 -- 1,250 (g) 8,844 (2,840)(i)
398 (i)
(1,250)(i)
------- -------- ------- ------- ------ ------ ------- -------
Total current
liabilities..... 4,840 10,060 3,999 1,625 2,765 1,250 24,539 (6,754)
------- -------- ------- ------- ------ ------ ------- -------
Long-term debt--
net............... -- 2,000 234 -- -- -- 2,234 --
------- -------- ------- ------- ------ ------ ------- -------
Deferred income
taxes............. -- -- -- 341 -- -- 341 --
------- -------- ------- ------- ------ ------ ------- -------
Common stock sub-
ject to rescis-
sion.............. -- 2,455 -- -- -- -- 2,455 --
------- -------- ------- ------- ------ ------ ------- -------
Shareholders' eq-
uity (deficit):
Series A convert-
ible preferred
stock............. -- 1,070 -- (1,070) -- -- -- --
Common stock:
CSI.............. 2,651 -- -- 5,479 -- 795 (f) 9,145 23,700 (h)
(133)(k)
GlobalTel........ -- 2,904 -- (2,904) -- 220 (g) -- --
ITC.............. -- -- -- -- -- -- -- --
Additional paid in
capital........... -- -- 1 -- (1) -- -- --
Common stock op-
tions............. 37 -- -- 682 -- -- 719 --
Obligation to is-
sue common stock.. 795 1,012 -- (1,012) 1,179 (795)(f) 1,179 --
Warrants.......... -- 2,118 -- (245) -- -- 1,873 --
Note receivable
from shareholder.. (35) -- -- -- -- -- (35) --
Accumulated defi-
cit............... (5,543) (18,106) (900) 18,106 900 -- (8,343) (225)(i)
(2,800) (398)(i)
(150)(i)
Treasury stock, at
cost.............. (133) -- -- -- -- -- (133) 133 (k)
------- -------- ------- ------- ------ ------ ------- -------
Total sharehold-
ers' equity
(deficit)....... (2,228) (11,002) (899) 16,236 2,078 220 4,405 22,927
------- -------- ------- ------- ------ ------ ------- -------
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY (DEFICIT).. $ 2,612 $ 3,513 $ 3,334 $18,202 $4,843 $1,470 $33,974 $16,173
======= ======== ======= ======= ====== ====== ======= =======
<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......... 5,152
-----------
Total current
liabilities..... 17,785
-----------
Long-term debt--
net............... 2,234
-----------
Deferred income
taxes............. 341
-----------
Common stock sub-
ject to rescis-
sion.............. 2,455
-----------
Shareholders' eq-
uity (deficit):
Series A convert-
ible preferred
stock............. --
Common stock:
CSI.............. 32,712
GlobalTel........ --
ITC.............. --
Additional paid in
capital........... --
Common stock op-
tions............. 719
Obligation to is-
sue common stock.. 1,179
Warrants.......... 1,873
Note receivable
from shareholder.. (35)
Accumulated defi-
cit............... (9,116)
Treasury stock, at
cost.............. --
-----------
Total sharehold-
ers' equity
(deficit)....... 27,332
-----------
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY (DEFICIT).. $50,147
===========
</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...... -- -- -- 6,586 1,653 (d) -- 8,239 --
Acquired in-proc-
ess research and
development...... -- -- -- 2,800 -- -- 2,800 --
--------- ------- ------ -------- ------- -------- --------- ----
Total operating
expenses........ 5,890 8,160 2,635 10,436 1,653 -- 28,774 --
--------- ------- ------ -------- ------- -------- --------- ----
LOSS FROM OPERA-
TIONS............ (1,092) (6,469) (913) (10,436) (1,653) -- (20,563) --
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) (9,694) (1,766) -- (21,564) --
INCOME TAX
BENEFIT.......... -- -- -- -- -- -- -- --
--------- ------- ------ -------- ------- -------- --------- ----
LOSS BEFORE
EXTRAORDINARY
ITEM............. $ (1,351) $(7,837) $ (916) $ (9,694) $(1,766) $ -- $ (21,564) $--
========= ======= ====== ======== ======= ======== ========= ====
BASIC LOSS PER
SHARE BEFORE
EXTRAORDINARY
ITEM ............ $ (.41) $ (4.21)
========= =========
WEIGHTED AVERAGE
SHARES OUTSTAND-
ING.............. 3,260,870 5,123,719
========= =========
<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...... 8,239
Acquired in-proc-
ess research and
development...... 2,800
-----------
Total operating
expenses........ 28,774
-----------
LOSS FROM OPERA-
TIONS............ (20,563)
OTHER INCOME (EX-
PENSE)--Net...... (1,001)
-----------
LOSS BEFORE
INCOME TAXES AND
EXTRAORDINARY
ITEM............. (21,564)
INCOME TAX
BENEFIT..........
-----------
LOSS BEFORE
EXTRAORDINARY
ITEM............. $ (21,564)
===========
BASIC LOSS PER
SHARE BEFORE
EXTRAORDINARY
ITEM ............ $ (2.47)
===========
WEIGHTED AVERAGE
SHARES OUTSTAND-
ING.............. 8,723,719
===========
</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...... -- -- -- 1,635 413 (d) -- 2,048 --
--------- ------- ------ -------- ----- -------- --------- ----
Total operating
expenses........ 1,283 1,734 703 1,635 413 -- 5,768 --
--------- ------- ------ -------- ----- -------- --------- ----
LOSS FROM OPERA-
TIONS............ (428) (1,509) (71) (1,635) (413) -- (4,056) --
OTHER INCOME (EX-
PENSE)--Net...... (698) (1,023) -- 772 -- -- (949) --
--------- ------- ------ -------- ----- -------- --------- ----
LOSS BEFORE
INCOME TAXES AND
EXTRAORDINARY
ITEM............. (1,126) (2,532) (71) (863) (413) -- (5,005) --
INCOME TAX
BENEFIT.......... -- -- -- -- -- -- -- --
--------- ------- ------ -------- ----- -------- --------- ----
LOSS BEFORE
EXTRAORDINARY
ITEM............. $ (1,126) $(2,532) $ (71) $ (863) $(413) $ -- $ (5,005) $--
========= ======= ====== ======== ===== ======== ========= ====
BASIC LOSS PER
SHARE BEFORE
EXTRAORDINARY
ITEM ............ $ (.34) $ (.96)
========= =========
WEIGHTED AVERAGE
SHARES OUTSTAND-
ING.............. 3,352,518 5,215,367
========= =========
<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...... 2,048
-----------
Total operating
expenses........ 5,768
-----------
LOSS FROM OPERA-
TIONS............ (4,056)
OTHER INCOME (EX-
PENSE)--Net...... (949)
-----------
LOSS BEFORE
INCOME TAXES AND
EXTRAORDINARY
ITEM............. (5,005)
INCOME TAX
BENEFIT.......... --
-----------
LOSS BEFORE
EXTRAORDINARY
ITEM............. $ (5,005)
===========
BASIC LOSS PER
SHARE BEFORE
EXTRAORDINARY
ITEM ............ $ (.57)
===========
WEIGHTED AVERAGE
SHARES OUTSTAND-
ING.............. 8,815,367
===========
</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 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
1,626,489 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 1,421,902 shares of its Common Stock and outstanding options
and warrants to purchase 1,740,983 of GlobalTel's common stock will be
cancelled. 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. 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 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. A deferred income
tax benefit, resulting from the generation of net operating losses
subsequent to the GlobalTel Merger and from the decreasing differences
between the book and tax bases of intangible assets, is recognized to
eliminate the deferred income tax liability. 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 1998 issuance of promissory notes totalling $1,250,000
and 74,074 shares of CSI Common Stock for $250,000, and the net
proceeds (net of debt issuance costs of $150,000 and stock offering
costs of $30,000) therefrom totalling $1,320,000.
OFFERING ADJUSTMENTS
(h) Reflects the estimated net proceeds of the Offering of $24,186,000, 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 1998 bridge debt of $1,250,000,
which is payable upon successful completion of the Offering, and the
write-off to accumulated deficit of the related unamortized debt
issuance costs of $150,000.
(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 up on
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
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 party
(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; 2,999,662,
3,255,197, 3,349,030 and
3,354,844 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... $ (.39) $ (.90) $ (.08) $ (.35) $ (.05) $ (.34)
Extraordinary item.... -- -- -- .22 -- --
---------- ----------- ----------- ----------- ---------- -----------
Net loss.............. $ (.39) $ (.90) $ (.08) $ (.13) $ (.05) $ (.34)
========== =========== =========== =========== ========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING............ 1,633,680 2,798,150 3,138,079 3,296,455 3,179,591 3,352,518
========== =========== =========== =========== ========== ===========
</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........ 1,633,680 $ 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..... 1,633,680 530,929 503,437 -- -- (1,216,298) -- -- (181,932)
Issuance of
subscribed stock... 562,421 503,437 (503,437) -- -- -- -- --
Sale of stock for
cash and note...... 311,333 542,000 -- -- (5,000) -- -- -- 537,000
Stock issued for
services........... 219,303 312,775 -- -- -- -- -- -- 312,775
Stock issued in
acquisition........ 272,925 -- -- -- -- -- -- -- --
Net loss............ -- -- -- -- -- (2,523,940) -- -- (2,523,940)
--------- ---------- --------- ------- -------- ----------- -------- --------- -----------
BALANCES,
April 30, 1996..... 2,999,662 1,889,141 -- -- (5,000) (3,740,238) -- -- (1,856,097)
Sale of stock for
cash............... 20,500 111,200 -- -- -- -- -- -- 111,200
Stock issued in
exchange for note.. 20,000 30,000 -- -- (30,000) -- -- -- --
Stock issued for
services........... 46,667 34,224 -- -- -- -- -- -- 34,224
Stock issued in
acquisition of
affiliate.......... 59,692 49,993 -- -- -- -- -- -- 49,993
Conversion of notes
and accrued
interest to stock.. 108,676 251,508 -- -- -- -- -- -- 251,508
Net loss............ -- -- -- -- -- (259,473) -- -- (259,473)
--------- ---------- --------- ------- -------- ----------- -------- --------- -----------
BALANCES,
April 30, 1997..... 3,255,197 2,366,066 -- -- (35,000) (3,999,711) -- -- (1,668,645)
Conversion of notes
and accrued
interest to stock.. 71,328 104,467 -- -- -- -- -- -- 104,467
Sale of stock for
cash............... 302,880 499,752 -- -- -- -- -- -- 499,752
Issuance of debt
with stock rights.. -- -- 795,200 -- -- -- -- -- 795,200
Stock options
granted............ -- -- -- 37,000 -- -- -- -- 37,000
Purchase of common
stock.............. -- -- -- -- -- -- (280,375) (462,619) (462,619)
Retirement of
treasury stock..... (133,333) (220,000) -- -- -- -- 133,333 220,000 --
Net loss............ -- -- -- -- -- (417,348) -- -- (417,348)
--------- ---------- --------- ------- -------- ----------- -------- --------- -----------
BALANCES,
December 31, 1997.. 3,496,072 2,750,285 795,200 37,000 (35,000) (4,417,059) (147,042) (242,619) (1,112,193)
Unaudited:
Conversion of notes
and accrued
interest to stock.. 5,814 10,300 -- -- -- -- -- -- 10,300
Retirement of
treasury stock..... (66,667) (110,000) -- -- -- -- 66,667 110,000 --
Net loss............ -- -- -- -- -- (1,126,221) -- -- (1,126,221)
--------- ---------- --------- ------- -------- ----------- -------- --------- -----------
BALANCES,
March 31, 1998
(unaudited)....... 3,435,219 $2,650,585 $ 795,200 $37,000 $(35,000) $(5,543,280) (80,375) $(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
party.................. 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, due December
29, 1998 or 5 days after the
closing of the proposed public
offering (see Note 12), which-
ever 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 10,000 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 by 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.
4.SHAREHOLDERS' EQUITY
During the year ended April 30, 1995, CSI accepted deposits for purchase of
562,421 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 333,333 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, 61,667 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 272,925 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 40.5 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 219,303 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 20,500 shares of Common Stock
for $6.00 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 59,692 shares of CSI's Common Stock to certain shareholders of
the affiliate and granted options to purchase 32,333 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 the beginning of fiscal 1996 and 1997 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 108,676 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 71,328 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 5,814 shares of stock.
During the year ended April 30, 1997, CSI issued 46,667 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 280,375 shares of its
Common Stock from such individuals for $1.65 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 133,333 and 66,667 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 302,880
shares of its Common Stock for $499,752, or $1.65 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 non-qualified 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 1,000,000. 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........................... 299,717 $1.50--$6.00 1998--2006
April 30, 1997........................... 294,733 $1.50--$8.64 1998--2007
December 31, 1997........................ 369,600 $.60--$8.64 1998--2007
March 31, 1998........................... 378,167 $.60--$8.64 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.......................................................... 299,717
Exercised........................................................ --
Expired or cancelled............................................. --
--------
Outstanding at April 30, 1996...................................... 299,717
Granted.......................................................... 146,883
Exercised........................................................ (20,000)
Expired or cancelled............................................. (131,867)
--------
Outstanding at April 30, 1997...................................... 294,733
Granted.......................................................... 157,233
Exercised........................................................ --
Expired or cancelled............................................. (82,366)
--------
Outstanding at December 31, 1997................................... 369,600
Granted.......................................................... 8,567
Exercised........................................................ --
Expired or cancelled............................................. --
--------
Outstanding at March 31, 1998...................................... 378,167
========
</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......... (.90) (.08) (.13)
Net loss per share--pro forma........... (.97) (.18) (.17)
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 50,000 shares of CSI's Common Stock at prices ranging from $4.50
to $10.50, 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 19,500
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 $.81 to $4.14 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 94,667 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 8,000 warrants to purchase shares of
CSI's Common Stock at prices ranging from $2.73 to $2.82, 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 asset--
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 69,000 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.MAJOR CUSTOMERS, SUPPLIERS AND FOREIGN MARKETS
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 all 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>
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 exceed $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 June 1998, management of CSI approved a 1-for-3 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-3 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 1,626,489 shares of its
Common Stock for all outstanding shares of GlobalTel's preferred and common
stock.
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
On May 1, 1998, CSI issued 12% secured promissory notes and 250,000 warrants
for $1,250,000 cash. The 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. If CSI is unable to obtain an effective
registration statement by July 26, 1998, the noteholders are entitled to
receive an additional 12,500 warrants for every seven calendar days after such
date until an effective registration statement is obtained. CSI also agreed to
issue 37,500 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 June 26, 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.
In May 1998, CSI loaned $500,000 from the proceeds of the above transactions
to GlobalTel. The loan, which bears interest at 20%, is 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 and 9,
as to which the date is
June 19, 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 June
19, 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 $2.7 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.
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>
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
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)
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,
---------------------
1996 1997 MARCH 31, 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).
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.
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)
Statement of Financial Accounting Standards ("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>
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.
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)
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, prior to
completion of the CSI Offering, GlobalTel plans to offer to rescind such prior
sales by offering to repurchase the Rescission Securities (the "Rescission
Offer") at the price originally paid plus interest at the annual statutory
rate of eight percent from the date of purchase to the expiration of the
Rescission Offer. 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. If all holders of
Rescission Securities as of March 31, 1998 were to accept the Rescission
Offer, GlobalTel would be required to pay approximately $3.7 million including
statutory accrued interest.
GlobalTel estimates that the total amount of its obligation for the
statutory accrued interest with respect to Rescission Stock could aggregate
approximately $327,000 as of March 31, 1998, if all offerees holding
Rescission Stock were to accept the Rescission Offer. Because of the
contingent nature of this liability and because the ultimate amount to be
paid, if any, is not presently known, the potential interest liability with
respect to Rescission Stock has not been accrued in the accompanying
consolidated financial statements, but will be recorded as an expense and a
liability of GlobalTel if and when the shares of common stock subject to
rescission are tendered pursuant to the Rescission Offer. The statutory rate
of interest with respect to the bridge loans covered by the Rescission Offer
is less than the interest that has already been accrued by GlobalTel under the
original terms of the bridge loans.
Although GlobalTel plans to make the Rescission Offer prior to completion of
the CSI Offering, completion of the Rescission Offer and payment for the
Rescission Securities tendered pursuant to the Rescission Offer is
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)
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 payments pursuant to
the repurchase of the Rescission Securities, if any are required. However,
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.
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 is subject to shareholder
approval. On June 19, 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 is subject to
preferred shareholder approval.
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>
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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-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)
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>
THREE MONTHS ENDED
--------------------
TEN MONTHS 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-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 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-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 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. ITC's stockholders have received $125,000 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-51
<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.................................................................. 1
Risk Factors............................................................. 5
The Acquisitions......................................................... 21
Use of Proceeds.......................................................... 23
Dividend Policy.......................................................... 24
Price Range of Common Stock.............................................. 25
Dilution................................................................. 26
Capitalization........................................................... 27
Selected Financial Data.................................................. 28
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 30
Business................................................................. 53
Management............................................................... 71
Principal and Selling Shareholders....................................... 78
Certain Transactions..................................................... 80
Description of Securities................................................ 85
Rescission Offer......................................................... 87
Shares Eligible for Future Sale.......................................... 89
Underwriting............................................................. 90
Legal Matters............................................................ 93
Experts.................................................................. 93
Additional Information................................................... 94
Glossary of Terms........................................................ 95
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
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
COMMON STOCK
----------------------
P R O S P E C T U S
----------------------
CRUTTENDEN ROTH
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 JUNE 19, 1998
PRELIMINARY PROSPECTUS
SHARES
[LOGO]
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 319,693 shares
of Common Stock of Communications Systems International, Inc. and shares
underlying warrants that were issued in private placements completed in
December 1997, May 1998 and June 1998 and 50,000 shares issuable upon the
exercise of certain warrants (collectively, the "Registered Securityholders'
Shares"). The Registered Securityholders' Shares are not part of the concurrent
underwritten offering and may not be offered or sold prior to 180 days 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 June 17, 1998, the
last reported closing high bid price of the Common Stock was $3.75 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 6.
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 $23.7 million from the sale of the shares of
Common Stock included in the underwritten public offering, and will receive
approximately $27.5 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..............
369,693 shares
Common Stock outstanding after
the offering..................... 9,217,693 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 and 1,626,489 shares of Common Stock issuable in
connection with the GlobalTel Merger. Does not include (i) up to 1,040,094
shares of Common Stock issuable upon exercise of outstanding options, (ii)
up to 1,551,612 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 $23.7 million from the sale of the shares of
Common Stock included in the underwritten public offering, and will receive
approximately $27.5 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 369,693 Registered Securityholders' Shares, comprised of approximately
162,286 Bridge Shares, 74,074 shares of Common Stock and 133,333 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. Pursuant to an agreement with Cohig & Associates, Inc. ("Cohig") none of
the Registered Securityholders' Shares may be sold by the Registered
Securityholders prior to 180 days after the date of this Prospectus without
the consent of Cohig. 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 -0-
Swedbank Luxembourg S.A. ...................... 22,857 -0-
Lee Schlessman, POA Sandra Garnett............. 5,714 -0-
Susan M. Duncan................................ 5,714 -0-
Susan M. Duncan Irrevocable Gift Trust......... 5,714 -0-
The Schlessman Family Foundation............... 5,714 -0-
Lee Schlessman, POA Gary Schlessman............ 5,714 -0-
Lee Schlessman, POA Cheryl Bennett............. 5,714 -0-
Cal J. Rickel & Amanda Mae Rickel.............. 5,714 -0-
Arab Commerce Bank Ltd. ....................... 5,714 -0-
Dr. Thomas R. Phelps, M.D. .................... 5,143 -0-
Todd & Tom Rafalovich.......................... 2,857 -0-
First Mortgage Income Trust.................... 5,714 -0-
Adams 1977 Family Trust........................ 2,857 -0-
Ted Rafalovich Living Trust.................... 2,857 -0-
Germaine Robineau O'Hare Trust................. 2,857 -0-
ProFutures Special Equities Fund, L.P.......... 217,407(2) -0-
Network 1 Financial Securities, Inc. .......... 30,000(2) -0-
-------
National Financial Services Group, Inc. ....... 10,000(2) 50,000
------
Richard Sullivan............................... 10,000(2) 10,000
</TABLE>
- --------
(1) Assumes all of the Bridge Shares and Registered Securityholders' Warrant
Shares are sold.
(2) Includes Registered Securityholders' Warrant Shares issuable upon exercise
of the Selling Securityholders' Warrants.
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
A-6
<PAGE>
[ALTERNATE PAGE FOR REGISTERED SECURITYHOLDERS' PROSPECTUS]
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 its account pursuant to this
Prospectus; (c) ordinary brokerage transactions and transactions in which the
broker solicits purchases; and (d) face-to-face transactions between sellers
and purchaser without a broker or dealer. In effecting sales, brokers or
dealers engaged by the Registered Securityholders may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with
such sales. From time to time, one or more of the Registered Securityholders
named herein may pledge, hypothecate or grant a security interest in some or
all of the Registered Securityholders' Shares, owned by them, and the
pledgees, secured parties or persons to whom such securities have been
hypothecated shall, upon foreclosure in the event of default, be deemed to be
Registered Securityholders for purposes hereof.
If any of the following occurs: (a) the securities are sold at a fixed price
or by option at a price other than the prevailing market price, (b) the
securities are sold in block transactions and the purchaser takes the
securities with an intent to resell, or (c) the compensation paid to broker-
dealers is other than usual and customary discounts, this Prospectus must be
amended to include additional disclosure relating to such price, arrangements
and compensation terms before offers and sales of the Registered
Securityholders' Shares may be made.
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............................................. $ 13,219
NASD filing fee.................................................. 4,981
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.................................................... 163,800*
----------
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 58,333 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
369,600 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
363,833 shares of Common Stock to accredited investors as defined under
Regulation D of the Securities Act ("Accredited Investors") at a price of
$1.50 per share.
On July 1, 1995, the Registrant granted options for 200,000 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 Combined
Company 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 272,925 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 10,000 shares of Common Stock
to Elmo D. Murphy for $9.00 per share.
From December 1995 through March 1996, the Registrant issued 60,000 shares
of Common Stock and warrants to purchase 50,000 shares of the Registrant's
Common Stock to three persons in exchange for financial consulting services.
Warrants to purchase 16,667 shares of Common Stock are exercisable at $4.50
per share, warrants to purchase 16,667 shares of Common Stock are exercisable
at $7.50 per share, and warrants to purchase 16,667 shares of Common Stock are
exercisable at $10.50 per share. As of the date hereof, no warrants have been
exercised.
II-2
<PAGE>
From June 1996 through September 1996, the Registrant issued 20,500 shares
of Common Stock to 11 Accredited Investors at a price of $6.00 per share.
Jason Harmon received a commission of $11,800 for acting as placement agent.
In July 1996, the Registrant issued 59,692 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 46,667 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 13,833 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 500 shares of Common Stock
are exercisable at $.(8) per share, warrants to purchase 1,333 shares of
Common Stock are exercisable at $1.56 per share, warrants to purchase 1,333
shares of Common Stock are exercisable at $1.59 per share, warrants to
purchase 667 shares of Common Stock are exercisable at $1.89 per share,
warrants to purchase 2,333 shares of Common Stock are exercisable at $2.25 per
share, warrants to purchase 3,000 shares of Common Stock are exercisable at
$2.43 per share, warrants to purchase 2,333 shares of Common Stock are
exercisable at $.88 per share and warrants to purchase 2,333 shares of Common
Stock are exercisable at $4.14 per share. From January 1997 through January
1998, 185,818 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 5,667
shares of Common Stock to three financially sophisticated investors. Warrants
to acquire 2,167 shares of Common Stock are exercisable at $1.14 per share,
warrants to purchase 2,333 shares of Common Stock are exercisable at $1.89 per
share and warrants to purchase 1.167 shares of Common Stock are exercisable at
$2.25 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 302,880 shares
of Common Stock to 30 investors (29 of whom were Accredited Investors) for
$1.65 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. The Representative acted as placement agent in the
December 1997 private placement for which it received $312,400 and warrants to
purchase 94,667 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 $320,000 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 June 1998, the Registrant issued (a) $1,250,000 principal amount
of notes bearing interest at 12% per annum together with 250,000 warrants to
purchase shares of Common Stock and (b) 74,074 shares of Common Stock for a
$3.375 per share to ProFutures Special Equities Fund, L.P., a financially
sophisticated, institutional Accredited Investor.
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
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
4.1* Specimen Common Stock certificate
4.2* Form of Warrant Agreement, including Form of Representatives' Warrant
5** 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.
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.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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)
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.
(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.
II-5
<PAGE>
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. 2 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON THEIR BEHALF BY THE UNDERSIGNED IN COLORADO SPRINGS, COLORADO, ON
JUNE 17, 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.
<TABLE>
<CAPTION>
<S> <C> <C>
Chairman of the
* Board designee June 17, 1998
- -------------------------------------
RONALD P. ERICKSON
Chief Executive
* Officer and Vice June 17, 1998
- ------------------------------------- Chairman of the
ROBERT A. SPADE Board (Principal
Executive Officer)
President, Chief
* Operating Officer June 17, 1998
- ------------------------------------- and Director
PATRICK R. SCANLON
* Chief Financial June 17, 1998
- ------------------------------------- Officer, Secretary
DANIEL R. HUDSPETH and Treasurer
(Principal
Financial and
Accounting Officer)
Director
* June 17, 1998
- -------------------------------------
DEAN H. CARY
Director
* June 17, 1998
- -------------------------------------
RICHARD F. NIPERT
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Director
* June 17, 1998
- -------------------------------------
CHARLES A. SHIELDS
Director designee
* June 17, 1998
- -------------------------------------
BRUCE L. CROCKETT
Director designee
* June 17, 1998
- -------------------------------------
LYMAN C. HAMILTON
Director designee
* June 17, 1998
- -------------------------------------
MICHAEL S. BROWNFIELD
/s/ Robert A. Spade
*By: ___________________________
Attorney-in-Fact
</TABLE>
II-8
<PAGE>
EXHIBIT 1.1
COMMUNICATION SYSTEMS INTERNATIONAL, INC.
_________________ Shares/1/
Common Stock
UNDERWRITING AGREEMENT
June ___, 1998
CRUTTENDEN ROTH INCORPORATED
JOHN G. KINNARD AND COMPANY, INCORPORATED
KAUFMAN BROS., L.P.
As Representatives of the Several Underwriters
18301 Von Karman, Suite 100
Irvine, California 92715
Dear Sirs:
Communication Systems International, Inc., a Colorado corporation (the
"Company"), and certain shareholders of the Company (the "Selling Shareholders")
hereby confirm their agreement with the several underwriters named in Schedule 1
hereto (the "Underwriters"), for whom you have been duly authorized to act as
representatives (in such capacity, the "Representatives"), as set forth below.
If you are the only Underwriters, all references herein to the Representatives
shall be deemed to be to the Underwriters.
1. SECURITIES. Subject to the terms and conditions herein contained, the
----------
Company proposes to sell an aggregate of _____ shares and the Selling
Shareholders propose to sell an aggregate of _____ shares to the several
Underwriters (the "Firm Securities") of the Company's Common Stock, no par value
per share (the "Common Stock"). The Company also proposes to sell to the several
Underwriters not more than __________ additional shares of Common Stock (15% of
the Firm Securities to be sold by the Company) if requested by the
Representatives as provided in Section 4 of this Agreement. Any and all shares
of Common Stock to be purchased by the Underwriters pursuant to such option are
referred to herein as the "Option Securities." The Firm Securities and any
Option Securities are collectively referred to herein as the "Securities."
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
(a) The Company represents and warrants to, and agrees with, each of
the several Underwriters that:
(i) a registration statement on Form S-1 (File No. 333-47045)
with respect to the Securities, including a prospectus subject to
completion, has been filed by the Company with the Securities and
Exchange Commission (the "Commission") under the Securities Act of
1933, as amended (the "Act"), and one or more amendments to
____________________
/1/Plus an option to purchase up to additional shares to cover
over-allotments, if any.
<PAGE>
such registration statement may have been so filed. After the
execution of this Agreement, the Company will file with the Commission
either (A) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective under the
Act, a prospectus in the form most recently included in an amendment
to such registration statement (or, if no such amendment shall have
been filed, in such registration statement), with such changes or
insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act, and as have been provided to and approved
by the Representatives prior to the execution of this Agreement, or
(B) if such registration statement, as it may have been amended, has
not been declared by the Commission to be effective under the Act, an
amendment to such registration statement, including a form of
prospectus, a copy of which amendment has been furnished to and
approved by the Representatives prior to the execution of this
Agreement. As used in this Agreement, the term "Registration
Statement" means the registration statement initially filed relating
to the Securities, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits thereto and
including any information omitted therefrom pursuant to Rule 430A
under the Act and included in the Prospectus (as hereinafter defined);
the term "Preliminary Prospectus" means each prospectus subject to
completion filed with such registration statement or any amendment
thereto (including the prospectus subject to completion, if any,
included in the Registration Statement or any amendment thereto at the
time it was or is declared effective); the term "Prospectus" means:
the prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act; or if no prospectus is required to be filed pursuant to
Rule 424(b) under the Act, the prospectus included in the Registration
Statement.
(ii) The Commission has not issued or, to the best knowledge of
the Company, threatened or contemplated any order preventing or
suspending the use of any Preliminary Prospectus; no stop order
suspending the sale of the Securities in any jurisdiction has been
issued and no proceedings for that purpose are pending or, to the best
knowledge of the Company, threatened or contemplated, and any request
of the Commission for additional information (to be included in the
Registration Statement, any Preliminary Prospectus or the Prospectus
or otherwise) has been complied with. When the Prospectus or any
amendment or supplement to the Prospectus is filed with the Commission
pursuant to Rule 424(b) (or, if the Prospectus or any part thereof or
such amendment or supplement is not required to be so filed, when the
Registration Statement or the amendment thereto containing such
amendment or supplement to the Prospectus was or is declared
effective) and on the Firm Closing Date and any Option Closing Date
(both as hereinafter defined), the Prospectus, as amended or
supplemented at any such time, (A) contained or will contain all
statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements
of, the Act and the rules and regulations of the Commission thereunder
and (B) did not or will not include any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. The foregoing provisions of this paragraph
(ii) do not apply to statements or omissions made in the Registration
Statement or any amendment thereto or the Prospectus or any amendment
or supplement thereto in
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<PAGE>
reliance upon and in conformity with written information furnished to
the Company by any Underwriter through the Representatives
specifically for use therein.
(iii) The Company and International Telephone Company, which
will be a subsidiary of the Company at the Closing Date (the
"subsidiary") have been duly organized and are validly existing as
corporations in good standing under the laws of their respective
jurisdictions of incorporation and are duly qualified to transact
business as foreign corporations and are in good standing under the
laws of all other jurisdictions where the ownership or leasing of
their respective properties or the conduct of their respective
businesses requires such qualification, except where the failure to be
so qualified does not result in a material adverse change in the
condition (financial or otherwise), business, prospects, net worth or
results of operations of the Company and its subsidiary, taken as a
whole (a "Material Adverse Effect").
(iv) The Company and its subsidiary have full power (corporate
and other) to own or lease their respective properties and conduct
their respective businesses as described in the Registration Statement
and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus); the Company has full power
(corporate and other) and authority to enter into this Agreement and
to carry out all the terms and provisions hereof to be carried out by
it; and the Company has full power (corporate and other) and authority
to execute and deliver the warrants to purchase Common Stock to be
issued and sold to the Representatives under the terms of the Warrant
Agreement (as hereinafter defined) in accordance with Section 6(n)
hereto (the "Representatives' Warrants").
(v) The issued shares of capital stock of the Company's
subsidiary have been duly authorized and validly issued, are fully
paid and nonassessable and are owned beneficially by the Company free
and clear of any security interests, liens, encumbrances, equities or
claims, other than the pledge thereof to secure the Mandatory
Redeemable Convertible Promissory Notes issued in December 1997 (the
"Bridge Notes"). The Common Stock issuable pursuant to the
Representatives' Warrants, when issued in accordance with the terms
thereof, will be duly authorized, validly issued, fully paid and
nonassessable. The Representatives' Warrants and the shares of Common
Stock issuable thereunder were not and will not be issued in violation
of any preemptive rights of any security holder of the Company. The
Company has reserved a sufficient number of shares of Common Stock for
issuance pursuant to the Representatives' Warrants. The holders of
the Common Stock issuable pursuant to the Representatives' Warrants
will not be subject to personal liability solely by reason of being
such holders. The issuance and sale of the Common Stock pursuant to
the Representatives' Warrants will be made in conformity with the
applicable registration requirements or exemptions therefrom under
federal and applicable state securities law.
(vi) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus). All of
the issued shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable.
The Firm Securities and the Option Securities have been duly
authorized and at the
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<PAGE>
Firm Closing Date or the related Option Closing Date (as the case may
be), after payment therefor in accordance herewith, will be validly
issued, fully paid and nonassessable. At the Firm Closing Date or the
Option Closing Date, no holders of outstanding shares of capital stock
of the Company will be entitled as such to any preemptive or other
rights to subscribe for any of the Securities, and no holder of
securities of the Company has any right which has not been fully
exercised or waived to require the Company to register the offer or
sale of any securities owned by such holder under the Act in the
public offering contemplated by this Agreement.
(vii) The capital stock of the Company conforms in all material
respects to the description thereof contained in the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary
Prospectus), and this Agreement, the Warrant Agreement and the
Representatives' Warrants conform in all material respects to the
descriptions thereof contained in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus).
(viii) Except as disclosed in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus), there are no outstanding (A) securities or obligations of
the Company or its subsidiary convertible into or exchangeable for any
capital stock of the Company or its subsidiary, (B) warrants, rights
or options to subscribe for or purchase from the Company or its
subsidiary any such capital stock or any such convertible or
exchangeable securities or obligations, or (C) obligations of the
Company or its subsidiary to issue any shares of capital stock, any
such convertible or exchangeable securities or obligations, or any
such warrants, rights or options.
(ix) The financial statements and schedules of the Company and
its subsidiary included in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present in all material respects the
financial position of the Company and its subsidiary and the results
of operations and cash flows as of the dates and periods therein
specified. Such financial statements and schedules have been prepared
in accordance with generally accepted accounting principles ("GAAP")
consistently applied throughout the periods involved (except as
otherwise noted therein). The selected financial data set forth under
the captions "Summary Financial Information" and "Capitalization" in
the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) fairly present, in accordance with
GAAP, as applicable, on the basis stated in the Prospectus (or such
Preliminary Prospectus), the information included therein. No other
financial statements or schedules are required to be included in the
Registration Statement.
(x) Stockman Kast Ryan & Scruggs, P.C., which has audited the
financial statements of the Company, and Richard A. Eisner & Company,
LLP, which has audited the financial statements of the subsidiary and
delivered their reports with respect to the audited financial
statements included in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), are independent public accountants as
required by the Act and the applicable rules and regulations
thereunder.
-4-
<PAGE>
(xi) The execution and delivery of this Agreement, the Warrant
Agreement and the Representatives' Warrants have been duly authorized
by the Company; this Agreement has been duly executed and delivered by
the Company and, as of the Closing Date, the Warrant Agreement and the
Representatives' Warrants will have been duly executed and delivered
by the Company and this Agreement is, and the Warrant Agreement and
the Representatives' Warrants when executed and delivered by the
Company on the Closing Date, and in the case of the Representatives'
Warrants, paid for by the Representatives, will be the valid and
binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, except as such enforceability
may be limited by the effect of bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to rights
and remedies of creditors or by general equitable principles. The
information in the Registration Statement and the Prospectus insofar
as it relates to the Representatives' Warrants, in each case as of the
date on which the Registration Statement is declared effective by the
Commission, the Closing Date and any Option Closing Date, is true,
correct and complete in all material respects.
(xii) No legal or governmental proceedings are pending to which
the Company or its subsidiary is a party or to which the property of
the Company or its subsidiary is subject that are required to be
described in the Registration Statement or the Prospectus and are not
described therein (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), and, to the Company's knowledge, no
such proceedings have been threatened against the Company or its
subsidiary or with respect to any of their respective properties; and
no contract or other document is required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit
to the Registration Statement that is not described therein (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus) or filed as required.
(xiii) The issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement and of the
Representatives' Warrants to the Representatives by the Company
pursuant to the Warrant Agreement; the execution and delivery of this
Agreement, the Warrant Agreement and the Representatives' Warrants by
the Company; the compliance by the Company with the provisions of this
Agreement, the Warrant Agreement and the Representatives' Warrants;
and the consummation of all transactions contemplated therein do not
(A) require the consent, approval, authorization, registration or
qualification of or with any court, government or governmental
authority, domestic or foreign, except such as have been obtained,
such as may be required under state securities or blue sky laws, such
as may be required by the National Association of Securities Dealers,
Inc. (the "NASD") and, if the Registration Statement filed with
respect to the Securities (as amended) is not effective under the Act
as of the time of execution hereof, such as may be required (and shall
be obtained as provided in this Agreement) under the Act, or (B)
conflict with or result in a breach or violation of any of the terms
and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, lease or other agreement or instrument to
which the Company or its subsidiary is a party or by which the Company
or its subsidiary or any of their respective properties are bound, or
the charter documents or by-laws of the Company or its subsidiary, or
-5-
<PAGE>
any statute or any judgment, decree, order, rule or regulation of any
court or other governmental authority or any arbitrator applicable to
the Company or its subsidiary, which would have a Material Adverse
Effect.
(xiv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus), neither the Company nor its subsidiary has sustained any
loss or interference with their respective businesses or properties
having or resulting in a Material Adverse Effect from fire, flood,
hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental
proceeding and there has not been any event, circumstance, or
development that results in, or that the Company believes would result
in, a Material Adverse Effect, except in each case as described in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xv) The Company and its subsidiary have not, directly or
indirectly (except for the sale of Securities under this Agreement),
(i) taken any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities or (ii)
since the filing of the Registration Statement (A) sold, bid for,
purchased, or paid anyone any compensation for soliciting purchases
of, the Securities or (B) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities
of the Company.
(xvi) (a) The Company and its subsidiary possess all
certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct
their respective businesses except where the failure to possess any
such item would not have a Material Adverse Effect, and (b) neither
the Company nor its subsidiary has received any notice of proceedings
relating to the revocation or modification of any such certificate,
authorization or permit that, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a
Material Adverse Effect, except as described in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(xvii) The Company is not an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and this
transaction will not cause the Company to become an investment company
subject to registration under the 1940 Act.
(xviii) The Company and its subsidiary have filed all foreign,
federal, state and local tax returns that are required to be filed or
has requested extensions thereof (except in any case in which the
failure so to file would not have a Material Adverse Effect) and has
paid all taxes required to be paid by them and any other assessment,
fine or penalty levied against them, to the extent that any of the
foregoing is due and payable, except for any such assessment, fine or
penalty that is currently being
-6-
<PAGE>
contested in good faith or as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xix) Except for the shares of capital stock of the subsidiary
owned by the Company, and except with respect to the merger pending
with GlobalTel Resources, Inc. ("GlobalTel") neither the Company nor
its subsidiary owns any shares of stock or any other equity securities
of any corporation or has any equity interest in any firm,
partnership, association or other entity.
(xx) The books, records and accounts of the Company and its
subsidiary accurately and fairly reflect, in reasonable detail, the
transactions in and dispositions of the assets of the Company and its
subsidiary, respectively. The Company and its subsidiary maintain a
system of internal accounting controls sufficient to provide
reasonable assurance that (A) transactions are executed in accordance
with management's general or specific authorizations; (B) transactions
are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles
and to maintain asset accountability; (C) access to assets is
permitted only in accordance with management's general or specific
authorization; and (D) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxi) Except as described in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), no default exists and no event has occurred
that, with notice or lapse of time or both, would constitute a
default, in the due performance and observance of any term, covenant
or condition of any contract, indenture, mortgage, deed of trust,
lease or other agreement or instrument to which the Company or its
subsidiary is a party or by which the Company or its subsidiary or any
of their respective properties is bound or may be affected, in any
respect that would have a Material Adverse Effect. The agreements to
which the Company or its subsidiary is a party described in the
Registration Statement are valid agreements, enforceable by the
Company or its subsidiary, except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors'
rights generally or by general equitable principles and, to the best
of the Company's knowledge, the other contracting party or parties
thereto are not in material breach or material default under any of
such agreements.
(xxii) The Company and the subsidiary have not distributed and,
prior to the later of (A) the Firm Closing Date or any Option Closing
Date and (B) the completion of the distribution of the Securities,
will not distribute any written offering material in connection with
the offering and sale of the Securities other than the Registration
Statement or any amendment thereto, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or other materials,
if any, permitted by the Act.
(xxiii) The Company and its subsidiary have good and marketable
title to all personal property owned by each of them, in each case
free and clear of any security
-7-
<PAGE>
interests, liens, encumbrances, equities, claims and other defects,
except for those relating to debts of the Company or its subsidiary
described in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus) and those that do not interfere with the use made or
proposed to be made of such property by the Company or its subsidiary,
and any real property and buildings held under lease by the Company or
its subsidiary are held under valid, subsisting and enforceable leases
(except as enforceability may be limited by the effect of bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating
to rights and remedies of creditors or by general equitable
principles), with such exceptions as are not material and do not
interfere with the use made or proposed to be made of such property
and buildings by the Company or its subsidiary, in each case except as
described in or contemplated by the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus). The
Company and its subsidiary own or lease all such properties as are
necessary to their respective operations as now conducted and as
described in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus).
(xxiv) No labor dispute with the employees of the Company or its
subsidiary exists or to the Company's knowledge, is threatened or
imminent that could result in a Material Adverse Effect, except as
described in or contemplated by the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), and the
Company is not aware of an existing, imminent or threatened labor
disturbance by the employees of any principal suppliers,
manufacturers, contractors or others that could result in a Material
Adverse Effect, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xxv) The Company and its subsidiary own or possess all material
trademarks, service marks, trade names, licenses, copyrights and
proprietary or other confidential information currently employed by
them in connection with their respective businesses, and neither the
Company nor its subsidiary has received any notice of infringement of
or conflict with asserted rights of any third party with respect to
any of the foregoing which, singly or in the aggregate, if the subject
of unfavorable decisions, rulings or findings, would have a Material
Adverse Effect, except as described in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus). The description of the Company's agreements with its
independent sales agents and carriers and resellers, and the
agreements relating to its strategic relationships, contained in the
Registration Statement and the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), are true
and complete in all material respects. All such agreements are valid,
binding and in full force and effect and neither the Company nor its
subsidiary is, or has received any notice that it is, in default (or
with the giving of notice or lapse of time or both, would be in
default) under any such agreements.
(xxvi) The Company and its subsidiary are insured by insurers of
recognized financial responsibility against such losses and risks and
in such amounts as are prudent and customary in the businesses in
which they are engaged; and neither the
-8-
<PAGE>
Company nor its subsidiary has any reason to believe that it will not
be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not
have a Material Adverse Effect, except as described in or contemplated
by the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus).
(xxvii) The Common Stock will be registered pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), on the date hereof and is traded on the OTC Bulletin
Board and, upon notice of issuance, the Securities will be traded on
the Nasdaq SmallCap Market, and the Company has taken no action
designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting
the Common Stock from the OTC Bulletin Board or that could in the
future cause the Common Stock to be delisted from the Nasdaq SmallCap
Market, nor has the Company received any notification that the
Commission or The Nasdaq Stock Market, Inc. is contemplating
terminating such registration or listing.
(xxviii) Neither the Company nor the subsidiary has at any time
during the last five (5) years (A) made any unlawful contribution to
any candidate for foreign office or failed to disclose fully any
contribution in violation of law, or (B) made any payment to any
federal or state governmental officer or official, or other person
charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof.
(xxix) Any pro forma financial or other information and related
notes included in the Registration Statement, each Preliminary
Prospectus and the Prospectus comply (or, if the Prospectus has not
been filed with the Commission, as to the Prospectus, will comply) in
all material respects with the requirements of the Act and the rules
and regulations of the Commission thereunder and present fairly in all
material respects the pro forma information shown, as of the dates and
for the periods covered by such pro forma information. Such pro forma
information, including any related notes and schedules, has been
prepared on a basis consistent with the historical financial
statements and other historical information, as applicable, included
in the Registration Statement, the Preliminary Prospectus and the
Prospectus, except for the pro forma adjustments specified therein,
and give effect to assumptions made on a reasonable basis to give
effect to historical and, if applicable, proposed transactions
described in the Registration Statement, each Preliminary Prospectus
and the Prospectus.
(xxx) Except as set forth in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus), there are no outstanding loans, advances or guaranties of
indebtedness by the Company or its subsidiary to or for the benefit of
any of (i) its "affiliates," as such term is defined in the Act and
the rules and regulations thereof or (ii) any of the members of the
families of any of them.
(xxxi) The Company and its subsidiary have no liability,
absolute or contingent, relating to: (A) public health or safety; (B)
worker health or safety; (C)
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<PAGE>
product defect or warranty (except, as to product defect or warranty,
as is disclosed in the Registration Statement and Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus)); or (D) pollution, damage to or protection of the
environment, including, without limitation, relating to damage to
natural resources, emissions, discharges, releases or threatened
releases of hazardous materials into the environment (including,
further without limitation, ambient air, surface water, groundwater,
land surface or subsurface strata) or otherwise relating to the
manufacture, processing, use, treatment, storage, generation,
disposal, transport or handling of any hazardous materials, except any
such liability that would not result in a material adverse effect.
The Company is not aware of the date hereof of the existence of any
such liability, absolute or contingent, of the type discussed above.
As used herein, "hazardous material" includes chemical substances,
wastes, pollutants, contaminants, hazardous or toxic substances,
constituents, materials or wastes, whether solid, gaseous or liquid in
nature.
(xxxii) Neither the Company nor its subsidiary is presently
doing business with the government of Cuba or with any person or
affiliate located in Cuba.
(b) Any certificate signed by any officer of the Company and delivered
to the Representatives or to counsel for the Representatives pursuant to
this Agreement shall be deemed a representation and warranty by the Company
to each Underwriter, as to the matters covered thereby.
(c) The Representatives shall receive, at the Firm Closing Date and
any Option Closing Date, representations and warranties of GlobalTel which
shall be identical in form and substance to the representations and
warranties of the Company set forth in Section 2(a) above. Such
representations and warranties shall be set forth in a certificate by the
executive officers of GlobalTel and delivered to the Representatives or to
counsel for the Representatives.
3. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each
----------------------------------------------------------
Selling Shareholder severally represents and warrants to, and agrees with,
the Company and the Underwriters that:
(a) Such Selling Shareholder has, and at the Closing Date will have,
valid marketable title to the Firm Securities proposed to be sold by such
Selling Shareholder hereunder on such date and full right, power and
authority to enter into this Agreement and to sell, assign, transfer and
deliver such Firm Securities hereunder, free and clear of all voting trust
arrangements, liens, encumbrances, equities, claims and community property
rights; and upon delivery of and payment for such Firm Securities
hereunder, the Underwriters will acquire valid marketable title thereto,
free and clear of all voting trust arrangements, liens, encumbrances,
equities, claims and community property rights.
(b) Such Selling Shareholder has not taken and will not take, directly
or indirectly, any action designed to or which might be reasonably expected
to cause or result, under the Exchange Act (as hereinafter defined) or
otherwise, in stabilization or manipulation of the price of the Firm
Securities, the Option Securities or other shares of Common Stock to
facilitate the sale or resale of the Firm Securities or other shares of
Common Stock.
(c) Such Selling Shareholder has executed and delivered a Selling
Shareholders' Power of Attorney ("Power of Attorney") between the Selling
Shareholder and Parcel, Mauro & Spaanstra, P.C. (the "Agent"), naming the
Agent as such Selling Shareholder's attorney-in-fact and, by the execution
by any Agent of this Agreement, such Agent hereby represents and warrants
that he has been duly appointed as Attorney-in-Fact by each Selling
Shareholder pursuant to the Power of Attorney for the purpose of entering
into and carrying out this Agreement, and the Power of Attorney has been
duly executed by such Selling Shareholder and a copy thereof has been
delivered to you.
(d) Such Selling Shareholder has deposited in custody with the
custodian, pursuant to a Letter of Transmittal and Custody Agreement
("Custody Agreement") with Parcel, Mauro & Spaanstra, P.C. (the
"Custodian"), certificates in negotiable form for the Firm Securities to be
sold hereunder by such Selling Shareholder, for the purpose of further
delivery pursuant to this Agreement. Such Selling Shareholder agrees that
the Firm Securities to be sold by such Selling Shareholder on deposit with
the Custodian are subject to the interests of the Company, the Underwriters
and the other Selling Shareholders, that the arrangements made for such
deposit are to that extent irrevocable, and that the obligations of such
Selling Shareholder hereunder shall not be terminated except as provided in
this Agreement or in the Custody Agreement by any act of such Selling
Shareholder, by operation of law, whether, in the case of an individual
Selling Shareholder, by the death or incapacity of such Selling Shareholder
or, in the case of a trust or estate, by the death of the trustee or
trustees or the executor or executors or the termination of such trust or
estate, or, in the case of a partnership or corporation, by the
dissolution, winding-up or other event affecting the legal existence of
such entity, or by the occurrence of any other event. If any individual
Selling Shareholder, trustee or executor should die or become
incapacitated, if any such trust, estate, partnership or corporation should
be terminated, or if any other event should occur before the delivery of
the Firm Securities to be sold by such Selling Shareholder hereunder, the
documents evidencing such Firm Securities then on deposit with the
Custodian shall be delivered by the Custodian in accordance with the terms
and conditions of this Agreement and of the Custody Agreement as if such
death, incapacity, termination or other event had not occurred, regardless
of whether or not the Custodian shall have received notice thereof. Each
Agent has been duly authorized by such Selling Shareholder to execute and
deliver this Agreement and the Custodian has been authorized to receive and
acknowledge receipt of the proceeds of sale of the Firm Securities to be
sold by such Selling Shareholder against delivery thereof and otherwise act
on behalf of such Selling Shareholder.
(e) Each Preliminary Prospectus, insofar as it has related to such
Selling Shareholder and, to the knowledge of such Selling Shareholder in
all other respects, as of its date, has conformed in all material respects
with the requirements of the Act and, as of this date, has not included any
untrue statement of material fact or omitted to state a material fact
necessary to make the statements therein not misleading; and when the
Registration Statement became effective, and at all times subsequent
thereto, up to the Closing Date, (1) such parts of the Registration
Statement and the Prospectus and any amendments or supplements thereto as
relate to such Selling Shareholder, and the Registration Statement and the
Prospectus and any amendments or supplements thereto, to the knowledge of
such Selling Shareholder, in all other respects, will contain all
statements that are required to be stated therein in accordance with the
Act and the Regulations and will in all material respects conform to the
requirements of the Act and the Regulations, and (2) neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, as it relates to such Selling Shareholder, and, to the knowledge
of such Selling Shareholder in all other respects, will include any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading.
(f) Such Selling Shareholder will not sell, contract to sell or
otherwise dispose of any Common Stock for a period of 180 days after this
Agreement becomes effective without the prior written consent of the
Company and the Representative.
(g) Except as disclosed in the Prospectus, such Selling Shareholder is
not a party to any formal or informal voting agreements, understandings or
arrangements with respect to the voting of the Common Stock.
4. PURCHASE, SALE AND DELIVERY OF THE SECURITIES.
---------------------------------------------
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein
set forth, (i) the Company and the Selling Shareholders agree to sell
Firm Securities, (ii) each of the Underwriters agrees to
purchase from the Company and the Selling Shareholders at a purchase price
of [$ ] per share, an aggregate number of Firm Securities set forth
opposite the name of such Underwriter in Schedule 1 hereto. One or more
certificates in definitive form for the Firm Securities that the several
Underwriters have agreed to purchase hereunder from the Company and the
Selling Shareholders, in such denomination or denominations and registered
in such name or names as the Representatives request upon notice to the
Company at least 48 hours prior to the Firm Closing Date, shall be
delivered by or on behalf of the Company to the Representatives for the
respective accounts of the Underwriters, against payment by or on behalf of
the Underwriters of the aggregate purchase price therefor by wire transfer
in same day funds (the "Wired Funds") to the account of the Company. Such
delivery of and payment for the Firm Securities shall be made at the
offices of Cruttenden Roth Incorporated, 18301 Von Karman, Suite 100,
Irvine, California 92715, at 6:30 a.m., Pacific time, on June _____, 1998,
or at such other place, time or date as the Representatives and the Company
may agree upon or as the Representatives may determine
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pursuant to Section 10 hereof, such time and date of delivery against
payment being herein referred to as the "Firm Closing Date." The Company
will make such certificate or certificates for the Firm Securities
available for checking and packaging by the Representatives at the offices
of the Company's transfer agent or registrar at least 24 hours prior to the
Firm Closing Date or, if available, will coordinate the transfer of the
Firm Securities to the Underwriters through the book-entry facilities of
the Depository Trust Company.
(b) For the sole purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Securities as contemplated by
the Prospectus, on the basis of the covenants and agreements of the
Underwriters contained in this Agreement and subject to the terms and
conditions set forth in this Agreement, the Company hereby grants to the
several Underwriters an option to purchase the Option Securities. The
purchase price to be paid for any Option Securities shall be the same price
per share as the price per share for the Firm Securities set forth above in
paragraph (a) of this Section 4. The option granted hereby may be
exercised as to all or any part of the Option Securities from time to time
within 45 days after the date of the Prospectus (or, if such 45th day shall
be a Saturday or Sunday or a holiday, on the next business day thereafter
when the Nasdaq SmallCap Market is open). The Underwriters shall not be
under any obligation to purchase any of the Option Securities prior to the
exercise of such option. The Representatives may from time to time
exercise the option granted hereby by giving notice in writing or by
telephone (confirmed within 24 hours in writing) to the Company setting
forth the aggregate number of Option Securities as to which the several
Underwriters are then exercising the option and the date and time for
delivery of and payment for such Option Securities. Any such date of
delivery shall be determined by the Representatives but shall not be
earlier than two business days or later than five business days after such
exercise of the option and, in any event, shall not be earlier than the
Firm Closing Date. The time and date set forth in such notice, or such
other time on such other date as the Representatives and the Company may
agree upon or as the Representatives may determine pursuant to Section 10
hereof, is herein called the "Option Closing Date" with respect to such
Option Securities. Upon exercise of the option as provided herein, the
Company shall become obligated to sell to each of the several Underwriters,
and, subject to the terms and conditions herein set forth, each of the
Underwriters (severally and not jointly) shall become obligated to purchase
from the Company, the same percentage of the total number of the Option
Securities as to which the several Underwriters are then exercising the
option as such Underwriter is obligated to purchase of the aggregate number
of Firm Securities, as adjusted by the Representatives in such manner as it
deems advisable to avoid fractional shares. If the option is exercised as
to all or any portion of the Option Securities, one or more certificates in
definitive form for such Option Securities, and payment therefor, shall be
delivered on the related Option Closing Date in the manner, and upon the
terms and conditions, set forth in paragraph (a) of this Section 4, except
that reference therein to the Firm Securities and the Firm Closing Date
shall be deemed, for purposes of this paragraph 4(b), to refer to such
Option Securities and Option Closing Date, respectively.
(c) It is understood that you, individually and not as the
Representatives, may (but shall not be obligated to) make payment on behalf
of any Underwriter or Underwriters for any of the Securities to be
purchased by such Underwriter or Underwriters. No such
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payment shall relieve such Underwriter or Underwriters from any of its or
their obligations hereunder.
(d) The Company hereby acknowledges that the wire transfer by or on
behalf of the Underwriters of the purchase price for any Securities does
not constitute closing of a purchase and sale of the Securities. Only
execution and delivery of a receipt (by facsimile or otherwise) for the
Securities by the Underwriters indicates completion of the closing of a
purchase of the Securities from the Company. Furthermore, in the event
that the Underwriters wire funds to the Company prior to the completion of
the closing of a purchase of Securities, the Company hereby acknowledges
that until the Underwriters execute and deliver a receipt for the
Securities, by facsimile or otherwise, the Company will not be entitled to
the wired funds and shall return the wired funds received by it to the
Underwriters as soon as practicable (by wire transfer of same-day funds)
upon demand. In the event that the closing of a purchase of Securities is
not completed and the wired funds are not returned by the Company to the
Underwriters on the same day the wired funds were received by the Company,
the Company agrees to pay to the Underwriters in respect of each day the
wired funds are not returned by it, in same-day funds, interest at the
Prime Rate (as defined in Section 9(a)) on the date hereof on the amount of
such wire funds received by them.
(e) At the Firm Closing Date and any Option Closing Date, the Company
shall pay to the Representatives a non-accountable expense allowance equal
to 2 1/2% of the gross proceeds from the sale of the Securities.
5. OFFERING BY THE UNDERWRITERS. Upon your authorization of the release
----------------------------
of the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the
Prospectus.
6. COVENANTS OF THE COMPANY. The Company covenants and agrees with each
------------------------
of the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, to
become effective as promptly as possible. If required, the Company will
file the Prospectus and any amendment or supplement thereto with the
Commission in the manner and within the time period required by Rule
424(b) under the Act. During any time when a prospectus relating to the
Securities is required to be delivered under the Act, the Company (i) will
comply with all requirements imposed upon it by the Act and the rules and
regulations of the Commission thereunder to the extent necessary to permit
the continuance of sales of or dealings in the Securities in accordance
with the provisions hereof and of the Prospectus, as then amended or
supplemented, and (ii) will not file with the Commission the Prospectus or
the amendment referred to in the second sentence of Section 2(a)(i) hereof,
any amendment or supplement to such Prospectus, or any amendment to the
Registration Statement of which the Representatives shall not previously
have been advised and furnished with a copy for a reasonable period of time
prior to the proposed filing and as to which filing the Representatives
shall not have given their consent. The Company will prepare and file with
the Commission, in accordance with the rules and regulations of the
Commission, promptly upon request by the Representatives or counsel for the
Representatives, any amendments to the Registration Statement or amendments
or supplements to the Prospectus that may be deemed necessary or advisable
in connection with the distribution of the Securities by the several
Underwriters, and will use its best efforts to cause any such amendment to
the Registration Statement to be declared effective by the Commission as
promptly as possible.
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<PAGE>
The Company will advise the Representatives, promptly after receiving
notice thereof, of the time when the Registration Statement or any
amendment thereto has been filed or declared effective or the Prospectus or
any amendment or supplement thereto has been filed and will provide to the
Representatives copies of each such filing.
(b) The Company will advise the Representatives, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or any amendment thereto or any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, (ii) the suspension of the qualification
of the Securities for offering or sale in any jurisdiction, (iii) the
institution, threatening or contemplation of any proceeding for any such
purpose, or (iv) any request made by the Commission for amending the
Registration Statement, for amending or supplementing the Prospectus or for
additional information. The Company will use its best efforts to prevent
the issuance of any such stop order and, if any such stop order is issued,
to obtain the withdrawal thereof as promptly as possible.
(c) The Company will arrange for the qualification of the Securities
for offering and sale under the securities or blue sky laws of such
jurisdictions as the Representatives may designate and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Securities; provided, however, that in connection
therewith the Company shall not be required to qualify as a foreign
corporation or to execute a general consent to service of process in any
jurisdiction. If, after the public offering of the Securities by the
Underwriters and during such period, the Underwriters propose to vary the
terms of offering thereof by reason of changes in general market conditions
or otherwise, the Representatives will advise the Company in writing of the
proposed variation and if, in the opinion either of counsel for the Company
or counsel for the Representatives, such proposed variation requires that
the Prospectus be supplemented or amended, the Company will forthwith
prepare and file with the Commission a supplement to the Prospectus or an
amended Prospectus setting forth such variation. The Company authorizes
the Underwriters and all dealers to whom any of the Securities may be sold
by the Underwriters to use the Prospectus, as from time to time so amended
or supplemented, in connection with the sale of the Securities in
accordance with the applicable provisions of the Act and the rules and
regulations thereunder for such period.
(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the
Act or (ii) the Option Closing Date, any event occurs as a result of which
the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if for any other reason it
is necessary at any time to amend or supplement the Prospectus to comply
with the Act or the rules or regulations of the Commission thereunder, the
Company will promptly notify the Representatives thereof and, subject to
Section 6(a) hereof, will prepare and file with the Commission, at the
Company's expense, an amendment to the Registration Statement or an
amendment or supplement to the Prospectus that corrects such statement or
omission or effects such compliance.
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<PAGE>
(e) The Company will, without charge, provide (i) to the
Representatives and to counsel for the Representatives a signed copy of the
registration statement originally filed with respect to the Securities and
each amendment thereto (in each case including exhibits thereto), (ii) to
each other Underwriter, a conformed copy of such registration statement and
each amendment thereto (in each case without exhibits thereto) and (iii) so
long as a prospectus relating to the Securities is required to be delivered
under the Act, as many copies of each Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto as the Representatives
may reasonably request; without limiting the application of clause (iii) of
this sentence, the Company shall, as soon as practicable following the
determination of the public offering price, deliver to the Underwriters,
without charge, as many copies of the Prospectus and any amendment or
supplement thereto as the Representatives may reasonably request for
purposes of confirming orders that are expected to settle on the Firm
Closing Date.
(f) The Company, as soon as practicable, will make generally available
to its security holders and to the Representatives an earnings statement of
the Company and its subsidiary that satisfies the provisions of Section
11(a) of the Act and Rule 158 thereunder.
(g) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.
(h) The Company will not, directly or indirectly, without the prior
written consent of the Representatives on behalf of the Underwriters,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer
of sale, contract of sale, pledge, grant of any option to purchase or other
sale or disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common
Stock for a period of 12 months after the date hereof, except pursuant to
this Agreement, issuances pursuant to warrants and options outstanding
prior to the date hereof, stock options granted under the company's stock
option plan to officers, employees, directors and consultants and any stock
issued on exercise thereof or issuances in connection with an acquisition
or business combination transaction. If the Company plans to issue any
Common Stock or other securities in connection with an acquisition or a
business combination transaction, the Company shall provide the
Representatives with 15 days' advance written notice of its intention to
so issue such securities including the terms of any such proposed
transaction.
(i) The Company will not, directly or indirectly, (i) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale
of the Securities or (ii) for a period of 12 months after the date hereof
(A) sell, bid for, purchase, or pay anyone any compensation for soliciting
purchases of, the Securities or (B) pay or agree to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company. The Company will not, directly or indirectly, without the prior
written consent of the Representatives on behalf of the Underwriters,
offer, purchase, offer to purchase, contract to purchase, grant any option
to sell or otherwise purchase or acquire (or announce any offer, purchase,
offer of purchase, contract to purchase, grant of any option to sell or
other purchase or acquisition of) any
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<PAGE>
shares of Common Stock or any securities convertible into, or exchangeable
or exercisable for, shares of Common Stock for a period of 12 months after
the date hereof.
(j) The Company will obtain the lockup agreements described in Section
8(e) hereof prior to the Firm Closing Date.
(k) The Company will cause the Securities to be duly traded on the
Nasdaq SmallCap Market prior to the Firm Closing Date. The Company will
use its best efforts to ensure that the Securities continue to be traded on
the Nasdaq SmallCap Market following the Firm Closing Date.
(l) During a period of five years commencing with the date of this
Agreement, the Company will promptly furnish to the Representatives and to
each Underwriter who may so request in writing copies of (i) all periodic
and special reports furnished by it to shareholders of the Company, (ii)
all information, documents and reports filed by it with the Commission, or
the Nasdaq SmallCap Market, (iii) all press releases and material news
items or articles in respect of the Company, its services or affairs
released or prepared by the Company (other than promotional and marketing
materials disseminated solely to customers and potential customers of the
Company in the ordinary course of business) and (iv) any additional
information concerning the Company or its business which the
Representatives may reasonably request.
(m) The Company will use its best efforts to maintain insurance of the
types and in the amounts which it deems adequate for its business
consistent with insurance coverage maintained by companies of similar size
and engaged in similar businesses including, but not limited to, general
liability insurance covering products sold or distributed by the Company,
all real and personal property owned or leased by the Company and its
subsidiary, and against theft, damage, destruction, acts of vandalism and
all other risks customarily insured against.
(n) On the Closing Date, the Company will sell to the Representatives,
at a purchase price of $0.001 per warrant, warrants to purchase
shares of Common Stock (in an amount equal to one warrant for each ten Firm
Shares sold). Such Representatives' Warrants will be issued pursuant to
the terms of the Warrant Agreement and will have an exercise price equal to
[$________], subject to adjustment, will be exercisable during the period
beginning on the first anniversary of the Effective Date and ending on the
fifth anniversary of the Effective Date and will contain customary anti-
dilution and registration rights provisions.
(o) Comply with all periodic reporting and proxy solicitation
requirements which may from time to time be applicable to the Company as a
result of the Company's registration under Section 12 of the Exchange Act
on a Registration Statement on Form 8-A.
(p) Refrain from filing a Form S-8 Registration Statement (or
successor form of registration statement) in connection with the issuance
of the Company's securities to employees, consultants or advisors for
services for a period of twenty-four (24) months from the Effective Date of
the Registration Statement without the Representatives' prior written
consent.
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(q) For a period of two years after the Effective Date the Company
will not conduct, and for a period of at least five years following the
Effective Date of the Registration Statement will provide the
Representatives at least 30 days' prior written notice of, a sale of any
securities of the Company in a "Regulation S" transaction, with such notice
to specify the type of securities to be offered, the purchase price thereof
and the proposed closing date of the Regulation S transaction.
(r) Inform the Florida Department of Banking and Finance at any time
prior to the consummation of the distribution of the Firm Securities and
the Option Securities by the Representatives if it commences engaging
in business with the government of Cuba or with any person or affiliate
located in Cuba. Such information will be provided within 90 days after
the commencement thereof or after a change occurs with respect to
previously reported information.
7. EXPENSES. The Company will pay all costs and expenses incident to the
--------
performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 12 hereof, including all costs and expenses incident to (i)
the printing or other production of documents with respect to the transactions,
including any costs of printing the Registration Statement originally filed with
respect to the Securities and any amendment thereto, any Preliminary Prospectus
and the Prospectus and any amendment or supplement thereto, this Agreement and
any blue sky memoranda, (ii) all arrangements relating to the delivery to the
Underwriters of copies of the foregoing documents, (iii) the fees and
disbursements of the counsel, the accountants and any other experts or advisors
retained by the Company, (iv) preparation, issuance and delivery to the
Underwriters of any certificates evidencing the Securities, including transfer
agent's and registrar's fees, (v) the qualification of the Securities under
state securities and blue sky laws, including filing fees and fees and
disbursements of counsel for the Company, (vi) the filing fees of the Commission
and the NASD relating to the Securities, (vii) any additional listing fees of
the Securities on the Nasdaq SmallCap Market, (viii) the Company's travel
expenses in connection with meetings with the brokerage community and
institutional investors and expenses associated with hosting such meetings,
including meeting rooms, meals, facilities and ground transportation expenses,
as well as any related expense for roadshow presentations transmitted over the
Internet, and (ix) the cost of preparing a total of eight bound volumes of the
public offering documents for the Representatives and their counsel. If the
sale of the Securities provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth in Section 8 hereof
is not satisfied, because this Agreement is terminated pursuant to Section 12
hereof or because of any failure, refusal or inability on the part of the
Company to perform all obligations and satisfy all conditions on its part to be
performed or satisfied hereunder other than by reason of a default by any of the
Underwriters, the Company will reimburse the Representatives upon demand for all
reasonable out-of-pocket expenses (including counsel fees and disbursements)
that shall have been incurred by them in connection with the proposed purchase
and sale of the Securities. The Company shall not in any event be liable to any
of the Underwriters for the loss of anticipated profits from the transactions
covered by this Agreement. If the sale of the Securities provided for herein is
consummated, the Underwriters shall pay all of their own out-of-pocket expenses
(including the fees and disbursements of their counsel) and the Company shall
have no obligation therefor.
8. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
-------------------------------------------
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the sole discretion of
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the Representatives, to the accuracy of the representations and warranties of
the Company and the Selling Shareholders contained herein as of the date hereof
and as of the Firm Closing Date, as if made on and as of the Firm Closing Date,
to the accuracy of the statements of the Company's officers made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Shareholders of their covenants and agreements hereunder and to the following
additional conditions:
(a) If the Registration Statement or any amendment thereto filed prior
to the Firm Closing Date has not been declared effective as of the time of
execution hereof, the Registration Statement or such amendment shall have
been declared effective not later than the earlier of (i) 11:00 A.M.,
Pacific time, on the date on which the amendment to the Registration
Statement originally filed with respect to the Securities or to the
Registration Statement, as the case may be, containing information
regarding the offering price of the Securities has been filed with the
Commission, and (ii) such later time and date as shall have been consented
to by the Representatives; if required, the Prospectus and any amendment or
supplement thereto shall have been filed with the Commission in the manner
and within the time period required by Rule 424(b) under the Act; no stop
order suspending the effectiveness of the Registration Statement or any
amendment thereto shall have been issued, and no proceedings for that
purpose shall have been instituted or threatened or, to the knowledge of
the Company or the Representatives, shall be contemplated by the
Commission; and the Company shall have complied with any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise).
(b) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Parcel, Mauro & Spaanstra, P.C., counsel for the Company
and the Selling Shareholders, dated the Closing Date (and stating that it
may be relied on by Berliner Zisser Walter & Gallegos, P.C., counsel to the
Representatives, in rendering their opinion), to the effect that:
(i) the Company and its subsidiary have been duly organized and
are validly existing as corporations in good standing under the laws
of the States of Colorado and Delaware, respectively, and are duly
qualified to transact business as foreign corporations and are in good
standing under the laws of the jurisdictions in which the operations
or business conducted require such qualification;
(ii) the Company and the subsidiary have the corporate power to
own or lease their properties and conduct their business as described
in the Registration Statement and the Prospectus, and the Company has
the corporate power to enter into this Agreement and to carry out all
the terms and provisions hereof to be carried out by it;
(iii) the issued and outstanding shares of capital stock of the
Company's Subsidiary has been duly authorized and validly issued, are
fully paid and nonassessable and are owned by the Company free and
clear of any perfected security interests (other than those disclosed
in the Prospectus) and the Prospectus accurately describes, to the
extent so described, any material corporation, association, or other
entity owned or controlled, or to be owned and controlled, directly or
indirectly, by the Company;
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(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued and
outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable,
and were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities; the
Firm Securities have been duly authorized by all necessary corporate
action of the Company and, when issued and delivered to and paid for
by the Underwriters pursuant to this Agreement, will be validly
issued, fully paid and nonassessable; no holders of outstanding shares
of capital stock of the Company are entitled as such to any preemptive
or other rights to subscribe for any of the Securities; no holders of
securities of the Company are entitled to have such securities
registered under the Registration Statement except for those which
have been so registered; the statements set forth under the heading
"Description of Securities" in the Prospectus, insofar as such
statements purport to summarize certain provisions of the capital
stock of the Company, provide a fair summary of such provisions; and
the statements set forth under the headings "Risk Factors - Shares
Eligible for Future Sale; Rights to Acquire Shares," "Risk Factors -
Regulation," "Risk Factors - Risks Associated with International
Operations," "Risk Factors - Legal Proceedings," "Risk Factors -
Charter and Statutory Provisions," "Business - Services," "Business -
Regulation," "Business - Network and Operations," "Management - Stock
Option Plan," "Rescission Offer," "Certain Transactions," "Shares
Eligible for Future Sale," "Description of Securities" in the
Prospectus, insofar as such statements constitute a summary of the
legal matters, documents or proceedings referred to therein, provide a
fair and accurate summary of such legal matters, documents and
proceedings in all material respects;
(v) the execution and delivery of this Agreement and the Warrant
Agreement have been duly authorized by all necessary corporate action
of the Company, and this Agreement and the Warrant Agreement have been
duly executed and delivered by the Company and, assuming due
authorization, execution and delivery by you, are binding agreements
of the Company, enforceable in accordance with their terms, except
insofar as indemnification provisions may be limited by applicable law
and to which counsel need not express any opinion and except as
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
(vi) no legal or governmental proceedings are pending to which
the Company or the subsidiary is a party or to which the property of
the Company or the subsidiary is subject that are required to be
described in the Registration Statement or the Prospectus and are not
described therein and, to counsel's knowledge, no such proceedings
have been threatened against the Company or its subsidiary or with
respect to any of their respective properties; no contract or other
document is required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration
Statement that is not described therein or filed as required;
(vii) to counsel's knowledge, subsequent to the respective dates
as of which information is given in the Registration Statement and the
Prospectus (or, if the
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Prospectus is not in existence, the most recent Preliminary
Prospectus), (A) the Company has not incurred any material liability
or obligation, direct or contingent, nor entered into any material
transaction not in the ordinary course of business; and (B) the
Company has not purchased any of its outstanding capital stock, nor
declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock, except in each case as described in or
contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus);
(viii) the issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement and of warrants
to the Representatives by the Company pursuant to the Warrant
Agreement; the compliance by the Company with the other provisions of
this Agreement and the Warrant Agreement; and the consummation of the
other transactions contemplated in such agreements do not (A) require
the consent, approval, authorization, registration or qualification of
or with any governmental authority, except such as have been obtained
and such as may be required under state securities or blue sky laws,
by the Nasdaq SmallCap Market and NASD, or (B) conflict with or result
in a breach or violation of any of the terms and provisions of, or
constitute a default under, any material contract, indenture,
mortgage, deed of trust, lease or other agreement or instrument known
to such counsel to which the Company is a party or by which the
Company or any of its properties are bound, or the charter documents
or by-laws of the Company or any statute or any judgment, decree,
order, rule or regulation of any court or other governmental authority
or any arbitrator having jurisdiction over the Company and no further
approval or authorization of the shareholders or the Board of
Directors of the Company is required for (Y) the issuance and sale of
the Securities to be sold by the Company pursuant to this Agreement or
(Z) the issuance and sale of the shares of Common Stock issuable upon
exercise of the Warrant Agreement;
(ix) the Registration Statement is effective under the Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been
made in the manner and within the time period required by Rule 424(b);
and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto
has been issued, and no proceedings for that purpose have been
instituted or are threatened by the Commission;
(x) the Registration Statement originally filed with respect to
the Securities and each amendment thereto, and the Prospectus (in each
case, other than the financial statements and other financial and
statistical information contained therein, as to which such counsel
need express no opinion) comply as to form in all material respects
with the applicable requirements of the Act and the rules and
regulations of the Commission thereunder;
(xi) the Company is not, and the transactions contemplated by
this Agreement will not cause the Company to become, an investment
company subject to registration under the 1940 Act;
(xii) the specimen stock certificate of the Company filed as an
exhibit to the Registration Statement or incorporated by reference
from prior filings made under
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or pursuant to the Act is in due and proper form to evidence shares of
Common Stock, has been duly authorized and approved by the Board of
Directors of the Company and complies with all legal requirements
applicable under the Colorado Business Corporation Act;
(xiii) the descriptions in the Registration Statement and the
Prospectus of the articles of incorporation and bylaws of the Company
and of statutes are accurate and fairly present the information
required to be presented by the Act and the applicable rules and
regulations (provided that counsel need not express any opinion as to
their completeness);
(xiv) except as described in the Prospectus, no holders of
Common Stock or other securities of the Company have registration
rights with respect to securities of the Company;
(xv) the Company is not currently offering any securities for
sale except as described in the Registration Statement;
(xvi) such counsel has no knowledge of any promoter,
affiliate, parent or subsidiaries of the Company except as are
described in the Registration Statement;
(xvii) the Company has no subsidiaries except as disclosed in
the Prospectus;
(xviii) the Company owns or possesses, free and clear of all
liens or encumbrances and rights thereto or therein by third parties,
the requisite licenses or other rights to use all trademarks,
copyrights, service marks, service names, trade names and licenses
necessary to conduct its business (including without limitation, any
such licenses or rights described in the Registration Statement as
being owned or possessed by the Company or any subsidiary) (all of
which are collectively referred to herein as the "Intellectual
Property"); there is no actual or pending, or threatened claim,
proceeding or action by any person pertaining to or which challenges
the exclusive rights of the Company with respect to any of the
Company's Intellectual Property;
(xix) neither the Company nor the subsidiary is a party to any
agreement giving rise to any obligation by the Company or the
subsidiary to pay any third-party royalties or fees of any kind
whatsoever with respect to any technology developed, employed, used
or licensed by the Company or the subsidiary, other than is disclosed
in the Prospectus;
(xx) the Common Stock is eligible for quotation on The Nasdaq
Smallcap Market;
(xxi) all issued and outstanding shares of Common Stock and all
other securities issued and sold or exchanged by the Company or its
subsidiaries have been issued and sold or exchanged in compliance
with all applicable state and federal securities laws and regulations;
(xxii) the Company, the subsidiary and all of their property are
in compliance with all environmental laws and the Company and the
subsidiary are in full compliance with all permits, licenses and
authorizations relating to environmental laws;
(xxiii) at the Closing Date and upon payment of the
consideration set forth in the Registration Statement, the Company
shall have purchased all of the outstanding common stock of the
subsidiary, and shall have received good title to such shares of
common stock of the subsidiary , free and clear of all liens, security
interests, pledges, charges, encumbrances, shareholders' agreements
and voting trusts. Each outstanding share of common stock of the
subsidiary is validly authorized, validly issued, fully paid and
nonassessable, with no personal liability attaching to the ownership
thereof, and has not been issued and is not owned or held in violation
of any preemptive right of shareholders. There is no commitment, plan
or arrangement to issue, and no outstanding option, warrant and or
other right for the issuance of any share of capital stock of the
subsidiary or any other security or other instrument which by its
terms is convertible into, exercisable for, or exchangeable for
capital stock of the subsidiary, except as is properly described in
the Prospectus;
(xxiv) The conversion and/or extension of promissory notes
by promissory note holders of the Company since January 1, 1996 does
not result in an integration with any other offering of securities
by the Company or with this offering;
(xxv) The conversion and/or extension of promissory notes
by promissory note holders of the Company since January 1, 1996 is
exempt from the registration requirements of Section 5 of the
Securities Act of 1933, as amended, and from the securities
registration requirements of any and all states which have
jurisdiction over such conversion and/or extension transactions;
(xxvi) Any distribution of recision materials, offering
materials or other materials to recipients of the recision offer prior
to this offering being consummated, is in compliance with applicable
federal and state securities laws;
(xxvii) Each Selling Shareholder has duly authorized, executed
and delivered a Power of Attorney and Custody Agreement which
constitute valid and legally binding agreements of such Selling
Shareholder in accordance with their terms, except as enforceability
of the same may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors rights generally;
(xxviii) This Agreement has been duly and validly executed and
delivered by or on behalf of each Selling Shareholder and constitutes
the valid and legally binding agreement of each Selling Shareholder
in accordance with its terms, except as enforceability of the same
may be limited by general equitable principles, bankruptcy,
insolvency, reorganization, moratorium or other laws affecting
creditors' rights generally and except as to those provisions
relating to indemnity or contribution for liability arising under
federal or state securities laws or under common law, as to which no
opinion need be expressed;
(xxix) Based solely upon representations which such counsel has
obtained from the Selling Shareholders (as to which nothing has come
to the attention of such counsel which has caused such counsel to
believe such representations are untrue) and the examination of the
certificates representing the Common Stock and, assuming that the
Underwriters are good faith purchasers of the Common Stock for value
without notice, the Underwriters will be the owners of such Common
Stock, free and clear of any claims, liens, encumbrances and security
interests whatsoever;
(xxx) To the best knowledge of such counsel, all
authorizations, orders and consents necessary for the execution and
delivery by each Selling Shareholder of this Agreement, the Power of
Attorney and the Custody Agreement have been duly and validly given,
and each Selling Shareholder has full legal rights, power and
authority to enter into this Agreement, the Power of Attorney and the
Custody Agreement and to sell, assign, transfer and deliver to the
Underwriters the number of shares of Common Stock to be sold by such
Selling Shareholder hereunder; and
(xxxi) The performance of this Agreement and the consummation
of the transaction contemplated hereby and by the Power of Attorney
and the Custody Agreement will not result in a breach or violation by
such Selling Shareholder of any of the terms or provisions of, or
constitute a default by such Selling Shareholder under, any indenture,
mortgage, trust (constructive or other), loan agreement or instrument
known to such counsel to which such Selling Shareholder is a party or
by which such Selling Shareholder is bound, any statute, or any
judgment, decree, order, rule or regulation known to such counsel of
any court or governmental agency or body applicable to such Selling
Shareholder.
Such counsel shall also state that such counsel has participated in conferences
with officers and other representatives of the Company, the independent public
accountants of the Company and the subsidiary, the Representatives and counsel
to the Representatives, at which conferences the contents of the Registration
Statement and the Prospectus and related matters were discussed and, although
such counsel has not undertaken to investigate or verify independently and does
not assume any responsibility for factual statements contained in the
Registration Statement and Prospectus (except as otherwise expressly set forth
herein), on the basis of the foregoing they have no reason to believe that the
Registration Statement, as of its effective date, contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or the date of such opinion, contained or contains
any untrue statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading (except such counsel
need express no view as to the financial statements and notes thereto, schedules
and reports thereon, and other financial data included in the Registration
Statement or Prospectus).
In rendering any such opinion, such counsel may rely, as to matters of fact, to
the extent such counsel deems proper, on certificates or opinions of responsible
officers of the Company and public officials, and may limit its opinions to the
laws of the United States of America and the States of Colorado and Delaware, as
appropriate.
References to the Registration Statement and the Prospectus in this paragraph
(b) shall include any amendment or supplement thereto at the date of such
opinion.
(c) At the Firm Closing Date, you shall have received the favorable
opinion of Haligman & Lottner, P.C., telecommunications counsel for the
Company, dated the date of delivery, addressed to you, and in form and
scope satisfactory to your counsel, to the effect that:
i. Each of the Company and its subsidiary is in compliance in
all material respects with all applicable telecommunications-related
rules and regulations of the United States and their respective state
of incorporation, compliance with which is necessary to their business
as currently conducted, including with respect
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to rules, regulations and tariffs promulgated by the Federal
Communications Commission;
ii. To the best knowledge of such counsel after review of the
Company's and the subsidiary's operations, each of the Company and its
subsidiary is in compliance in all material respects with applicable
telecommunications-related rules and regulations of foreign countries
in which the Company and its subsidiary currently operate, including
specifically the countries of Argentina, Brazil, Italy, Lebanon, South
Africa and South Korea;
iii. The statements of international or federal law or
regulations contained under the captions "Risk Factors" and "Business
- Regulation" and other references in the Registration Statement and
Prospectus to telecommunications regulatory matters (collectively, the
"Regulatory Portion") are, in all material respects, correct and
accurate statements or summaries of applicable international, federal
and state law and regulation, subject to the qualifications set forth
therein; and
iv. The Regulatory Portion of the Registration Statement and the
Prospectus, at the time the Registration Statement became effective
and at the Firm Closing Date, did not contain any untrue statement of
a material fact, or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading.
(d) The Representatives shall have received from Stockman Kast Ryan &
Scruggs, P.C. and Richard A. Eisner & Company, LLP, letters dated,
respectively, the date hereof and the Firm Closing Date, in form and
substance satisfactory to the Representatives, to the effect that:
(i) they are independent accountants with respect to the Company
and its subsidiary, respectively, within the meaning of the Act and
the applicable rules and regulations thereunder;
(ii) in their opinion, the audited financial statements and the
as adjusted financial data examined by them and included in the
Registration Statement and the Prospectus comply in form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations;
(iii) on the basis of carrying out certain specified procedures
(which do not constitute an examination made in accordance with
generally accepted auditing standards) that would not necessarily
reveal matters of significance with respect to the comments set forth
in this paragraph (iii), a reading of the minute books of the
shareholders, the board of directors and any committees thereof of the
Company and its subsidiary, and inquiries of certain officials of the
Company and its subsidiary who have responsibility for financial and
accounting matters, nothing came to their attention that caused them
to believe that at a specific date not more than five business days
prior to the date of such letter, there were any changes in the
capital stock or total debt of the Company and its subsidiary or any
decreases in total assets or shareholders' equity of the Company and
its subsidiary, in each case compared
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with amounts shown on the latest balance sheet included in the
Registration Statement and the Prospectus, or for the period from
April 30, 1997 or October 31, 1997 to such specified date there were
any decreases, as compared with the same period in the prior year, in
total revenue, net loss or net loss per share, respectively, of the
Company and its subsidiary, except in all instances for changes,
decreases or increases set forth in such letters;
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages
and financial information that are derived from the general accounting
records of the Company and its subsidiary and are included in the
Registration Statement and the Prospectus, and have compared such
amounts, percentages and financial information with such records of
the Company and its subsidiary and with information derived from such
records and have found them to be in agreement, excluding any
questions of legal interpretation; and
(v) their review of the system of internal controls of the
Company and its subsidiary, to the extent they deemed necessary in
establishing the scope of their examination of the Company's financial
statements as of April 30, 1997 or October 31, 1997 did not disclose
any weaknesses in internal controls that they considered to be
material weaknesses.
In the event that the letters referred to above set forth any
such changes, decreases or increases which, in the reasonable
discretion of the Representatives, are likely to result in a Material
Adverse Effect, it shall be a further condition to the obligations of
the Underwriters that such letters shall be accompanied by a written
explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary.
References to the Registration Statement and the Prospectus in
this paragraph (c) with respect to either letter referred to above
shall include any amendment or supplement thereto by the date of such
letter.
(e) The Representatives shall have received a certificate, dated the
Firm Closing Date, of Ronald P. Erickson, Robert A. Spade and Patrick R.
Scanlon, in their capacities as Chairman of the Board, Chief Executive
Officer and President, respectively, of the Company to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm
Closing Date; the Registration Statement, as amended as of the Firm
Closing Date, does not include any untrue statement of a material fact
or omit to state any material fact necessary to make the statements
therein not misleading, and the Prospectus, as amended or supplemented
as of the Firm Closing Date, does not include any untrue statement of
a material fact or omit to state any material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and the Company has
performed all covenants and agreements and satisfied all conditions on
its part to be performed or satisfied at or prior to the Firm Closing
Date;
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<PAGE>
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and
no proceedings for that purpose have been instituted or, to the best
of the Company's knowledge, threatened or are contemplated by the
Commission; and
(iii) subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, neither the
Company nor its subsidiary has sustained any loss or interference with
their respective businesses or properties having or resulting in a
Material Adverse Effect from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor
dispute or any legal or governmental proceeding, and there has not
been any event, circumstance, or development that results in, or that
the Company reasonably believes will result in, a Material Adverse
Effect, except in each case as described in or contemplated by the
Prospectus (exclusive of any amendment or supplement thereto).
(f) The Representatives shall have received from each officer and
director of the Company and the persons and entities listed in Schedule 3
an agreement to the effect that such person or entity will not, except to
the extent otherwise specifically permitted by the terms of each such
person's or entity's agreement, directly or indirectly, without the prior
written consent of the Representatives, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of an option to purchase or other sale or disposition) of any
shares of Common Stock or any securities convertible into, or exchangeable
or exercisable for, shares of Common Stock for a period of 12 months after
the date of this Agreement, without the Representatives' prior written
consent, which consent shall not be unreasonably withheld; provided,
however, that intra-family transfers or transfers to trust for estate
planning purposes shall not be so restricted.
(g) On or before the Firm Closing Date, the Representatives and their
counsel shall have received such further certificates, documents or other
information as they may have reasonably requested from the Company.
(h) Upon consummation of the offering of the Securities, the
Securities shall have approved for trading, on notice of issuance, on the
Nasdaq SmallCap Market.
(i) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Berliner Zisser Walter & Gallegos, P.C., counsel for the
Representatives, with respect to the issuance and sale of the Firm
Securities, the Registration Statement and Prospectus, and such other
related matters as the Representatives may reasonably require, and the
Company shall have furnished to such counsel such documents as they may
reasonably request for the purpose of enabling them to pass upon such
matters.
(j) The Company shall have executed and delivered a Warrant Agreement
in a form satisfactory to the Representatives (the "Warrant Agreement"),
and there shall have been tendered to the Representatives all of the
Representatives' Warrants described in Section 6(n) hereof to be purchased
by the Representatives on the Closing Date.
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<PAGE>
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Representatives. The Company shall furnish to the
Representatives such conformed copies of such opinions, certificates, letters
and documents in such quantities as the Representatives and counsel for the
Representatives shall reasonably request.
The respective obligations of the several Underwriters to purchase and pay
for any Option Securities shall be subject, in their discretion, to each of the
foregoing conditions to purchase the Firm Securities, except that all references
to the Firm Securities and the Firm Closing Date shall be deemed to refer to
such Option Securities and the related Option Closing Date, respectively.
9. INDEMNIFICATION AND CONTRIBUTION.
--------------------------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter, its counsel, each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act, and each Selling Shareholder, against any losses, claims,
damages or liabilities to which such Underwriter or such controlling person
may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of
or are based upon:
(i) any breach by the Company of its representations or
warranties set forth in Section 2(a) and (b) of this Agreement;
(ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any
amendment thereto, the Prospectus or any amendment or supplement
thereto or (B) any application or other document, or any amendment or
supplement thereto, executed by the Company or based upon written
information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Securities under the securities
or blue sky laws thereof or filed with the Commission or any
securities association or securities exchange (each, an
"Application");
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, or the Prospectus or
any amendment or supplement thereto, or any Application, a material
fact required to be stated therein or necessary to make the statements
therein not misleading; or
(iv) any untrue statement or alleged untrue statement of any
material fact made by the Company or prepared at its direction and
contained in any audio, visual, electronic or electronically
transmitted materials produced by the Company or at its direction and
used in connection with the marketing of the Securities, including
without limitation, slides, videos, films, Internet presentations,
tape recordings, and, such party or parties, as the case may be, will
reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with
investigating, defending against or appearing as a third-party witness
in connection with any such loss, claim, damage, liability or action;
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<PAGE>
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any untrue statement or alleged untrue statement or omission or alleged
omission made in such Registration Statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or
any Application in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein; and provided, further, that the Company will not
be liable to any Underwriter or any person controlling such Underwriter with
respect to any such untrue statement or omission made in any Preliminary
Prospectus that is corrected in the Prospectus (or any amendment or supplement
thereto) if the person asserting any such loss, claim, damage or liability
purchased Securities from such Underwriter but was not sent or given a copy of
the Prospectus (as amended or supplemented) at or prior to the written
confirmation of the sale of such Securities to such person in any case where
such delivery of the Prospectus (as amended or supplemented) is required by the
Act, unless such failure to deliver the Prospectus (as amended or supplemented)
was a result of noncompliance by the Company with Section 6(d) and (e) of this
Agreement. The Company shall not, without the prior written consent of the
Representatives, settle or compromise or consent to the entry of any judgment in
any pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not any Underwriter or any
person who controls any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of all of the Underwriters and such controlling persons
from all liability arising out of such claim, action, suit or proceeding.
In addition to its other obligations under this Section 9(a), the Company
agrees that, as an interim measure during the pendency of any claim, action,
investigation, inquiry, or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, described in this
Section 9(a), it will reimburse the Representatives and each Underwriter on a
monthly basis for all reasonable legal fees or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry, or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse the Representatives or Underwriters for such expenses
and the possibility that such payments might later be held to have been improper
by a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Representatives and
the Underwriters shall promptly return it to the party or parties that made such
payment, together with interest, compounded daily, determined on the basis of
the prime rate (or other commercial lending rate for borrowers of the highest
credit standing) announced from time to time by Bank of America (the "Prime
Rate"). Any such interim reimbursement payments which are not made to the
Representatives and Underwriters within 45 days of a request for reimbursement
shall bear interest at the Prime Rate from the date of such request. This
indemnity agreement shall be in addition to any liabilities which the Company
may otherwise have.
(b) The Selling Shareholders shall indemnify and hold harmless
the Company, each Underwriter, and each person, if any, who controls the
Company and each Underwriter within the meaning of the Act or the Exchange
Act, and all officers, directors, employers, agents and counsel of the
Company and each Underwriter against any and all loss, liability, claim,
damage and expense whatsoever, including, but not limited to, attorneys'
fees and any and all expense whatsoever incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or
any claim whatsoever or in connection with any investigation or inquiry of,
or action or proceeding that may be brought against, the respective
indemnified parties, arising out of or based upon any untrue statements or
alleged untrue statements of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any
application or other document (in this Section 9 collectively called
"application") executed by the Selling Shareholders and based upon written
information furnished by or on behalf of the Selling Shareholders filed in
any jurisdiction in order to qualify all or any part of the Shares under
the securities laws thereof or filed with the SEC or the NASD, or the
omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided,
however, that the foregoing indemnity shall not apply in respect of any
statement or omission made in reliance upon and in conformity with written
information furnished to the Selling Shareholders or any Underwriter
through the Representative expressly for use in any Preliminary Prospectus,
the Registration Statement or Prospectus, or any amendment or supplement
thereof. This indemnity agreement will be in addition to any liability the
Selling Shareholders may otherwise have.
(c) Each Underwriter, severally and not jointly, will indemnify
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, and each Selling Shareholder against any losses, claims,
damages or liabilities to which the Company or any such director, officer
or controlling person of the Company may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged
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<PAGE>
untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or any Application; (ii)
the omission or the alleged omission to state therein a material fact
required to be stated in the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or any Application or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through the
Representatives specifically for use therein; or (iii) any use of the
access code for the "NetRoadshow" by other than qualified investors,
registered broker-dealers or investment advisors which results in action
taken against the Company and/or the Selling Shareholders by such third
party obtaining access to the "NetRoadshow"; provided, however, the
Underwriter responsible for distributing such access code to other than a
qualified investor shall be the sole party responsible to the Company and
the Selling Shareholders in connection therewith. The Representatives shall
not, without the prior written consent of the Company and each such named
Selling Shareholder, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not
the Company or any person who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act is a party to such
claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of the Company, such controlling
persons and each such named Selling Shareholder from all liability arising
out of such claim, action, suit or proceeding. This indemnity agreement
will be in addition to any liability which such Underwriter may otherwise
have.
(d) Promptly after receipt by an indemnified party under this Section
9 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party
under this Section 9, notify the indemnifying party of the commencement
thereof, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party,
except to the extent that the indemnifying party demonstrates it has been
irreparably prejudiced by such failure to receive notice.
(e) In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the
extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably
concluded or shall have been advised by its counsel that there may be one
or more legal defenses available to it and/or other indemnified parties
that conflict with those available to the indemnifying party, the
indemnifying party shall not have the right to direct the defense of such
action on behalf of such indemnified party or parties and such indemnified
party or parties shall have the right to select separate counsel to defend
such action on behalf of such indemnified party or parties. After notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof and approval by such indemnified party of
counsel appointed to defend such action, the indemnifying party will not be
liable to such indemnified party under this Section 9 for any legal or
other
-26-
<PAGE>
expenses, other than reasonable costs of investigation, subsequently
incurred by such indemnified party in connection with the defense thereof,
unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying
party shall not be liable for the expenses of more than one separate
counsel (in addition to local counsel) in any one action or separate but
substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances, designated by the
Representatives in the case of paragraph (a) of this Section 9,
representing the indemnified parties under such paragraph (a) who are
parties to such action or actions) or (ii) the indemnifying party does not
promptly retain counsel satisfactory to the indemnified party or (iii) the
indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party.
(f) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 9 is unavailable or insufficient,
for any reason, to hold harmless an indemnified party in respect of any
losses, claims, damages or liabilities (or actions in respect thereof),
each indemnifying party, in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect (i) the relative benefits received by the
indemnifying party or parties on the one hand and the indemnified party on
the other from the offering of the Securities or (ii) if the allocation
provided by the foregoing clause (i) is not permitted by applicable law,
not only such relative benefits but also the relative fault of the
indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged
statements or omissions that resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company and
the Selling Shareholders on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total proceeds from the
offering (before deducting expenses) received by the Company and the
Selling Shareholders bear to the total underwriting discounts and
commissions received by the Underwriters. The relative fault of the parties
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company and the Selling Shareholders on the one hand or by the Underwriters
on the other hand, the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission, and any other equitable considerations appropriate in the
circumstances. The Company, the Selling Shareholders and the Underwriters
agree that it would not be equitable if the amount of such contribution
were determined by pro rata or per capita allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation that does not take into account the equitable
considerations referred to above in this paragraph (f). Notwithstanding any
other provision of this paragraph (f), no Underwriter shall be obligated to
make contributions hereunder that in the aggregate exceed the total public
offering price of the Securities purchased by such Underwriter under this
Agreement, less the aggregate amount of any damages that such Underwriter
has otherwise been required to pay in respect of the same or any
substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
hereunder are several in proportion to their respective underwriting
obligations and not joint, and as between themselves, contributions
-27-
<PAGE>
among Underwriters shall be governed by the provisions of the
Representatives' Agreement Among Underwriters. For the purposes of this
paragraph 9(f), each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act shall
have the same rights to contribution as such Underwriter, and each director
of the Company, each officer of the Company who signed the Registration
Statement, each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, and each
Selling Shareholder, shall have the same rights to contribution as the
Company.
10. DEFAULT OF UNDERWRITERS. If one or more Underwriters default in their
-----------------------
obligations to purchase Firm Securities or Option Securities hereunder and the
aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, then the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate number of
Firm Securities or Option Securities, as the case may be, to be purchased by all
of the Underwriters at such time hereunder, and if arrangements satisfactory to
the Representatives are not made within 36 hours after such default for the
purchase by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company other than as provided
in Section 11 hereof. In the event of any default by one or more Underwriters
as described in this Section 10, the Representatives shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 4 hereof for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purchase and delivery of the Firm Securities or Option
Securities, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
11. SURVIVAL. The respective representations, warranties, agreements,
--------
covenants, indemnities and other statements of the Company, its officers, the
Selling Shareholders and the several Underwriters set forth in this Agreement or
made by or on behalf of them, respectively, pursuant to this Agreement shall
remain in full force and effect, regardless of (i) any investigation made by or
on behalf of the Company, any of its officers or directors, any Selling
Shareholder, any Underwriter or any controlling person referred to in Section 9
hereof and (ii) delivery of and payment for the Securities. The respective
agreements, covenants, indemnities and other statements set forth in Sections 7
and 9 hereof shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement.
12. TERMINATION.
-----------
(a) This Agreement may be terminated with respect to the Firm
Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company
-28-
<PAGE>
given prior to the Firm Closing Date or the related Option Closing Date,
respectively, in the event that the Company shall have failed, refused or
been unable to perform all obligations and satisfy all conditions on its
part to be performed or satisfied hereunder at or prior thereto or, if at
or prior to the Firm Closing Date or, such Option Closing Date,
respectively,
(i) after the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change or development involving a prospective adverse change in or
affecting particularly the business, properties, condition (financial
or otherwise), results of operations or prospects of the Company,
whether or not arising in the ordinary course of business, occurs
which would, in the Representatives' sole judgment, make the offering
or the delivery of the Securities impracticable or inadvisable;
(ii) trading in the Common Stock shall have been suspended by the
Commission or the Nasdaq SmallCap Market or minimum or maximum prices
shall have been established on the Nasdaq SmallCap Market;
(iii) a banking moratorium shall have been declared by New York
or United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or
material adverse change in general economic, political or financial
conditions having an effect on the U.S. financial markets that, in the
sole judgment of the Representatives, makes it impractical or
inadvisable to proceed with the public offering or the delivery of the
Securities as contemplated by the Registration Statement, as amended
as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 12 shall be
without liability of any party to any other party except as provided in
Section 11 hereof.
13. INFORMATION SUPPLIED BY UNDERWRITERS. The statements set forth in (a)
------------------------------------
the last paragraph on the front cover page of any Preliminary Prospectus or the
Prospectus, (b) under the heading "Underwriting" in any Preliminary Prospectus
or the Prospectus and (c) on page 2 in any Preliminary Prospectus or the
Prospectus pertaining to stabilization (to the extent such statements relate to
the Underwriters) constitute the only information furnished by any Underwriter
through the Representatives to the Company and the selling Shareholders for the
purposes of Section 9 hereof. The Underwriters confirm that such statements (to
such extent) are correct.
14. NOTICES. All communications hereunder shall be in writing and, if
-------
sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Cruttenden Roth Incorporated,
18301 Von Karman, Suite 100, Irvine, California 92715, with a copy to Cohig &
Associates, Inc., 6300 South Syracuse Way, Suite 400, Englewood, Colorado
80111, and if sent to the Company, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to the Company at 8 South Nevada
Avenue, Suite 200, Colorado Springs, Colorado 80903, Attention: Chief
Executive Officer.
-29-
<PAGE>
15. SUCCESSORS. This Agreement shall inure to the benefit of and shall be
----------
binding upon the several Underwriters, the Selling Shareholders, the Company and
their respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all conditions
and provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that (a)
the indemnities of the Company contained in Section 9 of this Agreement shall
also be for the benefit of any person or persons who control any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
and (b) the indemnities of the Underwriters contained in Section 9 of this
Agreement shall also be for the benefit of the directors of the Company and the
officers of the Company who have signed the Registration Statement and any
person or persons who control the Company within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act. No purchaser of Securities from any
Underwriter shall be deemed a successor because of such purchase.
16. APPLICABLE LAW. The validity and interpretation of this Agreement,
--------------
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to any provisions relating to conflicts of laws.
17. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. All judicial
----------------------------------------------
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of California, and
by execution and delivery of this Agreement, the Company accepts for itself and
in connection with its subsidiaries and properties, and the Selling Shareholders
accept, generally and unconditionally, the nonexclusive jurisdiction of the
aforesaid courts and waive any defense of forum non conveniens and irrevocably
agree to be bound by any judgment rendered thereby in connection with this
Agreement. The Company and the Selling Shareholders designate and appoint Robert
A. Spade and such other persons as may hereafter be selected by the Company
irrevocably agreeing in writing to so serve, as its agent to receive on its
behalf service of all process in any such proceedings in any such court, such
service being hereby acknowledged by the Company and the Selling Shareholders to
be effective and binding service in every respect. A copy of any such process so
served shall be mailed by registered mail to the Company at its address provided
in Section 14 hereof; provided, however, that, unless otherwise provided by
applicable law, any failure to mail such copy shall not affect the validity of
service of such process. If any agent appointed by the Company and the Selling
Shareholders refuses to accept service, the Company and the Selling Shareholders
hereby agree that service of process sufficient for personal jurisdiction in any
action against the Company and/or the Selling Shareholders in the State of
California may be made by registered or certified mail, return receipt
requested, to the Company at its address provided in Section 14 hereof, and the
Company and the Selling Shareholders hereby acknowledge that such service shall
be effective and binding in every respect. Nothing herein shall affect the right
to serve process in any other manner permitted by law or shall limit the right
of any Underwriter to bring proceedings against the Company and/or the Selling
Shareholders in the courts of any other jurisdiction.
18. NO RULE OF CONSTRUCTION. The parties acknowledge that this Agreement
-----------------------
was initially prepared by the Representatives, and that all parties have read
and negotiated the language used in this Agreement. The parties agree that,
because all parties participated in negotiating and drafting this Agreement, no
rule of construction shall apply to this Agreement which construes ambiguous
language in favor of or against any party by reason of that party's role in
drafting this Agreement.
-30-
<PAGE>
19. COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
If the foregoing correctly sets forth our understanding please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company, each of the
Selling Shareholders and each of the several Underwriters.
Very truly yours,
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
By: ____________________________________________
Robert A. Spade, Chief Executive Officer
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
CRUTTENDEN ROTH INCORPORATED EACH OF THE SELLING SHAREHOLDERS
By: _________________________________ By: _________________________________
Name: __________________________ Attorney-in-fact
Title: __________________________
For themselves and as Representatives.
RWW\IASG\UA.498
-31-
<PAGE>
SCHEDULE 1
UNDERWRITERS
NUMBER OF
FIRM SECURITIES
UNDERWRITERS TO BE PURCHASED
- ------------ ---------------
Cruttenden Roth Incorporated........................ _________
John G. Kinnard and Company, Incorporated........... _________
Kaufman Bros., L.P. ................................ _________
Total............................................
=========
-32-
<PAGE>
SCHEDULE 2
SUBSIDIARY
Name Jurisdiction of Incorporation
- ---- -----------------------------
International Telephone Company Delaware
-33-
<PAGE>
SCHEDULE 3
PERSONS AND ENTITIES SUBJECT TO LOCK-UP AGREEMENTS
Name
----------------------------------------
-34-
<PAGE>
EXHIBIT 2.3
EXECUTION COPY
--------------
AGREEMENT AND PLAN OF MERGER
BETWEEN
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
AND
GLOBALTEL RESOURCES, INC.
MAY 29, 1998
<PAGE>
Table of Contents
-----------------
Page
----
AGREEMENT AND PLAN OF MERGER............................................... 1
ARTICLE I
Definitions............................................................. 1
ARTICLE II
Basic Transaction....................................................... 6
SECTION 2.1 The Merger........................................... 6
SECTION 2.2 Articles of Incorporation; Bylaws.................... 7
SECTION 2.3 Directors and Officers............................... 7
SECTION 2.4 Conversion of Shares................................. 8
SECTION 2.5 Intentionally omitted................................ 8
SECTION 2.6 No Fractional Shares................................. 8
SECTION 2.7 Capital Stock of CSI................................. 8
SECTION 2.8 Procedure for Exchange of Stock Certificates......... 9
SECTION 2.9 Stock Transfer Books.................................11
SECTION 2.10 Dissenting Shares....................................11
SECTION 2.11 Closing..............................................11
SECTION 2.12 Taking of Necessary Action...........................12
SECTION 2.13 Piggyback Registration Rights........................12
ARTICLE III
Representations and Warranties of GlobalTel.............................12
SECTION 3.1 Organization and Qualification.......................12
SECTION 3.2 Subsidiaries.........................................12
SECTION 3.3 Articles of Incorporation and Bylaws.................12
SECTION 3.4 Capitalization.......................................13
SECTION 3.5 Authorization of Transaction.........................14
SECTION 3.6 No Conflict; Required Filings and Consents...........14
SECTION 3.7 GlobalTel Financial Statements.......................14
SECTION 3.8 Absence of Certain Changes or Events.................15
SECTION 3.9 No Undisclosed Liabilities...........................15
SECTION 3.10 Absence of Litigation................................16
SECTION 3.11 Employee Benefit Plans; Employment Agreements........16
SECTION 3.12 Labor Matters........................................18
SECTION 3.13 Proxy Statement......................................18
SECTION 3.14 Restrictions on Business Activities..................19
SECTION 3.15 Title to Assets......................................19
SECTION 3.16 Contracts and Licenses...............................19
i
<PAGE>
Table of Contents
-----------------
Page
----
SECTION 3.17 Tax Matters..........................................20
SECTION 3.18 Intellectual Property Matters........................20
SECTION 3.19 Customers and Agents.................................21
SECTION 3.20 Compliance with Laws.................................21
SECTION 3.21 Brokers' Fees........................................21
SECTION 3.22 Continuity of Business Enterprise....................22
SECTION 3.23 Board Approval.......................................22
SECTION 3.24 Vote Required........................................22
SECTION 3.25 Nature of GlobalTel Shareholders.....................22
SECTION 3.26 Determination of Preferred Stock Liquidation
Preference..........................................22
ARTICLE IV
Representations and Warranties of CSI...................................22
SECTION 4.1 Organization and Qualification.......................23
SECTION 4.2 Articles of Incorporation and Bylaws.................23
SECTION 4.3 Capitalization.......................................23
SECTION 4.4 Authorization of Transaction.........................23
SECTION 4.5 No Conflict; Required Filings and Consents...........24
SECTION 4.6 CSI Financial Statements.............................24
SECTION 4.7 Absence of Certain Changes or Events.................25
SECTION 4.8 No Undisclosed Liabilities...........................25
SECTION 4.9 Absence of Litigation................................25
SECTION 4.10 Employee Benefit Plans; Employment Agreements........25
SECTION 4.11 Labor Matters........................................27
SECTION 4.12 Proxy Statement......................................27
SECTION 4.13 Restrictions on Business Activities..................28
SECTION 4.14 Title to Assets......................................28
SECTION 4.15 Contracts and Licenses...............................28
SECTION 4.16 Tax Matters..........................................29
SECTION 4.17 Intellectual Property Matters........................29
SECTION 4.18 Customers and Agents.................................30
SECTION 4.19 Compliance with Laws.................................30
SECTION 4.20 Brokers' Fees........................................30
SECTION 4.21 Continuity of Business Enterprise....................30
SECTION 4.22 Board Approval.......................................30
SECTION 4.23 Vote Required........................................31
ARTICLE V
Covenants of GlobalTel..................................................31
SECTION 5.1 Certain Affirmative Covenants of GlobalTel...........31
ii
<PAGE>
Table of Contents
-----------------
Page
----
SECTION 5.2 Certain Negative Covenants of GlobalTel..............32
SECTION 5.3 No Solicitation......................................34
ARTICLE VI
Covenants of CSI........................................................35
SECTION 6.1 Certain Affirmative Covenants of CSI.................35
SECTION 6.2 Certain Negative Covenants of CSI....................37
ARTICLE VII
Additional Agreements...................................................39
SECTION 7.1 GlobalTel Shareholders' Meeting......................39
SECTION 7.2 CSI Shareholders' Meeting............................39
SECTION 7.3 Confidentiality......................................39
SECTION 7.4 Stock Options and Warrants...........................40
SECTION 7.5 Public Announcements.................................41
SECTION 7.6 Listing of CSI Shares................................41
SECTION 7.7 Accountants' Letters.................................41
SECTION 7.8 Further Assurances...................................41
SECTION 7.9 Notice of Developments...............................42
SECTION 7.10 Indemnification......................................42
ARTICLE VIII
Conditions to the Merger................................................42
SECTION 8.1 Conditions to Obligations of Each Party to
Effect the Merger...................................42
SECTION 8.2 Conditions to Obligations of CSI.....................43
SECTION 8.3 Conditions to Obligations of GlobalTel...............46
ARTICLE IX
Termination.............................................................48
SECTION 9.1 Termination of Agreement.............................48
SECTION 9.2 Effect of Termination................................49
SECTION 9.3 Fees and Expenses....................................49
ARTICLE X
Miscellaneous...........................................................50
SECTION 10.1 Effectiveness of Representations, Warranties and
Agreements..........................................50
SECTION 10.2 Notices..............................................50
SECTION 10.3 Amendment............................................51
SECTION 10.4 Waiver...............................................51
SECTION 10.5 Headings.............................................51
iii
<PAGE>
Table of Contents
-----------------
Page
----
SECTION 10.6 Severability.........................................51
SECTION 10.7 Entire Agreement.....................................52
SECTION 10.8 Successors and Assigns...............................52
SECTION 10.9 GOVERNING LAW........................................52
SECTION 10.10 Construction.........................................52
SECTION 10.11 Incorporation of Exhibits and Disclosure
Schedules...........................................52
SECTION 10.12 Counterparts.........................................52
Exhibit 1--Amendments to Bylaws of Surviving Corporation
Exhibit 2--Additional Directors of Surviving Corporation
Exhibit 3--Piggyback Registration Rights
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger ("Agreement") is entered into as of May
29, 1998, by and between Communications Systems International, Inc., a Colorado
corporation ("CSI"), and GlobalTel Resources, Inc., a Washington corporation
("GlobalTel"). CSI and GlobalTel are referred to collectively herein as the
"Parties."
WHEREAS, the Board of Directors of CSI has determined that it is in the
best interest of CSI and its shareholders to merge GlobalTel with and into CSI
as described in Article II;
----------
WHEREAS, the Board of Directors of GlobalTel has determined that it is in
the best interest of GlobalTel and its shareholders to merge GlobalTel with and
into CSI as described in Article II; and
----------
WHEREAS, CSI and GlobalTel desire that the Merger (as defined below) be
made on the terms and subject to the conditions set forth in this Agreement and
qualify as a reorganization within the meaning of Section 368(a) of the Code;
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties and
covenants herein contained, the Parties agree as follows:
ARTICLE I
Definitions
-----------
As used in this Agreement, the following terms, whether in singular or
plural forms, shall have the following meanings:
"Acquisition Proposal" has the meaning set forth in Section 5.3(a).
--------------
"Affiliate" means, in respect of a specified Person, another Person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by or is under common control with, the Person specified.
"Business Day" means any day, other than a Saturday, Sunday or other day on
which banks are permitted to close in the State of Colorado and the State of
Washington.
"Certificate" has the meaning set forth in Section 3.4(c).
--------------
"Closing" has the meaning set forth in Section 2.11.
------------
"Closing Date" has the meaning set forth in Section 2.11.
------------
1
<PAGE>
"Code" means the Internal Revenue Service Code of 1986, as amended.
"Colorado Business Corporation Act" means the Colorado Business Corporation
Act, as amended.
"Common Stock Conversion Ratio" has the meaning set forth in Section
-------
2.4(a).
"Contract" means any written contract, mortgage, deed of trust, bond,
indenture, lease, license, note, franchise, certificate, option, warrant, right,
or other instrument, document, obligation or agreement and any oral obligation,
right or agreement.
"Cruttenden" means Cruttenden Roth Incorporated.
"CSI" has the meaning set forth in the preface above.
"CSI-owned Share" means any GlobalTel Share that CSI owns beneficially.
"CSI Common Stock" means any share of the Common Stock, no par value per
share, of CSI.
"CSI Disclosure Schedule" has the meaning set forth in Article IV.
----------
"CSI Dissenting Share" means any CSI Share as to which the holder thereof
possesses and has not effectively withdrawn or otherwise lost such holder's
dissenter's rights pursuant to the Colorado Business Corporation Act.
"CSI Employee Plans" has the meaning set forth in Section 4.10(a).
---------------
"CSI Intellectual Property" has the meaning set forth in Section 4.17(a).
---------------
"CSI Interim Balance Sheet" has the meaning set forth in Section 4.6.
-----------
"CSI Preferred Stock" means any share of the Preferred Stock, no par value
per share, of CSI.
"CSI Proxy Statement" has the meaning set forth in Section 3.13.
------------
"CSI Share" means any share of the CSI Common Stock.
"CSI Shareholders' Meeting" has the meaning set forth in Section 3.13.
------------
"Effective Time" has the meaning set forth in Section 2.1(b).
--------------
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
2
<PAGE>
"ERISA Affiliate" means, with respect to a specified Person, any other
Person that, together with the specified Person, would be treated as a single
employer under Section 414 of the Code.
-----------
"Exchange Agent" has the meaning set forth in Section 2.8 (a).
---------------
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"GlobalTel" has the meaning set forth in the preface above.
"GlobalTel Balance Sheet" has the meaning set forth in Section 3.7.
-----------
"GlobalTel Common Stock" means any share of the Common Stock, $0.05 par
value per share, of GlobalTel.
"GlobalTel Disclosure Schedule" has the meaning set forth in Article III.
-----------
"GlobalTel Dissenting Share" means any GlobalTel Share as to which the
holder thereof possesses and has not effectively withdrawn or otherwise lost
such holder's dissenter's rights pursuant to the Washington Business Corporation
Act.
"GlobalTel Employee Plans" has the meaning set forth in Section 3.11(a).
---------------
"GlobalTel Financial Statements" has the meaning set forth in Section 3.7.
-----------
"GlobalTel Intellectual Property" has the meaning set forth in Section
-------
3.18.
"GlobalTel Interim Balance Sheet" has the meaning set forth in Section 3.7.
-----------
"GlobalTel Preferred Stock" means any share of the Series A Convertible
Preferred Stock, $0.01 par value per share, of GlobalTel.
"GlobalTel Proxy Statement" has the meaning set forth in Section 3.13.
------------
"GlobalTel Shareholders' Meeting" has the meaning set forth in Section
-------
3.13.
"GlobalTel Shares" means any share of GlobalTel Common Stock or GlobalTel
Preferred Stock.
"GlobalTel Shareholder" means any Person who or which holds any GlobalTel
Shares.
"Governmental Authority" means (a) the United States of America, any state,
commonwealth, territory or possession thereof and any political subdivision or
quasi-governmental authority
3
<PAGE>
of any of the same, including courts, tribunals, departments, commissions,
boards, bureaus, agencies, counties, municipalities, provinces, parishes and
other instrumentalities, and (b) any foreign (as to the United States of
America) sovereign entity, including nations, states, republics, kingdoms and
principalities, any state, province, commonwealth, territory or possession
thereof, and any political subdivision or quasi-governmental authority of any of
the same, including limited to courts, tribunals, departments, commissions,
boards, bureaus, agencies, counties, municipalities, provinces, parishes and
other instrumentalities.
"Intellectual Property" has the meaning set forth in Section 3.18.
------------
"IRS" means the Internal Revenue Service.
"Judgment" means any judgment, writ, order, injunction, award or decree of
any court, judge, justice or magistrate, including any bankruptcy court or
judge, and any order of or by any Governmental Authority.
"Knowledge" means, in the case of GlobalTel, the actual knowledge after
reasonable investigation of Ronald P. Erickson, German F.H. Burtscher, Ronald
Fox and Eric Orse and, in the case of CSI, the actual knowledge after reasonable
investigation of Robert A. Spade, Patrick R. Scanlon and Daniel R. Hudspeth.
"Legal Requirement" means applicable common law and any constitution,
statute, ordinance, code or other law, rule, regulation, technical or other
standard, requirement or procedure enacted, adopted, promulgated, applied or
followed by any Governmental Authority, including Judgments.
"License" means any franchise, authorization, permit, license, consent or
regulatory approval issued by any Governmental Authority.
"Lien" means any lien, mortgage, pledge, encumbrance, indenture, charge,
adverse interest or other security interest, other than liens for taxes not yet
due and payable.
"Litigation" means any claim, action, suit, proceeding, arbitration,
investigation, hearing or other activity or procedure that could result in a
Judgment, and any notice of any of the foregoing.
"Material Adverse Effect" when used in connection with GlobalTel or any of
its Subsidiaries, or CSI, as the case may be, means any change of effect that,
individually or when taken together with all other such changes or effects that
have occurred prior to the date of determination of the occurrence of the
Material Adverse Effect, is or is reasonably likely to have a material adverse
effect on the business, assets (including intangible assets), liabilities,
financial condition, results of operations or prospects of GlobalTel and its
Subsidiaries, taken as a whole, or CSI, as the case may be, or on the ability of
the Surviving Corporation following the Merger to continue the business of
GlobalTel and its Subsidiaries and CSI substantially as currently conducted
(without loss of any material rights).
4
<PAGE>
"Merger" has the meaning set forth in Section 2.1(a).
--------------
"Merger Consideration" has the meaning set forth in Section 2.8(c).
--------------
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Parties" has the meaning set forth in the preface above.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, or a governmental entity (or any
department, agency, or political subdivision thereof).
"Registration Statement" means that registration statement No. 333-47045
filed with the SEC.
"Requisite CSI Shareholder Approval" means the affirmative vote of the
holders of not less than a majority of CSI Shares in favor of this Agreement and
the Merger.
"Requisite GlobalTel Shareholder Approval" means the affirmative vote of
the holders of not less than two-thirds of GlobalTel Shares as a whole, as well
as the affirmative vote of the holders of two-thirds of the holders of each of
GlobalTel Common Stock and GlobalTel Preferred Stock, voting as separate
classes, in favor of this Agreement and the Merger.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Subsidiary" means any corporation with respect to which GlobalTel (or a
Subsidiary of GlobalTel) owns a majority of the common stock or has the power to
vote or direct the voting of sufficient securities to elect a majority of the
directors.
"Superior Proposal" has the meaning set forth in Section 5.3 (a).
---------------
"Surviving Corporation" has the meaning set forth in Section 2.1(a).
--------------
"Taxes" means all levies and assessments of any kind or nature imposed by
any Governmen tal Authority, including all income, sales, use, ad valorem,
value added, franchise, severance, net or gross proceeds, withholding, payroll,
employment, excise or property taxes, together with any interest thereon and any
penalties, additions to tax or additional amounts applicable thereto.
5
<PAGE>
"Total Post-Merger Outstanding Common Stock" means the Total Pre-Merger
Outstanding CSI Common Stock divided by 60%.
"Total Pre-Merger Outstanding CSI Common Stock" means the aggregate number
of shares of CSI Common Stock outstanding immediately prior to the Effective
Time. For purposes of this definition, all shares of CSI Common Stock issuable
upon exercise of options or upon conversion, exchange or exercise of other
securities or other rights outstanding immediately prior to the Effective Time
(regardless of whether then exercisable, convertible or exchangeable) shall be
deemed to be outstanding; provided, however that the CSI Common Stock to be
issued in connection with the purchase of International Telephone Company
("ITC") or CSI's public offering pursuant to the Registration Statement
(including any shares issuable pursuant to underwriters' warrants) shall not be
included as part of Total Pre-Merger Outstanding CSI Common Stock.
"Total Pre-Merger Outstanding GlobalTel Common Stock" means the aggregate
number of shares of GlobalTel Common Stock outstanding immediately prior to the
Effective Time. For purposes of this definition, all shares of GlobalTel Common
Stock issuable upon exercise of options or upon conversion, exchange or exercise
of other securities or other rights outstanding immediately prior to the
Effective Time (regardless of whether then exercisable, convertible or
exchangeable), shall be deemed to be outstanding.
"Washington Business Corporation Act" means the Washington Business
Corporation Act, as amended.
ARTICLE II
Basic Transaction
-----------------
SECTION 2.1 The Merger.
----------
(a) Merger; Surviving Corporation. On and subject to the terms and
-----------------------------
conditions of this Agreement, at the Effective Time, GlobalTel will merge with
and into CSI (the "Merger") in accordance with the Colorado Business Corporation
Act and the Washington Business Corporation Act, whereupon the separate
existence of GlobalTel shall cease, and CSI shall be the surviving corporation
(the "Surviving Corporation").
(b) Effective Time. As soon as practicable after satisfaction or, to
--------------
the extent permitted hereunder, waiver of all conditions to the Merger set forth
in Article VIII, CSI and GlobalTel will file articles of merger with the
------------
Secretaries of State of the State of Colorado and the State of Washington,
respectively, and make all other filings or recordings required by the Colorado
Business Corporation Act or the Washington Business Corporation Act in
connection with the Merger. The Merger shall become effective at such time as
the articles of merger are duly filed with the Secretaries of State of the State
of Colorado and the State of Washington or at such later time as is specified in
the articles of merger (the "Effective Time"). Based on the certificates to be
delivered pursuant to Article VIII, CSI and GlobalTel shall calculate the
------------
numerical value of the
6
<PAGE>
Common Stock Conversion Ratio specified in Section 2.4 and such numerical value
-----------
shall be included in the articles of merger. The articles of merger, as filed,
absent manifest error, shall be conclusive of such Common Stock Conversion
Ratio.
(c) Effect of the Merger. From and after the Effective Time, the
--------------------
Surviving Corporation shall possess all the rights, privileges, powers and
franchises and be subject to all of the restrictions, disabilities and duties of
CSI and GlobalTel, all as provided under the Colorado Business Corporation Act
and the Washington Business Corporation Act.
SECTION 2.2 Articles of Incorporation; Bylaws.
---------------------------------
(a) Articles of Incorporation of the Surviving Corporation. The
------------------------------------------------------
articles of incorporation of CSI as in effect at the Effective Time shall be the
articles of incorporation of the Surviving Corporation until amended in
accordance with applicable law, except that Article I of the articles of
incorporation shall be amended to read in their entirety as follows:
ARTICLE I
---------
NAME
----
The name and style of said corporation shall be CS GLOBALTEL, INC.
(b) Bylaws of the Surviving Corporation. The bylaws of CSI as in
-----------------------------------
effect at the Effective Time shall be the bylaws of the Surviving Corporation
until amended in accordance with applicable law, except that the second sentence
of Article III, Section 1 of the bylaws and all of Article IV of the bylaws
shall be amended to read in their entirety as set forth in Exhibit 1 attached
---------
hereto and incorporated herein by this reference.
SECTION 2.3 Directors and Officers.
----------------------
(a) Directors of the Surviving Corporation. At the Effective Time,
--------------------------------------
all directors of CSI shall be deemed to have resigned as directors, except for
Robert A. Spade and Patrick R. Scanlon who shall be directors of the Surviving
Corporation until the next annual meeting of shareholders of the Surviving
Corporation and until their respective successors are elected and qualified. At
the Effective Time, Messrs. Spade and Scanlon shall fill the vacancies on the
board of directors of the Surviving Corporation by electing those persons named
on Exhibit 2 to hold office until the next annual meeting of shareholders of the
---------
Surviving Corporation and until their respective successors are elected and
qualified.
(b) Officers of the Surviving Corporation. At the Effective Time, all
-------------------------------------
officers of CSI shall continue as officers of the Surviving Corporation until
their respective successors are elected and qualified, except that, at the
Effective Time, Robert A. Spade shall resign as Chairman of the Board and the
directors of the Surviving Corporation shall elect Ronald P.
7
<PAGE>
Erickson to serve as Chairman of the Board and Robert A. Spade to serve as Chief
Executive Officer and Vice Chairman of the Board, each to hold office until his
respective successor is elected and qualified.
SECTION 2.4 Conversion of Shares.
--------------------
(a) GlobalTel Common Stock. At the Effective Time by virtue of the
----------------------
Merger, each issued and outstanding share of GlobalTel Common Stock outstanding
immediately prior to the Effective Time (other than shares held as treasury
stock of GlobalTel, CSI-owned Shares and GlobalTel Dissenting Shares) shall be
converted, subject to Section 2.6, into the number of CSI Shares equal to the
-----------
product of (x) the Total Post-Merger Outstanding Common Stock times (y) 40%
divided by (z) the Total Pre-Merger Outstanding GlobalTel Common Stock (such
number is referred to herein as the "Common Stock Conversion Ratio").
(b) GlobalTel Preferred Stock. At the Effective Time by virtue of the
-------------------------
Merger, each issued and outstanding share of GlobalTel Preferred Stock shall be
liquidated in accordance with its terms. Shares of GlobalTel Preferred Stock
shall not have the right to be converted in the Merger into any CSI Shares.
(c) Treasury Stock and CSI-owned Shares. At the Effective Time by
-----------------------------------
virtue of the Merger, each share of GlobalTel Common Stock held as treasury
stock of GlobalTel, each share of GlobalTel Preferred Stock held as treasury
stock of GlobalTel and each CSI-owned Share immediately prior to the Effective
Time shall be canceled and retired and cease to exist, and no exchange or
payment shall be made with respect thereof.
SECTION 2.5 Intentionally omitted.
SECTION 2.6 No Fractional Shares. No fractional CSI Shares, and no
--------------------
certificates representing such fractional shares, shall be issued upon the
surrender for exchange of certificates representing GlobalTel Shares. In lieu
of any fractional share, the Surviving Corporation shall pay to each holder of
GlobalTel Shares who otherwise would be entitled to receive a fractional CSI
Share (after aggregating all fractional CSI Shares to be received by such
holder) an amount of cash (rounded to the nearest whole cent), without interest,
equal to the product of (a) the average of the last sale price per CSI Share for
the most recent thirty consecutive trading days preceding the Effective Time as
reported on the OTC Bulletin Board, multiplied by (b) the fractional share
interest to which such holder would otherwise be entitled.
SECTION 2.7 Capital Stock of CSI.
--------------------
(a) CSI Shares. On and after the Effective Time, each CSI Share
----------
issued and outstanding immediately prior to the Effective Time shall remain an
issued and outstanding CSI Share and shall not be effected by the Merger.
8
<PAGE>
(b) Reservation of CSI Shares. On and after the Effective Time, CSI
-------------------------
shall reserve a sufficient number of authorized but unissued CSI Shares for
issuance in connection with the conversion of GlobalTel Shares into CSI Shares
as provided herein.
SECTION 2.8 Procedure for Exchange of Stock Certificates.
--------------------------------------------
(a) Certificates for CSI Shares. Prior to the Effective Time, the
---------------------------
Surviving Corporation shall supply, or shall cause to be supplied, to or for the
account of an exchange agent designated by the Surviving Corporation and
reasonably acceptable to GlobalTel (the "Exchange Agent") certificates
evidencing the CSI Shares issuable pursuant to Section 2.4.
-----------
(b) Letter of Transmittal and Instructions. As soon as reasonably
--------------------------------------
practicable after the Effective Time, the Surviving Corporation will cause the
Exchange Agent to mail to each holder of record of one or more GlobalTel Shares
immediately prior to the Effective Time (other than treasury shares of
GlobalTel, CSI-owned Shares and GlobalTel Dissenting Shares) (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the certificate or certificates which evidenced such GlobalTel
Share or GlobalTel Shares (the "Certificates") shall pass, only upon proper
delivery of the Certificates to the Exchange Agent and shall be in such form and
have such other provisions as the Surviving Corporation reasonably may specify
and (ii) instructions to effect the surrender of the Certificates in exchange
for certificates representing the CSI Shares and, in lieu of any fractional
share thereof, cash. The Exchange Agent shall be provided with the GlobalTel
Shares Schedule referred to in Section 3.4(c) in order to determine, for its
purposes, the number of GlobalTel Shares now evidenced by each surrendered
Certificate, in order to verify the number of CSI Shares that the holder of such
GlobalTel Shares is entitled to receive on account of his or her compliance with
the procedures in the letter of transmittal.
(c) Delivery of Merger Consideration. Upon surrender of a Certificate
--------------------------------
for cancellation to the Exchange Agent together with the letter of transmittal
described above, duly completed and executed, the holder of such Certificate
shall be entitled to receive in exchange therefor (i) certificates evidencing
that number of CSI Shares which such holder has the right to receive in
accordance with the Common Stock Conversion Ratio in respect of the GlobalTel
Shares formerly evidenced by such Certificate, (ii) any dividends or other
distributions to which such holder is entitled pursuant to Section 2.8(d), and
--------------
(iii) cash in lieu of fractional CSI Shares to which such holder is entitled
pursuant to Section 2.6 (the CSI Shares, dividends, distributions and cash
-----------
described in this Section 2.8(c) being, collectively, the "Merger
--------------
Consideration"), and the Certificate so surrendered shall forthwith be canceled.
(d) Dividends and Distributions. Until Certificates are surrendered
---------------------------
as provided in this Section 2.8, no dividend or distribution payable to holders
-----------
of record of CSI Shares shall be paid to any holder of such Certificates, but
upon surrender of such Certificates by such holder there shall be paid to such
holder the amount of any dividends or distributions (without interest)
theretofore paid with respect to such whole CSI Shares, but not paid to such
holder, and which dividends or distributions had a record date occurring on or
subsequent to the Effective Time.
9
<PAGE>
(e) Transfers of GlobalTel Shares. In the event of a transfer of
-----------------------------
ownership of GlobalTel Shares which is not registered in the transfer records of
GlobalTel as of the Effective Time, CSI Shares and cash may be issued and paid
in accordance with this Section 2.8 to a transferee if the Certificate
-----------
evidencing such GlobalTel Shares is presented to the Exchange Agent, accompanied
by all documents required to evidence and effect such transfer and by evidence
that any applicable stock transfer taxes have been paid.
(f) Certificates. Until surrendered as provided in this Section 2.8,
------------ -----------
each outstanding Certificate that, immediately prior to the Effective Time,
represented GlobalTel Shares (other than treasury shares of GlobalTel, CSI-owned
Shares and GlobalTel Dissenting Shares) will be deemed from and after the
Effective Time, for all corporate purposes other than the payment of dividends
and the making of distributions, to evidence the ownership of the number of
whole CSI Shares into which such GlobalTel Shares shall have been converted
(pursuant to Section 2.4) and the right to receive an amount in cash in lieu of
-----------
the issuance of any fractional shares (pursuant to Section 2.6).
-----------
(g) No Liability. Neither CSI nor GlobalTel shall be liable to any
------------
holder of GlobalTel Shares for any Merger Consideration (or dividends or
distributions with respect thereto) delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law.
(h) Withholding Rights. The Surviving Corporation and the Exchange
------------------
Agent shall be entitled to deduct and withhold from the Merger Consideration
otherwise payable pursuant to this Agreement to any holder of GlobalTel Shares
such amounts as the Surviving Corporation or the Exchange Agent is required to
deduct and withhold with respect to the making of such payment under the Code or
any provision of state, local, provincial or foreign tax law. To the extent
that amounts are so withheld, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the CSI Shares
in respect of which such deduction and withholding was made.
(i) Lost Certificates. In the event any Certificate shall have been
-----------------
lost, stolen or destroyed, the Exchange Agent shall issue and pay in exchange
for such lost, stolen or destroyed Certificate, upon the making of an affidavit
of that fact by the holder of record thereof, such CSI Shares and cash for
fractional shares, if any, as may be required pursuant to this Agreement;
provided, however, that CSI may, in its discretion and as a condition precedent
to the issuance and payment thereof, require the owner of such lost, stolen or
destroyed Certificate to deliver a bond in such sum as it may reasonably require
as indemnity against any claim that may be made against CSI, GlobalTel, the
Exchange Agent or any other party with respect to the Certificate alleged to
have been lost, stolen or destroyed.
(j) Limitations on Resale. The CSI Shares to be issued in the Merger
---------------------
have not been registered for sale under state or federal securities laws and
will be "restricted securities." The issuance of such CSI Shares is intended to
be exempt from registration under the
10
<PAGE>
Securities Act by virtue of Section 4(2) of the Securities Act and the
provisions of Rule 506 of Regulation D promulgated thereunder. CSI Shares
issued in the Merger are subject to restrictions on transferability and resale
and may not be sold or otherwise transferred without registration under the
Securities Act and applicable state securities laws or without an exemption
therefrom. CSI has no obligation to register such CSI Shares except as set
forth in Section 8.1(e). Any certificate representing such CSI Shares may bear
--------------
a legend restricting the transfer thereof consistent with the foregoing.
SECTION 2.9 Stock Transfer Books. At the Effective Time, the stock
--------------------
transfer books of GlobalTel shall be closed, and there shall be no further
registration of transfers of GlobalTel Shares thereafter on the records of
GlobalTel.
SECTION 2.10 Dissenting Shares.
-----------------
(a) GlobalTel Dissenting Shares. The holders of GlobalTel Shares are
---------------------------
entitled to dissenters' rights under the Washington Business Corporation Act.
Notwithstanding any provision of this Agreement to the contrary, any GlobalTel
Dissenting Shares shall not be converted into CSI Shares as otherwise provided
in Section 2.4 unless and until the holder of such GlobalTel Dissenting Shares
-----------
shall have effectively withdrawn or otherwise lost such holder's dissenter's
rights under the Washington Business Corporation Act, at which time such
GlobalTel Shares shall be converted into CSI Shares as provided in Section 2.4.
------------
Following approval of the Merger by the shareholders of GlobalTel, GlobalTel or
the Surviving Corporation shall deliver notice to the holders of GlobalTel
Dissenting Shares as required by Section 23B.13.220 of the Washington Business
------------------
Corporation Act. Promptly following the Effective Time (or the later due
receipt of demand for payment and deposit of certificates representing GlobalTel
Dissenting Shares), the Surviving Corporation shall remit to the holders of
GlobalTel Dissenting Shares payment of the fair value of such shares, as
determined by the Surviving Corporation.
(b) CSI Dissenting Shares. The holders of CSI Shares on the record
---------------------
date fixed to determine the shareholders of CSI entitled to receive notice of
the CSI Shareholders' Meeting are entitled to dissenters' rights under the
Colorado Business Corporation Act. Following approval of the Merger by the
shareholders of CSI, CSI or the Surviving Corporation shall deliver notice to
the holders of CSI Dissenting Shares as required by Section 7-113-203 of the
-----------------
Colorado Business Corporation Act. Promptly following the Effective Time (or
the later due receipt of demand for payment and deposit of certificates
representing CSI Dissenting Shares), the Surviving Corporation shall remit to
the holders of CSI Dissenting Shares payment of the fair value of such shares,
as determined by the Surviving Corporation.
SECTION 2.11 Closing. Unless this Agreement shall have been terminated
-------
pursuant to the provisions of Article IX, and subject to the provisions of
----------
Article VIII, the closing of the Merger (the "Closing") shall take place at
- ------------
10:00 a.m. (local time) on a date (the"Closing Date") to be mutually agreed upon
by the Parties, which date shall be no later than the third Business Day after
all of the conditions set forth in Article VIII shall have been satisfied (or
------------
waived in accordance with the
11
<PAGE>
provisions of this Agreement), unless another date is agreed to in writing by
the Parties. The closing shall take place at the offices of Parcel, Mauro &
Spaanstra, P.C. in Denver, Colorado, unless another place is agreed to in
writing by the Parties.
SECTION 2.12 Taking of Necessary Action. Prior to the Effective Time,
--------------------------
the Parties shall take, or cause to be taken (as the case may be), all such
reasonable actions as may be necessary or appropriate in order to effectuate, as
expeditiously as reasonably practicable, the Merger.
SECTION 2.13 Piggyback Registration Rights. CSI grants to the holders of
-----------------------------
CSI Shares issued in the Merger by conversion of GlobalTel Shares those
piggyback registration rights described (and for the period prescribed) in
Exhibit 3 attached hereto and by this reference incorporated herein.
- ---------
ARTICLE III
Representations and Warranties of GlobalTel
-------------------------------------------
Except as specifically set forth in and qualified by the disclosure
schedule furnished by GlobalTel to CSI prior to the date hereof (the "GlobalTel
Disclosure Schedule"), which GlobalTel Disclosure Schedule shall refer
specifically to each Section or subsection of this Agreement that is so
qualified by a disclosure set forth therein, GlobalTel represents and warrants
to CSI that:
SECTION 3.1 Organization and Qualification. Except as set forth in
------------------------------
Section 3.1 of the GlobalTel Disclosure Schedule, each of GlobalTel and its
- -----------
Subsidiaries is a corporation duly organized and validly existing, under the
laws of the jurisdiction of its incorporation and has the requisite corporate
power and authority, and is in possession of all franchises, grants, Licenses,
easements, certificates, approvals and orders necessary, to own, lease and
operate the properties it purports to own, lease and operate and to carry on its
business as now conducted. Each of GlobalTel and its Subsidiaries is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where the character of the property owned, leased or operated
by it or the nature of its activities makes such qualification necessary except
where the lack of such qualification would not have a Material Adverse Effect.
SECTION 3.2 Subsidiaries. A true and complete list of all of
------------
GlobalTel's Subsidiaries, together with the jurisdiction of incorporation of
each Subsidiary and the percentage of each Subsidiary's outstanding capital
stock owned by GlobalTel or another Subsidiary, is set forth in Section 3.2 of
-----------
the GlobalTel Disclosure Schedule, except as noted therein. Except as set forth
in Section 3.2 of the GlobalTel Disclosure Schedule, GlobalTel does not directly
-----------
or indirectly own any equity or similar interest in, or any interest convertible
into or exchangeable or exercisable for, any equity or similar interest in, any
Person.
SECTION 3.3 Articles of Incorporation and Bylaws. GlobalTel has
------------------------------------
heretofore furnished to CSI a complete and correct copy of its articles of
incorporation and bylaws, each as amended to the date of this Agreement, and,
except as set forth in Section 3.3 of the GlobalTel Disclosure Schedule,
-----------
equivalent organizational documents of each of its Subsidiaries, each as amended
to the date of this
12
<PAGE>
Agreement. Such articles of incorporation and bylaws and equivalent
organizational documents are in full force and effect. Neither GlobalTel nor any
of its Subsidiaries is in violation of any of the provisions of its respective
articles of incorporation or bylaws or equivalent organizational documents.
SECTION 3.4 Capitalization.
--------------
(a) GlobalTel. The entire authorized capital stock of GlobalTel
---------
consists of 50,000,000 shares of common stock, $0.05 par value per share and
5,000,000 shares of preferred stock, $0.01 par value per share, one series of
which has been designated. As of March 31, 1998: (a) 1,747,976 shares of
GlobalTel Common Stock were issued and outstanding, (b) 275,000 shares of
GlobalTel Preferred Stock were issued and outstanding, (c) no GlobalTel Shares
were held in the treasury of GlobalTel, (d) 640,108 shares of GlobalTel Common
Stock were reserved for future issuance upon exercise of outstanding warrants
and (e) 700,000 shares of GlobalTel Common Stock were reserved for future
issuance pursuant to option grants under its 1996 Stock Option Plan. All of the
issued and outstanding GlobalTel Shares have been duly authorized and are
validly issued, fully paid, and nonassessable and have not been issued in
violation of any preemptive right of shareholders. Except as set forth in
Section 3.4 of the GlobalTel Disclosure Schedule, there are no outstanding or
- -----------
authorized options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights or other Contracts that could require GlobalTel or any
of its Subsidiaries to issue, sell or otherwise cause to become outstanding any
of its respective capital stock. Except as set forth in Section 3.4 of the
-----------
GlobalTel Disclosure Schedule, there are no outstanding or authorized stock
appreciation, phantom stock, profit participation or similar rights with respect
to GlobalTel or any of its Subsidiaries. There are no outstanding obligations
of GlobalTel or any of it Subsidiaries to repurchase, redeem or otherwise
acquire any of their respective securities.
(b) Subsidiaries. Section 3.4(b) of the GlobalTel Disclosure Schedule
------------ --------------
sets forth as of the date of this Agreement: (i) the authorized capital of each
Subsidiary; (ii) the issued and outstanding shares of each Subsidiary; (iii) the
owners of the issued and outstanding shares of each Subsidiary and the number of
shares held by them in each Subsidiary; (iv) the number of shares held in the
treasury of each Subsidiary; and (v) the number of shares of each Subsidiary
reserved for future issuance.
(c) Certificates for GlobalTel Shares. Earlier in 1998, GlobalTel
----------------------------------
completed a 1-for-5 reverse stock split of all issued and outstanding shares of
GlobalTel Common Stock, pursuant to which the number of GlobalTel Shares held by
each holder of GlobalTel Common Stock was reduced and any fractional share
thereby created was converted to a right to receive cash. The number of
GlobalTel Shares now evidenced by each stock certificate heretofore issued by
GlobalTel (the "Certificates") is set forth in the schedule (the "GlobalTel
Shares Schedule") described in Section 3.4(c) of the GlobalTel Disclosure
--------------
Schedule, in the column entitled "POST-SPLIT Shares." (The GlobalTel Shares
Schedule also identifies the number of GlobalTel Shares that existed and were
evidenced by the Certificate prior to the reverse stock split and, where
applicable, the fractional share created by the reverse stock split and now
subject to monetary satisfaction.)
13
<PAGE>
Each Certificate states a number of PRE-SPLIT Shares, and GlobalTel has not
required its shareholders to surrender those Certificates or issued replacement
certificates to evidence, for each holder, the POST-SPLIT number of GlobalTel
Shares now held.
SECTION 3.5 Authorization of Transaction. GlobalTel has all necessary
----------------------------
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder; provided, however, that GlobalTel cannot
consummate the Merger unless and until it receives the Requisite GlobalTel
Shareholder Approval. The execution and delivery of this Agreement by GlobalTel
and the consummation by GlobalTel of the transactions contemplated by this
Agreement have been duly and validly authorized by all necessary corporate
action other than the Requisite GlobalTel Shareholder Approval. This Agreement
has been duly and validly executed and delivered by GlobalTel. This Agreement
constitutes the valid and legally binding obligation of GlobalTel, enforceable
in accordance with its terms and conditions, subject to (i) bankruptcy,
insolvency, reorganization, arrangement, moratorium, and other laws of general
application affecting the rights and remedies of creditors, and (ii) general
principles of equity, regardless of whether such enforcement is considered in a
proceeding in equity or at law.
SECTION 3.6 No Conflict; Required Filings and Consents.
------------------------------------------
(a) Except as set forth in Section 3.6 of the GlobalTel Disclosure
-----------
Schedule, the execution and the delivery of this Agreement by GlobalTel and the
consummation by GlobalTel of the Merger will not (i) violate or conflict with
any provision of the articles of incorporation or bylaws or equivalent
organizational documents of GlobalTel or any of its Subsidiaries, (ii) violate
or conflict with any Legal Requirement applicable to GlobalTel or any of its
Subsidiaries or by which any of their respective properties is bound or affected
or (iii) conflict with, result in a breach of, constitute a default (or an event
that with notice or lapse of time or both would become a default) under, result
in the acceleration of, create in any party the right to accelerate, terminate,
modify, or cancel, or result in the creation of any Lien under, any Contract or
License to which any of GlobalTel or any of its Subsidiaries is a party or by
which it is bound or to which any of its assets is subject.
(b) The execution and delivery of this Agreement by GlobalTel does
not, and the performance of this Agreement by GlobalTel will not, require any
consent, approval, authorization or permit of, or filing with or notification to
any Governmental Authority or other Person, except (i) for applicable
requirements, if any, of the Securities Act, the Securities Exchange Act and
state securities laws, (ii) the filing of articles of merger under the Colorado
Business Corporation Act and the Washington Business Corporation Act, and (iii)
as set forth in Section 3.6(b) of the GlobalTel Disclosure Schedule.
--------------
SECTION 3.7 GlobalTel Financial Statements. GlobalTel has delivered to
------------------------------
CSI: (a) an audited consolidated balance sheet of GlobalTel and its Subsidiaries
as of December 31 in each of the years 1995, 1996 and 1997, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flow for each of the fiscal years then ended, together with the report
14
<PAGE>
of Arthur Andersen LLP, independent certified public accountants, (b) a
consolidated balance sheet of GlobalTel and its Subsidiaries as of December 31,
1997 (including the notes thereto, the "GlobalTel Balance Sheet"), and the
related consolidated statements of income, changes in stockholders' equity, and
cash flow for the fiscal year then ended, together with the report of Arthur
Andersen LLP, independent certified public accountants, and (c) an unaudited
consolidated balance sheet of GlobalTel and its Subsidiaries as of March 31,
1998 (the "GlobalTel Interim Balance Sheet") and the related unaudited
consolidated statements of income, changes in stockholders' equity, and cash
flow for the three months then ended, including in each case the notes thereto
(the financial statements referred to in clauses (a) through (c), together with
the notes thereto, being hereinafter referred to collectively as the "GlobalTel
Financial Statements"). The GlobalTel Financial Statements and notes fairly
present the financial condition and the results of operation, changes in
stockholders' equity, and cash flow of GlobalTel and its Subsidiaries as of the
respective dates of and for the periods referred to in such Financial
Statements, all in accordance with GAAP consistently applied throughout the
periods involved (except as disclosed in the notes thereto), subject, in the
case of interim GlobalTel Financial Statements, to normal recurring year-end
adjustments (the effect of which will not, individually or in the aggregate, be
materially adverse) and the absence of notes (that, if presented, would not
differ materially from those included in the GlobalTel Balance Sheet).
SECTION 3.8 Absence of Certain Changes or Events. Except as set forth
------------------------------------
in Section 3.8 of the GlobalTel Disclosure Schedule, since December 31, 1997,
-----------
each of GlobalTel and its Subsidiaries has conducted its respective business in
the Ordinary Course of Business and there has not occurred: (a) any amendment or
change in the articles of incorporation or bylaws or other equivalent
organizational documents of GlobalTel or any of its Subsidiaries; (b) any damage
to, destruction or loss of any assets of GlobalTel or any of its Subsidiaries
(whether or not covered by insurance) that had a Material Adverse Effect; (c)
any change by GlobalTel or any Subsidiary in its accounting methods, principles
or practices; (d) any revaluation by GlobalTel or any of its Subsidiaries of any
of their respective assets, including writing off notes or accounts receivable
other than in the Ordinary Course of Business; (e) any event, occurrence or
development of a state of circumstances or facts which has, had or reasonably
could be expected to have, a Material Adverse Effect; (f) any declaration,
setting aside or payment of any dividend or other distribution with respect to
any GlobalTel Share, or any repurchase or redemption or other acquisition by
GlobalTel of any outstanding GlobalTel Shares or other securities of, or other
ownership interest in, GlobalTel.
SECTION 3.9 No Undisclosed Liabilities. Except as disclosed in Section
-------------------------- -------
3.9 of the GlobalTel Disclosure Schedule, neither GlobalTel nor any of its
- ---
Subsidiaries has any liabilities (absolute, accrued, contingent or otherwise)
which are, in the aggregate, material to the business, operations or financial
condition of GlobalTel and its Subsidiaries taken as a whole, except liabilities
(a) adequately provided for in the GlobalTel Balance Sheet, (b) incurred in the
Ordinary Course of Business and not required under GAAP to be reflected on the
GlobalTel Balance Sheet, (c) incurred since December 31, 1997 in the Ordinary
Course of Business and consistent with past practice, and (d) incurred in
connection with this Agreement.
15
<PAGE>
SECTION 3.10 Absence of Litigation. Except as disclosed in Section 3.10
--------------------- ------------
of the GlobalTel Disclosure Schedule: (a) there is no Litigation pending or, to
the Knowledge of GlobalTel, threatened against GlobalTel or any of its
Subsidiaries, or any properties or rights of GlobalTel or any of its
Subsidiaries, by or before any Governmental Authority or private arbitrational
tribunal, domestic or foreign, that could have a Material Adverse Effect, and
(b) there is not in existence any Judgment naming and requiring GlobalTel or any
Subsidiary to take any action of any kind with respect to its assets or its
business or to which GlobalTel or any Subsidiary, or its respective assets or
business, is subject or by which they are bound or affected.
SECTION 3.11 Employee Benefit Plans; Employment Agreements.
---------------------------------------------
(a) Employee Plans. Section 3.11(a) of the GlobalTel Disclosure
-------------- ---------------
Schedule lists all employee benefit plans (as defined in Section 3(3) of ERISA),
------------
regardless of whether ERISA is applicable thereto, all other bonus stock option,
stock purchase, incentive, deferred compensation, supplemental retirement,
severance or termination pay, medical or life insurance, supplemental
unemployment benefits, profit-sharing, pension or retirement plans, agreements
or arrangements and other similar fringe or employee benefit plans, programs or
arrangements, and any current or former employment or executive compensation or
severance agreements, written or otherwise, for the benefit of, or relating to,
any employee of GlobalTel or any of its Subsidiaries or any ERISA Affiliate of
GlobalTel or any of its Subsidiaries, to which GlobalTel, any Subsidiary or any
ERISA Affiliate of GlobalTel or any Subsidiary is a party, with respect to which
GlobalTel, any Subsidiary or any ERISA Affiliate of GlobalTel or any Subsidiary
has or could have any obligation, as well as each plan with respect to which
GlobalTel, any Subsidiary or an ERISA Affiliate of GlobalTel or any Subsidiary
has or could incur liability if such plan has been or were terminated
(collectively, the "GlobalTel Employee Plans"), and GlobalTel has furnished to
CSI a complete and correct copy of each such written GlobalTel Employee Plan.
(b) Compliance. Except as set forth in Section 3.11(b) of the
---------- ---------------
GlobalTel Disclosure Schedule, (i) none of the GlobalTel Employee Plans promises
or provides retiree medical or other retiree welfare benefits to any Person and
none of the GlobalTel Employee Plans is a "multi-employer plan" as such term is
defined in Section 3(37) of ERISA; (ii) there has been no transaction or failure
-------------
to act with respect to any GlobalTel Employee Plan, which could result in any
material liability of GlobalTel or any Subsidiary; (iii) all GlobalTel Employee
Plans are in compliance in all material respects with the requirements
prescribed by any and all Legal Requirements currently in effect with respect
thereto, and GlobalTel and each of its Subsidiaries have performed all material
obligations required to be performed by them under, are not in any material
respect in default under or violation of, and have no Knowledge of any default
or violation by any other Person to, any of the GlobalTel Employee Plans, except
as to which such non-compliance, non-performance or default would not have a
Material Adverse Effect; (iv) each GlobalTel Employee Plan intended to qualify
under Section 401(a) of the Code is the subject of a favorable determination
--------------
letter from the IRS, and nothing has occurred which may reasonably be expected
to impair such determination; (v) all contributions required to be made to any
GlobalTel Employee Plan, or pursuant to the terms of any GlobalTel Employee Plan
or any collective bargaining agreement, have been made on or before their
16
<PAGE>
due dates and a reasonable amount has been accrued for contribution to each
GlobalTel Employee Plan for the current plan years; (vi) with respect to each
GlobalTel Employee Plan, no "reportable event" within the meaning of Section
-------
4043 of ERISA (excluding any such event for which the thirty day notice
- ----
requirement has been waived under the regulations to Section 4043 of ERISA) nor
------------
any event described in Section 4062, 4063 or 4041 of ERISA has occurred; and
------------------ ----
(vii) neither GlobalTel nor any Subsidiary nor any ERISA Affiliate of GlobalTel
or any Subsidiary has incurred, nor reasonably expects to incur, any liability
under Title IV of ERISA (other than liability for premium payments to the
--------
Pension Benefit Guaranty Corporation arising in the Ordinary Course of
Business).
(c) Qualification. Each GlobalTel Employee Plan that is required or
-------------
intended to be qualified under any applicable Legal Requirement or registered or
approved by a Governmental Authority has been so qualified, registered or
approved by the appropriate Governmental Authority, and nothing has occurred
since the date of the last qualification, registration or approval to adversely
affect, or cause the appropriate Governmental Authority to revoke, such
qualification, registration or approval.
(d) Contributions. All contributions (including premiums) required by
-------------
any Legal Requirement or Contract to have been made or approved by GlobalTel or
any Subsidiary under or with respect to GlobalTel Employee Plans have been paid
or accrued by GlobalTel and its Subsidiaries. Without limiting the foregoing,
except as disclosed in Section 3.11(d) of the GlobalTel Disclosure Schedule,
---------------
there are no material unfunded liabilities under any GlobalTel Employee Plan.
(e) No Litigation. There is no pending or, to the Knowledge of
-------------
GlobalTel and its Subsidiaries, threatened Litigation against GlobalTel or any
Subsidiary with respect to any of the GlobalTel Employee Plans.
(f) No Employee Claims. Except as set forth in Section 3.11(f) of the
------------------ ---------------
GlobalTel Disclosure Schedule, there is no Litigation pending or, to the
Knowledge of GlobalTel and its Subsidiaries, threatened by former or present
employees of GlobalTel or any Subsidiary (or their beneficiaries) with respect
to GlobalTel Employee Plans or the assets or fiduciaries thereof (other than
routine claims for benefits).
(g) No Material Liability. No condition or event has occurred with
---------------------
respect to the GlobalTel Employee Plans which has or could reasonably be
expected to result in a material liability to GlobalTel or any Subsidiary.
(h) Stock Options. Section 3.11(h) of the GlobalTel Disclosure
------------- --------
Schedule sets forth a true and complete list of each current or former employee,
officer or director of GlobalTel or any Subsidiary who, as of the date of this
Agreement, holds any option to purchase any GlobalTel Shares or any capital
stock of any Subsidiary, together with the number of GlobalTel Shares or shares
of capital stock of such Subsidiary subject to such option, the date of grant of
such option, the extent to which such option is vested, the option price of such
option (to the extent determined as of the date hereof), whether such option is
intended to qualify as an incentive stock
17
<PAGE>
option within the meaning of Section 422(b) of the Code and the expiration date
--------------
of such option. Section 3.11(h) of the GlobalTel Disclosure Schedule also sets
---------------
forth the total number of such incentive stock options and non-qualified
options.
(i) Employment and Other Contracts. GlobalTel has furnished to CSI
------------------------------
(i) complete and correct copies of all employment Contracts with officers of
GlobalTel or any Subsidiary; (ii) complete and correct copies of all Contracts
with consultants obligating GlobalTel or any Subsidiary to make annual cash
payments in an amount exceeding $10,000; (iii) a schedule listing all officers
of GlobalTel or any Subsidiary who have executed a non-competition Contract with
GlobalTel or a Subsidiary; (iv) complete and correct copies of all plans,
programs, Contracts and other arrangements of GlobalTel or any Subsidiary with
or relating to its respective employees which contain change in control
provisions; (v) the form of standard employment Contract, if any, of GlobalTel
or any Subsidiary for its respective non-executive employees; (vi) the standard
form agency, distributor or similar Contract, if any, of GlobalTel or any
Subsidiary for its respective sales agents; and (vii) complete and correct
copies of all confidentiality agreements or similar nondisclosure Contracts to
which GlobalTel or any Subsidiary is a party or by which any of them is bound or
affected.
SECTION 3.12 Labor Matters. There are no controversies pending or, to
-------------
the Knowledge of GlobalTel and its Subsidiaries, threatened, between GlobalTel
or any of its Subsidiaries and any of their respective employees, which
controversies have or may have a Material Adverse Effect. Neither GlobalTel nor
any of its Subsidiaries is a party to any collective bargaining agreement or
other labor union Contract applicable to persons employed by GlobalTel or any of
its Subsidiaries. Neither GlobalTel nor any of its Subsidiaries knows of any
activities or proceedings of any labor union to organize any such employees.
Neither GlobalTel nor any of its Subsidiaries has any Knowledge of any strikes,
slowdowns, work stoppages, lockouts or threats thereof by or with respect to any
employees of GlobalTel or any of its Subsidiaries.
SECTION 3.13 Proxy Statement. None of the information supplied or to be
---------------
supplied by GlobalTel in writing for inclusion or incorporation by reference in
(a) the proxy statement relating to the meeting of GlobalTel shareholders (the
"GlobalTel Shareholders' Meeting") to be held in connection with the Merger (the
"GlobalTel Proxy Statement"), (b) the proxy statement relating to the meeting of
CSI shareholders (the "CSI Shareholders' Meeting") to be held in connection with
the Merger (the "CSI Proxy Statement") or (c) the Registration Statement will,
in the case of the Registration Statement, at the time it is filed with the SEC
and at the time it becomes effective under the Securities Act, and, in the case
of the GlobalTel Proxy Statement and the CSI Proxy Statement, at the date it or
any amendments or supplements thereto are mailed to GlobalTel Shareholders
and/or the shareholders of CSI, at the time of the GlobalTel Shareholders'
Meeting, at the time of the CSI Shareholders' Meeting and at the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The GlobalTel Proxy Statement will comply as to form in all
material respects with the applicable provisions of the Washington Business
Corporation Act and any other applicable Legal
18
<PAGE>
Requirements. If at any time prior to the Effective Time any event relating to
GlobalTel or any Subsidiary or any of their respective Affiliates, officers or
directors should be discovered by GlobalTel which should be set forth in an
amendment to the Registration Statement or a supplement to the GlobalTel Proxy
Statement or the CSI Proxy Statement, GlobalTel shall promptly inform CSI.
Notwithstanding the foregoing, GlobalTel makes no representation or warranty
with respect to any information supplied by CSI which is contained in any of the
foregoing documents.
SECTION 3.14 Restrictions on Business Activities. Except as set forth in
-----------------------------------
Section 3.14 of the GlobalTel Disclosure Schedule and except for this Agreement,
- ------------
there is no material Contract or Judgment binding upon GlobalTel or any
Subsidiary which has or could reasonably be expected to have the effect of
prohibiting or impairing any material business practice of GlobalTel or any of
its Subsidiaries, acquisition of property by GlobalTel or any of its
Subsidiaries or the conduct of business by GlobalTel or any of its Subsidiaries
as currently conducted or as proposed to be conducted by GlobalTel.
SECTION 3.15 Title to Assets. Except for personal property sold or
---------------
otherwise disposed of in the Ordinary Course of Business since December 31,
1997, GlobalTel and its Subsidiaries have good and marketable title to all
assets reflected on the GlobalTel Balance Sheet, free and clear of all Liens
except (a) Liens reflected in the GlobalTel Balance Sheet and (b) Liens set
forth in Section 3.15 of the GlobalTel Disclosure Schedule. The tangible assets
------------
reflected on the GlobalTel Balance Sheet are in good condition and repair,
ordinary wear and tear excepted. The assets reflected on the GlobalTel Balance
Sheet constitute all property and rights, real and personal, tangible and
intangible, necessary or required, to operate the business of GlobalTel and its
Subsidiaries as currently conducted.
SECTION 3.16 Contracts and Licenses.
----------------------
(a) Identification. Section 3.16(a) of the GlobalTel Disclosure
--------------
Schedule sets forth a correct and complete list of: (i) all Licenses possessed
by or issued to GlobalTel or any of its Subsidiaries; and (ii) all Contracts to
which GlobalTel or any of its Subsidiaries is a party or by which any of them or
any of their respective properties is bound or affected in any of the following
categories: carrier contracts, sales agent contracts, marketing contracts,
product and service development contracts, director indemnity contracts and
Contracts generally described in subsection 3.16(c). GlobalTel has delivered to
CSI correct and complete copies of each of the Contracts and Licenses listed in
Section 3.16(a) of the GlobalTel Disclosure Schedule, including any amendments
- ---------------
thereto (or, in the case of oral Contracts or Licenses, correct and complete
written summaries thereof).
(b) Validity. Except as set forth in Section 3.16(b) of the GlobalTel
-------- ---------------
Disclosure Schedule: (i) each of the Contracts and Licenses listed in Section
-------
3.16(a) thereof is valid, in full force and effect and enforceable in accordance
- -------
with its terms against the parties thereto, and GlobalTel and its Subsidiaries
have fulfilled when due, or have taken all action necessary to enable them to
fulfill when due, all of their respective obligations thereunder; (ii) there has
not occurred any
19
<PAGE>
default (without regard to lapse of time, the giving of notice, the election of
any Person other than GlobalTel or any Subsidiary or any combination thereof) by
GlobalTel or any Subsidiary nor, to the Knowledge of GlobalTel and its
Subsidiaries, by any other Person under any of such Contracts or Licenses, which
default remains uncured; and (iii) neither GlobalTel nor any Subsidiary nor, to
the Knowledge of GlobalTel and its Subsidiaries, any other Person is in arrears
in the performance or satisfaction of its respective obligations under any of
such Contracts or Licenses, and no waiver or indulgence has been granted by any
of the parties thereto.
(c) No Other Contracts and Licenses. Except for the Contracts and
-------------------------------
Licenses listed in Section 3.16(a) of the GlobalTel Disclosure Schedule, neither
---------------
GlobalTel nor any of its Subsidiaries is bound or affected by: (i) any lease of
real or personal property (whether as lessor or lessee); (ii) any Contract
granting any Person a Lien on or against any of the assets of GlobalTel or any
of its Subsidiaries; (iii) any franchise or similar authorization; (iv) any
license or permit authorized or issued by any Governmental Authority or any
other Person; (v) any Contract of employment or Contract with any consultant or
independent contractor; or (v) any Contract which contemplates payments by or to
GlobalTel or any Subsidiary in any twelve-month period exceeding $25,000
individually or $50,000 in the aggregate.
SECTION 3.17 Tax Matters. Except as set forth in Section 3.17 of the
----------- ------------
GlobalTel Disclosure Schedule, GlobalTel and each of the Subsidiaries have filed
in true and correct form all federal, state, local and foreign Tax returns and
other reports required to be filed and have timely paid all Taxes which have
become due and payable, whether or not shown on any such return or report.
Neither GlobalTel nor any Subsidiary has received any notice of, and neither
GlobalTel nor any Subsidiary has any Knowledge of any notice of, deficiency or
assessment or proposed deficiency or assessment from any Taxing Governmental
Authority. There are no audits pending with respect to GlobalTel or any
Subsidiary and there are no outstanding agreements or waivers by or with respect
to GlobalTel or any Subsidiary that extend the statutory period of limitations
applicable to any federal, state, local or foreign Tax returns or Taxes for any
period. There are no determined Tax deficiencies or proposed assessments
against GlobalTel or any Subsidiary. As of the date of the GlobalTel Balance
Sheet the unpaid Taxes of GlobalTel and its Subsidiaries did not exceed the
liability for Taxes set forth on the face of the GlobalTel Balance Sheet.
SECTION 3.18 Intellectual Property Matters.
-----------------------------
(a) GlobalTel Intellectual Property. Section 3.18(a) of the GlobalTel
------------------------------- ---------------
Disclosure Schedule sets forth a correct and complete list of all domestic
(federal, state or local) and foreign (i) patents and patent applications, (ii)
trademark and service mark registrations, (iii) copyright registrations and
applications, (iv) trade names and unregistered trademarks and service mark and
(v) software (collectively, the "Intellectual Property") that are licensed to or
owned or used by GlobalTel or any Subsidiary, and all applications for, or
licenses or other rights to use any of the same (collectively, the "GlobalTel
Intellectual Property"). Except as disclosed in Section 3.18(a) of the
---------------
GlobalTel Disclosure Schedule: (i) the activities of GlobalTel and its
Subsidiaries as currently conducted do not infringe, misappropriate or otherwise
misuse any rights to Intellectual Property of
20
<PAGE>
other Persons; (ii) the validity of GlobalTel Intellectual Property, and the
title or other rights thereto of GlobalTel, have not been questioned in any
Litigation to which GlobalTel or any Subsidiary is a party, nor to the Knowledge
of GlobalTel and its Subsidiaries is any such Litigation threatened; and (iii)
to the Knowledge of GlobalTel and its Subsidiaries, there is no unauthorized
use, infringement, misappropriation or other misuse by other Persons of any
GlobalTel Intellectual Property.
(b) Validity. Except as set forth in Section 3.18 (b) of the
-------- ----------------
GlobalTel Disclosure Schedule: (i) all patents, patent applications and rights
to inventions or other intellectual property heretofore owned or held by any
employee or officer of GlobalTel or any Subsidiary, where required by any Legal
Requirement or Contract to be transferred to GlobalTel or any Subsidiary, have
been duly and effectively transferred to GlobalTel or a Subsidiary with no
restrictions on the subsequent transfer thereof by GlobalTel or any Subsidiary;
(ii) there has been no act or omission by GlobalTel or any Subsidiary or any of
their respective employees, duly authorized attorneys or agents, as the case may
be, or any other fact, which makes or will make invalid or unenforceable any of
the GlobalTel Intellectual Property (by assignment or otherwise), or which
negates or will negate the right to the issuance of any the GlobalTel
Intellectual Property; and (iii) all of the patents and trademark and service
mark registrations included in the GlobalTel Intellectual Property have been
duly issued by the United States Patent and Trademark office or the
corresponding office of another country, as indicated in Section 3.18(b) of the
---------------
GlobalTel Disclosure Schedule, and all copyright registrations included in the
GlobalTel Intellectual Property have been duly issued by the United States
Register of Copyrights or the corresponding office of another country, as
indicated in Section 3.18(b) of the GlobalTel Disclosure Schedule.
---------------
SECTION 3.19 Customers and Agents. Section 3.19 of the GlobalTel
-------------------- ------------
Disclosure Schedule sets forth, as of December 31, 1997 the total number of
sales agents engaged by GlobalTel and its Subsidiaries and the revenue of the
top ten agents for the 12 months ended December 31, 1997. There has been no
material loss of agents since December 31, 1997.
SECTION 3.20 Compliance with Laws. Except as set forth in Section 3.20
-------------------- ------------
of the GlobalTel Disclosure Schedule, GlobalTel and each of its Subsidiaries (a)
is not in violation of, and has not violated, any applicable provision of any
Legal Requirement and (b) has not received any notice from any Governmental
Authority or other Person that it is in violation of, or has violated, any
applicable provision of any Legal Requirement, except in the case of both
clauses (a) and (b) for violations, individually or in the aggregate, which have
not had and could not reasonably be expected to have a Material Adverse Effect.
Except as set forth in Section 3.20 of the GlobalTel Disclosure Schedule,
------------
GlobalTel and its Subsidiaries have all Licenses from Governmental Authorities
required to conduct their respective businesses as now being conducted, except
for such Licenses the absence of which would not, individually or in the
aggregate, have a Material Adverse Effect.
SECTION 3.21 Brokers' Fees. Except as set forth in Section 3.21 of the
------------- ------------
GlobalTel Disclosure Schedule, none of GlobalTel and its Subsidiaries has any
liability or obligation to pay any fees or commissions to any broker, finder, or
agent with respect to the Merger, except for a merger
21
<PAGE>
completion fee payable to Cruttenden pursuant to written contract, a true and
correct copy of which GlobalTel has furnished to CSI.
SECTION 3.22 Continuity of Business Enterprise. GlobalTel operates at
---------------------------------
least one significant historic business line, or owns at least a significant
portion of its historic business assets, in each case within the meaning of
Treas. Reg. (S)1.368-1(d).
SECTION 3.23 Board Approval. The Board of Directors of GlobalTel has (a)
--------------
approved this Agreement and the Merger and the transactions contemplated hereby
and thereby, (b) determined that this Agreement and the Merger are in the best
interests of the GlobalTel shareholders and are on terms that are fair to such
shareholders and (c) recommended that the GlobalTel shareholders approve this
Agreement and the Merger.
SECTION 3.24 Vote Required. The affirmative vote of (a) the holders of
-------------
not less than two-thirds of the outstanding GlobalTel Common Stock and the
outstanding GlobalTel Preferred Stock, voting together, (b) the holders of not
less than two-thirds of the outstanding GlobalTel Common Stock, voting as a
voting group and (c) the holders of not less than two-thirds of the outstanding
GlobalTel Preferred Stock, voting as a voting group, is required to approve this
Agreement and the Merger.
SECTION 3.25 Nature of GlobalTel Shareholders. At the date of this
--------------------------------
Agreement, at the date the GlobalTel Proxy Statement or any amendments or
supplements thereto are mailed to GlobalTel Shareholders, at the time of the
GlobalTel Shareholders' Meeting, and at the Effective Time, each Person entitled
to receive CSI Shares in the Merger either (a) shall be an "accredited investor"
as such term is defined in Rule 501(a) of Regulation D promulgated by the SEC or
(b) shall alone or with such Person's "purchase representative" (as such term is
defined in Rule 501(d) of said Regulation D) have such knowledge and experience
in financial and business matters that such Person is capable of evaluating the
merits and risks of the Merger and the investment in CSI Shares.
SECTION 3.26 Determination of Preferred Stock Liquidation Preference.
-------------------------------------------------------
The Chief Executive Officer of GlobalTel has determined, pursuant to Article
III, Section (C)(3) of GlobalTel's amended and restated articles of
incorporation, that the liquidation preference per share of GlobalTel Preferred
Stock shall be $4.00 plus any unpaid dividend accrued thereon.
ARTICLE IV
Representations and Warranties of CSI
-------------------------------------
Except as specifically set forth in and qualified by the disclosure
schedule furnished by CSI to GlobalTel prior to the date hereof (the "CSI
Disclosure Schedule"), which CSI Disclosure Schedule shall refer specifically to
each Section or subsection of this Agreement that is so qualified by a
disclosure set forth therein, CSI represents and warrants to GlobalTel that:
22
<PAGE>
SECTION 4.1 Organization and Qualification. Except as set forth in
------------------------------
Section 4.1 of the CSI Disclosure Schedule, CSI is a corporation duly organized,
- -----------
validly existing, and in good standing under the laws of the jurisdiction of its
incorporation and has the requisite corporate power and authority, and is in
possession of all grants, Licenses, easements, certificates, approvals and
orders necessary, to own, lease and operate the properties it purports to own,
lease and operate and to carry on its business as now conducted. Except in
Florida, where CSI is in the process of qualifying as a foreign corporation, CSI
is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where the character of the property owned, leased
or operated by it or the nature of its activities makes such qualification
necessary except where the lack of such qualification would not have a Material
Adverse Effect.
SECTION 4.2 Articles of Incorporation and Bylaws. CSI has heretofore
------------------------------------
furnished to GlobalTel a complete and correct copy of CSI's articles of
incorporation and bylaws, each as amended to the date of this Agreement. Such
articles of incorporation and bylaws are in full force and effect. CSI is not
in violation of any of the provisions of its articles of incorporation or
bylaws.
SECTION 4.3 Capitalization. The entire authorized capital stock of CSI
--------------
consists of 25,00,000 shares of common stock, no par value per share and
5,000,000 shares of preferred stock, no par value per share. As of March 31,
1998: (a) 10,505,657 shares of CSI Common Stock were issued and outstanding, (b)
no shares of CSI Preferred Stock were issued and outstanding, (c) 241,126 CSI
Shares were held in the treasury of CSI, (d) 601,150 shares of CSI Common Stock
were reserved for future issuance upon exercise of outstanding warrants and (e)
3,000,000 shares of CSI Common Stock were reserved for future issuance pursuant
to option grants under its 1998 Stock Option Plan. All of the issued and
outstanding CSI Shares have been duly authorized and are validly issued, fully
paid, and nonassessable (except for 60,000 CSI Shares that were purchased with a
promissory note) and have not been issued in violation of any preemptive right
of shareholders. Except as set forth in Section 4.3 of the CSI Disclosure
-----------
Schedule, there are no outstanding or authorized options, warrants, purchase
rights, subscription rights, conversion rights, exchange rights, or other
Contracts that could require CSI or any of its Subsidiaries to issue, sell, or
otherwise cause to become outstanding any of its respective capital stock.
Except as set forth in Section 4.3 of the CSI Disclosure Schedule, there are no
-----------
outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to CSI or any of its Subsidiaries.
There are no outstanding obligations of CSI or any of it Subsidiaries to
repurchase, redeem or otherwise acquire any of their respective securities.
SECTION 4.4 Authorization of Transaction. CSI has all necessary
----------------------------
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder; provided, however, that CSI cannot consummate
the Merger unless and until it receives the Requisite CSI Shareholder Approval.
The execution and delivery of this Agreement by CSI and the consummation by CSI
of the transactions contemplated by this Agreement have been duly and validly
authorized by all necessary corporate action other than the Requisite CSI
Shareholder Approval. This Agreement has been duly and validly executed and
delivered by CSI. This Agreement constitutes the valid and legally binding
obligation of CSI, enforceable in accordance with its terms and
23
<PAGE>
conditions, subject to (i) bankruptcy, insolvency, reorganization, arrangement,
moratorium, and other laws of general application affecting the rights and
remedies of creditors, and (ii) general principles of equity, regardless of
whether such enforcement is considered in a proceeding in equity or at law.
SECTION 4.5 No Conflict; Required Filings and Consents.
------------------------------------------
(a) Except as set forth in Section 4.5 of the CSI Disclosure Schedule,
-----------
the execution and the delivery of this Agreement by CSI and the consummation by
CSI of the Merger will not (i) violate or conflict with any provision of the
articles of incorporation or bylaws of CSI, (ii) violate or conflict with any
Legal Requirement applicable to CSI or by which any of its properties is bound
or affected or (iii) conflict with, result in a breach of, constitute a default
(or an event that with notice or lapse of time or both would become a default)
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or result in the creation of any Lien
under, any Contract or License to which CSI is a party or by which it is bound
or to which any of its assets is subject.
(b) The execution and delivery of this Agreement by CSI does not, and
the performance of this Agreement by CSI will not, require any consent,
approval, authorization or permit of, or filing with or notification to any
Governmental Authority or other Person, except (i) for applicable requirements,
if any, of the Securities Act, the Securities Exchange Act, and state securities
laws, (ii) the filing of articles of merger under the Colorado Business
Corporation Act and the Washington Business Corporation Act, and (iii) as set
forth in Section 4.5(b) of the CSI Disclosure Schedule.
--------------
SECTION 4.6 CSI Financial Statements. CSI has delivered to GlobalTel:
------------------------
(a) an audited balance sheet of CSI as of April 30, 1997, and the related
statements of operations, changes in stockholders' equity, and cash flow for the
fiscal years then ended, together with the report of Stockman Kast Ryan &
Scruggs, P.C., independent certified public accountants, (b) an unaudited
balance sheet of CSI as of December 31, 1997 (including the notes thereto, the
"CSI Balance Sheet"), and the related unaudited statements of operations,
changes in stockholders' equity, and cash flow for the fiscal year then ended,
and (c) an unaudited balance sheet of CSI as of March 31, 1998 (the "CSI Interim
Balance Sheet") and the related unaudited statements of operations, changes in
stockholders' equity, and cash flow for the nine months then ended, including in
each case the notes thereto (the financial statements referred to in clauses (a)
through (c), together with the notes thereto, being hereinafter referred to
collectively as the "CSI Financial Statements"). The CSI Financial Statements
fairly present the financial condition and the results of operation, changes in
stockholders' equity, and cash flow of CSI as of the respective dates of and for
the periods referred to in such Financial Statements, all in accordance with
GAAP consistently applied throughout the periods involved (except as disclosed
in the notes thereto), subject, in the case of interim CSI Financial Statements,
to normal recurring year-end adjustments (the effect of which will not,
individually or in the aggregate, be materially adverse) and the absence of
notes (that, if presented, would not differ materially from those included in
the CSI Balance Sheet).
24
<PAGE>
SECTION 4.7 Absence of Certain Changes or Events. Except as set forth
------------------------------------
in Section 4.7 of the CSI Disclosure Schedule, since April 30, 1997, CSI has
-----------
conducted its business in the Ordinary Course of Business and there has not
occurred: (a) any amendment or change in the articles of incorporation or bylaws
of CSI; (b) any damage to, destruction or loss of any assets of CSI (whether or
not covered by insurance) that had a Material Adverse Effect; (c) any change by
CSI in its accounting methods, principles or practices; (d) any revaluation by
CSI of any of its assets, including writing off notes or accounts receivable
other than in the Ordinary Course of Business; (e) any event, occurrence or
development of a state of circumstances or facts which has, had or reasonably
could be expected to have, a Material Adverse Effect; or (f) any declaration,
setting aside or payment of any dividend or other distribution with respect to
any CSI Common Stock or CSI Preferred Stock, or any repurchase or redemption or
other acquisition by CSI of any outstanding shares of capital stock or other
securities of, or other ownership or interest in, CSI.
SECTION 4.8 No Undisclosed Liabilities. Except as disclosed in Section
-------------------------- -------
4.8 of the CSI Disclosure Schedule, CSI does not have any liabilities (absolute,
- ---
accrued, contingent or otherwise) which are, in the aggregate, material to the
business, operations or financial condition of CSI , except liabilities (a)
adequately provided for in the CSI Balance Sheet, (b) incurred in the Ordinary
Course of Business and not required under GAAP to be reflected on the CSI
Balance Sheet, (c) incurred since April 30, 1997 in the Ordinary Course of
Business and consistent with past practice, and (d) incurred in connection with
this Agreement.
SECTION 4.9 Absence of Litigation. Except as disclosed in Section 4.9
--------------------- -----------
of the CSI Disclosure Schedule, there is no Litigation pending or, to the
Knowledge of CSI, threatened against CSI or any properties or rights of CSI
before any Governmental Authority or private arbitrational tribunal, domestic or
foreign, that could have a Material Adverse Effect and (b) there is not in
existence any Judgment naming and requiring CSI to take any action of any kind
with respect to its assets or its business or to which CSI, or is assets or
business, is subject or by which they are bound or affected.
SECTION 4.10 Employee Benefit Plans; Employment Agreements.
---------------------------------------------
(a) Employee Plans. Section 4.10(a) of the CSI Disclosure Schedule
-------------- ---------------
lists all employee benefit plans (as defined in Section 3(3) of ERISA),
------------
regardless of whether ERISA is applicable thereto, all other bonus stock option,
stock purchase, incentive, deferred compensation, supplemental retirement,
severance or termination pay, medical or life insurance, supplemental
unemployment benefits, profit-sharing, pension or retirement plans, agreements
or arrangements and other similar fringe or employee benefit plans, programs or
arrangements, and any current or former employment or executive compensation or
severance agreements, written or otherwise, for the benefit of, or relating to,
any employee of CSI any ERISA Affiliate of CSI, to which CSI or any ERISA
Affiliate of CSI is a party, with respect to which CSI or any ERISA Affiliate of
CSI has or could have any obligation, as well as each plan with respect to which
CSI or an ERISA Affiliate of CSI has or could incur liability if such plan has
been or were terminated (collectively, the "CSI
25
<PAGE>
Employee Plans"), and CSI has furnished to GlobalTel a complete and correct copy
of each such written Employee Plan.
(b) Compliance. Except as set forth in Section 4.10(b) of the CSI
---------- ---------------
Disclosure Schedule, (i) none of the CSI Employee Plans promises or provides
retiree medical or other retiree welfare benefits to any Person and none of the
CSI Employee Plans is a "multi-employer plan" as such term is defined in Section
-------
3(37) of ERISA; (ii) there has been no transaction or failure to act with
- -----
respect to any CSI Employee Plan, which could result in any material liability
of CSI; (iii) all CSI Employee Plans are in compliance in all material respects
with the requirements prescribed by any and all Legal Requirements currently in
effect with respect thereto, and CSI has performed all material obligations
required to be performed by it under, is not in any material respect in default
under or violation of, and has no Knowledge of any default or violation by any
other Person to, any of the CSI Employee Plans, except as to which such non-
compliance, non-performance or default would not have a Material Adverse Effect;
(iv) each CSI Employee Plan intended to qualify under Section 401(a) of the Code
--------------
is the subject of a favorable determination letter from the IRS, and nothing has
occurred which may reasonably be expected to impair such determination; (v) all
contributions required to be made to any CSI Employee Plan, or pursuant to the
terms of any CSI Employee Plan or any collective bargaining agreement, have been
made on or before their due dates and a reasonable amount has been accrued for
contribution to each CSI Employee Plan for the current plan years; (vi) with
respect to each CSI Employee Plan, no "reportable event" within the meaning of
Section 4043 of ERISA (excluding any such event for which the thirty day notice
- ------------
requirement has been waived under the regulations to Section 4043 of ERISA) nor
------------
any event described in Section 4062, 4063 or 4041 of ERISA has occurred; and
------------------ ----
(vii) neither CSI nor any ERISA Affiliate of CSI has incurred, nor reasonably
expects to incur, any liability under Title IV of ERISA (other than liability
--------
for premium payments to the Pension Benefit Guaranty Corporation arising in the
Ordinary Course of Business).
(c) Qualification. Each CSI Employee Plan that is required or
-------------
intended to be qualified under any applicable Legal Requirement or registered or
approved by a Governmental Authority has been so qualified, registered or
approved by the appropriate Governmental Authority, and nothing has occurred
since the date of the last qualification, registration or approval to adversely
affect, or cause the appropriate Governmental Authority to revoke, such
qualification, registration or approval.
(d) Contributions. All contributions (including premiums) required by
-------------
any Legal Requirement or Contract to have been made or approved by CSI under or
with respect to CSI Employee Plans have been paid or accrued by CSI. Without
limiting the foregoing, except as disclosed in Section 4.10(d) of the CSI
---------------
Disclosure Schedule, there are no material unfunded liabilities under any CSI
Employee Plan.
(e) No Litigation. There is no pending or, to the Knowledge of CSI,
-------------
threatened Litigation against CSI with respect to any of the CSI Employee Plans.
26
<PAGE>
(f) No Employee Claims. Except as set forth in Section 4.10(f) of the
------------------ ---------------
CSI Disclosure Schedule, there is no Litigation pending or, to the Knowledge of
CSI, threatened by former or present employees of CSI (or their beneficiaries)
with respect to CSI Employee Plans or the assets or fiduciaries thereof (other
than routine claims for benefits).
(g) No Material Liability. No condition or event has occurred with
---------------------
respect to the CSI Employee Plans which has or could reasonably be expected to
result in a material liability to CSI.
(h) Stock Options. Section 4.10(h) of the CSI Disclosure Schedule
------------- --------
sets forth a true and complete list of each current or former employee, officer
or director of CSI who, as of the date of this Agreement, holds any option to
purchase and CSI Shares, together with the number of CSI subject to such option,
the date of grant of such option, the extent to which such option is vested, the
option price of such option (to the extent determined as of the date hereof),
whether such option is intended to qualify as an incentive stock option within
the meaning of Section 422(b) of the Code and the expiration date of such
--------------
option. Section 4.10(h) of the CSI Disclosure Schedule also sets forth the
---------------
total number of such incentive stock options and non-qualified options.
(i) Employment and Other Contracts. CSI has furnished to GlobalTel
------------------------------
(i) complete and correct copies of all employment Contracts with officers of
CSI; (ii) complete and correct copies of all Contracts with consultants
obligating CSI to make annual cash payments in an amount exceeding $10,000;
(iii) a schedule listing all officers of CSI who have executed a non-competition
Contract with CSI; (iv) complete and correct copies of all plans, programs,
Contracts and other arrangements of CSI with or relating to its respective
employees which contain change in control provisions; (v) the form of standard
employment Contract, if any, of CSI for its respective non-executive employees;
(vi) the standard form agency, distributor or similar Contract, if any, of CSI
for its sales agents; and (vii) complete and correct copies of all
confidentiality agreements or similar nondisclosure Contracts to which CSI is a
party or by which it is bound or affected.
SECTION 4.11 Labor Matters. There are no controversies pending or, to
-------------
the Knowledge of CSI, threatened, between CSI and any of its employees, which
controversies have or may have a Material Adverse Effect. CSI is a not party to
any collective bargaining agreement or other labor union Contract applicable to
persons employed by CSI. CSI does not know of any activities or proceedings of
any labor union to organize any such employees. CSI has no Knowledge of any
strikes, slowdowns, work stoppages, lockouts or threats thereof by or with
respect to any employees of CSI.
SECTION 4.12 Proxy Statement. None of the information supplied or to be
---------------
supplied by CSI in writing for inclusion or incorporation by reference in the
GlobalTel Proxy Statement, the CSI Proxy Statement or the Registration Statement
will, in the case of the Registration Statement, at the time it is filed with
the SEC and at the time it becomes effective under the Securities Act, and, in
the case of the GlobalTel Proxy Statement and the CSI Proxy Statement, at the
date it or any amendments or supplements thereto are mailed to GlobalTel
Shareholders and/or the shareholders
27
<PAGE>
of CSI, at the time of the GlobalTel Shareholders' Meeting, at the time of the
CSI Shareholders' Meeting and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The CSI Proxy
Statement will comply as to form in all material respects with the applicable
provisions of the Colorado Business Corporation Act and any other applicable
Legal Requirements. If at any time prior to the Effective Time any event
relating to CSI or any of its Affiliates, officers or directors should be
discovered by CSI which should be set forth in an amendment to the Registration
Statement or a supplement to GlobalTel Proxy Statement or the CSI Proxy
Statement, CSI shall promptly inform GlobalTel. Notwithstanding the foregoing,
CSI makes no representation or warranty with respect to any information supplied
by GlobalTel which is contained in any of the foregoing documents.
SECTION 4.13 Restrictions on Business Activities. Except as set forth in
-----------------------------------
Section 4.13 of the CSI Disclosure Schedule and except for this Agreement, there
- ------------
is no material Contract or Judgment binding upon CSI which has or could
reasonably be expected to have the effect of prohibiting or impairing any
material business practice of CSI, acquisition of property by CSI or the conduct
of business by CSI as currently conducted or as proposed to be conducted by CSI.
SECTION 4.14 Title to Assets. Except for personal property sold or
---------------
otherwise disposed of in the Ordinary Course of Business since April 30, 1997,
CSI has good and marketable title to all assets reflected on the CSI Balance
Sheet, free and clear of all Liens except (a) Liens reflected in the CSI Balance
Sheet and (b) Liens set forth in Section 4.14 of the CSI Disclosure Schedule.
------------
The tangible assets reflected on the CSI Balance Sheet are in good condition and
repair, ordinary wear and tear excepted. The assets reflected on the CSI
Balance Sheet constitute all property and rights, real and personal, tangible
and intangible, necessary or required, to operate the business of CSI as
currently conducted.
SECTION 4.15 Contracts and Licenses.
----------------------
(a) Identification. Section 4.15(a) of the CSI Disclosure Schedule
-------------- ---------------
sets forth a correct and complete list of: (i) all Licenses possessed by or
issued to CSI; and (ii) all Contracts to which CSI is a party or by which it or
any of its properties is bound or affected in any of the following categories:
carrier contracts, sales agent contracts, marketing contracts, product and
service development contracts, director indemnity contracts and Contracts
generally described in subsection 4.15(c). CSI has delivered to GlobalTel
correct and complete copies of each of the Contracts and Licenses listed in
Section 4.15(a) of the CSI Disclosure Schedule, including any amendments thereto
- ---------------
(or, in the case of oral Contracts or Licenses, correct and complete written
summaries thereof).
(b) Validity. Except as set forth in Section 4.15(b) of the CSI
-------- ---------------
Disclosure Schedule: (i) each of the Contracts and Licenses listed in Section
-------
4.15(a) thereof is valid, in full force and effect and enforceable in accordance
- -------
with its terms against the parties thereto, and CSI has fulfilled when due, or
has taken all action necessary to enable it to fulfill when due, all of its
28
<PAGE>
respective obligations thereunder; (ii) there has not occurred any default
(without regard to lapse of time, the giving of notice, the election of any
Person other than CSI or any combination thereof) by CSI nor, to the Knowledge
of CSI, by any other Person under any of such Contracts or Licenses, which
default remains uncured; and (iii) neither CSI nor, to the Knowledge of CSI, any
other Person is in arrears in the performance or satisfaction of its respective
obligations under any of such Contracts or Licenses, and no waiver or indulgence
has been granted by any of the parties thereto.
(c) No Other Contracts and Licenses. Except for the Contracts and
-------------------------------
Licenses listed in Section 4.15(a) of the CSI Disclosure Schedule and except as
---------------
set forth in Section 4.15(c) of the CSI Disclosure Schedule, CSI is not bound or
---------------
affected by: (i) any lease of real or personal property (whether as lessor or
lessee); (ii) any Contract granting any Person a Lien on or against any of the
assets of CSI; (iii) any franchise or similar authorization; (iv) any license or
permit authorized or issued by any Governmental Authority or any other Person;
(v) any Contract of employment or Contract with any consultant or independent
contractor; or (v) any Contract which contemplates payments by or to CSI in any
twelve-month period exceeding $25,000 individually or $50,000 in the aggregate.
SECTION 4.16 Tax Matters. Except as set forth in Section 4.16 of the CSI
----------- ------------
Disclosure Schedule, CSI has filed in true and correct form all federal, state,
local and foreign Tax returns and other reports required to be filed and have
timely paid all Taxes which have become due and payable, whether or not shown on
any such return or report. CSI has not received any notice of, and CSI has no
Knowledge of any notice of, deficiency or assessment or proposed deficiency or
assessment from any Taxing Governmental Authority. There are no audits pending
with respect to CSI and there are no outstanding agreements or waivers by or
with respect to CSI that extend the statutory period of limitations applicable
to any federal, state, local or foreign Tax returns or Taxes for any period.
There are no determined Tax deficiencies or proposed assessments against CSI.
As of the date of the CSI Balance Sheet the unpaid Taxes of CSI did not exceed
the liability for Taxes set forth on the face of the CSI Balance Sheet.
SECTION 4.17 Intellectual Property Matters.
-----------------------------
(a) CSI Intellectual Property. Section 4.17(a) of the CSI Disclosure
------------------------- ---------------
Schedule sets forth a correct and complete list of all domestic (federal, state
or local) and foreign Intellectual Property that is licensed to or owned or used
by CSI, and all applications for, or licenses or other rights to use any of the
same (collectively, the "CSI Intellectual Property"). Except as disclosed in
Section 4.17(a) of the CSI Disclosure Schedule: (i) the activities of CSI as
- ---------------
currently conducted do not infringe, misappropriate or otherwise misuse any
rights to Intellectual Property of other Persons; (ii) the validity of CSI
Intellectual Property, and the title or other rights thereto of CSI, have not
been questioned in any Litigation to which CSI is a party, nor to the Knowledge
of CSI is any such Litigation threatened; and (iii) to the Knowledge of CSI,
there is no unauthorized use, infringement, misappropriation or other misuse by
other Persons of any CSI Intellectual Property.
29
<PAGE>
(b) Validity. Except as set forth in Section 4.17 (b) of the CSI
-------- ----------------
Disclosure Schedule: (i) all patents, patent applications and rights to
inventions or other intellectual property heretofore owned or held by any
employee or officer of CSI, where required by any Legal Requirement or Contract
to be transferred to CSI, have been duly and effectively transferred to CSI with
no restrictions on the subsequent transfer thereof by CSI; (ii) there has been
no act or omission by CSI or any of its employees, duly authorized attorneys or
agents, as the case may be, or any other fact, which makes or will make invalid
or unenforceable any of the CSI Intellectual Property (by assignment or
otherwise), or which negates or will negate the right to the issuance of any the
CSI Intellectual Property; and (iii) all of the patents and trademark and
service mark registrations included in the CSI Intellectual Property have been
duly issued by the United States Patent and Trademark office or the
corresponding office of another country, as indicated in Section 4.17(b) of the
---------------
CSI Disclosure Schedule, and all copyright registrations included in the CSI
Intellectual Property have been duly issued by the United States Register of
Copyrights or the corresponding office of another country, as indicated in
Section 4.17(b) of the CSI Disclosure Schedule.
- ---------------
SECTION 4.18 Customers and Agents. Section 4.18 of the CSI Disclosure
-------------------- ------------
Schedule sets forth, as of December 31, 1997, the total number of sales agents
engaged by CSI and the revenue for the top ten agents for the 12 months ended
December 31, 1997. There has been no material loss of agents since December 31,
1997.
SECTION 4.19 Compliance with Laws. Except as set forth in Section 4.19
-------------------- ------------
of the CSI Disclosure Schedule, CSI (a) is not in violation of, and has not
violated, any applicable provision of any Legal Requirement and (b) has not
received any notice from any Governmental Authority or other Person that it is
in violation of, or has violated, any applicable provision of any Legal
Requirement, except in the case of both clauses (a) and (b) for violations,
individually or in the aggregate, which have not had and could not reasonably be
expected to have a Material Adverse Effect. Except as set forth in Section 4.19
------------
of the CSI Disclosure Schedule, CSI has all Licenses from Governmental
Authorities required to conduct its business as now being conducted, except for
such Licenses the absence of which would not, individually or in the aggregate,
have a Material Adverse Effect.
SECTION 4.20 Brokers' Fees. CSI has no liability or obligation to pay
-------------
any fees or commissions to any broker, finder, or agent with respect to the
Merger.
SECTION 4.21 Continuity of Business Enterprise. CSI operates at least
---------------------------------
one significant historic business line, or owns at least a significant portion
of its historic business assets, in each case within the meaning of Treas. Reg.
(S)1.368-1(d).
SECTION 4.22 Board Approval. The Board of Directors of CSI has (a)
--------------
approved this Agreement and the Merger and the transactions contemplated hereby
and thereby, (b) determined that this Agreement and the Merger are in the best
interests of the shareholders of CSI and are on terms that are fair to such
shareholders and (c) recommended that the shareholders of CSI approve this
Agreement and the Merger.
30
<PAGE>
SECTION 4.23 Vote Required. The affirmative vote of the holders of not
-------------
less than a majority of the outstanding CSI Common Stock is required to approve
this Agreement and the Merger.
ARTICLE V
Covenants of GlobalTel
----------------------
SECTION 5.1 Certain Affirmative Covenants of GlobalTel. During the
------------------------------------------
period from the date of this Agreement and continuing until the earlier of the
date of termination of this Agreement or the Effective Time, GlobalTel covenants
and agrees that, unless CSI shall otherwise agree in writing, GlobalTel shall,
and GlobalTel shall cause each of its Subsidiaries to:
(a) conduct its business only in the Ordinary Course of Business;
(b) use reasonable commercial efforts to preserve substantially intact
the business organization of GlobalTel and the Subsidiaries;
(c) keep available the services of the present officers, employees and
consultants of GlobalTel and its Subsidiaries;
(d) take all reasonable action in the Ordinary Course of Business
necessary to prevent the loss, cancellation, abandonment, or forfeiture of any
of the business of GlobalTel and its Subsidiaries;
(e) continue normal marketing, advertising and promotional
expenditures with respect to the business of GlobalTel and its Subsidiaries;
(f) preserve the current relationships of GlobalTel and its
Subsidiaries with customers, suppliers, sales agents and other persons with
which GlobalTel or any of its Subsidiaries has business relations;
(g) maintain (i) its respective assets in good condition and repair,
ordinary wear and tear excepted, and (ii) in full force and effect policies of
insurance with respect to its respective assets and the operation of its
business, with such insurers of recognized responsibility, in such amounts and
with respect to such risks and losses as are adequate for such business in
accordance with customary industry practice;
(h) (i) duly comply with all applicable Legal Requirements; (ii)
perform without default all of its respective obligations under all Contracts
and Licenses to which it is a party or by which it or any of its respective
properties is bound or affected;
(i) (i) give to CSI, and its counsel, accountants and other
representatives, full access during normal business hours to the premises of
GlobalTel and its Subsidiaries, all of
31
<PAGE>
their respective properties and assets, books and records and their respective
personnel; (ii) furnish to CSI and such representatives all such additional
documents (certified by an officer of GlobalTel or a Subsidiary, if requested),
financial information and other information as CSI may from time to time
reasonably request; and (iii) cause GlobalTel's accountants to permit CSI and
its accountants to examine the records and working papers pertaining to such
accountants' audits and other reviews of the GlobalTel Financial Statements;
provided that no investigation by CSI or its representatives shall affect or
limit the scope of any of the representations and warranties of GlobalTel herein
or limit the liability of GlobalTel for breach of such representations and
warranties; and, provided further, that notwithstanding the foregoing, GlobalTel
and its Subsidiaries shall not be required to disclosure the contents of books,
records and other documents to the extent prohibited by employment record
confidentiality laws for the benefit of employees and to the extent necessary to
preserve attorney-client and similar evidentiary privileges for the benefit of
GlobalTel or a Subsidiary;
(j) use its best efforts to obtain in writing as promptly as possible
all approvals, authorizations and consents required to be obtained by GlobalTel
or any Subsidiary in order to consummate the Merger and deliver to CSI copies,
satisfactory in form and substance to CSI, of such approvals, authorizations and
consents; provided, however, that GlobalTel and its Subsidiaries shall not
accept or agree or accede to any modification or amendment to, or any condition
to the transfer of, any Contract or License to which it is a party or by which
it or any of its respective properties is bound or affected, which modification,
amendment or condition is not acceptable to CSI;
(k) promptly deliver to CSI true and complete copies of all monthly
and quarterly financial statements and operating reports of GlobalTel and its
Subsidiaries and any reports with respect to their respective businesses
prepared by or for GlobalTel or any Subsidiary at any time after the date of
this Agreement, and any other similar material which CSI reasonably may request;
(l) promptly notify CSI of any circumstance, event or action by
GlobalTel, any Subsidiary or otherwise (i) which, if known at the date of this
Agreement, would have been required to be disclosed in or pursuant to this
Agreement or (ii) the existence, occurrence or taking of which would result in
any of the representations or warranties of GlobalTel contained in this
Agreement not being true and correct when made or at Closing, and, with respect
to clause (ii), use its best efforts to remedy the same; and
(m) cause the GlobalTel Preferred Stock to be converted into
GlobalTel Common Stock prior to the Effective Time.
SECTION 5.2 Certain Negative Covenants of GlobalTel. Except as
---------------------------------------
contemplated by this Agreement or as described in Section 5.2 of the GlobalTel
-----------
Disclosure Schedule, GlobalTel covenants that neither it nor any of its
Subsidiaries shall, during the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement or the
Effective Time, directly or indirectly do, or propose to do, any of the
following without the prior written consent of CSI:
32
<PAGE>
(a) amend of otherwise change the articles of incorporation or bylaws
of GlobalTel or the equivalent organizational documents of any Subsidiary;
(b) issue, sell, pledge, dispose of or encumber, or authorize the
issuance, sale, pledge, disposition or encumbrance of, any shares of capital
stock of any class, or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of capital stock, or any other
ownership interest (including any phantom interest) of GlobalTel or any of its
Subsidiaries (except for the issuance of GlobalTel Shares issuable upon the
exercise of any warrants or options or the conversion of other securities
outstanding on the date of this Agreement);
(c) sell, pledge, dispose of or encumber any assets of GlobalTel or
any of its Subsidiaries (except for (i) sales of assets in the Ordinary Course
of Business and (ii) dispositions of obsolete or worthless assets);
(d) amend or change the period (or permit any acceleration, amendment
or change) of exercisability of options granted under the GlobalTel Employee
Plans or authorize cash payments in exchange for any options granted under any
of such plans;
(e) (i) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any combination thereof) in
respect of any of its capital stock, (ii) split, combine or reclassify any of
its capital stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock or (iii) amend the terms of, repurchase, redeem or otherwise
acquire, or permit any Subsidiary to repurchase, redeem or otherwise acquire,
any of its securities or any securities of its Subsidiaries, or propose to do
any of the foregoing.
(f) sell, transfer, license, sublicense or otherwise dispose of any
GlobalTel Intellectual Property, or amend or modify any existing Contracts with
respect to GlobalTel Intellectual Property;
(g) other than in the Ordinary Course of Business, modify, terminate,
renew, suspend or abrogate any Contract or License to which it is a party or by
which it or any of its respective properties is bound or affected;
(h) (i) acquire (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership or other business organization or division
thereof; (ii) incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse or otherwise as an accommodation
become responsible for, the obligations of any Person, or make any loans or
advances, except in the Ordinary Course of Business; (iii) enter into or amend
any Contract other than in the Ordinary Course of Business; (iv) authorize any
capital expenditures or purchase of fixed assets which are, in the aggregate, in
excess of $50,000 for GlobalTel and its Subsidiaries,
33
<PAGE>
taken as a whole; or (v) enter into or amend any Contract, commitment or
arrangement to effect any of the matters prohibited by this Section 5.1(h);
---------------
(i) increase the compensation payable or to become payable to its
officers or employees, except for increases in salary or wages of employees of
GlobalTel or its Subsidiaries who are not officers of GlobalTel or its
Subsidiaries in accordance with past practices, or grant any severance or
termination pay to, or enter into any employment or severance agreement with any
director, officer (except for officers who are terminated on an involuntary
basis) or other employee of GlobalTel or any Subsidiary, or establish, adopt,
enter into or amend any GlobalTel Employee Plan;
(j) take any action, other than as required by GAAP, to change
accounting policies or procedures;
(k) make any material Tax election inconsistent with past practices or
settle or compromise any material federal, state, local or foreign Tax liability
or agree to an extension of a statute of limitations for any assessment of any
Tax, except to the extent the amount of any such settlement has been reserved
for on the GlobalTel Interim Balance Sheet;
(l) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, contingent or otherwise), other than the payment, discharge
or satisfaction in the Ordinary Course of Business of liabilities, reflected or
reserved against in the GlobalTel Financial Statements or incurred in the
Ordinary Course of Business;
(m) except as may be required by any Legal Requirement, take any
action to terminate or amend any of the GlobalTel Employee Plans other than in
connection with the Merger; or
(n) take, or agree in writing or otherwise to take, any of the actions
described in this Section 5.2, or any action which would make any of the
-----------
representations or warranties of GlobalTel contained in this Agreement untrue or
incorrect or prevent GlobalTel from performing or cause GlobalTel not to perform
its covenants hereunder or result in any of the conditions to the Merger set
forth herein not being satisfied.
SECTION 5.3 No Solicitation.
---------------
(a) Restriction. GlobalTel shall not, directly or indirectly, through
-----------
any officer, director, employee, representative or agent of GlobalTel or any
Subsidiary, solicit or encourage (including by way of furnishing information)
the initiation of any inquiries or proposals regarding any merger, amalgamation,
take-over bid, sale of substantial assets, sale of shares of capital stock
(including by way of a tender offer) or similar transaction involving GlobalTel
or any Subsidiary (any of the foregoing inquiries or proposals being referred to
herein as an "Acquisition Proposal"); provided, however, that nothing contained
in this Agreement shall prevent the Board of
34
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Directors of GlobalTel from referring any third party to this Section 5.3(a).
--------------
Nothing contained in this Section 5.3(a) or any other provision of this
--------------
Agreement shall prevent the Board of Directors of GlobalTel from considering,
negotiating, approving and recommending to the GlobalTel Shareholders an
unsolicited bona fide written Acquisition Proposal which the Board of Directors
of GlobalTel determines in good faith (after consultation with its financial
advisors, and after receiving a written opinion of outside counsel or the advise
of such counsel that is reflected in the minutes of a meeting of the Board of
Directors of GlobalTel, to the effect that the Board of Directors is required to
do so in order to discharge properly its fiduciary duties) would result in a
transaction more favorable to GlobalTel Shareholders than the Merger (any such
Acquisition Proposal being referred to herein as a "Superior Proposal").
(b) Notification. GlobalTel shall immediately notify CSI after
------------
receipt of any Acquisition Proposal or any request for non-public information
relating to GlobalTel or any of its Subsidiaries in connection with an
Acquisition Proposal of for access to the properties, books or records of
GlobalTel or any Subsidiary by any Person that informs the Board of Directors of
GlobalTel of such Subsidiary that it is considering making, or has made, an
Acquisition Proposal. Such notice to CSI shall be made orally and in writing and
shall indicate in reasonable detail the identity of the offeror and the terms
and conditions of such proposal, inquiry or contact.
(c) Provision of Information. If the Board of Directors of GlobalTel
------------------------
receives a request for material non-public information by a party who make a
bona fide Acquisition Proposal and the Board of Directors of GlobalTel
determines that such proposal, if consummated pursuant to its terms, would be a
Superior Proposal, then, and only in such case, GlobalTel may, subject to the
execution of a confidentiality and standstill agreement substantially similar to
that then in effect between GlobalTel and CSI, provide such party with access to
information regarding GlobalTel and its Subsidiaries.
(d) Existing Discussions. GlobalTel shall immediately cease and cause
--------------------
to be terminated any existing discussions or negotiations with any parties,
other than CSI, conducted heretofore with respect to any of the foregoing.
GlobalTel shall not release any third party from any confidentiality or
standstill agreement to which GlobalTel is a party.
(e) Liability. GlobalTel shall ensure that the officers, directors
---------
and employees of GlobalTel and its Subsidiaries and any investment banker or
other advisor or representative retained by GlobalTel are aware of the
restrictions described in this Section and shall be responsible for any breach
of this Section 5.3 by such bankers, advisors and representatives.
-----------
ARTICLE VI
Covenants of CSI
----------------
SECTION 6.1 Certain Affirmative Covenants of CSI. During the period
------------------------------------
from the date of this Agreement and continuing until the earlier of the date of
termination of this Agreement or the
35
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Effective Time, CSI covenants and agrees that, unless GlobalTel shall otherwise
agree in writing, CSI shall:
(a) conduct its business only in the Ordinary Course of Business;
(b) use reasonable commercial efforts to preserve substantially
intact the business organization of CSI;
(c) keep available the services of the present officers,
employees and consultants of CSI;
(d) take all reasonable action in the Ordinary Course of Business
necessary to prevent the loss, cancellation, abandonment, or forfeiture of any
of the business of CSI;
(e) continue normal marketing, advertising and promotional
expenditures with respect to the business of CSI;
(f) preserve the current relationships of CSI with customers,
suppliers, sales agents and other persons with which CSI has business relations;
(g) maintain (i) its assets in good condition and repair, ordinary
wear and tear excepted, and (ii) in full force and effect policies of insurance
with respect to its assets and the operation of its business, with such insurers
of recognized responsibility, in such amounts and with respect to such risks and
losses as are adequate for such business in accordance with customary industry
practice;
(h) (i) duly comply with all applicable Legal Requirements; (ii)
perform without default all of its obligations under all Contracts and Licenses
to which it is a party or by which it or any of its properties is bound or
affected;
(i) (i) give to GlobalTel, and its counsel, accountants and other
representatives, full access during normal business hours to the premises of
CSI, all of its properties and assets, books and records and its personnel; (ii)
furnish to GlobalTel and such representatives all such additional documents
(certified by an officer of CSI, if requested), financial information and other
information as GlobalTel may from time to time reasonably request; and (iii)
cause CSI's accountants to permit GlobalTel and its accountants to examine the
records and working papers pertaining to such accountants' audits and other
reviews of the CSI Financial Statements; provided that no investigation by
GlobalTel or its representatives shall affect or limit the scope of any of the
representations and warranties of CSI herein or limit the liability of CSI for
breach of such representations and warranties; and, provided further, that
notwithstanding the foregoing, CSI and its Subsidiaries shall not be required to
disclosure the contents of books, records and other documents to the extent
prohibited by employment record confidentiality laws for the benefit of
36
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employees and to the extent necessary to preserve attorney-client and similar
evidentiary privileges for the benefit of CSI;
(j) use its best efforts to obtain in writing as promptly as possible
all approvals, authorizations and consents required to be obtained by CSI in
order to consummate the Merger and deliver to GlobalTel copies, satisfactory in
form and substance to GlobalTel, of such approvals, authorizations and consents;
provided, however, that CSI shall not accept or agree or accede to any
modification or amendment to, or any condition to the transfer of, any Contract
or License to which it is a party or by which it or any of its properties is
bound or affected, which modification, amendment or condition is not acceptable
to GlobalTel;
(k) promptly deliver to GlobalTel true and complete copies of all
monthly and quarterly financial statements and operating reports of CSI and any
reports with respect to its business prepared by or for CSI at any time after
the date of this Agreement, and any other similar material which GlobalTel
reasonably may request; and
(l) promptly notify GlobalTel of any circumstance, event or action by
CSI or otherwise (i) which, if known at the date of this Agreement, would have
been required to be disclosed in or pursuant to this Agreement or (ii) the
existence, occurrence or taking of which would result in any of the
representations or warranties of CSI contained in this Agreement not being true
and correct when made or at Closing, and, with respect to clause (ii), use its
best efforts to remedy the same.
SECTION 6.2 Certain Negative Covenants of CSI. Except as contemplated
---------------------------------
by this Agreement or the Registration Statement or as described in Section 6.2
-----------
of the CSI Disclosure Schedule, CSI covenants that it shall not, during the
period from the date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time, directly or indirectly do,
or propose to do, any of the following without the prior written consent of
GlobalTel:
(a) amend of otherwise change the articles of incorporation or
bylaws of CSI;
(b) issue, sell, pledge, dispose of or encumber, or authorize this
issuance, sale, pledge, disposition or encumbrance of, any shares of capital
stock of any class, or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of capital stock, or any other
ownership interest (including any phantom interest) of CSI (except for the
issuance of CSI Shares issuable upon the exercise of any warrants or options or
the conversion of other securities outstanding on the date of this Agreement);
(c) sell, pledge, dispose of or encumber any assets of CSI (except for
(i) sales of assets in the Ordinary Course of Business and (ii) dispositions of
obsolete or worthless assets);
37
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(d) amend or change the period (or permit any acceleration, amendment
or change) of exercisability of options granted under the CSI Employee Plans or
authorize cash payments in exchange for any options granted under any of such
plans;
(e) (i) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any combination thereof) in
respect of any of its capital stock, (ii) split, combine or reclassify any of
its capital stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock or (iii) amend the terms of, repurchase, redeem or otherwise
acquire any of its securities, or propose to do any of the foregoing;
(f) sell, transfer, license, sublicense or otherwise dispose of any
CSI Intellectual Property, or amend or modify any existing Contracts with
respect to CSI Intellectual Property;
(g) other than in the Ordinary Course of Business, modify, terminate,
renew, suspend or abrogate any Contract or License to which it is a party or by
which it or any of its properties is bound or affected;
(h) (i) acquire (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership or other business organization or division
thereof; (ii) incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse or otherwise as an accommodation
become responsible for, the obligations of any Person, or make any loans or
advances, except in the Ordinary Course of Business; (iii) enter into or amend
any Contract other than in the Ordinary Course of Business; (iv) authorize any
capital expenditures or purchase of fixed assets which are, in the aggregate, in
excess of $50,000 for CSI; or (v) enter into or amend any Contract, commitment
or arrangement to effect any of the matters prohibited by this Section 6.1(h);
---------------
(i) increase the compensation payable or to become payable to its
officers or employees, except for increases in salary or wages of employees of
CSI who are not officers of CSI in accordance with past practices, or grant any
severance or termination pay to, or enter into any employment or severance
agreement with any director, officer (except for officers who are terminated on
an involuntary basis) or other employee of CSI, or establish, adopt, enter into
or amend any CSI Employee Plan;
(j) take any action, other than as required by GAAP, to change
accounting policies or procedures;
(k) make any material Tax election inconsistent with past practices or
settle or compromise any material federal, state, local or foreign Tax liability
or agree to an extension of a statute of limitations for any assessment of any
Tax, except to the extent the amount of any such settlement has been reserved
for on the CSI Interim Balance Sheet;
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(l) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, contingent or otherwise), other than the payment, discharge
or satisfaction in the Ordinary Course of Business of liabilities, reflected or
reserved against in the CSI Financial Statements or incurred in the Ordinary
Course of Business;
(m) except as may be required by any Legal Requirement, take any
action to terminate or amend any of the CSI Employee Plans other than in
connection with the Merger; or
(n) take, or agree in writing or otherwise to take, any of the actions
described in this Section 6.2, or any action which would make any of the
-----------
representations or warranties of CSI contained in this Agreement untrue or
incorrect or prevent CSI from performing or cause CSI not to perform its
covenants hereunder or result in any of the conditions to the Merger set forth
herein not being satisfied.
ARTICLE VII
Additional Agreements
---------------------
SECTION 7.1 GlobalTel Shareholders' Meeting. GlobalTel shall, in
-------------------------------
accordance with the Washington Business Corporation Act and its articles of
incorporation and bylaws, call and hold the GlobalTel Shareholders' Meeting as
promptly as practicable for the purpose of voting upon the approval of this
Agreement and the Merger. GlobalTel shall use its reasonable best efforts to
solicit from its shareholders proxies in favor of the approval of this Agreement
and the Merger and shall take all other action necessary or advisable to secure
the Requisite GlobalTel Shareholder Approval. The GlobalTel Proxy Statement
shall include the recommendation of the Board of Directors of GlobalTel in favor
of the Merger, subject to the second sentence of Section 5.3(a).
--------------
SECTION 7.2 CSI Shareholders' Meeting. CSI shall, in accordance with
-------------------------
the Colorado Business Corporation Act and its articles of incorporation and
bylaws, call and hold the CSI Shareholders' Meeting as promptly as practicable
for the purpose of voting upon the approval of this Agreement and the Merger.
CSI shall use its reasonable best efforts to hold the CSI Shareholders' Meeting
as soon as practicable after the date of which the Registration Statement
becomes effective. CSI shall use its reasonable best efforts to solicit from its
shareholders proxies in favor of the approval of this Agreement and the Merger
and shall take all other action necessary or advisable to secure the Requisite
CSI Shareholder Approval. The CSI Proxy Statement shall include the
recommendation of the Board of Directors of CSI in favor of the Merger.
SECTION 7.3 Confidentiality.
---------------
(a) By GlobalTel. Any non-public information that GlobalTel or any
------------
Subsidiary may obtain from CSI in connection with this Agreement and the
transactions contemplated hereby shall be deemed confidential and, unless and
until Closing shall occur, GlobalTel shall not, and GlobalTel shall cause each
of the Subsidiaries not to, disclose any such information to any third party
(other than its directors, officers and employees, and representatives of its
advisors and lenders whose knowledge thereof is necessary in order to facilitate
the consummation of the transactions contemplated hereby) or use such
39
<PAGE>
information to the detriment of CSI; provided that (i) GlobalTel may use and
disclose any such information once it has been publicly disclosed (other than by
GlobalTel or any Subsidiary in breach of its obligations under this Section) or
which rightfully has come into the possession of GlobalTel or any of its
Subsidiaries (other than from CSI), and (ii) to the extent that GlobalTel or any
Subsidiary may become compelled by Legal Requirements to disclose any of such
information, GlobalTel or such Subsidiary may disclose such information if it
shall have used all reasonable efforts, and shall have afforded CSI the
opportunity, to obtain an appropriate protective order, or other satisfactory
assurance of confidential treatment, for the information compelled to be
disclosed. In the event of termination of this Agreement, GlobalTel shall, and
GlobalTel shall cause its Subsidiaries and advisors to, use all reasonable
efforts to cause to be delivered to CSI, and retain no copies of, any documents,
work papers and other materials obtained by GlobalTel or on its behalf from CSI,
whether so obtained before or after the date of this Agreement.
(b) By CSI. Any non-public information that CSI may obtain from
------
GlobalTel in connection with this Agreement and the transactions contemplated
hereby shall be deemed confidential and, unless and until Closing shall occur,
CSI shall not disclose any such information to any third party (other than its
directors, officers and employees, and representatives of its advisors and
lenders whose knowledge thereof is necessary in order to facilitate the
consummation of the transactions contemplated hereby) or use such information to
the detriment of GlobalTel; provided that (i) CSI may use and disclose any such
information once it has been publicly disclosed (other than by CSI in breach of
its obligations under this Section) or which rightfully has come into the
possession of CSI (other than from GlobalTel or any Subsidiary), and (ii) to the
extent that CSI may become compelled by Legal Requirements to disclose any of
such information, CSI may disclose such information if it shall have used all
reasonable efforts, and shall have afforded GlobalTel the opportunity, to obtain
an appropriate protective order, or other satisfactory assurance of confidential
treatment, for the information compelled to be disclosed. In the event of
termination of this Agreement, CSI shall, and CSI shall cause its advisors to,
use all reasonable efforts to cause to be delivered to GlobalTel, and retain no
copies of, any documents, work papers and other materials obtained by CSI or on
its behalf from GlobalTel, whether so obtained before or after the date of this
Agreement.
SECTION 7.4 Stock Options and Warrants.
--------------------------
(a) Assumption. At the Effective Time, GlobalTel's obligations with
----------
respect to each outstanding option or warrant to purchase GlobalTel Shares
(each, a "GlobalTel Option"), whether vested or unvested, will be assumed by the
Surviving Corporation. Each GlobalTel Option so assumed by the Surviving
Corporation under this Agreement shall continue to have, and be subject to, the
same terms and conditions pursuant to which the GlobalTel Option was issued as
in effect immediately prior to the Effective Time, except that (i) such
GlobalTel Option shall be exercisable for that number of CSI Shares equal to the
product of the number of GlobalTel
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Shares that were purchasable under such GlobalTel Option immediately prior to
the Effective Time multiplied by the Common Stock Conversion Ratio rounded up to
the nearest whole number of CSI Shares, and (ii) the per share exercise price
for the CSI Shares issuable upon exercise of such assumed GlobalTel Option will
be equal to the quotient determined by dividing the exercise price per GlobalTel
Share at which such GlobalTel Option was exercisable immediately prior to the
Effective Time by the Common Stock Conversion Ratio and rounding the resulting
exercise price up to the nearest whole cent.
(b) Incentive Stock Options. It is the intention of the Parties that
-----------------------
the Company Options assumed by the Surviving Corporation qualify, following the
Effective Time, as incentive stock options as defined in the Code to the extent
the Company Options qualified as incentive stock options immediately prior to
the Effective Time.
(c) Documentation. After the Effective Time, the Surviving
-------------
Corporation will issue to each holder of an outstanding Company Option a
document evidencing the foregoing assumption by the Surviving Corporation.
SECTION 7.5 Public Announcements. Neither CSI, on the one hand, nor
--------------------
GlobalTel nor any of its Subsidiaries, on the other hand, shall issue any press
release or make any public statement with respect to the Merger or this
Agreement without the prior consent of the other Party, which consent shall not
be unreasonably withheld; provided, however, that if a Party has used all
reasonable efforts to consult with the other Party, a Party may, without the
prior consent of the other Party, issue such press release or make such public
announcement as may upon the advice of legal counsel be required by any Legal
Requirement, the National Association of Securities Dealers or the Nasdaq Stock
Market.
SECTION 7.6 Listing of CSI Shares. CSI shall file an application for
---------------------
listing of the CSI Shares, including the CSI Shares issuable in the Merger, in
accordance with the rules of the Nasdaq SmallCap Market in order to have the CSI
Shares to be issued in connection with the Merger to be approved for listing on
the Nasdaq SmallCap Market and shall use its reasonable best efforts to have
such application approved by the Nasdaq SmallCap Market prior to the Effective
Time.
SECTION 7.7 Accountants' Letters. Upon reasonable notice from one Party
--------------------
to the other Party, the other Party shall use its best efforts to cause its
independent certified public accountants to deliver to the requesting Party a
letter covering such matters as are requested by the requesting Party and as are
customarily addressed in accountant's "comfort" letters.
SECTION 7.8 Further Assurances. At and after the Effective Time, the
------------------
officers and directors of the Surviving Corporation shall be authorized to
execute and deliver, in the name of and on behalf of GlobalTel, any deeds, bills
of sale, assignments, assurances or other documents and to take and do, in the
name and on behalf of GlobalTel, any other actions and things to vest, perfect
or confirm of record or otherwise in the Surviving Corporation any and all
right, title and interest in, to and
41
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under any of the rights, properties or assets of GlobalTel acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with, the
Merger.
SECTION 7.9 Notice of Developments. Each Party will give prompt written
----------------------
notice to the other of any material adverse development causing a breach of any
of its own representations and warranties in Article III and Article IV above.
----------- ----------
No disclosure by any Party pursuant to this Section 7.9, however, shall be
-----------
deemed to amend or supplement such Party's Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
SECTION 7.10 Indemnification. CSI, as the Surviving Corporation in the
---------------
Merger, will observe any indemnification provisions now existing in the articles
of incorporation or bylaws of GlobalTel and in the indemnity agreements
described in Section 3.16(a) of the GlobalTel Disclosure Schedule for the
---------------
benefit of any individual who served as a director or officer of GlobalTel or
any Subsidiary at any time prior to the Effective Time. All such persons are
express third-party beneficiaries of this section of the Agreement.
ARTICLE VII
Conditions to the Merger
------------------------
SECTION 8.1 Conditions to Obligations of Each Party to Effect the
-----------------------------------------------------
Merger. The respective obligations of each Party to consummate the Merger are
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) Shareholder Approval. This Agreement and the Merger shall have
--------------------
been approved and adopted by the Requisite GlobalTel Shareholders Vote and the
Requisite CSI Shareholders Vote.
(b) No Injunctions or Restraints. No Judgment issued by any
----------------------------
Governmental Authority of competent jurisdiction preventing the consummation of
the Merger shall be in effect, nor shall any proceeding brought by any
Governmental Authority seeking any such Judgment be pending. There shall not be
any action taken, or any Legal Requirement applicable to the Merger, which makes
consummation of the Merger illegal.
(c) Tax Opinion. CSI and GlobalTel shall have received the written
-----------
opinion of Parcel, Mauro & Spaanstra, P.C. in form and substance reasonably
satisfactory to them to the effect that the Merger will constitute a
reorganization within the meaning of Section 368 of the Code, and such opinion
-----------
shall not have been withdrawn. In rendering such opinion, counsel shall be
entitled to rely upon representations of CSI and GlobalTel and certain
Affiliates and shareholders of GlobalTel.
(d) Nasdaq Stock Market. The CSI Shares to be issued in the Merger
-------------------
shall have been approved for listing, subject to notice of issuance, on the
Nasdaq Stock Market.
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(e) CSI Public Offering. The Registration Statement shall have become
-------------------
effective and the public sale of CSI Shares described in the Registration
Statement shall have been completed, realizing not less than $20 million in net
proceeds to CSI and based on a valuation of the combined companies (including
ITC) of not less than $50 million.
SECTION 8.2 Conditions to Obligations of CSI. The obligations of CSI
--------------------------------
to consummate the Merger are subject also to the satisfaction at or prior to the
Effective Time of the following conditions:
(a) Dissenting Shares. Immediately prior to the Effective Time,
-----------------
neither (i) shall the number of GlobalTel Dissenting Shares representing shares
of GlobalTel Common Stock exceed two percent of the number of outstanding shares
of GlobalTel Common Stock nor (ii) shall the number of GlobalTel Dissenting
Shares representing shares of GlobalTel Preferred Stock exceed two percent of
the number of outstanding shares of GlobalTel Preferred Stock nor (iii) shall
the number of CSI Dissenting Shares exceed two percent of the number of
outstanding CSI Shares.
(b) Representations and Warranties. Except as contemplated by this
------------------------------
Agreement, the representations and warranties of GlobalTel set forth in this
Agreement shall be true and correct in all material respects (except for such
representations and warranties which are qualified by a reference to
materiality, which representations and warranties as so qualified shall be true
in all respects) on and as of the Closing Date, with the same force and effect
as though made on and as of the Closing Date, except that a representation or
warranty made as of a particular date need only be true and correct as of such
date, and CSI shall have received a certificate to such effect signed on behalf
of the corporation by the chief executive officer and the chief financial
officer of GlobalTel.
(c) Agreements and Covenants. GlobalTel shall have performed or
------------------------
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by it on or prior to the Closing
Date, and CSI shall have received a certificate to such effect signed on behalf
of the corporation by the chief executive officer and the chief financial
officer of GlobalTel.
(d) Consents. All consents, waivers, approvals, authorizations or
--------
orders required to be obtained (including those shown in Section 3.6(b) of the
--------------
GlobalTel Disclosure Schedule), and all filings required to be made, by
GlobalTel for the authorization, execution and delivery of this Agreement and
the consummation by it of the transactions contemplated hereby shall have been
obtained and made by GlobalTel in form and substance reasonably satisfactory to
CSI.
(e) Material Adverse Change. Since the date of the GlobalTel Interim
-----------------------
Balance Sheet, there shall have been no change, occurrence or circumstance in
the business, results of operations or financial condition of GlobalTel or any
Subsidiary having or reasonably likely to have a Material Adverse Effect.
43
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(f) Affiliate Agreements. CSI shall have received an Affiliate
--------------------
Agreement from each person who is identified in the Affiliate Letter as an
Affiliate of GlobalTel, and each such Affiliate Agreement shall be in full force
and effect.
(g) Opinion of Counsel. CSI shall have received opinions of counsel
------------------
from Squires, Sanders and Dempsey (as to regulatory and Blue Stone International
Ltd. matters), Early, Lennon, Peters & Crocker (as to foreign corporation
qualifications) and Heller Ehrman White & McAuliffe (as to other matters)
addressed to CSI and dated as of the Closing Date. The opinions, each of which
shall be subject to the limitations, qualifications and assumptions mutually
agreed upon by the parties and customary for opinions delivered on such
subjects, shall in the aggregate be substantially to the effect that:
(1) GlobalTel has been duly incorporated and is validly existing
under the laws of the State of Washington. GlobalTel is duly qualified to do
business and is in good standing in each other jurisdiction in the United States
where the character of the property owned, leased or operated by it or the
nature of its activities make such qualification necessary except where the lack
of such qualification would not have a Material Adverse Effect.
(2) The authorized capital of GlobalTel is as stated in this
Agreement.
(3) All of the outstanding GlobalTel Shares have been duly
authorized and validly issued and are fully paid, non-assessable, and are free
and clear of any preemptive rights arising pursuant to GlobalTel's articles of
incorporation, bylaws and the laws of the State of Washington. To the actual
knowledge of attorneys who are currently involved in legal representation of
GlobalTel in connection with this Agreement (the "attorneys' knowledge"), except
as set forth in the GlobalTel Disclosure Schedule: (A) GlobalTel has not granted
or issued any options, warrants, convertible or exchangeable securities or other
rights to any person for the purchase or acquisition from GlobalTel of any
shares of capital stock of GlobalTel; (B) there are no outstanding or authorized
stock appreciation, phantom stock, profit participation or similar rights with
respect to GlobalTel; and (C) GlobalTel is not subject to any obligation
(contingent or otherwise) to repurchase or otherwise acquire or retire any
shares of its capital stock or any convertible securities, rights or options of
the type described in subpart (A).
(4) GlobalTel has all requisite corporate power and corporate
authority to enter into and perform the Agreement, to own its properties and to
carry on its business as, to the attorneys' knowledge, it is now conducted. The
Agreement has been duly authorized by all necessary corporate action on the part
of GlobalTel and has been duly executed and delivered on behalf of GlobalTel.
The Agreement is a valid and binding obligation of GlobalTel, enforceable
against GlobalTel in accordance with its terms, subject, as to enforcement, (i)
to bankruptcy, insolvency, reorganization, arrangement, moratorium and other
laws of general applicability affecting creditors' rights and remedies and (ii)
to general principles of equity, whether such enforcement is considered in a
proceeding in equity or at law.
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(5) Neither the execution and delivery of the Agreement on behalf
of GlobalTel nor the consummation by GlobalTel of the Merger as provided in the
Agreement (i) conflicts with any provision of the articles of incorporation or
bylaws of GlobalTel or any of its Subsidiaries, (ii) violates any law applicable
to GlobalTel or any of its Subsidiaries, or (iii) results in a breach or
violation of , or constitutes a default under, any judgment of which the
attorneys have knowledge and to which GlobalTel or any of its Subsidiaries is a
party or by which any of them or any of their respective properties is bound.
(6) Each Subsidiary (other than with respect to Ratsten
International Telecommunications, Inc.) has been duly incorporated and is
validly existing under the laws of the respective jurisdiction of its
incorporation set forth in the GlobalTel Disclosure Schedule. Each Subsidiary
(other than with respect to Ratsten International Telecommunications, Inc.) is
duly qualified to do business and is in good standing in the jurisdictions
listed in Section 3.1 of the GlobalTel Disclosure Schedule. Ratsten
International Telecommunications, Inc. has been duly incorporated and is validly
existing under the laws of the State of California, but is no longer in good
standing in that state.
(7) The authorized capital of each Subsidiary is as stated in the
GlobalTel Disclosure Schedule. The stock register of each Subsidiary indicates
that all of the issued and outstanding shares of capital stock of that
Subsidiary are registered in the name identified and set forth in Section 3.4(b)
of the GlobalTel Disclosure Schedule as the owner of those shares.
(8) All outstanding shares of capital stock of each Subsidiary are
duly and validly authorized and issued, fully paid and non-assessable and are
free and clear of any preemptive rights arising pursuant to the Subsidiary's
articles of incorporation, bylaws and the laws of the state of organization. To
the attorneys' knowledge: (A) there are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights or other
contracts or commitments that could require any Subsidiary to issue, sell or
otherwise cause to become outstanding any of its capital stock; (B) there are
not outstanding or authorized stock appreciation, phantom stock, profit
participation or similar rights with respect to any Subsidiary; and (C) there
are no outstanding obligations of any Subsidiary to repurchase, redeem or
otherwise acquire any of its securities.
(9) To the attorneys' knowledge, there is no action, suit or
proceeding against GlobalTel or any Subsidiary by any Governmental Authority
which seeks to restrain, prohibit or invalidate the transactions contemplated by
this Agreement that is either pending or has been threatened in writing.
(10) No governmental consents, approvals, authorizations,
registrations, declarations or filings are required for the execution and
delivery of the Agreement on behalf of GlobalTel or any of its Subsidiaries and
consummation by GlobalTel or any of its Subsidiaries of the Merger as provided
in the Agreement except such as have been obtained or made.
45
<PAGE>
(h) Shareholder Affidavits. CSI shall have received from each Person
----------------------
entitled to receive CSI Shares in the Merger a duly executed affidavit, in form
and substance reasonably satisfactory to CSI, to the effect that such Person
either (i) is an "accredited investor" as such term is defined in Rule 501(a) of
Regulation D promulgated by the SEC or (ii) alone or with such Person's
"purchaser representative" (as such term is defined in Rule 501(d) of said
Regulation D) has such knowledge and experience in financial and business
matters that such Person is capable of evaluating the merits and risks of the
Merger and the investment in CSI Shares. All but 35 or fewer of the Persons
entitled to receive CSI Shares in the Merger shall be accredited investors.
(i) Outstanding GlobalTel Common Stock. CSI shall have received a
----------------------------------
certificate signed by the chief executive officer and the principal financial
officer of GlobalTel certifying as to the Total Pre-Merger Outstanding GlobalTel
Common Stock. Such certificate shall include a summary of such outstanding
stock as CSI shall reasonably require.
(j) Other. All actions taken by GlobalTel in connection with
-----
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments and other documents required to effect the transactions
contemplated hereby shall be reasonably satisfactory in form and substance to
CSI.
CSI may waive any condition specified in this Section 8.2 if it executes a
writing so stating at or prior to the Closing.
SECTION 8.3 Conditions to Obligations of GlobalTel. The obligations of
--------------------------------------
GlobalTel to consummate the Merger are subject also to the satisfaction at or
prior to the Effective Time of the following conditions:
(a) Representations and Warranties. Except as contemplated by this
------------------------------
Agreement, the representations and warranties of CSI set forth in this Agreement
shall be true and correct in all material respects (except for such
representations and warranties which are qualified by a reference to
materiality, which representations and warranties as so qualified shall be true
in all respects) on and as of the Closing Date, with the same force and effect
as though made on and as of the Closing Date, except that a representation or
warranty made as of a particular date need only be true and correct as of such
date, and GlobalTel shall have received a certificate to such effect signed by
the chief executive officer and the chief financial officer of CSI.
(b) Agreements and Covenants. CSI shall have performed or complied in
------------------------
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the Closing
Date, and GlobalTel shall have received a certificate to such effect signed by
the chief executive officer and the chief financial officer of CSI.
46
<PAGE>
(c) Consents. All consents, waivers, approvals, authorizations or
--------
orders required to be obtained (including those shown in Section 4.5(b) of the
--------------
CSI Disclosure Schedule), and all filings required to be made, by CSI for the
authorization, execution and delivery of this Agreement and the consummation by
it of the transactions contemplated hereby shall have been obtained and made by
CSI in form and substance reasonably satisfactory to GlobalTel.
(d) Material Adverse Change. Since the date of the CSI Interim
-----------------------
Balance Sheet, there shall have been no change, occurrence or circumstance in
the business, results of operations or financial condition of CSI having or
reasonably likely to have a Material Adverse Effect.
(e) Opinion of Counsel. GlobalTel shall have received an opinion of
------------------
counsel from Parcel, Mauro & Spaanstra, P.C. addressed to GlobalTel and dated as
of the Closing Date, substantially to the effect that:
(1) CSI has been duly incorporated and is validly existing under
the laws of the State of Colorado. Except in Florida, where CSI is in the
process of qualifying as a foreign corporation, CSI is duly qualified to do
business and is in good standing in each other jurisdiction in the United States
where the character of the property owned, leased or operated by it or the
nature of its activities make such qualification necessary except where the lack
of such qualification would not have a Material Adverse Effect.
(2) The authorized capital of CSI is as stated in this Agreement.
(3) All of the outstanding CSI Shares have been duly authorized
and validly issued and are fully paid, non-assessable (except with respect to
60,000 CSI Shares that were purchased with a promissory note), and are free and
clear of any preemptive rights arising pursuant to CSI's articles of
incorporation, bylaws and the laws of the State of Colorado. To the actual
knowledge of attorneys who are currently involved in legal representation of CSI
in connection with this Agreement or the Registration Statement (the "attorneys'
knowledge"), except as set forth in the CSI Disclosure Schedule: (A) CSI has not
granted or issued any options, warrants, convertible or exchangeable securities
or other rights to any person for the purchase or acquisition from CSI of any
shares of capital stock of CSI; (B) there are no outstanding or authorized stock
appreciation, phantom stock, profit participation or similar rights with respect
to CSI; and (C) CSI is not subject to any obligation (contingent or otherwise)
to repurchase or otherwise acquire or retire any shares of its capital stock or
any convertible securities, rights or options of the type described in subpart
(A).
(4) The CSI Shares, when issued as provided in the Agreement, will
be duly and validly authorized, fully paid and nonassessable shares of the
capital stock of CSI.
(5) CSI has all requisite corporate power and corporate authority
to enter into and perform the Agreement, to own its properties and to carry on
its business as, to the attorneys' knowledge, it is now conducted. The Agreement
has been duly authorized by all
47
<PAGE>
necessary corporate action on the part of CSI and has been duly executed and
delivered on behalf of CSI. The Agreement is a valid and binding obligation of
CSI, enforceable against CSI in accordance with its terms, subject, as to
enforcement, (i) to bankruptcy, insolvency, reorganization, arrangement,
moratorium and other laws of general applicability affecting creditors' rights
and remedies and (ii) to general principles of equity, whether such enforcement
is considered in a proceeding in equity or at law.
(6) Neither the execution and delivery of the Agreement on behalf
of CSI nor the consummation by CSI of the Merger as provided in the Agreement
(i) conflicts with any provision of the articles of incorporation or bylaws of
CSI, (ii) violates any law applicable to CSI, or (iii) results in a breach or
violation of , or constitutes a default under, any judgment of which the
attorneys have knowledge and to which CSI is a party or by which it or any of
its properties is bound.
(7) To the attorneys' knowledge, there is no action, suit or
proceeding against CSI by any Governmental Authority which seeks to restrain,
prohibit or invalidate the transactions contemplated by this Agreement that is
either pending or has been threatened in writing.
(8) No governmental consents, approvals, authorizations,
registrations, declarations or filings are required for the execution and
delivery of the Agreement on behalf of CSI and consummation by CSI of the Merger
as provided in the Agreement except such as have been obtained or made.
(f) Outstanding CSI Common Stock. GlobalTel shall have received a
----------------------------
certificate signed by the chief executive officer and the principal financial
officer of CSI certifying as to the Total Pre-Merger Outstanding CSI Common
Stock. Such certificate shall include a summary of such outstanding stock as
GlobalTel shall reasonably require.
(g) Other. All actions taken by CSI in connection with consummation
-----
of the transactions contemplated hereby and all certificates, opinions,
instruments and other documents required to effect the transactions contemplated
hereby shall be reasonably satisfactory in form and substance to GlobalTel.
GlobalTel may waive any condition specified in this Section 8.3 if it
-----------
executes a writing so stating at or prior to the Closing.
ARTICLE IX
Termination
-----------
SECTION 9.1 Termination of Agreement. This Agreement may be terminated
------------------------
at any time prior to the Effective Time, notwithstanding approval thereof by the
shareholders of GlobalTel and the shareholders of CSI:
48
<PAGE>
(a) by mutual written consent duly authorized by the respective
Boards of Directors of the Parties; or
(b) by either Party if the Merger shall not have been consummated by
September 30, 1998 (provided, however, that the right to terminate under this
Section 9.1(b) shall not be available to any Party whose failure to fulfill any
- --------------
obligation under this Agreement has been the cause of or resulted in the failure
of the Merger to occur on or before such date); or
(c) by either Party if a Governmental Authority of competent
jurisdiction shall have issued a non-appealable final Judgment or taken any
other action, in each case having the effect of permanently restraining,
enjoining or otherwise prohibiting the Merger; or
(d) by either Party if at the GlobalTel Shareholders' Meeting the
Requisite GlobalTel Shareholders' Vote shall not have been obtained or if at the
CSI Shareholders' Meeting the Requisite CSI Shareholders' Vote shall not have
been obtained; or
(e) by either Party upon a breach of any representation, warranty,
covenant or agreement on the part of the other Party set forth in this Agreement
or if any representation or warranty of such other Party shall have become
untrue, in either case such that the conditions set forth in Section 8.2(b) or
--------------
8.2(c) or Section 8.3(a) or 8.3(b) would not be satisfied; or
- ------ -------------- ------
(f) by either Party if the Board of Directors of GlobalTel shall have
resolved to accept, or accepted, a Superior Proposal.
SECTION 9.2 Effect of Termination. In the event of the termination of
---------------------
this Agreement pursuant to Section 9.1, this Agreement shall forthwith become
-----------
void and there shall be no liability on the part of any Party hereto or any of
its Affiliates, directors, officers or shareholders except (i) as set forth in
Section 9.3 and Section 10.1 hereof and (ii) nothing herein shall relieve any
- ----------- ------------
party form liability for any willful breach hereof (provided that any fee paid
pursuant to Section 9.3(b) shall be credited towards any such liability of
--------------
GlobalTel).
SECTION 9.3 Fees and Expenses.
-----------------
(a) Generally. Except as set forth in this Section 9.3, all fees and
--------- -----------
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the Party incurring such expenses, whether
or not the Merger is consummated.
(b) GlobalTel Fee. GlobalTel shall pay CSI a fee of $400,000 upon the
-------------
termination of this Agreement by CSI or GlobalTel pursuant to Section 9.1(f).
--------------
Any fee payable pursuant to this Section 9.3(b) shall be paid within one
--------------
Business Day after the date of termination of this Agreement.
49
<PAGE>
ARTICLE X
Miscellaneous
-------------
SECTION 10.1 Effectiveness of Representations, Warranties and Agreements.
-----------------------------------------------------------
Except as otherwise provided in this Section 10.1, the representations,
------------
warranties and agreements of each Party hereto shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
the other Party hereto, whether prior to or after the execution of this
Agreement. Any disclosure made with reference to one or more sections of the
GlobalTel Disclosure Schedule or the CSI Disclosure Schedule shall be deemed
disclosed with respect to each other section therein as to which such disclosure
is relevant provided such relevance is reasonably apparent. The representa
tions, warranties and agreements in this Agreement shall terminate at the
Effective Time or upon the termination of this Agreement pursuant to Section
-------
9.1, as the case may be, except that the agreement set forth in Article II shall
- --- ----------
survive the Effective Time if the Merger is consummated and those set forth in
Sections 7.3 and 9.3 shall survive termination of this Agreement.
- ------------ ---
SECTION 10.2 Notices. All notices and other communications given or made
-------
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date delivered if delivered personally, three days after being
sent by registered or certified mail (postage prepaid, return receipt
requested), one Business Day after dispatch by recognized overnight courier
(provided delivery is confirmed by the carrier) and upon transmission by
telecopy, confirmed received, to the Parties at the following addresses (or at
such other address for a Party as shall be specified by notice given in
accordance with this Section):
(a) If to CSI:
Communications Systems International, Inc.
8 South Nevada Avenue
Colorado Springs, Colorado 80903
Attention: Robert A. Spade
Telecopy: (719) 577-4470
with a copy to:
Parcel, Mauro & Spaanstra, P.C.
1801 California Street, Suite 3600
Denver, Colorado 80202
Attention: Douglas R. Wright, Esq.
Telecopy: (303) 295-3040
50
<PAGE>
(b) If to GlobalTel:
GlobalTel Resources Inc.
1520 Eastlake Avenue East
Seattle, Washington 98102
Attention: Ronald P. Erickson
Telecopy: (206) 720-7251
with a copy to:
Heller Ehrman White & McAuliffe
6100 Columbia Center
701 Fifth Avenue
Seattle, WA 98104-7098
Attention: John W. Hanley, Jr., Esq.
Telecopy: (206) 447-0849
SECTION 10.3 Amendment. This Agreement may be amended by the Parties by
---------
action taken by or on behalf of their respective Boards of Directors at any time
prior to the Effective Time; provided, however, that, after approval of the
Merger by the shareholders of GlobalTel or the shareholders of CSI, no amendment
may be made which by law requires further approval by such shareholders without
such further approval.
SECTION 10.4 Waiver. At any time prior to the Effective Time, either
------
Party may (a) extend the time for performance of any of the obligations or other
acts of the other Party, waive any inaccuracies in the representations and
warranties of the other Party contained herein or in any document delivered
pursuant hereto and (c) waive compliance by the other Party with any of the
agreements or conditions contained herein. Any such extension or waiver shall
be valid if set forth in an instrument in writing signed by the Party to be
bound thereby. No failure or delay by any Party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law or at equity.
SECTION 10.5 Headings. The headings contained in this Agreement are for
--------
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 10.6 Severability. The Parties intend that the provisions of
------------
this Agreement be enforced to the fullest extent permissible under the Legal
Requirements and public policy applied in each jurisdiction in which enforcement
is sought. Accordingly, in the event that any provision of this Agreement
should be held in any jurisdiction to be invalid, prohibited or unenforceable
for any reason, such provision,
51
<PAGE>
as to such jurisdiction, shall be ineffective, without invalidating the
remaining provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction. Notwithstanding the
foregoing, if such provision could be more narrowly drawn so as not to be
invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such
jurisdiction, be so narrowly drawn, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction.
SECTION 10.7 Entire Agreement. This Agreement, together with the
----------------
GlobalTel Disclosure Schedule and the CSI Disclosure Schedule, constitutes the
entire agreement, and supersedes all prior agreements and understandings, both
written and oral, between the Parties with respect to the subject matter hereof
and, except as otherwise expressly provided herein, is not intended to confer
upon any other Person any rights or remedies hereunder.
SECTION 10.8 Successors and Assigns. The provisions of this Agreement
----------------------
shall be binding upon and inure to the benefit of the Parties and their
respective successors and assign, provided that no Party may assign, delegate or
otherwise transfer any of its rights or obligations under this Agreement without
the prior written consent of the other Party.
SECTION 10.9 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO, WITHOUT GIVING
EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF.
SECTION 10.10 Construction. The Parties have participated jointly in the
------------
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. The word "including" shall mean including
without limitation.
SECTION 10.11 Incorporation of Exhibits and Disclosure Schedules. The
--------------------------------------------------
Exhibits and Disclosure Schedules identified in this Agreement are incorporated
herein by reference and made a part hereof.
SECTION 10.12 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be an original, with the same effect as if the
signature thereto and hereto were upon the same instrument. This Agreement
shall become effective when each Party shall have received a counterpart signed
by the other Party.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
52
<PAGE>
COMMUNICATIONS SYSTEMS
INTERNATIONAL, INC.
By:________________________________
Name:___________________________
Title:__________________________
GLOBALTEL RESOURCES, INC.
By:________________________________
Name:___________________________
Title:__________________________
53
<PAGE>
EXHIBIT 1
TO
AGREEMENT AND PLAN OF MERGER
BETWEEN
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
AND
GLOBALTEL RESOURCES, INC.
AMENDMENT TO BYLAWS OF SURVIVING CORPORATION
--------------------------------------------
1. The second sentence of Article III, Section 1 of the bylaws of the
Surviving Corporation shall be amended to read in its entirety as follows:
Management of the affairs, property, and business of the Corporation shall
be vested in the Board of Directors, which shall consist of nine members.
2. Article IV of the bylaws of the Surviving Corporation shall be amended
to read in its entirety as follows:
ARTICLE IV
OFFICERS
SECTION 1. TITLES:
- -------------------
The officers of the Corporation shall consist of a Chairman of the Board,
Vice Chairman of the Board, Chief Executive Officer, President, one or more Vice
Presidents, a Secretary, and a Treasurer, who shall each be elected for one (1)
year by the directors at their first meeting following the annual meeting of
stockholders. Such officers shall hold office until their successors are
elected and qualify. The Board of Directors may appoint from time to time such
other officers as it deems desirable who shall serve during such terms as may be
fixed by the Board at a duly held meeting. The Board, by resolution, shall
specify the titles, duties and responsibilities of such officers.
SECTION 2. CHAIRMAN OF THE BOARD:
- ---------------------------------
The Chairman of the Board shall, when present, preside at all meetings of
shareholders and of the Board of Directors, and in general shall perform all
duties incident to the office of Chairman of the Board and such other duties as
from time to time may be assigned to the Chairman by the Board of Directors, or
as prescribed herein.
1-1
<PAGE>
SECTION 3. VICE CHAIRMAN OF THE BOARD:
- --------------------------------------
The Vice Chairman of the Board shall perform such duties and possess such
powers as from time to time may be assigned to the Vice Chairman by the Board of
Directors or the Chairman. In the absence of the Chairman or in the event of
the Chairman's inability or refusal to act, the Vice Chairman shall perform the
duties of the Chairman and when so performing shall have all the powers of and
be subject to all the restrictions upon the Chairman.
SECTION 4. CHIEF EXECUTIVE OFFICER:
- -----------------------------------
The Chief Executive Officer shall have general charge, supervision and
authority over the property, affairs and business of the Corporation, and over
its several offices, subject, however, to the control of the Board of Directors.
The Chief Executive Officer shall have authority to cause the employment or
appointment of such employees and agents of the Corporation (other than officers
or agents elected or appointed by the Board) as the conduct of the business of
the Corporation may require, and to fix their compensation, and to remove or
suspend any employee or agent who shall not have been appointed by the Board.
SECTION 5. PRESIDENT:
- ----------------------
The President shall be the chief operating officer of the Corporation. The
President shall make reports to the Board of Directors, Chief Executive Officer
and stockholders and shall perform such other duties and services as may be
required from time to time by the Board of Directors or the Chief Executive
Officer. The President shall see that all orders and resolutions of the Board
of Directors are carried into effect. The President shall countersign all
certificates, contracts, and other instruments of the Corporation as authorized
by the Board of Directors or required by law. In the absence of the Chief
Executive Officer or in the event of such officer's inability or refusal to act,
the President shall perform the duties of the Chief Executive Officer and when
so performing shall have all the powers of and be subject to all the
restrictions upon the Chief Executive Officer.
SECTION 6. VICE PRESIDENT:
- --------------------------
The Vice President shall perform all the duties of the President if the
President is absent or for any other reason is unable to perform such officer's
duties and shall have such other duties as the Board of Directors shall
authorize or direct.
SECTION 7. SECRETARY:
- ---------------------
The Secretary shall issue notices of all meetings of stockholders and
directors, shall keep minutes of all such meetings, and shall record all
proceedings. The Secretary shall have custody and control of the corporate
records and shall make such reports and perform such other duties as may be
consistent with such office or as may be required of such officer from time to
time by the Board of Directors.
1-2
<PAGE>
SECTION 8. TREASURER:
- ---------------------
The Treasurer shall have custody of all moneys and securities of the
Corporation and shall have supervision over the regular books of account. The
Treasurer shall deposit all moneys, securities, and other valuable effects of
the Corporation in such banks and depositories as the Board of Directors may
designate and shall disburse the funds of the Corporation in payment of just
debts and demands against the Corporation, or as they may be ordered by the
Board of Directors, shall render such account of such officer's transactions as
may be required of such officer by the President or the Board of Directors from
time to time and shall otherwise perform such duties as may be required of such
officer by the Board of Directors.
The Board of Directors may require the Treasurer to give a bond
indemnifying the Corporation against larceny, theft, embezzlement, forgery,
misappropriation, or any other act of fraud or dishonesty resulting from such
officer's duties as Treasurer of the Corporation, which bond shall be in such
amount as appropriate resolution or resolutions of the Board of Directors may
require.
SECTION 9. VACANCIES OR ABSENCES:
- ---------------------------------
If a vacancy in any office arises in any manner, the directors then in
office may choose, by a majority vote, a successor to hold office for the
unexpired term of the officer. If any officer shall be absent or unable for any
reason to perform such officer's duties, the Board of Directors, to the extent
not otherwise inconsistent with these Bylaws, may direct that the duties of such
officer during such absence or inability shall be performed by such other
officer or subordinate officer as seems advisable to the Board.
SECTION 10. COMPENSATION:
- -------------------------
No officer shall receive any salary or compensation for such officer's
services unless and until the Board of Directors authorizes and fixes the amount
and terms of such salary or compensation.
1-3
<PAGE>
EXHIBIT 2
TO
AGREEMENT AND PLAN OF MERGER
BETWEEN
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
AND
GLOBALTEL RESOURCES, INC.
ADDITIONAL DIRECTORS OF SURVIVING CORPORATION
---------------------------------------------
Messrs. Spade and Scanlon will elect the following persons to fill the
vacancies on the board of directors of the Surviving Corporation to hold office
until the next annual meeting of shareholders of the Surviving Corporation and
until their respective successors are elected: Ronald P. Erickson, Bruce L.
Crockett, Lyman C. Hamilton, Jr., Michael S. Brownfield, Dean H. Cary, Richard
F. Nipert and Charles A. Shields.
2-1
<PAGE>
EXHIBIT 3
TO
AGREEMENT AND PLAN OF MERGER
BETWEEN
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
AND
GLOBALTEL RESOURCES, INC.
1. PIGGYBACK REGISTRATION RIGHTS.
-----------------------------
(a) Certain Definitions. As used in this Section, the following terms
-------------------
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
----------
other federal agency at the time administering the Securities Act.
"Holder" shall mean any person who owns any Registrable Securities and
------
assignees thereof in accordance with Section (f) below.
"Registrable Securities" shall mean (i) CSI Shares issued by CSI
----------------------
pursuant to that Agreement and Plan of Merger dated May 29, 1998, in conversion
of GlobalTel Shares (as defined therein) and (ii) any securities issued in
respect of such CSI Shares upon any stock split, stock dividend,
recapitalization, or similar event; provided, however, that shares of CSI common
-------- ------- ----
or preferred stock shall no longer be treated as Registrable Securities after
they have become eligible to be sold to or through a broker or dealer or
underwriter in a public distribution or a public offering, whether in a
registered offering, Rule 144 transaction or otherwise.
"Registration Expenses" shall mean all expenses, except as otherwise
---------------------
stated below, incurred by CSI in complying with subsection 1(b) hereof,
including, without limitation, all registration, qualification and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for CSI, blue
sky fees and expenses, the expense of any special audits incident to or required
by any such registration (but excluding the compensation of regular employees of
CSI which shall be paid in any event by CSI) and the reasonable fees and
disbursements of one counsel for all Holders.
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"Selling Expenses" shall mean all underwriting discounts, selling
----------------
commissions and stock transfer taxes applicable to the securities registered by
the Holders and, except as set forth in the definition of Registration Expenses,
all fees and disbursements of counsel for any Holder.
(b) Piggyback Registration Rights.
-----------------------------
3-1
<PAGE>
(i) If at any time or from time to time during the period
beginning one year after the effective date of CSI's registration statement no.
333-47045 relating to its underwritten public offering of common stock being
managed by Cruttenden Roth Incorporated and ending on the second anniversary of
such date CSI shall determine to register any of its securities, either for its
own account or the account of a security holder or holders, other than (i) a
registration relating solely to employee benefit plans, or (ii) a registration
relating solely to a Commission Rule 145 transaction, CSI will:
(A) promptly give to each Holder written notice thereof; and
(B) include in such registration (and any related
qualification under Blue Sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made by any Holder within 20 days after receipt of such written
notice from CSI.
(ii) If the registration of which CSI gives notice is for a
registered public offering involving an underwriting, CSI shall so advise the
Holders as a part of the written notice given pursuant to subsection 1(c)(i)(A).
In such event the right of any Holder to registration pursuant to subsection
1(b) shall be conditioned upon such Holder's participation in such underwriting
and the inclusion of the Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall (together with CSI and the other holders
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by CSI. Notwithstanding any other provision of this
subsection 1(b), if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten in CSI's
registered public offering, the managing underwriter may limit on a pro rata
basis the Registrable Securities to be included in such registration, to an
amount not less than one-fourth (1/4) of the aggregate number of securities
included in such registration. CSI shall advise all Holders and all other
persons distributing their securities through such underwriting of any
limitation described above; and the number of shares of Registrable Securities
that may be included in the registration and underwriting shall be allocated
among all participating Holders and such other persons having a contractual
right to include shares of CSI Common Stock in such registration in proportion,
as nearly as practicable, to the respective amounts of Registrable Securities
held by such participating Holders and such other participating holders at the
time of filing the registration statement. If any officers, directors,
employees, Holders or Holder disapproves of the terms of any such underwriting,
he may elect to withdraw therefrom by written notice to CSI and the managing
underwriter.
(iii) If a Holder decides not to include all of its Registrable
Securities in any registration statement filed by CSI, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent registration statement or registration statements as may be filed
by CSI with respect to offerings of its securities, all upon the terms and
conditions set forth herein.
3-2
<PAGE>
(iv) CSI shall have the right to terminate or withdraw any
registration initiated by it under this subsection 1(b) prior to the
effectiveness of such registration, whether or not any Holder has elected to
include securities in such registration.
(c) Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with all registrations pursuant to subsection l(b) shall be borne by
CSI. Unless otherwise stated, all Selling Expenses relating to securities
registered on behalf of a Holder shall be borne by such Holder.
(d) Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by CSI pursuant to Section l(b), CSI will
keep each Holder advised in writing as to the initiation of each registration,
qualification and compliance and as to the completion thereof. At its expense
CSI will with all deliberate speed:
(i) Prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for a period up to two
hundred seventy (270) days;
(ii) Furnish to the Holders participating in such registration
and to the underwriters (if any) of the securities being registered such
reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such underwriters may
reasonably request in order to facilitate the public offering of such
securities;
(iii) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statements as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(iv) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that CSI shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions; and
(v) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering.
(vi) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto covered
by such registration statement is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or
3-3
<PAGE>
necessary to make the statements therein not misleading in the light of the
circumstances then existing.
(vii) At the request of the managing underwriter of any
underwritten offering, furnish on the date that such Registrable Securities are
delivered to the underwriters for sale in connection with a registration
pursuant to this Agreement (i) an opinion, dated such date, of the counsel
representing CSI for the purposes of such registration, in form and substance as
is customarily given to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated such date, from
the independent certified public accountants of CSI, in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities.
(viii) For as long as CSI has any registration obligations
hereunder, timely file all such reports, forms or other documents as may be
required from time to time under the Securities Act, the Securities Exchange Act
of 1934, as amended, and the rules and regulations thereunder and cause such
reports, forms or other documents to comply as to form and substance with such
acts and such rules and regulations.
(e) Indemnification.
---------------
(i) CSI will indemnify each Holder, each of its officers and
directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section, and each
underwriter, if any, and each person who controls any underwriter within the
meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof) arising out of or
based on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, or incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, or any violation by CSI of the Securities Act or
any rule or regulation promulgated under the Securities Act applicable to CSI in
connection with any such registration, qualification or compliance, and CSI will
reimburse promptly upon request each such Holder, each of its officers and
directors, and each person controlling such Holder, each such underwriter and
each person who controls any such underwriter, for any legal or any other
expenses reasonably incurred in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, provided that CSI
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission or alleged untrue statement or omissions, made in reliance upon and
in conformity with written information furnished to CSI by an instrument duly
executed by such Holder, controlling person or underwriter and stated to be
specifically for use therein. Each Holder
3-4
<PAGE>
will, if Registrable Securities held by such Holder are included in the
securities as to which such registration, qualification or compliance is being
effected, indemnify CSI, each of its directors and officers, each underwriter,
if any, of CSI's securities covered by such a registration statement, each
person who controls CSI or such underwriter within the meaning of Section 15 of
the Securities Act, and each other such Holder, each of its officers, directors
and partners and each person controlling such Holder within the meaning of
Section 15 of the Securities Act, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to CSI by an
instrument duly executed by such Holder and stated to be specifically for use
therein.
(ii) Each party entitled to indemnification under this subsection
(e) (the "Indemnified Party") shall give notice to the party required to provide
-----------------
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
------------------
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provide further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this subsection (e) unless the failure to give such notice
is materially prejudicial to an Indemnifying Party's ability to defend such
action and provided further, that an Indemnified Party shall have the right to
retain its own counsel, with the fees and expenses to be paid by the
Indemnifying Party, if, in the opinion of counsel for the Indemnifying Party,
representation of such Indemnified Party by the counsel retained by the
Indemnifying Party would be inappropriate due to actual or potential differing
interests between such Indemnified Party and any other party represented by such
counsel in such proceeding. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation. No Indemnifying Party shall be liable for indemnification
hereunder with respect to any settlement or consent to judgment, in connection
with any claim or litigation to which these indemnification provisions apply,
that has been entered into without the prior consent of the Indemnifying Party
(which consent will not be unreasonably withheld).
(f) Assignment of Registration Rights. The rights to cause CSI to
---------------------------------
register Registrable Securities pursuant to this Agreement may be assigned by a
Holder to a transferee or assignee of such securities who shall, upon such
transfer or assignment, be deemed a "Holder" under
3-5
<PAGE>
this Agreement if and only if CSI is, within a reasonable period of time after
such transfer, not to exceed sixty (60) days, furnished with written notice of
the name and address of such transferee or assignee and the Registrable
Securities with respect to which such registration rights are being assigned.
(g) Limitations on Subsequent Registration Rights. From and after the
---------------------------------------------
date of this Agreement, CSI shall not, without the prior written consent of a
majority in interest of the Holders, enter into any agreement with any holder or
prospective holder of any securities of CSI which would grant registration
rights to such holder or prospective holder which are prior or superior to the
rights of the Holders hereunder.
3-6
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No. 333-
47045 of Communications Systems International, Inc. of our report dated May
28, 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
June 19, 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. 2 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
June 17, 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
June 19, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAY-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 429,373
<SECURITIES> 0
<RECEIVABLES> 1,369,493
<ALLOWANCES> 342,276
<INVENTORY> 0
<CURRENT-ASSETS> 1,475,960
<PP&E> 767,791
<DEPRECIATION> 284,156
<TOTAL-ASSETS> 2,975,305
<CURRENT-LIABILITIES> 4,087,498
<BONDS> 0
0
0
<COMMON> 2,750,285
<OTHER-SE> (3,862,478)
<TOTAL-LIABILITY-AND-EQUITY> 2,975,305
<SALES> 8,114,737
<TOTAL-REVENUES> 8,114,737
<CGS> 4,878,478
<TOTAL-COSTS> 4,878,478
<OTHER-EXPENSES> 4,278,078
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113,529
<INCOME-PRETAX> (417,348)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,164,348)
<DISCONTINUED> 0
<EXTRAORDINARY> 747,000
<CHANGES> 0
<NET-INCOME> (417,348)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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