<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 1998.
REGISTRATION NO. 333-47045.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1 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 OFFICER
COLORADO SPRINGS, COLORADO 80903 8 SOUTH NEVADA AVENUE, SUITE 200
(719) 471-3332 COLORADO SPRINGS, COLORADO 80903
(ADDRESS, INLUDING ZIP CODE, AND (719) 471-3332
TELEPHONE NUMBER, INCLUDING AREA (NAME, ADDRESS, INCLUDING ZIP CODE,
CODE, OF REGISTRANT'S PRINCIPAL AND TELEPHONE NUMBER, INCLUDING AREA
EXECUTIVE OFFICES) CODE, OF AGENT FOR SERVICE)
Copies to:
DOUGLAS R. WRIGHT, ESQ. ROBERT W. WALTER, ESQ.
JEFFREY A. SHERMAN, ESQ. BERLINER ZISSER WALTER & GALLEGOS, P.C.
PARCEL, MAURO & SPAANSTRA, P.C. 1700 LINCOLN
1801 CALIFORNIA STREET, SUITE 3600 SUITE 4700
DENVER, COLORADO 80202 DENVER, COLORADO 80203
(303) 292-6400 (303) 830-1700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
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)......... 3,450,000 $11.00 $37,950,000 $11,195.25
- -----------------------------------------------------------------------------------------
Common Stock(3)......... 263,600 $11.00 $ 2,899,600 $ 855.38
- -----------------------------------------------------------------------------------------
Representatives'
Warrants(4)............ 300,000 $ -- $ -- $ -- (5)
- -----------------------------------------------------------------------------------------
Common Stock Underlying
Representatives'
Warrants(6)............ 300,000 $13.20 $ 3,960,000 $ 1,168.20
- -----------------------------------------------------------------------------------------
TOTAL................................................... $44,809,600 $13,218.83
- -----------------------------------------------------------------------------------------
AMOUNT PREVIOUSLY PAID................................................. $ 5,406.49
- -----------------------------------------------------------------------------------------
AMOUNT OWED............................................................ $ 7,812.34
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</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 450,000 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 Selling Securityholders' Shares which will be
offered to the public by the Selling 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 300,000 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
All historical share and per share information has been removed from this
registration statement (the "Registration Statement") pending a proposed
reverse stock split that Communications Systems International, Inc. ("CSI")
intends to effectuate in order to comply with the listing requirements of The
Nasdaq Stock Market, Inc. Upon the determination of the reverse stock split
ratio, this Registration Statement will be amended to include all such share
and per share information.
This Registration Statement contains two prospectuses: one related to the
offering of shares of Common Stock (the "Common Stock") by CSI (the
"Prospectus"); and one relating to the offering of shares of Common Stock by
certain selling Securityholders (the "Selling Securityholders' Prospectus").
The exact number of Selling Securityholders' Shares to be registered cannot be
determined until CSI effects its proposed reverse stock split. Following the
Prospectus are certain substitute pages of the Selling 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 Selling Securityholder Prospectus included herein is
labeled "Alternate Page for Selling Securityholders' Prospectus" or
"Additional Page for Selling Securityholders' Prospectus." All other sections
of the Prospectus, other than "Underwriting" and "Concurrent Offering," are to
be used in the Selling Securityholders' Prospectus. In addition, cross-
references in the Prospectus will be modified in the Selling 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 APRIL 24, 1998
PROSPECTUS
SHARES
[LOGO]
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
COMMON STOCK
---------
All of the shares of Common Stock offered hereby are being sold by
Communications Systems International, Inc. ("CSI"). 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 , 1998, the closing bid price of the Common Stock was $ per
share. See "Price Range of Common Stock." It is currently estimated that the
public offering price will be between $ and $ 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, shares of Common Stock are being registered
for offer and sale by certain Securityholders (collectively, the "Selling
Securityholders") of the Company. Such shares consist of a maximum of 113,600
shares of Common Stock that were issued in a private placement completed in
December 1997 and shares issuable upon the exercise of certain warrants
(collectively, the "Selling Security- holders' Shares"). The Selling
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 Selling Securityholders' Shares. In addition,
the Selling Securityholders have agreed with the Representatives not to sell or
transfer the Selling 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
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................... $ $ $
- --------------------------------------------------------------------------------
Total(3).................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) CSI has 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 shares of Common Stock exercisable at $ per share (the
"Representatives' Warrants"). See "Underwriting."
(2) Before deducting expenses payable by CSI estimated at $ , including the
Representatives' nonaccountable expense allowance.
(3) CSI has granted to the Underwriters a 45-day option to purchase an
aggregate of up to 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
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 Cohig & Associates, Inc.
INCORPORATED
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."
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
Securities Exchange Act of 1934, as amended (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 Nike Inc., 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 Chile, Korea, Australia and the Ukraine 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 reverse stock split that will be completed prior to the date
of this Prospectus. CSI has entered into an agreement in principle 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
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered... shares
Common Stock outstanding
after the offering.... 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]
</TABLE>
- --------
(1) Includes 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 $ per share in connection with the notes (the "Bridge
Notes") issued by CSI in December 1997 (the "December 1997 Financing").
Excludes (i) up to shares of Common Stock issuable upon exercise of
outstanding options, which have a weighted average exercise price of $
per share, (ii) up to shares of Common Stock issuable upon the exercise
of outstanding warrants, which have a weighted average exercise price of
$ per share, (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 shares of Common Stock issuable upon
exercise of the Representatives' Warrants, (v) shares issuable in
connection with the ITC Acquisition, (vi) the issuance of and
shares of Common Stock to certain holders of notes of GlobalTel (the
"GlobalTel Full Coverage Notes") and past noteholders of GlobalTel,
respectively, assuming an initial public offering price of $ per share,
(vii) the issuance of shares of Common Stock upon the cashless
conversion of certain warrants (the "Cashless Warrants") at the closing of
this offering, assuming an initial public offering price of $ per share,
(viii) the issuance of shares of Common Stock to an officer of
GlobalTel upon the closing of this offering in connection with the
acquisition of GFP Group, Inc., (ix) the issuance of shares of Common
Stock to an affiliate of GlobalTel in connection with services to be
rendered by such affiliate, assuming an initial public offering price of
$ per share, and (x) the conversion of certain long-term debt into
shares of Common Stock upon the closing of the offering at a price of $
per share (collectively referred to herein as "Additional Securities").
See "Management," "Description of Securities" and "Underwriting."
3
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
The summary financial information set forth below is derived from the audited
financial statements of CSI, GlobalTel and ITC, the unaudited financial
statements of CSI 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--
HISTORICAL--CSI GLOBALTEL HISTORICAL--ITC PRO FORMA
----------------------------- ---------------- ------------------------ AS ADJUSTED 12
THREE MONTHS MONTHS ENDED
ENDED DECEMBER 31,
12 MONTHS 12 MONTHS
ENDED NINE MONTHS ENDED 10 MONTHS
APRIL 30, ENDED DECEMBER 31, ENDED
---------------- JANUARY 31, ---------------- OCTOBER 31, JANUARY 31,
1996 1997 1998 1996 1997 1997 1998 1997
------- ------- ----------- ------- ------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA:
Revenue......... $ 6,741 $11,865 $ 8,895 $ 9,136 $12,862 $8,054 $2,849 $ 35,261
Cost of
revenue........ 5,963 7,755 5,394 8,230 11,171 6,790 2,194 28,094
------- ------- ------- ------- ------- ------ ------ ---------
Gross margin.... 778 4,110 3,501 906 1,691 1,264 655 7,167
Operating
expenses:
Sales and
marketing...... 1,573 2,080 1,961 682 788 715 244 3,520
General and
administrative.. 1,652 2,024 2,604 5,773 7,119 1,388 476 11,789
Depreciation and
amortization
expense........ 58 103 105 98 253 73 29 9,610
Acquired in-
process
research and
development.... -- -- -- -- -- -- -- 3,475
------- ------- ------- ------- ------- ------ ------ ---------
Total operating
expenses....... 3,283 4,207 4,670 6,553 8,160 2,176 749 28,394
------- ------- ------- ------- ------- ------ ------ ---------
Loss from
operations..... (2,505) (97) (1,169) (5,647) (6,469) (912) (94) (21,227)
Interest
expense,
including
amortization of
debt discount.. (19) (162) (348) (225) (1,368) (57) (15) (702)
Other income.... -- -- -- -- -- 119 12 --
------- ------- ------- ------- ------- ------ ------ ---------
Loss before
income taxes
and
extraordinary
item........... (2,524) (259) (1,517) (5,872) (7,837) (850) (97) (21,929)
Income tax
(benefit)...... -- -- -- -- -- -- -- (2,437)
------- ------- ------- ------- ------- ------ ------ ---------
Loss before
extraordinary
item........... (2,524) (259) (1,517) (5,872) (7,837) (850) (97) (19,492)
Extraordinary
item--gain on
extinguishment
of debt........ -- -- 747 -- -- -- -- --
------- ------- ------- ------- ------- ------ ------ ---------
Net loss........ $(2,524) $ (259) $ (770) $(5,872) $(7,837) $ (850) $ (97) $ (19,492)
======= ======= ======= ======= ======= ====== ====== =========
Series A
convertible
preferred stock
dividends...... -- -- -- -- (39) -- -- --
------- ------- ------- ------- ------- ------ ------ ---------
Net loss
applicable to
common
shareholders... $(2,524) $ (259) $ (770) $(5,872) $(7,876) $ (850) $ (97) $ (19,492)
======= ======= ======= ======= ======= ====== ====== =========
EBITDA(1)....... $(2,447) $ 6 $(1,064) $(5,549) $(6,216) $ (720) $ (53) $ (8,142)
Basic loss per
share(excluding
extraordinary
item)..........
Weighted average
number of
shares
outstanding....
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL--
HISTORICAL--CSI GLOBALTEL HISTORICAL--ITC PRO FORMA
--------------------- ------------ ----------------------- AS ADJUSTED
APRIL 30, JANUARY 31, DECEMBER 31, OCTOBER 31, JANUARY 31, DECEMBER 31,
1997 1998 1997 1997 1998 1997
--------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................... $ 147 $ 566 $ 849 $ 848 $ 978 $21,761
Working capital
(deficit).............. (2,331) (2,977) (4,934) (1,259) (1,402) 13,364
Total assets............ 1,946 2,943 4,354 2,720 3,338 57,223
Long-term debt, net of
current maturities and
debt discount.......... -- -- 3,832 292 227 4,291
Common stock subject to
rescission............. -- -- 2,455 -- -- 2,455
Total shareholders'
equity (deficit)....... (1,669) (1,455) (8,534) (781) (878) 35,414
</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, and
a loss of approximately $770,000, during the nine months ended January 31,
1998, resulting in an accumulated deficit of approximately $4.8 million as of
January 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, resulting in an accumulated deficit of $15.6 million as of
December 31, 1997. In addition, ITC incurred a loss of approximately $850,000
during the 10 months ended October 31, 1997. 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.
GLOBALTEL 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
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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. There
can be no assurance that this 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
January 31, 1998, CSI and ITC, and at December 31, 1997, GlobalTel,
respectively, had working capital deficits of approximately $3.0 million, $1.4
million and $4.9 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 54.3%,
and 11.5%, respectively, of CSI's revenue in the 12 months ended December 31,
1997, and the ten largest independent sales agents accounted for approximately
91.3% of CSI's revenue in the nine months ended January 31, 1998. GlobalTel
currently depends on 81 independent sales agents to sell its services. The 10
largest independent sales agents accounted for approximately 30.9% of
GlobalTel's revenue in the 12 months ended December 31, 1997. ITC currently
depends on approximately 55 independent sales agents to sell its services,
including Generic Telecom, Inc., Zohair Attoue and Janel Richards
(collectively, with Mr. Stoever and CS do Brazil, the "Key Independent Sales
Agents"). These three independent sales agents accounted for approximately
26.6%, 21.4% and 12.7%, respectively, of ITC's revenue in the 10 months ended
October 31, 1997, and the ten largest independent sales agents accounted for
approximately 89.1% of ITC's revenue in the 10 months ended October 31, 1997.
If the Combined Company fails to retain the services of any of the Key
Independent Sales Agents for any reason or loses the services of other
independent sales agents that contribute significantly to the Combined
Company's revenue, the Combined Company's cash flow and results of operations
would be adversely affected because of expected high customer attrition. The
Combined Company also depends on its independent sales agents and persons
engaged by them to install and service much of the Combined Company's
technologies. The
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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. CSI's former independent sales agent in Singapore
recently 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; SELECTION AND INTEGRATION OF
UNSPECIFIED ACQUISITIONS
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.
A key element of the Combined Company's strategy is expansion through the
additional acquisitions of complementary international customer bases,
products and infrastructure. Except for the GlobalTel Merger agreement in
principle and the ITC Acquisition agreement, the Combined Company has no
agreements, arrangements or understandings for any such acquisition as of the
date of this Prospectus. There can be no assurance that the Combined Company
will be successful in identifying appropriate acquisition opportunities or
negotiating favorable terms. In most cases, the Combined Company will not be
required to obtain shareholder approval in order to complete its acquisitions.
Under the Colorado Business Corporation Act, a corporation may effect a merger
with or an acquisition of another company without shareholder approval if the
corporation will be the surviving entity, the articles of incorporation of the
corporation are not substantively amended, each shareholder will hold the same
number and type of shares after the transaction as he did before, and the
outstanding shares of the corporation will not be increased by more than 20%
as a result of the transaction. Any future acquisitions or related activity
will involve additional risks including, among others, the difficulty of
identifying appropriate acquisition candidates, the difficulty of assimilating
the operations and personnel of the respective entities, the potential
disruption of the Combined Company's ongoing business and the inability of
management to capitalize on the opportunities presented by the acquisitions.
In addition, the failure to successfully incorporate acquired technology and
rights into the Combined Company's services, the inability to maintain uniform
standards, controls, procedures and policies, the impairment of relationships
with employees and customers as a result of changes in management and an
increase in amortization of intangible assets in the Combined Company's
financial statements may adversely affect the Combined Company. If the
Combined Company completes acquisitions through the issuance of Common Stock,
the ownership interest of existing holders would be decreased. There can be no
assurance that the Combined Company will be able to finance any future
acquisitions.
The successful integration of any such acquisition is critical to the future
financial performance of the Combined Company. Complete integration of any
acquisitions could take several fiscal quarters to accomplish and would
require, among other things, coordination of the respective companies' sales,
marketing and technical development efforts. The integration process may cause
management's attention to be diverted from operating the Combined Company, and
any difficulties encountered in the transition process could have an adverse
impact on the business, financial condition and results of operations of the
Combined Company. There can be no assurance that present and potential
customers of the Combined Company and any acquired entity would
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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.
MANAGEMENT OF GROWTH
The Combined Company has experienced significant growth in the past two
years and expects such growth to continue. The Combined Company's growth may
place significant strains on the Combined Company's management, staff, working
capital and operating and financial control systems. There can be no assurance
that the Combined Company's management, staff, working capital and systems
will be adequate to support its future anticipated growth. The failure to
recruit qualified staff, to continue to upgrade operating and financial
control systems or to respond effectively to difficulties encountered during
expansion could have a material adverse effect on the Combined Company's
business, financial condition and results of operations.
DEPENDENCE ON CARRIERS AND OTHER SUPPLIERS
The Combined Company's ability to achieve and maintain profitable operations
is heavily dependent upon the agreements the Combined Company has with certain
international long distance carriers. The Combined Company, among other
things, must negotiate favorable rates with these long distance carriers.
Because of the frequent fluctuations in rates of long distance carriers, the
Combined Company believes that it is in its best interest to have short-term
agreements with its carriers. Most of the Combined Company's agreements with
its carriers will expire, or may be terminated by either party, within one
year, and there can be no assurance that these agreements will be renewed or
that the Combined Company will be able to obtain favorable rates from these or
other carriers. There are a small number of carriers with whom the Combined
Company has carrier agreements. The Combined Company's dependence on
particular carriers will vary because the Combined Company shifts its use of
carriers depending on the rates offered. The Combined Company periodically
renegotiates rates with its current carriers and seeks to establish
relationships with new long distance carriers that provide the most favorable
rates. The Combined Company's ability to obtain favorable rates from the
carriers depends, in large part, on the Combined Company's total volume of
long distance traffic. There is no guarantee that the Combined Company will be
able to maintain the volume of international long distance traffic necessary
to obtain favorable rates. The loss of any carrier could have a material
adverse effect on the Combined Company.
Due to its financial condition, CSI defaulted on payment obligations to
certain carriers in 1995, 1996 and 1997. Although CSI was able to negotiate
deferred payment arrangements with these carriers (and thereafter made such
deferred payments) and was able to continue 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
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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
$550,000, which represent approximately 23.5% of the Combined Company's
average monthly cost of revenue for the 12 months ended December 31, 1997.
Failure to maintain favorable carrier contracts would increase the Combined
Company's cost of revenue and the ability to achieve and maintain
profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."
A failure by a carrier to deliver quality services or products on a timely
basis, or the inability of the Combined Company to develop alternative
suppliers if and as required, could result in delays in the provision of
service to the Combined Company's customers which could have a material
adverse effect on the Combined Company. The Combined Company's remedies
against carriers that fail to deliver services or products on a timely basis
are limited, in certain cases, by the Combined Company's desire to maintain
relationships with its key carriers. In addition, as the Combined Company's
carriers upgrade their technology, the Combined Company may encounter
difficulties in integrating new technology into the Combined Company's
network.
The Combined Company is dependent on certain third-party suppliers of
equipment and hardware components, including its integrated computer systems
and switching platforms, and expects that it will become more dependent on
such suppliers as its business expands. A failure by a supplier to deliver
quality products on a timely basis, or the inability to develop other sources
of supply if required, could result in delays that could adversely affect the
Combined Company. In addition, the Combined Company's business is highly
dependent on its computer systems, telephone equipment and software. See
"Business."
RECENT INTRODUCTION AND ONGOING DEVELOPMENT OF ENHANCED SERVICES
Substantially all of the Combined Company's revenue to date has been derived
from international call- reorigination services and reselling international
long distance minutes to other carriers and resellers. The Combined Company
believes that as deregulation occurs and competition increases in markets
around the world, the pricing advantage of traditional call-reorigination
relative to conventional international long-distance service will diminish. In
order to maintain its existing customer base, attract new customers and
increase its revenue, the Combined Company must offer a variety of enhanced
telecommunications services, as well as its own call-through service, at
competitive prices. Accordingly, the Combined Company is in the process of
developing a number of enhanced telecommunications services such as fax and
business grade Internet services. The first of these enhanced services was
offered to GlobalTel's customers in November 1997. To date GlobalTel has not
generated significant revenue from these services. Several other new services
described in this Prospectus are still under development and are not scheduled
for implementation until various times in 1998 or later. It is not uncommon
for the introduction of new telecommunications services to be delayed or
occasioned by technical problems. There can be no assurance that the Combined
Company will not encounter delays or technical problems in the introduction of
new services which will inhibit the Combined Company's ability to compete.
Also, there can be no assurance that the Combined Company will have sufficient
capital to complete development
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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 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
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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,
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
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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."
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
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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
Immediately after the closing of this offering, 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 shares
of Common Stock (the "Rescission Stock"), $350,000 in aggregate principal
amount of promissory notes (the "Rescission Notes") and warrants (the
"Rescission Warrants") to purchase an aggregate of approximately shares of
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. Following this
offering the Combined Company intends to refile a registration statement
previously filed by GlobalTel relating to the Rescission Offer (the
"Rescission Offer Registration Statement") under the Securities Act.
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 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 $ per share. The aggregate price paid for the
Rescission Notes, which are to be repaid from the proceeds of this offering,
is $350,000. See "Use of Proceeds." Each of the Rescission Warrants was issued
in conjunction with Rescission Stock or Rescission 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
$3.2 million, plus the aggregate amount of any additional interest thereon
that accrues after June 30, 1998. The Rescission Offer will expire 15 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
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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 Registration Statement
has been declared effective by the Securities and Exchange Commission and 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 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
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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 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
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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 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
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assurance that the Combined Company will be successful in recruiting and
retaining such personnel. See "Management."
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
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."
SHARES ELIGIBLE FOR FUTURE SALE; RIGHTS TO ACQUIRE SHARES
Following this offering, shares of the Combined Company's outstanding
shares of Common Stock will be "restricted securities" and may in the future
be sold upon registration or in compliance with an exemption from registration
such as the exemption provided by Rule 144 adopted under the Securities Act.
Rule 144 as currently in effect generally provides that beneficial owners of
shares who have held such shares for one year may sell within a three-month
period a number of shares not exceeding the greater of 1% of the total
outstanding shares or the average trading volume of the shares during the four
calendar weeks preceding such sale. Of the
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shares of restricted stock that are presently outstanding, approximately
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 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 have agreed with the Representatives not to sell such shares for a
period of 12 months following the date of this Prospectus. The Selling
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
shares of Common Stock, which have a weighted average exercise price of $
per share, (ii) warrants to purchase up to shares of Common Stock, which
have a weighted average exercise price of $ 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, (iv) shares of GlobalTel's Series A
Convertible Preferred Stock, which will be converted into approximately
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 $
per share, (v) convertible promissory notes in the aggregate principal amount
of approximately $2.7 million that were issued by GlobalTel, which have a
conversion price per share equal to the price of the Common Stock in this
offering, and (vi) GlobalTel Full Coverage Notes in the aggregate principal
amount of approximately $3.0 million which have a conversion price of $ per
share. At the completion of this offering, the Representatives will receive
warrants (the "Representatives' Warrants") to purchase up to shares of
Common Stock at an exercise price of $ (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 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."
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
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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 $ ( %) 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 $ 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.
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
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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."
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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 April 1998, CSI entered into an agreement in principle 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 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, the approval of the
shareholders of both CSI and GlobalTel and 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 and shares of Common Stock based on
an assumed initial offering price of $ 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 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 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 $ per share, the net proceeds
from the sale of the shares of Common Stock offered hereby are estimated to be
approximately $ million ($ million if the Underwriters' over-allotment
option is fully exercised).
The Combined Company plans to use (i) approximately $3.1 million to repay
the outstanding amount of Bridge Notes issued in December 1997 and estimated
accrued interest thereon; (ii) approximately $3.0 million to repay the
GlobalTel Full Coverage Notes issued by GlobalTel in December 1997; (iii)
approximately $3.0 million to pay deferred payables owed by the Combined
Company; (iv) approximately $2.9 million to complete the ITC Acquisition; (v)
approximately $1.6 million to pay the outstanding amount of the GlobalTel
Bridge Notes, issued at various times during 1996 and 1997; (vi) approximately
$1.1 million to repay the outstanding amount of the GlobalTel Note that
becomes payable in June 1998; (vii) approximately $600,000 to repay various
outstanding short term debt of CSI; (viii) approximately $400,000 to install
automated switching equipment that facilitates transparent call-reorigination
services in high volume customers; (ix) approximately $400,000 to purchase or
lease and install regional switches or other telecommunications equipment in
select countries to facilitate least cost routing; (x) approximately $200,000
for technical development associated with the Combined Company's enhanced
services; and (xi) the remaining net proceeds for working capital and general
corporate purposes, which includes an $80,000 severance payment to a former
employee of CSI and $50,000 to be paid a director of CSI for consulting
services provided. Additionally, a portion of the proceeds will be used to
fund the repurchase of any securities of the Combined Company tendered in
connection with the Rescission Offer in an approximate amount of up to $2.8
million, plus approximately $397,000 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 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 to repay trade payables and notes to telecommunications carriers.
The notes issued by GlobalTel bear interest at a rate of either 10% or 12% and
are due upon the completion of this offering. The proceeds of such note
issuances were used for working capital or to repay debt.
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.
23
<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 April 30, 1998, and the range of high and low
closing bid prices thereafter, as adjusted to give effect to the assumed 1 for
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)................
1997
July 31, 1996.............................................
October 31, 1996..........................................
January 31, 1997..........................................
April 30, 1997............................................
1998
July 31, 1997.............................................
October 31, 1997..........................................
January 31, 1998..........................................
April 30, 1998 (through April , 1998)....................
</TABLE>
On , 1998, the closing bid price of the Common Stock as reported on
the OTC Bulletin Board was $ per share. CSI had approximately holders of
record of Common Stock as of March 31, 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.
24
<PAGE>
DILUTION
As of December 31, 1997, CSI's net tangible book value was a $ million
deficit or $ per share of Common Stock. After giving effect to the sale by
the Combined Company of shares of Common Stock at an assumed offering
price of $ per share and the receipt of the estimated net proceeds thereof,
the GlobalTel Merger and the ITC Acquisition, the pro forma net tangible book
value of the Combined Company as of December 31, 1997 would have been
approximately $ million or $ per share. This represents an immediate
increase in pro forma net tangible book value of $ per share to existing
shareholders and an immediate dilution of $ 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>
Assumed public offering price......................................... $
Net tangible book value (deficit) per share as of December 31,
1997...............................................................
Increase per share of Common Stock attributable to new investors,
the GlobalTel Merger and the ITC Acquisition.......................
Pro forma net tangible book value per share after the offering........ $
----
Dilution per share of Common Stock to new investors................... $
====
Dilution as a percentage of assumed offering price.................... %
====
</TABLE>
The following table summarizes as of December 31, 1997, 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 shares of Common Stock at the assumed
offering price of $ 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)................. % $ % $
New shareholders........ %
------- --------- -------- ----------
Total................... 100.0% $ 100.0%
======= ========= ======== ==========
</TABLE>
- --------
(1) Includes Bridge Shares to be issued immediately prior to the closing of
this offering based on an assumed offering price of $ per share and
shares issued in exchange for rent, services rendered and equipment valued
at $423,000. See "Management," "Description of Securities" and
"Underwriting."
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.
25
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of CSI at
December 31, 1997 and (ii) the Pro Forma As Adjusted capitalization to reflect
the GlobalTel Merger and ITC Acquisition and the sale of the shares of
Common Stock at an assumed public offering price of $ (after deducting
underwriting discounts and commissions and estimated offering expenses).
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------
PRO FORMA
CSI ACTUAL AS ADJUSTED(1)(2)
---------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Current portion of notes payable, bridge
loans and capital leases.................... $2,687 $ 3,144
------ -------
Long-term debt, net of current portion....... -- 4,291
------ -------
Common stock subject to rescission........... -- 2,455
------ -------
Shareholders' equity (deficit):
Preferred stock, no par value; 5,000,000
shares authorized, none issued or
outstanding............................... -- --
Common Stock, no par value; 25,000,000
shares authorized; shares issued and
outstanding, actual; shares issued and
outstanding, pro forma as adjusted........ 2,750 40,311
Obligation to issue common stock............. 795 2,263
Common stock options......................... 37 37
Warrants..................................... -- 2,152
Notes receivable from shareholder............ (35) (35)
Accumulated deficit.......................... (4,351) (9,071)
Treasury stock, at cost...................... (243) (243)
------ -------
Total shareholders' equity (deficit)......... (1,047) 35,414
------ -------
Total capitalization......................... $1,640 $45,304
====== =======
</TABLE>
- --------
(1) Adjusted to reflect the GlobalTel Merger, the ITC Acquisition and the
application of the net proceeds from the sale of Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(2) Does not include the Additional Securities.
26
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND 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 has been derived from CSI's
audited financial statements as of April 30 1996 and 1997 and for each of the
three years in the period ended April 30, 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 periods ended January 31, 1997 and 1998 and the
balance sheet data as of January 31, 1998 have been derived from CSI's
unaudited financial statements. The selected financial data for ITC with
respect to the periods ended December 31, 1996 and January 31, 1998 and the
balance sheet data as of January 31, 1998 have been derived from ITC's
unaudited financial statements. Management believes that CSI's and ITC's
interim financial statements as of January 31, 1998 and for the periods ended
December 31, 1996, January 31, 1997 and 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 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.
<TABLE>
<CAPTION>
HISTORICAL--CSI HISTORICAL--GLOBALTEL
------------------------------------------------ -------------------------
NINE MONTHS 12 MONTHS
12 MONTHS ENDED ENDED ENDED
APRIL 30, JANUARY 31, DECEMBER 31,
------------------------------- --------------- -------------------------
1994 1995 1996 1997 1997 1998 1995 1996 1997
----- ------ ------- ------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
operations data:
Revenue......... $ 137 $1,838 $ 6,741 $11,865 $8,660 $ 8,895 $ 2,113 $ 9,136 $12,862
Cost of
revenue......... 191 1,298 5,963 7,755 5,695 5,394 1,928 8,230 11,171
----- ------ ------- ------- ------ ------- ------- ------- -------
Gross margin.... (54) 540 778 4,110 2,965 3,501 185 906 1,691
Operating
expenses:
Sales and
marketing....... 29 529 1,573 2,080 1,491 1,961 238 682 788
General and
administrative.. 461 625 1,652 2,024 1,326 2,604 1,536 5,773 7,119
Depreciation and
amortization.... 13 19 58 103 71 105 111 98 253
Acquired in-
process research
and
development..... -- -- -- -- -- -- -- -- --
----- ------ ------- ------- ------ ------- ------- ------- -------
Total operating
expenses........ 503 1,173 3,283 4,207 2,888 4,670 1,885 6,553 8,160
----- ------ ------- ------- ------ ------- ------- ------- -------
Income
(loss) from
operations...... (557) (633) (2,505) (97) 77 (1,169) (1,700) (5,647) (6,469)
Interest
expense,
including
amortization of
debt
discounted...... -- -- (19) (162) (114) (348) (34) (225) (1,368)
Other income.... -- -- -- -- -- -- -- -- --
----- ------ ------- ------- ------ ------- ------- ------- -------
Income (loss)
before income
taxes and
extraordinary
item............ (557) (633) (2,524) (259) (37) (1,517) (1,734) (5,872) (7,837)
Income tax
provision
(benefit)....... -- -- -- -- -- -- -- -- --
----- ------ ------- ------- ------ ------- ------- ------- -------
Income (loss)
before
extraordinary
item............ (557) (633) (2,524) (259) (37) (1,517) (1,734) (5,872) (7,837)
Extraordinary
item--gain
on extinguishment of
debt............ -- -- -- -- -- 747 -- -- --
----- ------ ------- ------- ------ ------- ------- ------- -------
Net income
(loss).......... $(557) $ (633) $(2,524) $ (259) $ (37) $ (770) $(1,734) $(5,872) $(7,837)
===== ====== ======= ======= ====== ======= ======= ======= =======
Series A
convertible
preferred stock
dividends....... -- -- -- -- -- -- -- -- (39)
----- ------ ------- ------- ------ ------- ------- ------- -------
Net income
(loss)
applicable to
common
shareholders.... $(557) $ (633) $(2,524) $ (259) $ (37) $ (770) $(1,734) $(5,872) $(7,876)
===== ====== ======= ======= ====== ======= ======= ======= =======
EBITDA.......... $(544) $ (614) $(2,447) $ 6 $ 148 $(1,064) $(1,589) $(5,549) $(6,216)
===== ====== ======= ======= ====== ======= ======= ======= =======
Basic loss per
share (excluding
extraordinary
item)...........
===== ====== ======= ======= ====== ======= ======= ======= =======
Weighted average
number of shares
outstanding.....
===== ====== ======= ======= ====== ======= ======= ======= =======
<CAPTION>
HISTORICAL--ITC
----------------------------------------------------
PRO FORMA
12 MONTHS 10 MONTHS THREE MONTHS ENDED AS ADJUSTED
ENDED ENDED ------------------------ 12 MONTHS ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31, JANUARY 31, DECEMBER 31,
--------------- ----------- ------------ ----------- ---------------
1995 1996 1997 1996 1998 1997
------- ------- ----------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Statement of
operations data:
Revenue......... $8,197 $7,603 $8,054 $1,942 $2,849 $ 35,261
Cost of
revenue......... 5,407 5,070 6,790 1,274 2,194 28,094
------- ------- ----------- ------------ ----------- ---------------
Gross margin.... 2,790 2,533 1,264 668 655 7,167
Operating
expenses:
Sales and
marketing....... 1,220 1,099 715 210 244 3,520
General and
administrative.. 1,149 1,446 1,388 494 476 11,789
Depreciation and
amortization.... 53 69 73 22 29 9,610
Acquired in-
process research
and
development..... -- -- -- -- -- 3,475
------- ------- ----------- ------------ ----------- ---------------
Total operating
expenses........ 2,422 2,614 2,176 726 749 28,394
------- ------- ----------- ------------ ----------- ---------------
Income
(loss) from operations.. 368 (81) (912) (58) (94) (21,227)
Interest expense, including
amortization of
debt
discounted...... (11) (21) (57) (5) (15) (702)
Other income.... 8 113 119 7 12 --
------- ------- ----------- ------------ ----------- ---------------
Income (loss)
before income
taxes and
extraordinary
item............ 365 11 (850) (56) (97) (21,929)
Income tax
provision
(benefit)....... 21 4 -- -- -- (2,437)
------- ------- ----------- ------------ ----------- ---------------
Income (loss)
before
extraordinary
item............ 344 7 (850) (56) (97) (19,492)
Extraordinary
item--gain
on extinguishment of
debt............ -- -- -- -- -- --
------- ------- ----------- ------------ ----------- ---------------
Net income
(loss).......... $ 344 $ 7 $ (850) $ (56) $ (97) $(19,492)
======= ======= =========== ============ =========== ===============
Series A
convertible
preferred stock
dividends....... -- -- -- -- -- --
------- ------- ----------- ------------ ----------- ---------------
Net income
(loss)
applicable to
common
shareholders.... $ 344 $ 7 $ (850) $ (56) $ (97) $(19,492)
======= ======= =========== ============ =========== ===============
EBITDA.......... $ 429 $ 101 $ (720) $ (29) $ (53) $ (8,142)
======= ======= =========== ============ =========== ===============
Basic loss per
share (excluding
extraordinary
item)...........
======= ======= =========== ============ =========== ===============
Weighted average
number of shares
outstanding.....
======= ======= =========== ============ =========== ===============
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL--
HISTORICAL--CSI GLOBALTEL HISTORICAL--ITC PRO FORMA
--------------------------------------- -------------- ------------------------------------ AS ADJUSTED
APRIL 30, JANUARY 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, JANUARY 31, DECEMBER 31,
-------------------------- ----------- -------------- ------------ ----------- ----------- ------------
1994 1995 1996 1997 1998 1996 1997 1996 1997 1998 1997
---- ---- ------ ------ ----------- ------ ------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA:
Cash............ $ 7 $ 82 $ 57 $ 147 $ 566 $ 446 $ 849 $ 218 $ 848 $ 978 $21,761
Working capital
(deficit)....... (114) (288) (2,153) (2,331) (2,977) (5,248) (4,934) (383) (1,259) (1,402) 13,364
Total assets.... 161 459 1,519 1,946 2,943 3,701 4,354 1,956 2,720 3,338 57,223
Long-term debt,
net of current
maturities and
debt discount... -- -- -- -- -- 2,283 3,832 21 292 227 4,291
Common stock
subject to
rescission...... -- -- -- -- -- 1,519 2,455 -- -- -- 2,455
Total
shareholders'
equity
(deficit)....... (42) (182) (1,856) (1,669) (1,455) (7,565) (8,534) 69 (781) (878) 35,414
</TABLE>
27
<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 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."
28
<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 December 1997, the Combined Company's aggregate
minimum monthly commitments were approximately $550,000, which represented
approximately 23.5% 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.
29
<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 4.2%
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 $28.1 million for the 12 months ended December 31,
1995, 1996 and 1997, respectively. As a percent of revenue, these costs were
74.3%, 76.8% and 79.7% 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 $3.5 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 10.0% 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 $11.8 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
30
<PAGE>
terminated public offering and $447,000 of non-cash compensation cost. As a
percent of revenue, general and administrative expense was 24.0%, 34.4% and
33.4% 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 1.4%, .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 $1.4 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,
$6.7 million and $8.0 million for the 12 months ended December 31, 1995, 1996
and 1997, respectively. As a percentage of revenue, negative EBITDA was 15.8%,
24.7% and 22.6% 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 $8.8
million at December 31, 1997. 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
31
<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" ("Statements 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.
32
<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>
YEAR ENDED NINE MONTHS ENDED
APRIL 30, JANUARY 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.............. 70.6 88.5 65.4 65.8 60.6
----- ----- ----- -------- --------
Gross margin................. 29.4 11.5 34.6 34.2 39.4
Operating expenses:
Sales and marketing........ 28.8 23.3 17.5 17.2 22.1
General and administra-
tive...................... 34.0 24.5 17.0 15.3 29.2
Depreciation and amortiza-
tion...................... 1.0 0.9 0.9 0.8 1.2
----- ----- ----- -------- --------
Total operating expenses..... 63.8 48.7 35.4 33.3 52.5
----- ----- ----- -------- --------
Income (loss) from opera-
tions....................... (34.4) (37.2) (0.8) 0.9 (13.1)
Interest expense, including
amortization of debt dis-
count....................... 0.0 (0.3) (1.4) (1.3) (3.9)
----- ----- ----- -------- --------
Net income (loss) before ex-
traordinary item............ (34.4) (37.5) (2.2) (0.4) (17.0)
Extraordinary item........... -- -- -- -- 8.4
----- ----- ----- -------- --------
Net income (loss)............ (34.4)% (37.5)% (2.2)% (0.4)% (8.6)%
===== ===== ===== ======== ========
</TABLE>
COMPARISON OF NINE MONTHS ENDED JANUARY 31, 1997 AND 1998
Revenue increased $235,000 or 2.7% from approximately $8.7 million for the
nine months ended January 31, 1997 to $8.9 million for the nine months ended
January 31, 1998. Revenue decreased $606,000 or 19.4% from approximately $3.1
million for the third quarter of fiscal 1997 to approximately $2.5 million
during the third quarter of fiscal 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 decreased $301,000 or 5.3% from approximately $5.7
million in the nine months ended January 31, 1997 to approximately $5.4
million for the nine months ended January 31, 1998. As a percentage of
revenue, these costs decreased from 65.8% to 60.6% for the nine months ended
January 31, 1997 and 1998, respectively. As of March 1997, CSI had new
contractual commitments with Sprint reflecting more favorable rates that
resulted in improved gross margins during the nine months ended January 31,
1998.
Sales and marketing expense increased $471,000 or 31.6% from $1.5 million
for the nine months ended January 31, 1997 to $2.0 million for the nine months
ended January 31, 1998. As a percentage of revenue, these costs increased from
17.2% to 22.1% for the nine months ended January 31, 1997 and 1998,
respectively. The increase in absolute dollars was due in part to an increase
in independent sales agent commissions caused by the increase in revenue and
advertising expense and additional in-house sales personnel, while the
increase as a percentage of revenue was due primarily to an increase in
advertising expense and hiring of additional in-house sales personnel.
General and administrative expense increased $1.3 million or 96.3% from $1.3
million for the nine months ended January 31, 1997 to $2.6 million for the
nine months ended January 31, 1998. As a percentage of revenue, these costs
increased from 15.3% to 29.2% for the nine months ended January 31, 1997 and
1998, respectively. The significant increase in expenses is the result of CSI
building its administrative infrastructure during fiscal 1998 in anticipation
of significant growth. These expenses included costs associated with
relocating personnel and integrating operations with ITC's operations in Ft.
Lauderdale, Florida, costs associated with terminating former members of
senior management and hiring experienced executive management, and costs
associated with
33
<PAGE>
adding additional customer support and administrative personnel to support the
growth of CSI's operations. CSI also increased its reserve for bad debt by
$350,000, which was primarily associated with a receivable owed by a former
independent sales agent. CSI has implemented internal control procedures to
mitigate the risk of significant loss in the future from individual
independent sales agents. CSI continues to vigorously pursue the collections
of all bad debt expenses from former customers and independent sales agents.
Depreciation and amortization expense increased $34,000 or 48.4% from
approximately $71,000 for the nine months ended January 31, 1997 to
approximately $105,000 for the nine months ended January 31, 1998. These costs
increased primarily as a result of CSI's higher fixed asset base during the
nine months ended January 31, 1998 as compared with the nine months ended
January 31, 1997.
Interest and debt discount expense increased $234,000, or 205% from
approximately $114,000 for the nine months ended January 31, 1997 to
approximately $348,000 for the nine months ended January 31, 1998. These
expenses primarily represent 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.
CSI did not record an income tax expense or benefit for the nine months
ended January 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.
CSI had a net loss of approximately $37,000 for the nine months ended
January 31, 1997 compared to a net loss before extraordinary item of
approximately $1.5 million for the nine months ended January 31, 1998. The
increase in net loss before extraordinary items was due primarily to the
significant increase in general and administrative expense and debt financing
costs.
CSI recorded an extraordinary gain on extinguishment of debt totaling
$747,000, net of related expense, associated with the early repayment of notes
from proceeds of the December 1997 Financing.
CSI had a net loss of $37,000 for the nine months ended January 31, 1997
compared to a net loss of $770,000 for the nine months ended January 31, 1998.
The increase in net loss was due primarily to the significant increase in
general and administrative expense and debt financing costs partially offset
by the gain on extinguishment of debt.
CSI had basic loss per share of $ for the nine months ended January 31,
1997 compared to basic loss per share of $ for the nine months ended
January 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 positive EBITDA of $148,000 for the nine months ended January 31,
1997 compared to negative EBITDA of $1.1 million for the nine months ended
January 31, 1998. The decrease in EBITDA was primarily due to the increase in
general and administrative expenses.
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 expenses increased $507,000 or 32.3% 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
34
<PAGE>
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 17.1% 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 78.0% 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 $2.4 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 $ for fiscal 1996 compared to basic loss
per share of $ for fiscal 1997. The decrease in basic loss per share was
due primarily to CSI's obtaining more favorable carrier rates and increases in
customer volumes as well as an increase in the weighted average number of
shares outstanding.
CSI had negative EBITDA of $2.5 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 197.2% 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 164.6% from
$624,000 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.
35
<PAGE>
Depreciation and amortization expense increased $39,000 or 202.7% from
approximately $19,000 for fiscal 1995 to approximately $58,000 for fiscal
1996. These expenses increased primarily as a result of CSI's higher fixed
asset base in fiscal 1996 which was principally due to investments in
telecommunications equipment, infrastructure and facility expansion.
Interest expense was approximately $19,000 for fiscal 1996 and was a nominal
amount in fiscal 1995. Interest expense was due primarily to the issuance of
notes payable to satisfy carrier obligations.
CSI did not record an income tax benefit in either fiscal 1995 or fiscal
1996 but recorded valuation allowances to offset the deferred tax asset due to
the uncertainty of the ultimate realization of the net operating loss
carryforwards.
The net loss increased from $633,000 for fiscal 1995 to $2.5 million for
fiscal 1996. The increase in net loss was primarily due to CSI's unfavorable
carrier rates and significant increase in operating expenses.
CSI had basic loss per share of $ for fiscal 1996 compared to basic loss
per share of $ for fiscal 1995. 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
seven quarters ended January 31, 1998. This quarterly information has been
derived from CSI's unaudited financial statements which, in the opinion of
CSI's management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information for the
periods presented. Operating results for any one quarter are not necessarily
indicative of the results that may be expected in any future period.
CSI's quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future as a result of a variety of factors,
some of which are outside CSI's control. These factors include demand for
international telecommunications services, capital expenditures and other
costs relating to the expansion of operations, the timing of new service
introductions by CSI or its competitors, market availability and acceptance of
new and enhanced versions of CSI's or its competitors' services, changes in
the mix of revenue, rates of customer acquisition and retention and general
economic conditions.
<TABLE>
<CAPTION>
FISCAL 1997 QUARTER ENDED FISCAL 1998 QUARTER ENDED
--------------------------------------- ------------------------------
JULY 31 OCTOBER 31 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
------- ---------- ---------- -------- ------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $2,579 $2,952 $3,129 $3,205 $3,370 $3,002 $2,523
Cost of revenue......... 1,675 1,933 2,086 2,061 2,023 1,784 1,587
------ ------ ------ ------ ------ ------ ------
Gross margin............ 904 1,019 1,043 1,144 1,347 1,218 936
------ ------ ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing.... 447 496 548 589 654 616 691
General and
administrative........ 388 455 484 697 798 918 888
Depreciation and
amortization.......... 19 23 28 33 33 35 37
------ ------ ------ ------ ------ ------ ------
Total operating
expenses............... 854 974 1,060 1,319 1,485 1,569 1,616
------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations............. 50 45 (17) (175) (138) (351) (680)
Interest expense........ (40) (36) (38) (48) (47) (42) (259)
------ ------ ------ ------ ------ ------ ------
Net income (loss) before
extraordinary item..... 10 9 (55) (223) (185) (393) (939)
Extraordinary item...... -- -- -- -- -- -- 747
------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $ 10 $ 9 $ (55) $ (223) $ (185) $ (393) $ (192)
====== ====== ====== ====== ====== ====== ======
</TABLE>
36
<PAGE>
CSI experienced declining revenue in the quarters ended October 31, 1997 and
January 1, 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 and January 31, 1998, due to unpaid
receivables owed by a former independent sales agent. Interest expense
increased significantly during the quarter ended January 31, 1998, primarily
to non-cash financing activities in the quarter. CSI also recognized gain on
extinguishment of debt during the quarter ended January 31, 1998 related to
the repayment of notes using the proceeds of the December 1997 Financing.
LIQUIDITY AND CAPITAL RESOURCES
CSI's capital resources have been used to fund operating losses, debt
service and capital expenditures associated with development of its customer
base and the establishment and upgrade of its network infrastructure. Since
its inception, CSI has experienced net losses and negative cash flow from
operations. As of January 31, 1998, CSI had a working capital deficit of
approximately $3.0 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 January 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 $400,000. 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 used in operating activities was approximately $882,000 for the
nine months ended January 31, 1998, as compared to cash provided by operating
activities of approximately $473,000 for the nine months ended January 31,
1997. Adjustments to the $770,000 net loss for the period to reconcile to net
cash used in operating
37
<PAGE>
activities consisted primarily of a $747,000 extraordinary gain on
extinguishment of debt, $208,000 in amortized costs associated with the
December 1997 Financing and $105,000 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 $362,000 for the nine months ended January 31,
1998, compared to approximately $167,000 for the nine months ended January 31,
1997. The increase was primarily due to acquisition deposits paid to ITC. Net
cash provided by financing activities was approximately $1.7 million for the
nine months ended January 31, 1998, compared to cash used in financing
activities of approximately $314,000 for the nine months ended January 31,
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.
38
<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,
---------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Revenue............................................ 100.0% 100.0% 100.0%
Cost of revenue.................................... 91.3 90.1 86.9
----- ----- -----
Gross margin....................................... 8.7 9.9 13.1
Operating expenses:
Sales and marketing.............................. 11.3 7.5 6.1
General and administrative....................... 72.7 63.1 55.3
Depreciation and amortization.................... 5.2 1.1 2.0
----- ----- -----
Total operating expenses........................... 89.2 71.7 63.4
----- ----- -----
Loss from operations............................... (80.5) (61.8) (50.3)
Interest expense, including amortization of debt
discount.......................................... (1.6) (2.5) (10.6)
----- ----- -----
Net loss........................................... (82.1)% (64.3)% (60.9)%
===== ===== =====
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1997
Revenue increased $3.8 million or 41.7% from $9.1 million in 1996 to $12.9
million in 1997. Revenue from call-reorigination increased $262,000 or 3.1%
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 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% to $788,000 in 1997
from $682,000 in 1996. 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 22.4% 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.
39
<PAGE>
Depreciation and amortization increased $155,000 or 158.2% 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 $ for 1996 and basic loss per share
of 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 333.3% 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.
Cost of revenue increased $6.3 million or 331.6% 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% 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 $4.3 million or 286.7% 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
40
<PAGE>
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 11.8% 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 561.8% 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 $ for 1995 compared to basic loss
per share of $ 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.
<TABLE>
<CAPTION>
1996 QUARTER ENDED 1997 QUARTER ENDED
------------------------------------ ------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- ------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <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
Cost of revenue......... 1,520 1,753 1,882 3,075 3,811 2,992 2,204 2,164
------- ------- ------- ------- ------- ------- ------- -------
Gross margin............ (13) 295 393 231 574 597 461 59
Operating expenses:
Sales and marketing.... 122 199 173 188 226 229 209 124
General and
administrative........ 1,087 1,538 1,470 1,678 1,411 1,497 1,750 2,461
Depreciation and
amortization.......... 22 24 40 12 18 59 65 111
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 1,231 1,761 1,683 1,878 1,655 1,785 2,024 2,696
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (1,244) (1,466) (1,290) (1,647) (1,081) (1,188) (1,563) (2,637)
Interest expense,
including amortization
of debt discount....... (20) (21) (62) (122) (169) (240) (178) (781)
------- ------- ------- ------- ------- ------- ------- -------
Net loss................ $(1,264) $(1,487) $(1,352) $(1,769) $(1,250) $(1,428) $(1,741) $(3,418)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
41
<PAGE>
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, and December 31, 1997. This decline was primarily a result
of GlobalTel's decision in May 1997 to temporarily de-emphasize its carrier
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
$473,000 in the quarter ended December 31, 1997. 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. 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.
GlobalTel also experienced an increase in cost of revenue as a percentage of
revenue in the quarter 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. General
and administrative expense increased in the quarter ending December 31, 1997
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, 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 December 31, 1997, GlobalTel had a working capital
deficit of approximately $4.9 million. Through December 31, 1997, 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, $5.2 million in net
borrowings from shareholders and others represented by promissory notes (the
"Notes"), as well as revenue from operations. See "Certain Transactions." At
December 31, 1997, Notes aggregating approximately $7.0 million remained
outstanding, of which $1.8 million will mature prior to December 31, 1998.
Substantially all of the Notes accrue interest at the rate of 10% per annum,
increasing to 12% when the Notes become past due. Notes outstanding at
December 31, 1997, with an aggregate principal amount of $2.7 million are
convertible at the option of the holders into an aggregate of shares
of
42
<PAGE>
Common Stock, assuming an initial public offering price of $ per share.
Warrants to purchase an aggregate of shares of Common Stock were
issued in connection with the issuance of the Notes, all of which remained
outstanding at December 31, 1997. Also, in September 1997, deferred salaries
aggregating $1.2 million were converted into warrants to purchase 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 shares of Common Stock at an exercise price of $ 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.
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, as 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, as 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 $3.1 million
increase in trade accounts payable, accrued liabilities and notes payable. Net
cash used in investing activities was $688,000 for 1996, as 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, as 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.
43
<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 and the three months ended December 31, 1996 is
not directly comparable to the three months ended January 31, 1998. 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>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------- TEN MONTHS ENDED ----------------------------------
1995 1996 OCTOBER 31, 1997 DECEMBER 31, 1996 JANUARY 31, 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 65.6 77.0
----------- ----------- ------ ----- -----
Gross margin.................. 34.1 33.3 15.7 34.4 23.0
Operating expenses:
Sales and marketing......... 14.9 14.5 8.9 10.8 8.6
General and administrative.. 14.7 19.0 17.2 25.4 16.7
Depreciation................ 0.6 0.9 0.9 1.2 1.0
----------- ----------- ------ ----- -----
Total operating expenses...... 30.2 34.4 27.0 37.4 26.3
----------- ----------- ------ ----- -----
Income (loss) from opera-
tions........................ 3.9 (1.1) (11.3) (3.0) (3.3)
Interest and other income
(expense).................... 0.0 1.2 0.7 0.1 (0.1)
----------- ----------- ------ ----- -----
Income (loss) before taxes.... 3.9 0.1 (10.6) (2.9) (3.4)
Income tax expense............ 0.3 0.0 0.0 0.0 0.0
----------- ----------- ------ ----- -----
Net income (loss)............. 3.6% 0.1% (10.6)% (2.9)% (3.4)%
=========== =========== ====== ===== =====
</TABLE>
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1996 TO THE THREE MONTHS ENDED
JANUARY 31, 1998
Revenue increased $907,000 or 46.7% from approximately $1.9 million for the
three months ended December 31, 1996 to approximately $2.8 million for the
three months ended January 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 $920,000 or 72.2% from approximately $1.3 million
for the three months ended December 31, 1996 to approximately $2.2 million for
the three months ended January 31, 1998. As a percentage of revenue, these
costs increased from 65.6% to 77.0% for the periods ended December 31, 1996
and January 31, 1998, respectively. The increase in cost of revenue is due to
an increase in transmission costs directly related to usage. 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 margins.
Sales and marketing expense increased $34,000 or 16.2% from approximately
$210,000 for the three months ended December 31, 1996 to approximately
$244,000 for the three months ended January 31, 1998. As a percentage of
revenue, sales and marketing expense decreased from 10.8% to 8.6% for the
periods ended December 31, 1996 and January 31, 1998, respectively. The
decrease was due primarily to higher levels of carrier and reseller sales not
requiring advertising and sales commissions.
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General and administrative expense decreased $18,000 or 3.6% from $494,000
for the three months ended December 31, 1996 to $476,000 for the three months
ended January 31, 1998. The decrease in these costs was due primarily to lower
officers' compensation.
Depreciation expense increased $7,000 or 31.8% from approximately $22,000
for the three months ended December 31, 1996 to approximately $29,000 for the
three months ended January 31, 1998. These costs increased primarily as a
result of ITC's higher fixed asset base during the three months ended January
31, 1998.
Interest expense increased $10,000 or 200.0% from approximately $5,000 for
the three months ended December 31, 1996 to approximately $15,000 for the
three months ended January 31, 1998. The increase in interest expense was due
primarily to a capital lease obligation incurred to acquire telecommunications
equipment.
ITC did not record an income tax benefit for the three months ended January
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. ITC recorded an income tax expense of $4,000 for the year ended
December 31, 1996.
ITC reported a net loss of approximately $97,000 for the three months ended
January 31, 1998 compared to net loss of approximately $56,000 for the three
months ended December 31, 1996.
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
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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 $205,000 for the
three months ended January 31, 1998, compared to cash used in operating
activities of approximately $143,000 for the three months ended December 31,
1996. The increase in cash provided by operating activities was due primarily
to the increase in accounts payable and a payable due to CSI under the
Reciprocal Telecommunications Agreement, net of an increase in trade
receivables related primarily to an increase in revenue from the comparable
period in 1996. Net cash used in investing activities totaling $10,000 during
the three months ended January 31, 1998 was due primarily to additional
equipment purchases. Net cash used in financing activities totaling $65,000
during the three months ended January 31, 1998 was due to payments on capital
lease obligations.
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 Nike Inc., 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 Chile, Korea, Australia and the Ukraine 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-
ices "Turnkey Business ISP"
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 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 January 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--Overview."
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>
Nike, Inc. Holiday Inn Hotels(11) U.S. Embassy in Chile
Microsoft Corporation InterContinental Hotel U.S. Embassy in Korea
Mitsubishi Corporation Copacabana Palace U.S. Embassy in Australia
Chrysler International Marina Hotel U.S. Embassy in Ukraine
Warner-Lambert Corporation Caesar Park Hotel UN Consulate in South Africa
Diners Club International
DHL Aviation
Wal-Mart Stores, Inc.
Citibank, N.A.
Bank of Tokyo
Royal Bank of Canada
</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 $550,000, which represent
approximately 23.5% of the Combined Company's average monthly cost of revenue
for the 12 months ended December 31, 1997. 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 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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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 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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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 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
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------- UNDERLYING ALL OTHER
NAME AND POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
----------------- ---- ------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert A. Spade
Vice-Chairman and Chief Executive
Officer.......................... 1997 $90,374
1996 67,500
1995 41,000
</TABLE>
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Option Grants Table
The following table contains information concerning stock option grants made
to the Named Executive Officer during the year ended December 31, 1997. See
"--Stock Option Plan" for information relating to vesting and exercise terms.
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE
SECURITIES OPTIONS EXERCISE VALUE AT ASSUMED
UNDERLYING GRANTED TO PRICE ANNUAL RATES OF STOCK
OPTIONS EMPLOYEES PER EXPIRATION PRICE APPRECIATION FOR
NAME GRANTED IN 1997 SHARE DATE OPTION TERMS(1)
---- ---------- ---------- -------- ---------- -----------------------
5% 10%
----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Spade......... 20.1 8/29/07
</TABLE>
- --------
(1) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Combined Company's estimate or
projection of the future Common Stock price. Actual gains, if any, on
stock option exercises are dependent on the future financial performance
of the Combined Company, overall market conditions and the option holders'
continued employment through the vesting period.
Option Values. The following table contains information concerning options
to purchase Common Stock held by the Named Executive Officer as of December
31, 1997. The Named Executive Officer did not exercise any stock options
during 1997.
1997 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 (#) DECEMBER 31, 1997 ($) (1)
------------------------------------ -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert A. Spade......... -- -- --
</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.
71
<PAGE>
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 $150,000, $140,000 and $110,000 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 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
3,000,000 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 January 31, 1998,
Non-Qualified Stock Options to purchase up to shares of Common Stock have
been granted under the Stock Option Plan. No Incentive Stock Options have been
granted under the Stock Option Plan.
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.
72
<PAGE>
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.
73
<PAGE>
PRINCIPAL 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, and (iii) 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
OWNED PRIOR TO OFFERING PERCENTAGE
-------------------------- OWNED AFTER
NAME AND ADDRESS NUMBER(1) PERCENT OFFERING
---------------- ------------ ----------- -----------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Ronald P. Erickson(2)................
Robert A. Spade(3)...................
Patrick R. Scanlon(4)................
Daniel R. Hudspeth...................
Philip A. Thomas(5)..................
Dean H. Cary(6)......................
71 Burnwood Lane
Upper Saddle River, NJ 07458
Richard F. Nipert(7).................
1140 Grant Street, Suite 100
Denver, CO 80203
Charles A. Shields...................
Bruce L. Crockett(8).................
Lyman C. Hamilton....................
Michael S. Brownfield(9).............
All directors and executive officers
as a group (11 persons)(10).........
OTHER SHAREHOLDERS:
James L. Williams(11)................
123 Vientos Road
Camarillo, CA 93010
Steven S.V. Wong(12).................
20 Queen Astrid Park
Singapore 266824
DuPont Ltd.(13)......................
20 Queen Astrid Park
Singapore 266824
PBIG-GTR Partners L.P.(14)...........
</TABLE>
- --------
* Less than 1%.
(1) Shares outstanding before offering include Bridge Shares to be issued
immediately prior to this offering and shares of Common Stock issued
in connection with the GlobalTel Merger.
(2) Includes shares of Common Stock issuable upon conversion of
outstanding warrants, shares of Common Stock issuable upon the
cashless conversion of outstanding warrants, shares of Common Stock
issuable upon exercise of options, and shares of Common Stock held by
North
74
<PAGE>
Willow Family L.P., a limited partnership in which Mr. Erickson and his two
daughters are partners. See "Certain Transactions."
<TABLE>
<CAPTION>
<C> <S>
(3) Includes shares held of record by Mr. Spade or his spouse and
shares are issuable upon exercise of options held by Mr. Spade.
(4) Includes shares issuable upon exercise of options.
(5) Excludes shares Mr. Thomas will receive on the first anniversary of
the closing of this offering in connection with the ITC Acquisition.
(6) Includes shares issuable upon exercise of options.
(7) Includes shares issuable upon exercise of options.
(8) Includes 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."
(9) Includes shares of Common Stock issuable upon exercise of outstanding
warrants, shares of Common Stock issuable upon exercise of options,
shares of Common Stock issuable upon the closing of the offering in
connection with a GlobalTel Full Coverage Note in the principal amount of
$25,000 and shares of Common Stock issuable upon conversion of a
promissory note in the principal amount of $150,000, plus accrued
interest as of January 31, 1998. See "Certain Transactions."
(10) Includes shares issuable upon exercise of options.
(11) Includes shares issuable upon exercise of warrants.
(12) Includes shares of Common Stock issuable upon exercise of options,
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, shares of Common Stock
issuable upon the cashless conversion of outstanding warrants held by
Dupont Ltd., shares of Common Stock issuable upon the cashless
conversion of outstanding warrants held by Trans-Pacific Consultants Pte
Ltd., shares of Common Stock issuable upon the cashless conversion of
outstanding warrants held by Gereg Capital Corporation and shares of
Common Stock held by Gereg Capital Corporation. Also includes shares
of Common Stock issuable upon conversion of $1,000,000 in principal, plus
accrued interest as of January 31, 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.
(13) Includes shares of Common Stock issuable upon the cashless conversion
of outstanding warrants and shares of Common Stock issuable upon
conversion of a $1,000,000 in principal, plus accrued interest as of
January 31, 1998, pursuant to a promissory note held by Dupont Ltd. See
"Certain Transactions."
(14) Includes shares of Common Stock issuable upon exercise of outstanding
warrants, shares of Common Stock issuable upon the cashless conversion
of outstanding warrants and 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 January 31, 1998. See
"Certain Transactions." PBIG-GTR Partners is controlled by Kenneth Huang.
Mr. Huang's address is 20987 Fairwoods Drive, Cupertino, CA 90541.
</TABLE>
75
<PAGE>
CERTAIN TRANSACTIONS
CSI
Effective September 14, 1995, Redden Dynamics, Inc. ("Redden") was merged
with and into CSI. Shareholders of Redden received a total of 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 shares of Common Stock. Immediately after
the merger, Mr. Spade transferred shares of such Common Stock to 21
persons, including Mr. Nipert ( shares) and Mr. Scanlon ( 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 January 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 shares of Common Stock and granted options to
purchase shares of Common Stock at $ 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 and shares of Common Stock respectively, in the
WIN transaction. The Common Stock was valued at $ 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 shares of Common Stock at $ 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 $ to $ per share.
In October 1997, CSI incurred an obligation to pay $50,000 and in January
1998 granted options to purchase shares of Common Stock at an exercise price
of $ 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 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 warrants; Charles A. Shields (and his wife Mary Jo
Shields), who was issued a $50,000 10% Note and granted warrants; Dean H.
Cary, who was issued a $100,000 10% Note and granted warrants. James L.
Williams, was also issued a $40,000 10% Note and granted warrants.
76
<PAGE>
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.
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 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 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 director and former Senior Vice President of
GlobalTel, were the sole partners, was issued shares of GlobalTel
common stock. In connection with the acquisition, GlobalTel also agreed to
issue to each of Messrs. Burtscher and Krentzman shares of GlobalTel
common stock, and to grant Mr. Erickson an option to purchase 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 shares of GlobalTel common stock. Concurrently
therewith, GlobalTel sold to Mr. Brownfield shares of GlobalTel common
stock for a purchase price of $ per share and granted Mr. Brownfield a
warrant to purchase shares of GlobalTel common stock at an exercise
price of $ per share.
In November 1995, Gereg Capital Corporation ("Gereg") purchased
shares of GlobalTel common stock from GlobalTel for a purchase price of $
per share. In consideration of this purchase of GlobalTel common stock,
GlobalTel granted Gereg a warrant to purchase shares of GlobalTel
common stock. The warrant has an exercise price of $ per share and expires
on December 29, 1998. Stephen S.V. Wong, a 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 purchase shares of
GlobalTel common stock, and will grant additional warrants if GlobalTel
reaches certain revenue targets. The warrants all have an exercise price of
$ 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).
77
<PAGE>
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>
- --------
<TABLE>
<CAPTION>
<C> <S>
(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 maturing upon closing of the offering.
(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 May 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.
</TABLE>
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 ISSUE
NAME SHARES DATE EXERCISE PRICE EXPIRATION DATE
---- ------------------ ----- -------------- ---------------
<S> <C> <C> <C> <C>
Michael S. Brownfield.......................
Ronald P. Erickson..........................
ITEX Capital Corporation....................
Gereg Capital Corporation...................
Dupont Ltd..................................
Trans-Pacific Consultants Pte. Ltd..........
PBIG-GTR Partners, L.P......................
</TABLE>
78
<PAGE>
The following table shows the amounts outstanding under GlobalTel notes to
the foregoing persons as of March 31, 1998 and the amounts that will be
outstanding after giving effect to the application of the net proceeds of this
offering. See "Use of Proceeds."
<TABLE>
<CAPTION>
OUTSTANDING
PRINCIPAL AMOUNT
-------------------
BEFORE AFTER
NAME OFFERING OFFERING
---- ---------- --------
<S> <C> <C>
Michael S. Brownfield....................................... $ 410,000 $150,000
Ronald P. Erickson.......................................... 0 0
ITEX Corporation............................................ 200,000 0
Gereg Capital Corporation................................... 0 0
Dupont Ltd.................................................. 2,000,000 0
Trans-Pacific Consultants Pte. Ltd.......................... 0 0
PBIG-GTR Partners, L.P...................................... 1,070,000 0
</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.
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 shares of Common Stock based on an assumed
initial offering price of $ 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 "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 shares of Common
Stock from CSI at various times from April 1993 to December 1994 at prices
ranging from $ per share to $ per share.
79
<PAGE>
Mr. Williams purchased shares of Common Stock from CSI at various times
from April 1993 to June 1995 at prices ranging from $ to $ per share.
Mr. Williams also acquired 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 shares of Common Stock at $ 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 shares of Common Stock at an exercise price of $ per share. In
October 1997, Mr. Williams purchased shares of Common Stock for $ 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.
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."
80
<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, 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, 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 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 Bridge Shares upon the closing of this offering,
based on a $ 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 January 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 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.
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 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 Convertible Notes. As of January 31, 1998, promissory notes issued
by GlobalTel in the aggregate principal amount of $2.7 million convertible
into an aggregate of approximately shares of GlobalTel common stock were
outstanding. The notes generally bear interest at a rate of 10% per annum, are
for a term of 12 or 18 months and are convertible into GlobalTel common stock
under certain circumstances.
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 upon the closing of this offering. In addition to repayment of principal
and interest, note holders will receive a total of shares of Common Stock
upon the closing of the GlobalTel Merger. If the offering is not completed by
July 1, 1998, noteholders have the right to receive warrants to purchase
shares of common stock equal to the principal amount of the note divided by
$ , in lieu of the shares of common stock to be issuable upon closing of the
GlobalTel Merger, warrants equal to the principal amount of the note divided
by $ . These warrants will have an exercise price of $ per share and will
expire three years from the date of grant.
REGISTRATION RIGHTS
CSI has agreed to grant to two holders of 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 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
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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.
Following the closing of the GlobalTel Merger, the holders of approximately
shares of outstanding Common Stock and Common Stock issued upon conversion
or exercise of certain of GlobalTel's outstanding securities will be entitled
to certain rights with respect to the registration of such shares under the
Securities Act.
TRANSFER AGENT
The transfer agent and registrar for CSI's Common Stock is American
Securities Transfer & Trust, Inc.
RESCISSION OFFER
Immediately after the closing of this offering, 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 shares of Common Stock, of which and shares were
issued at $ and $ per share, respectively (the "Cash Rescission
Stock");
(ii) an aggregate of shares of Common Stock (the "1995 Rescission Stock")
which were issued to one individual at $ per share, together with a
warrant to purchase approximately shares of Common Stock;
(iii) an aggregate of shares of Common Stock (the "Converted Note
Rescission Stock") issued upon conversion of promissory notes, together
with warrants to purchase an aggregate of approximately shares of
Common Stock delivered in conjunction with the issuance of such
promissory notes;
(iv) $350,000 in aggregate principal amount of promissory notes (the
"Rescission Notes"), together with warrants to purchase an aggregate of
approximately shares of Common Stock; and
(v) an aggregate of shares of Common Stock (the "Converted Warrants
Rescission Stock") to be issued upon the closing of this offering upon
conversion of certain warrants (the "Converted Warrants").
The Converted Warrants were originally issued to certain individuals in
conjunction with promissory notes that were subsequently converted (together
with accrued interest thereon) into shares of Converted Note Rescission Stock.
The Cash Rescission Stock, 1995 Rescission Stock, Converted Note Rescission
Stock and Converted Warrants Rescission Stock are hereinafter collectively
referred to as the "Rescission Stock." The Converted Warrants, together with
the warrants delivered in connection with the 1995 Rescission Stock, Converted
Note 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." Following this offering the Combined Company
intends to refile a registration statement previously filed by GlobalTel
relating to the Rescission Offer.
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 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 price paid for the Cash Rescission Stock
is $ per share with respect to shares and $ per share with respect to
shares, for an aggregate price of $1.0 million. The price
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paid for the 1995 Rescission Stock is $ 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 $350,000. 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 $3.2 million, plus the
aggregate amount of any additional interest thereon that accrues after June
30, 1998. The Rescission Offer will expire 15 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
Registration Statement has been declared effective by the Securities and
Exchange Commission and 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 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, shares of Common
Stock will be outstanding. Of these shares, the 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.
The remaining 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 shares of Common Stock have been reserved for issuance upon
exercise of options granted under the Option Plan, under which options to
acquire 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 and Cohig &
Associates, Inc. are acting as the representatives (the "Representatives"),
have severally agreed to purchase from CSI the shares of Common Stock offered
hereby. 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......................................
Cohig & Associates, Inc...........................................
----
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 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 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.
The Representatives have informed CSI that it does 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
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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, 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
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 $ 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.
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 between CSI 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 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.
91
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED).................... F-2
Pro Forma Condensed Combined Balance Sheet as of December 31, 1997..... F-3
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1997..................................................... F-5
Notes to Pro Forma Condensed Combined Financial Statements............. F-6
HISTORICAL FINANCIAL STATEMENTS
Independent Auditors' Report........................................... F-8
Balance Sheets as of April 30, 1996 and 1997 and January 31, 1998 (un-
audited).............................................................. F-9
Statements of Operations for the years ended April 30, 1995, 1996 and
1997 and nine months ended January 31, 1997 and 1998 (unaudited)...... F-10
Statements of Shareholders' Deficit for the years ended April 30, 1995,
1996 and 1997 and nine months ended January 31, 1998 (unaudited)...... F-11
Statements of Cash Flows for the years ended April 30, 1995, 1996 and
1997 and nine months ended January 31, 1997 and 1998 (unaudited)...... F-12
Notes to Financial Statements.......................................... F-14
GLOBALTEL RESOURCES, INC.
HISTORICAL FINANCIAL STATEMENTS
Report of Independent Public Accountants............................... F-23
Consolidated Balance Sheets as of December 31, 1996 and 1997........... F-24
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997................................................... F-25
Consolidated Statements of Common Stock Subject to Rescission and
Shareholders' Deficit for the years ended December 31, 1995, 1996 and
1997.................................................................. F-26
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997................................................... F-27
Notes to Consolidated Financial Statements............................. F-28
INTERNATIONAL TELEPHONE COMPANY
HISTORICAL FINANCIAL STATEMENTS
Report of Independent Auditors......................................... F-39
Balance Sheets as of December 31, 1996, October 31, 1997 and January
31, 1998 (unaudited).................................................. F-40
Statements of Operations for the years ended December 31, 1995 and
1996, ten months ended October 31, 1997 and three months ended Decem-
ber 31, 1996 and January 31, 1998 (unaudited)......................... F-41
Statements of Changes in Shareholders' Equity for the years ended De-
cember 31, 1995 and 1996, ten months ended October 31, 1997 and three
months ended January 31, 1998 (unaudited)............................. F-42
Statements of Cash Flows for the years ended December 31, 1995 and
1996, ten months ended October 31, 1997 and three months ended Decem-
ber 31, 1996 and January 31, 1998 (unaudited)......................... F-43
Notes to Financial Statements.......................................... F-44
</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 a letter of intent with GlobalTel pursuant to which
GlobalTel will merge with CSI and CSI will issue shares of its Common Stock
for all outstanding shares of GlobalTel's preferred and common stock. The pro
forma condensed combined balance sheet as of December 31, 1997 assumes the
Merger was consummated on December 31, 1997. The pro forma condensed combined
statement of operations for the year ended December 31, 1997 assumes 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 shares of CSI's Common Stock valued at
$2,070,000. The number of shares to be issued by CSI will be based on the
public offering per share price. The pro forma condensed balance sheet as of
December 31, 1997 assumes the Acquisition was consummated on December 31,
1997. The pro forma condensed combined statement of operations for the year
ended December 31, 1997 assumes 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 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 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)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
GLOBALTEL ITC
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>
ASSETS
Current assets:
Cash............ $ 429 $ 849 $ 905 $ -- $ -- $ -- $ 2,183 $24,293 (g)
(2,840)(h)
(125)(j)
(1,750)(i)
Restricted
cash............ -- -- -- -- -- -- -- 1,325 (g)
Receivables--
net............. 1,027 712 934 -- -- -- 2,673 --
Prepaid expenses
and other....... 19 106 106 -- -- -- 231 --
------- ------- ------- ------- ------ ----- ------- -------
Total current
assets 1,475 1,667 1,945 -- -- -- 5,087 20,903
Property and
equipment--net.. 484 1,372 629 -- -- -- 2,485 --
Deferred financ-
ing costs....... 450 568 -- (568) -- -- 450 (450)(h)
Deposits........ 448 -- 130 -- (225) -- 353 --
Other assets.... 118 747 -- (227) -- -- 638 (118)(g)
Distribution
channels and
customer lists.. -- -- -- 15,000 4,946 -- 19,946 --
Intellectual
property and li-
cense agree-
ment............ -- -- -- 5,000 -- -- 5,000 --
Goodwill........ -- -- -- 2,929 - -- 2,929 --
------- ------- ------- ------- ------ ----- ------- -------
TOTAL ASSETS.... $ 2,975 $ 4,354 $ 2,704 $22,134 $4,721 $ -- $36,888 $20,335
======= ======= ======= ======= ====== ===== ======= =======
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
ASSETS
Current assets:
Cash............ $21,761
Restricted
cash............ 1,325
Receivables--
net............. 2,673
Prepaid expenses
and other....... 231
-----------
Total current
assets 25,990
Property and
equipment--net.. 2,485
Deferred financ-
ing costs....... --
Deposits........ 353
Other assets.... 520
Distribution
channels and
customer lists.. 19,946
Intellectual
property and li-
cense agree-
ment............ 5,000
Goodwill........ 2,929
-----------
TOTAL ASSETS.... $57,223
===========
</TABLE>
See notes to pro forma condensed combined financial statements.
F-3
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
GLOBALTEL ITC
HISTORICAL HISTORICAL HISTORICAL PURCHASE PURCHASE RECAPITALIZATION PRO FORMA OFFERING
CSI GLOBALTEL ITC ADJUSTMENTS(A) ADJUSTMENTS(C) ADJUSTMENTS(F) COMBINED ADJUSTMENTS
---------- ---------- ---------- -------------- -------------- ---------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQ-
UITY (DEFICIT)
Current liabili-
ties:
Accounts payable.. $ 930 $ 2,279 $ 2,927 $ -- $ -- $ -- $ 6,136 $ --
Accrued expenses.. 405 1,213 10 -- -- -- 1,628 --
Customer deposits
and prepayments... -- 845 -- -- -- -- 845 --
ITC acquisition
consideration..... -- -- -- -- 1,750 -- 2,623 (1,750)(i)
873
Payable to related
parties........... 243 247 -- -- -- -- 490 --
Debt to sharehold-
ers............... 274 -- 82 -- -- -- 356 (125)(j)
Capitalized lease
obligations....... -- -- 281 -- -- -- 281 --
Note payable...... 125 22 -- -- -- -- 147 --
Bridge notes pay-
able--net......... 2,045 1,995 -- -- -- -- 4,040 (2,840)(h)
795 (h)
------ -------- ------- ------- ------ ----- ------- -------
Total current
liabilities..... 4,022 6,601 3,300 -- 2,623 -- 16,546 (3,920)
------ -------- ------- ------- ------ ----- ------- -------
Long-term debt--
net............... -- 3,832 251 208 -- -- 4,291 --
------ -------- ------- ------- ------ ----- ------- -------
Deferred income
taxes............. -- -- -- 2,437 -- -- 2,437 --
------ -------- ------- ------- ------ ----- ------- -------
Common stock sub-
ject to rescis-
sion.............. -- 2,455 -- -- -- -- 2,455 --
------ -------- ------- ------- ------ ----- ------- -------
Shareholders' eq-
uity (deficit):
Series A convert-
ible preferred
stock............. -- 1,055 -- (1,055) -- -- -- --
Common stock:
CSI.............. 2,750 -- -- 11,266 -- 795 14,811 25,500 (g)
GlobalTel........ -- 2,805 -- (2,805) -- -- -- --
ITC.............. -- -- -- -- -- -- -- --
Additional paid in
capital........... -- -- 1 -- (1) -- -- --
Common stock op-
tions............. 37 -- -- -- -- -- 37 --
Obligation to is-
sue common stock.. 795 1,012 -- -- 1,251 (795) 2,263 --
Warrants.......... -- 2,152 -- -- -- -- 2,152 --
Note receivable
from shareholder.. (35) -- -- -- -- -- (35) --
Accumulated defi-
cit............... (4,351) (15,558) (848) 15,558 848 -- (7,826) (450)(h)
(3,475) (795)(h)
Treasury stock, at
cost.............. (243) -- -- -- -- -- (243) --
------ -------- ------- ------- ------ ----- ------- -------
Total sharehold-
ers' equity
(deficit)....... (1,047) (8,534) (847) 19,489 2,098 -- 11,159 24,255
------ -------- ------- ------- ------ ----- ------- -------
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY (DEFICIT).. $2,975 $ 4,354 $ 2,704 $22,134 $4,721 $ -- $36,888 $20,335
====== ======== ======= ======= ====== ===== ======= =======
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
LIABILITIES AND
SHAREHOLDERS' EQ-
UITY (DEFICIT)
Current liabili-
ties:
Accounts payable.. $ 6,136
Accrued expenses.. 1,628
Customer deposits
and prepayments... 845
ITC acquisition
consideration..... 873
Payable to related
parties........... 490
Debt to sharehold-
ers............... 231
Capitalized lease
obligations....... 281
Note payable...... 147
Bridge notes pay-
able--net......... 1,995
-----------
Total current
liabilities..... 12,626
-----------
Long-term debt--
net............... 4,291
-----------
Deferred income
taxes............. 2,437
-----------
Common stock sub-
ject to rescis-
sion.............. 2,455
-----------
Shareholders' eq-
uity (deficit):
Series A convert-
ible preferred
stock............. --
Common stock:
CSI.............. 40,311
GlobalTel........ --
ITC.............. --
Additional paid in
capital........... --
Common stock op-
tions............. 37
Obligation to is-
sue common stock.. 2,263
Warrants.......... 2,152
Note receivable
from shareholder.. (35)
Accumulated defi-
cit............... (9,071)
Treasury stock, at
cost.............. (243)
-----------
Total sharehold-
ers' equity
(deficit)....... 35,414
-----------
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY (DEFICIT).. $57,223
===========
</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>
GLOBALTEL ITC
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.............. 2,557 788 878 -- -- -- 4,223 --
General and ad-
ministrative..... 3,218 7,119 1,664 -- -- -- 12,001 --
Depreciation and
amortization..... 134 253 93 -- -- -- 480 --
Amortization of
acquisition
intangibles...... -- -- -- 7,480 1,650 (d) -- 9,130 --
Acquired in-proc-
ess research and
development...... -- -- -- 3,475 -- -- 3,475 --
--------- ------- ------ -------- ------- -------- -------- ----
Total operating
expenses........ 5,909 8,160 2,635 10,955 1,650 -- 29,309 --
--------- ------- ------ -------- ------- -------- -------- ----
LOSS FROM OPERA-
TIONS............ (1,111) (6,469) (913) (10,955) (1,650) -- (21,098) --
OTHER INCOME (EX-
PENSE)--Net...... (174) (1,368) (3) 827 (178)(e) -- (831) --
65 (e)
--------- ------- ------ -------- ------- -------- -------- ----
LOSS BEFORE
INCOME TAXES AND
EXTRAORDINARY
ITEM............. (1,285) (7,837) (916) (10,128) (1,763) -- (21,929) --
INCOME TAX
BENEFIT.......... -- -- -- 2,437 -- -- 2,437 --
--------- ------- ------ -------- ------- -------- -------- ----
LOSS BEFORE
EXTRAORDINARY
ITEM............. $ (1,285) $(7,837) $ (916) $ (7,691) $(1,763) $ -- $(19,492) $--
========= ======= ====== ======== ======= ======== ======== ====
BASIC LOSS PER
SHARE BEFORE
EXTRAORDINARY
ITEM ............ $ (.13)
=========
WEIGHTED AVERAGE
SHARES OUTSTAND-
ING.............. 9,782,610
=========
<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.............. 4,223
General and ad-
ministrative..... 12,001
Depreciation and
amortization..... 480
Amortization of
acquisition
intangibles...... 9,130
Acquired in-proc-
ess research and
development...... 3,475
-----------
Total operating
expenses........ 29,309
-----------
LOSS FROM OPERA-
TIONS............ (21,098)
OTHER INCOME (EX-
PENSE)--Net...... (831)
-----------
LOSS BEFORE
INCOME TAXES AND
EXTRAORDINARY
ITEM............. (21,929)
INCOME TAX
BENEFIT.......... 2,437
-----------
LOSS BEFORE
EXTRAORDINARY
ITEM............. $(19,492)
===========
BASIC LOSS PER
SHARE BEFORE
EXTRAORDINARY
ITEM ............ $
===========
WEIGHTED AVERAGE
SHARES OUTSTAND-
ING..............
===========
</TABLE>
See notes to pro forma condensed combined financial statements.
F-5
<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 December 31, 1997
for the balance sheet and (ii) the Merger, the Acquisition and the Offering as
of January 1, 1997 for the statement of operations:
PURCHASE ADJUSTMENTS
(a) Reflects the proposed acquisition of GlobalTel through the issuance of
shares of CSI's Common Stock for all the outstanding preferred and
common stock of GlobalTel, including GlobalTel's common stock subject
to rescission. The CSI Common Stock to be issued to GlobalTel's common
shareholders has been valued at an assumed public offering price of
$ per 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.
(c) Reflects the proposed acquisition of ITC for $5,370,000 based on
currently agreed upon terms which include: cash payments of $1,750,000
(excluding deposits of $225,000 made prior to December 31, 1997) due to
the ITC shareholders at the completion of the Offering; the commitment
to issue an estimated number of CSI Common Stock valued at $1,250,900
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; accrual of an
estimated payment to the ITC shareholders of $873,000; reclassification
of deposits given to ITC of $225,000; 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.
(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.
RECAPITALIZATION ADJUSTMENT
(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.
F-6
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
OFFERING ADJUSTMENTS
(g) Reflects the estimated net proceeds of the Offering of $25,617,719, of
which $1,325,000 is to be placed in escrow to satisfy the terms of the
ITC acquisition agreement. Reflects deferred offering costs of $117,719
incurred as of December 31,1997, which have been added back in
determining the estimated net proceeds of the Offering.
(h) Reflects the repayment of CSI's bridge debt of $2,840,000 which is
payable upon successful completion of the Offering. Reflects the write-
offs to accumulated deficit totalling $1,245,127 of the unamortized
debt issuance costs of $449,927 and the unamortized discount on such
debt of $795,200.
(i) Reflects the cash payment of $1,750,000 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 in
1998)
(j) Reflects payment amount due to a former officer of CSI pursuant to a
settlement agreement.
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
Communications Systems International, Inc.
Colorado Springs, Colorado
We have audited the accompanying balance sheets of Communications Systems
International, Inc. (CSI) as of April 30, 1996 and 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. 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 the results of its operations and its cash
flows for each of the three years in the period ended April 30, 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 April 30, 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
June 2, 1997
(August 11, 1997 as to the tenth paragraph of Note 4; September 17, 1997 as
to the last paragraph of Note 8; October 9, 1997 as to the second paragraph
of Note 3; October 31, 1997 as to the last paragraph of Note 4 and the
first paragraph of Note 13; December 30, 1997 as to the third paragraph of
Note 3; and, April 22, 1998 as to the second paragraph of Note 13)
F-8
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30,
---------------------- JANUARY 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................... $ 57,394 $ 146,686 $ 566,124
Accounts receivable--net.................. 1,104,606 1,053,233 835,024
Prepaid expenses and other current as-
sets..................................... 60,893 83,962 19,686
---------- ---------- ----------
Total current assets.................... 1,222,893 1,283,881 1,420,834
PROPERTY AND EQUIPMENT--Net (Notes 2 and
3)....................................... 271,499 457,791 515,143
DEFERRED OFFERING COSTS (Note 12)......... -- 83,939 183,769
DEPOSITS (Notes 10 and 13)................ 25,000 120,880 448,065
DEBT ISSUANCE COSTS (Note 3).............. -- -- 374,856
---------- ---------- ----------
TOTAL ASSETS............................ $1,519,392 $1,946,491 $2,942,667
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable.......................... $ 965,646 $1,287,187 $1,191,190
Accrued commissions....................... 254,224 145,352 307,328
Accrued expenses and customer deposits.... 129,007 88,940 100,587
Payables to former shareholders (Note 4).. -- -- 242,619
Debt to related parties (Note 8).......... 159,915 148,761 263,343
Notes payable (Note 3).................... 1,866,697 1,944,896 2,292,333
---------- ---------- ----------
Total current liabilities............... 3,375,489 3,615,136 4,397,400
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
(Notes 8 and 10)
SHAREHOLDERS' DEFICIT
(Notes 4, 5 and 6)
Preferred stock, no par value--5,000,000
shares authorized; none issued or
outstanding..............................
Common stock, no par value--25,000,000
shares authorized; 8,998,987, 9,765,590
and 10,064,531 shares issued and
outstanding.............................. 1,889,141 2,366,066 2,760,127
Obligation to issue common stock.......... -- -- 795,200
Common stock options...................... -- -- 37,000
Notes receivable from shareholder......... (5,000) (35,000) (35,000)
Accumulated deficit....................... (3,740,238) (3,999,711) (4,769,441)
Treasury stock, at cost................... -- -- (242,619)
---------- ---------- ----------
Total shareholders' deficit............. (1,856,097) (1,668,645) (1,454,733)
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEF-
ICIT................................... $1,519,392 $1,946,491 $2,942,667
========== ========== ==========
</TABLE>
See notes to financial statements.
F-9
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED APRIL 30, PERIOD ENDED JANUARY 31,
------------------------------------ --------------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE................. $1,837,580 $ 6,741,022 $11,865,412 $ 8,659,523 $ 8,894,803
COST OF REVENUE......... 1,297,861 5,962,609 7,754,897 5,694,895 5,393,796
---------- ----------- ----------- ----------- ------------
GROSS MARGIN............ 539,719 778,413 4,110,515 2,964,628 3,501,007
---------- ----------- ----------- ----------- ------------
OPERATING EXPENSES
Sales and marketing..... 529,161 1,572,747 2,080,020 1,490,805 1,961,350
General and administra-
tive (Note 8).......... 624,585 1,652,374 2,024,383 1,326,300 2,603,660
Depreciation and amorti-
zation................. 19,107 57,843 102,983 70,508 104,605
---------- ----------- ----------- ----------- ------------
Total operating ex-
penses............... 1,172,853 3,282,964 4,207,386 2,887,613 4,669,615
---------- ----------- ----------- ----------- ------------
INCOME (LOSS) FROM
OPERATIONS............. (633,134) (2,504,551) (96,871) 77,015 (1,168,608)
INTEREST EXPENSE........ 139 (19,389) (162,602) (114,155) (348,122)
---------- ----------- ----------- ----------- ------------
LOSS BEFORE
EXTRAORDINARY ITEM..... (632,995) (2,523,940) (259,473) (37,140) (1,516,730)
EXTRAORDINARY ITEM--
Gain on extinguishment
of debt
(Note 3)............... -- -- -- -- 747,000
---------- ----------- ----------- ----------- ------------
NET LOSS................ $ (632,995) $(2,523,940) $ (259,473) $ (37,140) $ (769,730)
========== =========== =========== =========== ============
BASIC PER SHARE AMOUNTS:
Loss before extraordi-
nary item............ $ (.10) $ (.30) $ (.03) $ (.00) $ (.15)
Extraordinary item.... -- -- -- -- .07
---------- ----------- ----------- ----------- ------------
Net loss.............. $ (.10) $ (.30) $ (.03) $ (.00) $ (.08)
========== =========== =========== =========== ============
WEIGHTED AVERAGE SHARES
OUTSTANDING............ 6,213,380 8,394,451 9,414,238 9,321,197 10,021,832
========== =========== =========== =========== ============
</TABLE>
See notes to financial statements.
F-10
<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....... 4,901,040 $ 530,929 $ 10,412 $ -- $ -- $ (583,303) -- $ -- $ (41,962)
Common stock sub-
scribed........... -- -- 493,025 -- -- -- -- -- 493,025
Net loss........... -- -- -- -- -- (632,995) -- -- (632,995)
---------- ---------- -------- ------- -------- ----------- -------- --------- -----------
BALANCES,
April 30, 1995.... 4,901,040 530,929 503,437 -- -- (1,216,298) -- -- (181,932)
Issuance of sub-
scribed stock..... 1,687,263 503,437 (503,437) -- -- -- -- --
Sale of stock for
cash and note..... 934,000 542,000 -- -- (5,000) -- -- -- 537,000
Stock issued for
services.......... 657,910 312,775 -- -- -- -- -- -- 312,775
Stock issued in ac-
quisition......... 818,774 -- -- -- -- -- -- -- --
Net loss........... -- -- -- -- -- (2,523,940) -- -- (2,523,940)
---------- ---------- -------- ------- -------- ----------- -------- --------- -----------
BALANCES,
April 30, 1996.... 8,998,987 1,889,141 -- -- (5,000) (3,740,238) -- -- (1,856,097)
Sale of stock for
cash.............. 61,500 111,200 -- -- -- -- -- -- 111,200
Stock issued in ex-
change for note... 60,000 30,000 -- -- (30,000) -- -- -- --
Stock issued for
services.......... 140,000 34,224 -- -- -- -- -- -- 34,224
Stock issued in ac-
quisition of
affiliate......... 179,076 49,993 -- -- -- -- -- -- 49,993
Conversion of notes
and
accrued interest
to stock.......... 326,027 251,508 -- -- -- -- -- -- 251,508
Net loss........... -- -- -- -- -- (259,473) -- -- (259,473)
---------- ---------- -------- ------- -------- ----------- -------- --------- -----------
BALANCES,
April 30, 1997.... 9,765,590 2,366,066 -- -- (35,000) (3,999,711) -- -- (1,668,645)
Unaudited:
Conversion of notes
and
accrued interest
to stock.......... 231,426 114,309 -- -- -- -- -- -- 114,309
Sale of stock for
cash.............. 908,641 499,752 -- -- -- -- -- -- 499,752
Issuance of debt
with stock
conversion
rights............ -- -- 795,200 -- -- -- -- -- 795,200
Stock options
granted........... -- -- -- 37,000 -- -- -- -- 37,000
Purchase of common
stock............. -- -- -- -- -- -- (841,126) (462,619) (462,619)
Retirement of trea-
sury stock........ (400,000) (220,000) -- -- -- -- 400,000 220,000 --
Net loss........... -- -- -- -- -- (769,730) -- -- (769,730)
---------- ---------- -------- ------- -------- ----------- -------- --------- -----------
BALANCES,
January 31, 1998
(unaudited)...... 10,505,657 $2,760,127 $795,200 $37,000 $(35,000) $(4,769,441) (441,126) $(242,619) $(1,454,733)
========== ========== ======== ======= ======== =========== ======== ========= ===========
</TABLE>
See notes to financial statements.
F-11
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED APRIL 30, PERIOD ENDED JANUARY 31,
--------------------------------- ----------------------------
1995 1996 1997 1997 1998
--------- ----------- --------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................ $(632,995) $(2,523,940) $(259,473) $ (37,140) $ (769,730)
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........ -- -- -- -- 207,604
Stock and options is-
sued or subscribed
for services and in-
terest............... 32,000 312,775 38,566 35,671 37,000
Depreciation and amor-
tization............. 19,107 57,843 102,983 70,508 104,605
Changes in operating
assets and
liabilities:
Accounts receiv-
able............... (123,644) (904,447) 52,565 12,675 218,209
Other assets........ (65,000) (15,393) (115,783) (111,824) (64,075)
Accounts payable and
accrued
expenses........... 372,697 2,711,390 911,463 503,117 131,391
--------- ----------- --------- ----------- -------------
Net cash provided by
(used in) operating
activities............. (397,835) (361,772) 730,321 473,007 (881,996)
--------- ----------- --------- ----------- -------------
INVESTING ACTIVITIES
Purchases of property
and equipment.......... (53,987) (222,813) (218,668) (167,423) (161,957)
Increase in deposits for
acquisition............ -- -- (25,000) -- (200,000)
--------- ----------- --------- ----------- -------------
Net cash used in
investing activities... (53,987) (222,813) (243,668) (167,423) (361,957)
--------- ----------- --------- ----------- -------------
FINANCING ACTIVITIES
Proceeds from issuance
of notes............... -- 7,000 405,000 200,000 2,485,073
Proceeds from the
issuance of stock or
stock subscriptions.... 461,025 537,000 111,200 111,200 499,752
Repayment of notes
payable................ -- (78,530) (818,418) (625,582) (1,001,604)
Increase in deferred
offering costs......... -- -- (83,989) -- (99,830)
Payment for treasury
stock.................. -- -- -- -- (220,000)
Net proceeds
(repayments) from
issuances of debt to
related party.......... 65,000 94,915 (11,154) 812 --
--------- ----------- --------- ----------- -------------
Net cash provided by
(used in) financing
activities............. 526,025 560,385 (397,361) (313,570) 1,663,391
--------- ----------- --------- ----------- -------------
NET INCREASE (DECREASE)
IN CASH................ 74,203 (24,200) 89,292 (7,986) 419,438
CASH, Beginning of
period................. 7,391 81,594 57,394 57,394 146,686
--------- ----------- --------- ----------- -------------
CASH, End of period..... $ 81,594 $ 57,394 $ 146,686 $ 49,408 $ 566,124
========= =========== ========= =========== =============
</TABLE>
(continued)
See notes to financial statements.
F-12
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED APRIL 30, PERIOD ENDED JANUARY 31,
--------------------------- --------------------------
1995 1996 1997 1997 1998
------- ---------- -------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest paid......... $ -- $ 7,879 $126,066 $ 75,301 $ 29,161
SUPPLEMENTAL NONCASH
INVESTING AND FINANCING
ACTIVITIES
Stock and options
issued or subscribed
for services and
interest............. $32,000 $ 312,775 $ 38,566 $ 35,671 $ 37,000
Conversion of accounts
payable to notes
payable.............. -- 1,938,227 761,617 -- --
Issuance of stock in
exchange for note.... -- 5,000 30,000 30,000 --
Stock issued in acqui-
sition of affiliate.. -- -- 49,993 49,993 --
Conversion of notes
and accrued interest
to stock............. -- -- 274,342 -- 115,475
Purchase of treasury
stock................ -- -- -- -- 242,619
</TABLE>
(concluded)
See notes to financial statements.
F-13
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED JANUARY 31, 1997 AND 1998 IS
UNAUDITED)
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Communications Systems International, Inc. (CSI) is a rapidly growing
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 (ITOs).
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 April 30, 1997. In addition, CSI has used substantial
amounts of working capital in its operations. At April 30, 1997, current
liabilities exceeded current assets by $2,331,255 and total liabilities
exceeded total assets by $1,668,645.
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 telecommunications carriers enabling
CSI to reduce its cost of revenue 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 nine-month period ended January 31, 1998.
In fiscal 1998, 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 fiscal 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 and January 31, 1998, the allowance for
doubtful accounts was $164,245, $186,489 and $403,991, 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 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.
F-14
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 nine
months ended January 31, 1997 and 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, JANUARY 31,
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Equipment.................................... $311,446 $574,966 $734,656
Furniture and fixtures....................... 44,259 61,601 62,131
Leasehold improvements....................... 5,238 13,651 15,387
-------- -------- --------
Total...................................... 360,943 650,218 812,174
Less accumulated depreciation and amortiza-
tion........................................ 89,444 192,427 297,031
-------- -------- --------
Property and equipment--net.................. $271,499 $457,791 $515,143
======== ======== ========
</TABLE>
F-15
<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, JANUARY 31,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Mandatorily redeemable convertible
promissory notes bearing interest at 10%
which is payable semiannually, due
December 29, 1998 or 5 days after the
closing of the proposed public offering
(see Note 12), whichever is earlier....... $ -- $ -- $2,840,000
Unsecured note payable to long distance
carriers, bearing interest at 10% and 12%,
repaid December 1997; see below .......... 1,859,697 1,809,896 --
Unsecured notes payable, bearing interest
at 15%, principal and interest due Septem-
ber 1998.................................. -- 85,000 85,000
Unsecured convertible notes payable bearing
interest at 10% which is payable semi-an-
nually on March 31 and September 30; the
outstanding principal is due in 1998, how-
ever, the notes are callable at the option
of the noteholders at any interest payment
date...................................... -- 50,000 30,000
Other...................................... 7,000 -- --
---------- ---------- ----------
1,866,697 1,944,896 2,955,000
Less discount on mandatorily redeemable
convertible promissory notes.............. -- -- 662,667
---------- ---------- ----------
Total..................................... $1,866,697 $1,944,896 $2,292,333
========== ========== ==========
</TABLE>
On October 9, 1997, CSI entered into an agreement with a long distance
carrier to which CSI had a note payable with an outstanding balance of
$1,485,909 as of April 30, 1997. The agreement provided that the carrier would
accept a payment of $650,000 in full satisfaction of the remaining principal
balance on the note ($1,458,292 at October 9, 1997) and all accrued and unpaid
interest thereon ($116,755 at October 9, 1997). 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 30,000 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 the stock conversion rights, CSI has
recorded a discount on the notes and recognized an obligation to issue Common
Stock of $795,200. The discount is being amortized over a six-month period
since management believes CSI will complete its offering by June 30, 1998. At
January 31, 1998, the unamortized portion of the discount was $662,667. In
connection with the placement of the notes, CSI incurred debt issuance costs
of $449,927 which are also being amortized over a six-month period. At January
31, 1998, the unamortized portion of the debt issuance costs was $374,856.
F-16
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of April 30, 1997, all of CSI's obligations are classified as current
liabilities due to their repayment terms or CSI's failure to make timely
principal and interest payments.
4.SHAREHOLDERS' EQUITY
During the year ended April 30, 1995, CSI accepted deposits for purchase of
1,687,263 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 1,000,000 shares of its no par Common Stock at a purchase
price of $.50 per share under a private placement memorandum dated January 31,
1995. At April 30, 1995, 185,000 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 818,774 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 13.5 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 revenue 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 657,910 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 61,500 shares of Common Stock
for $2.00 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 179,076 shares of CSI's Common Stock to certain shareholders
of the affiliate and granted options to purchase 97,000 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 326,027 shares of stock; upon
conversion, CSI charged the remaining unamortized deferred financing costs of
$22,834 relating to such notes against the recorded amount of Common Stock.
During the nine months ended January 31, 1998, CSI sold an additional $95,000
principal amount of the convertible notes, and noteholders converted notes
totalling $115,000 principal amount and accrued interest of $475 into 231,426
shares of Common Stock. Upon conversion, CSI charged unamortized deferred
financing costs of $1,166 relating to such notes against the recorded amount
of Common Stock.
During the year ended April 30, 1997, CSI issued 140,000 shares of its
Common Stock in exchange for financial and technological consulting services.
The cost of the services provided of $34,224 has been charged to operations.
F-17
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
CSI has notes receivable from a shareholder totalling $35,000 which resulted
from the issuance of Common Stock, bear interest at 10% and are payable on
demand.
In August 1997, CSI entered into settlement agreements with two former
employees who were also shareholders of CSI to repurchase 841,126 shares of
its Common Stock from such individuals for $.55 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. As of January 31, 1998, CSI has made payments
totalling $220,000 to these individuals and received 400,000 shares of its
Common Stock which have been retired. As of January 31, 1998, CSI has recorded
a liability for the remaining payments totalling $242,619 and treasury stock
for the shares that it is committed to purchase.
In a private placement in September and October 1997, CSI sold 908,641
shares of its Common Stock for $499,752, or $.55 per share, the proceeds of
which were partially used to repurchase the shares described in the preceding
paragraph.
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 3,000,000. CSI has granted the following stock
options:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PRICE PER EXPIRATION
OPTIONS SHARE DATE
--------- ----------- ----------
<S> <C> <C> <C>
April 30, 1996.............................. 899,150 $.50--$2.00 1998--2006
April 30, 1997.............................. 884,200 $.50--$2.88 1998--2007
January 31, 1998............................ 1,108,800 $.20--$2.88 1998--2007
</TABLE>
Information with respect to options granted under the plan is as follows:
<TABLE>
<S> <C>
Outstanding at May 1, 1995........................................ --
Granted......................................................... 899,150
Exercised....................................................... --
Expired or cancelled............................................ --
---------
Outstanding at April 30, 1996..................................... 899,150
Granted......................................................... 440,650
Exercised....................................................... (60,000)
Expired or cancelled............................................ (395,600)
---------
Outstanding at April 30, 1997..................................... 884,200
Granted......................................................... 471,700
Exercised....................................................... --
Expired or cancelled............................................ (247,100)
---------
Outstanding at January 31, 1998................................... 1,108,800
=========
</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
F-18
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
at the grant date for awards in the years ended April 30, 1996 and 1997
consistent with the provisions of SFAS No.123, CSI's net loss and net loss per
share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1996 1997
----------- ---------
<S> <C> <C>
Net loss--as reported............................... $(2,524,000) $(259,000)
Net loss--pro forma................................. (2,724,000) (575,000)
Net loss per share--as reported..................... (.30) (.03)
Net loss per share--pro forma....................... (.32) (.06)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the years ended April 30, 1996 and 1997;
expected volatility of 132%; risk-free interest rate of 6% and expected lives
of three to ten years.
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 150,000 shares of CSI's common stock at prices ranging from $1.50
to $3.50, 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 58,500
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 $.27 to $1.38 per share; the warrants expire in 1998
and 1999.
In connection with the placement of the mandatorily redeemable convertible
promissory notes, CSI issued to the placement agent 284,000 warrants to
purchase shares of CSI's Common Stock. The warrants are exercisable at 125% of
proposed public offering price per share; if no offering occurs within one
year from the closing of the offering of the notes, the exercise price is
reduced to 50% of the closing bid price. (See note 3)
7.INCOME TAXES
The tax effects of temporary differences to significant portions of deferred
taxes are as follows:
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1996 1997
---------- ----------
<S> <C> <C>
Deferred tax asset--
Net operating loss carryforwards.................... $1,270,000 $1,330,000
Less valuation allowance.............................. 1,270,000 1,330,000
---------- ----------
$ -- $ --
========== ==========
</TABLE>
As of April 30, 1997, CSI's net operating loss carryforwards of
approximately $3,400,000 will begin expiring in the year 2009. The
carryforwards will be available for the reduction of future income tax
liabilities. As of April 30, 1997, CSI has recorded a valuation allowance 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
and $60,000 during the years ended April 30, 1995, 1996 and 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.
F-19
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 and $87,259 for the years ended April 30,
1995, 1996 and 1997, respectively. Future annual minimum lease payments
required under such leases are as follows as of April 30, 1997:
<TABLE>
<S> <C>
Fiscal year ending April 30:
1998............................................................ $136,633
1999............................................................ 118,101
2000............................................................ 54,822
--------
Total......................................................... $309,556
========
</TABLE>
CSI receives periodic advances from its principal shareholder. At April 30,
1996 and 1997 and January 31, 1998, CSI had an unsecured note payable of
$159,915, $148,761 and $148,761, respectively, to its principal shareholder,
payable May 31, 1999 and bearing interest at 10%.
In fiscal year 1998, 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 prior to full payment of the note, the remaining balance is due.
Such amounts have been reflected as general and administrative expense for the
nine months ended January 31, 1998.
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 distributors in Argentina and Brazil generated
revenue (as a percentage of CSI's total revenue) as follows:
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Argentina..................................................... -- 49% 56%
Brazil........................................................ 34% 14 10
</TABLE>
CSI's ability to provide its telephone services is heavily dependent upon
the agreements CSI has with its telecommunications carriers. CSI's long
distance services were provided by various carriers as follows:
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Carrier A..................................................... 59% 39% 59%
Carrier B..................................................... 22 49 23
Other carriers................................................ 19 12 18
</TABLE>
F-20
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10.COMMITMENTS AND CONTINGENCIES
In September 1996, CSI entered into a consulting and royalty agreement to
acquire the rights of 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 $1,500,000 prior to September
1997; after September 1997, the buyout amount is 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.
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%.
CSI is subject to a $100,000 claim by a manufacturer from which CSI received
telecommunications equipment. CSI believes that the equipment is not suitable
for its intended purpose and that the manufacturer misrepresented certain
matters pertaining to this equipment. CSI has offered to return the equipment
in exchange for a release of the manufacturer's claim and the manufacturer has
rejected CSI's offer. CSI has not made a provision for any loss that might
result from the outcome of this matter; however, CSI believes that the
ultimate resolution of this claim will not have a material adverse effect on
its financial position or results of operations.
CSI has agreements with certain of its carriers that 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 and
$220,000 at April 30, 1996, and 1997 and January 31, 1998, respectively. The
agreements expire through 1999 and require minimum annual usage as follows:
<TABLE>
<S> <C>
Fiscal year ending April 30:
1998.......................................................... $3,700,000
1999.......................................................... 1,450,000
----------
Total....................................................... $5,150,000
==========
</TABLE>
11.PROPOSED 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. 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 not been restated to reflect any potential
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 acquisitions
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.
F-21
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13.PENDING ACQUISITIONS
CSI has entered into an 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 in cash and the issuance of
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 agreement provides that $1,325,000 of the cash payment will be
placed into an escrow account to satisfy any potential claims against the
selling shareholders, and 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 agreement. Included in deposits in
the accompanying balance sheets at April 30, 1997 and January 31, 1998 are
standstill deposits totalling $25,000 and $225,000, respectively, which are
nonrefundable and are to be credited against the purchase price. The 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 April 22, 1998, CSI entered into a letter of intent to acquire all of the
outstanding common stock of GlobalTel Resources, Inc. (GlobalTel), another
telecommunications company which also provides services similar to that of
CSI, through the issuance of a number of shares of CSI's Common Stock to be
determined.
CSI's acquisitions of GlobalTel and ITC will be accounted for by the
purchase method.
F-22
<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
Note 9, as to which the
date is April 24, 1998)
F-23
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash.............................................. $ 446,257 $ 848,668
Receivables:
Trade accounts, net of allowance for doubtful
accounts of $207,000 and $180,000.............. 1,288,047 622,154
Related party................................... -- 35,500
Other .......................................... 333,181 54,859
Deposits and other................................ 149,178 105,814
----------- ------------
Total current assets............................ 2,216,663 1,666,995
Property and equipment, net......................... 670,712 1,372,154
Other assets:
License agreement, net............................ 163,573 151,749
Organizational costs, net......................... 110,114 75,381
Bridge loan issue costs, net...................... 107,356 567,804
Equipment to be placed in service................. 374,075 519,688
Other............................................. 58,994 --
----------- ------------
Total assets.................................... $ 3,701,487 $ 4,353,771
=========== ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable.................................. $ 2,570,745 $ 2,278,611
Accounts payable to related parties............... -- 247,270
Accrued liabilities............................... 1,937,154 1,212,881
Bridge loans...................................... 1,840,000 1,995,000
Notes payable..................................... 92,310 21,542
Customer deposits and prepayments................. 1,024,743 845,474
----------- ------------
Total current liabilities....................... 7,464,952 6,600,778
Bridge loans, net of unamortized discount of $0 and
$1,208,511......................................... 2,282,500 3,832,289
----------- ------------
Total liabilities............................... 9,747,452 10,433,067
----------- ------------
Commitments and contingencies (see Notes 6 and 8)
Common stock subject to rescission; par value $0.05;
326,385 and 496,466 shares issued and outstanding.. 1,519,387 2,454,829
----------- ------------
Shareholders' deficit:
Series A convertible preferred stock; par value
$0.01; 5,000,000 shares authorized; 0, and
275,000 shares issued and outstanding;
liquidation preference of $0 and $1,138,666...... -- 1,054,689
Common stock; par value $0.05; 50,000,000 shares
authorized; 675,447 and 1,233,432 shares issued
and outstanding.................................. 56,383 2,804,709
Obligation to issue common stock.................. 8,400 1,012,309
Common stock warrants............................. 52,306 2,152,460
Accumulated deficit............................... (7,682,441) (15,558,292)
----------- ------------
Total shareholders' deficit..................... (7,565,352) (8,534,125)
----------- ------------
Total liabilities and shareholders' deficit..... $ 3,701,487 $ 4,353,771
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-24
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenue................................. $ 2,113,047 $ 9,135,935 $12,862,629
Operating expenses:
Cost of revenue....................... 1,928,396 8,229,546 11,171,220
Sales and marketing................... 238,168 682,332 788,191
General and administrative............ 1,536,215 5,773,133 7,119,335
Depreciation and amortization......... 111,062 98,288 253,320
----------- ----------- -----------
Total operating expenses................ 3,813,841 14,783,299 19,332,066
----------- ----------- -----------
Operating loss.......................... (1,700,794) (5,647,364) (6,469,437)
Interest expense ($1,291, $61,350 and
$288,962 to related parties) including
amortization of debt discount.......... (33,681) (224,964) (1,367,748)
----------- ----------- -----------
Net loss before income taxes............ (1,734,475) (5,872,328) (7,837,185)
Provision for income taxes.............. -- -- --
----------- ----------- -----------
Net loss................................ $(1,734,475) $(5,872,328) $(7,837,185)
=========== =========== ===========
Series A convertible preferred stock
dividends.............................. -- -- (38,666)
----------- ----------- -----------
Net loss applicable to common sharehold-
ers.................................... $(1,734,475) $(5,872,328) $(7,875,851)
=========== =========== ===========
Basic loss per share.................... $ (2.75) $ (5.88) $ (6.48)
=========== =========== ===========
Weighted average number of common shares
outstanding (includes common shares
subject to rescission)................. 629,776 998,735 1,214,797
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-25
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION AND
SHAREHOLDERS' DEFICIT
<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
======= ========== ======= ========== ========= =========== ==========
<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 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)
========== ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-26
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................... $(1,734,475) $(5,872,328) $(7,837,185)
Adjustments to reconcile net loss to
net cash used in operating
activities--
Depreciation and amortization........ 111,062 98,288 253,320
Amortization of bridge loan issue
costs and debt discount............. 7,904 28,999 741,669
Loss on disposal of assets........... -- 12,538 49,800
Compensation and consulting expenses
paid in common stock and warrants... -- -- 398,326
Changes in certain assets and
liabilities:
Trade and related party accounts
receivable......................... (376,118) (911,929) 630,393
Other receivables and other current
assets............................. (160,061) (315,045) 322,592
Trade and related party accounts
payable, accrued liabilities and
notes payable...................... 658,421 3,807,276 514,199
Customer deposits and prepayments... 493,908 530,835 (179,269)
----------- ----------- -----------
Net cash used in operating activities.. (999,359) (2,621,366) (5,106,155)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.... (260,449) (329,390) (649,963)
Proceeds from disposition of assets.... -- 15,000 --
Organizational costs incurred.......... (162,929) -- --
Acquisition of business, net of cash
acquired.............................. (99,003) -- --
Deposits made to purchase property and
equipment............................. -- (374,075) (16,773)
----------- ----------- -----------
Net cash used in investing activities.. (522,381) (688,465) (666,736)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of bridge
loans................................. 265,000 3,857,500 6,397,508
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)
Cash paid for bridge loan issue costs
incurred.............................. -- (76,954) (518,461)
Proceeds from issuance of common stock,
net................................... 2,598,323 99,000 --
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
----------- ----------- -----------
Net increase (decrease) in cash........ 433,627 (269,730) 402,411
Cash, beginning of year................ 282,360 715,987 446,257
----------- ----------- -----------
Cash, end of year...................... $ 715,987 $ 446,257 $ 848,668
=========== =========== ===========
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
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-27
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 early 1999 (see Notes 3 and 5). In
addition, GlobalTel will require additional capital to effect the Recission
Offer (see Note 6), to bring current approximately $2 million of certain past
due trade accounts payable as of April 10, 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 Merger or 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 results 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-28
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
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,
---------------------
1996 1997
--------- ----------
<S> <C> <C>
Telecommunications equipment........................ $ 336,466 $1,018,292
Furniture, computers, fixtures and other............ 457,716 672,598
--------- ----------
794,182 1,690,890
Less--Accumulated depreciation...................... (123,470) (318,736)
--------- ----------
Property and equipment, net......................... $ 670,712 $1,372,154
========= ==========
</TABLE>
GlobalTel recorded depreciation expense of $55,272, $76,884, and $206,763
for the years ended December 31, 1995, 1996 and 1997, respectively.
Other Assets
Other assets consist primarily of a license agreement, organizational costs,
bridge loan issue costs and telecommunications equipment to be placed in
service. The license agreement purchased by GlobalTel (see Note 7) is being
amortized on a straight-line basis over 15 years. GlobalTel recorded
amortization expense related to the license agreement of $1,970, $11,825 and
$11,825 for the years ended December 31, 1995, 1996 and 1997, respectively.
Certain organizational costs (primarily legal expenses) incurred in
connection with establishing and organizing GlobalTel and its subsidiaries are
being 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 and $34,732 for the years ended December 31, 1995, 1996 and
1997, respectively.
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. For the years ended 1995, 1996 and 1997, GlobalTel
recognized $7,904, $28,999 and $214,666, respectively, in additional interest
expense from amortization of the bridge loan issue costs.
For the years ended December 31, 1996 and 1997, GlobalTel held
telecommunications equipment to be placed in service of $374,075 and $519,688,
respectively. GlobalTel has not yet placed this equipment into service as
certain components necessary to complete the installation have not yet been
acquired.
F-29
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
Accrued Liabilities
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Telecommunications costs............................ $ 511,550 $ 215,649
Deferred salaries................................... 667,000 --
Accrued interest.................................... 203,456 386,077
Other............................................... 555,148 611,155
---------- ----------
$1,937,154 $1,212,881
========== ==========
</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.
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.
F-30
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 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, approximates the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Africa................................... $ 731,000 $3,180,000 $ 2,477,000
Asia..................................... 361,000 1,550,000 1,345,000
Australia................................ 130,000 557,000 1,352,000
Europe................................... 230,000 987,000 593,000
North America--United States (includes
domestic wholesale carrier revenue)..... 366,000 1,612,000 5,043,000
North America--other..................... 5,000 17,000 285,000
South America............................ 290,000 1,233,000 1,768,000
---------- ---------- -----------
$2,113,000 $9,136,000 $12,863,000
========== ========== ===========
</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.
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 year amounts have been reclassified to conform with the
current year presentation.
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. The SOP is effective for financial statements with
fiscal years beginning after December 15, 1998, although earlier application
is encouraged. In the period that the SOP is adopted, GlobalTel will be
required to write-off any previously deferred start-up or organizational costs
as a cumulative effect of a change in accounting principle. Management intends
to adopt the SOP in the first quarter of 1998, which will result in a charge
of approximately $75,000 to GlobalTel's consolidated statement of operations.
Effects of retroactive application are not required by the SOP upon adoption.
F-31
<PAGE>
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 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.
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
F-32
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
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 January 1, 1995............................. -- $--
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
=======
</TABLE>
There were 13,100, 63,609 and 162,546 options exercisable as of December 31,
1995, 1996 and 1997, respectively. The outstanding options at December 31,
1997 have a weighted average remaining contractual life of 8.9 years. As of
December 31, 1997, there were 301,574 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.
The weighted average fair value per option of GlobalTel's stock-based awards
granted to employees was $1.05, $0.91 and $0.90 as of 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>
F-33
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
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>
1996 1997
---------------------- -----------------------
NUMBER NUMBER
OF EXERCISE PRICE OF EXERCISE PRICE
SHARES PER SHARE SHARES PER SHARE
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Beginning balance.............. 23,896 $0.00 158,606 $0.00-$5.50
Grants in connection with
certain bridge loan
issuances..................... 78,910 $5.50 209,489 $3.50-$5.50
Grants to consultants.......... 55,800 $5.50 80,715 $0.05-$5.50
Deferred salaries converted to
warrants...................... -- -- 215,428 $0.05
Exercise of warrants........... -- -- (23,896) $0.00
------- -------
Ending balance................. 158,606 $0.00-$5.50 640,342 $0.05-$5.50
======= =======
</TABLE>
In connection with the bridge loans issued by GlobalTel, warrants to
purchase 78,910 and 209,489 shares of GlobalTel's common stock were issued in
1996 and 1997, 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 and $197,584 in 1996 and 1997, 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 immediately upon issuance. The 1997 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 with respect to the 1997 grants.
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 will expire.
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 resulted in additional
interest expense in 1997. The remaining debt discount will be amortized to
April 30, 1998.
4. INCOME TAXES
Significant components of GlobalTel's deferred tax assets and liabilities
are as follows:
F-34
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
<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.
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% 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:
F-35
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Payable to shareholders and management:
Maturing through March 1996, due upon demand after ma-
turity date........................................... $ 210,000 $ 0
Maturing through January 1999, or upon closing of an
IPO, whichever is earlier............................. 1,105,000 530,000
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
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 in-
terest will be converted to common stock at a price of
$3.85 per share....................................... -- 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 ma-
turity date........................................... 55,000 --
Due upon demand........................................ 150,000 --
Maturing through January 1999, or upon closing of an
IPO, whichever is earlier............................. 1,202,500 45,000
Maturing June 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 mil-
lion, 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 rev-
enue over the number of common shares outstanding..... 900,000 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
Maturing January 1999, or upon closing of an IPO,
whichever is earlier.................................. -- 2,840,800
---------- ----------
Total bridge loans....................................... 4,122,500 7,035,800
Less:
Current portion (see Note 6)........................... 1,840,000 1,995,000
Debt discount.......................................... -- 1,208,511
---------- ----------
Long-term bridge loans................................... $2,282,500 $3,832,289
========== ==========
</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. 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 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, GlobalTel had recognized $146,838 of 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.
F-36
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
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, conditioned on
completion of the proposed Merger and 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. As such, 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 December 31, 1997,
there were 496,466 shares of common stock, $350,000 in aggregate principal
amounts of bridge loans and warrants to purchase an aggregate of approximately
35,000 shares of common stock identified for possible rescission. In addition,
GlobalTel expects to repay $455,000 in bridge loans from proceeds of the CSI
Offering that would otherwise be identified for possible rescission. If all
holders of Rescission Securities as of December 31, 1997 were to accept the
Rescission Offer, GlobalTel would be required to pay approximately $3.1
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 $278,000 as of December 31, 1997, 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.
GlobalTel plans to make the Rescission Offer if the CSI Offering and the
Merger are completed. 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
F-37
<PAGE>
GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
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
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. 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.
9. SUBSEQUENT EVENTS
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. On April 24, 1998, CSI filed a registration
statement with the Securities and Exchange Commission related to the CSI
Offering.
F-38
<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-39
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER
31, OCTOBER 31, JANUARY 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 $ 978,000
Accounts receivable (net of allowance
for doubtful accounts of $25,000,
$57,000 and $25,000)................. 1,250,000 1,045,000 1,342,000
Other current assets.................. 15,000 57,000 267,000
----------- ----------- -----------
Total current assets................ 1,483,000 1,950,000 2,587,000
Furniture and equipment (net of accumu-
lated depreciation of $130,000,
$87,000, and $115,000) (Notes B[4] and
C)..................................... 343,000 640,000 621,000
Security deposits....................... 130,000 130,000 130,000
----------- ----------- -----------
$ 1,956,000 $ 2,720,000 $ 3,338,000
=========== =========== ===========
LIABILITIES
Current liabilities:
Loan payable (Note D)................. $ 66,000 $ 3,000 $ 3,000
Accounts payable (Note G)............. 1,224,000 2,463,000 3,058,000
Accrued expenses...................... 142,000 67,000 14,000
Accrued commissions................... 165,000 145,000 200,000
Customer advances..................... 170,000 150,000 175,000
Due to shareholders................... 100,000 22,000
Due to CSI (Note K)................... 236,000
Deferred taxes........................ 6,000
Equipment lease obligations--current
portion (Note E)..................... 93,000 281,000 281,000
----------- ----------- -----------
Total current liabilities........... 1,866,000 309,000 3,989,000
Equipment leases obligations, less cur-
rent portion (Note E).................. 21,000 292,000 227,000
----------- ----------- -----------
1,887,000 301,000 4,216,000
----------- ----------- -----------
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) (879,000)
----------- ----------- -----------
Total shareholders' equity (capital
deficiency)........................ 69,000 (781,000) (878,000)
----------- ----------- -----------
$ 1,956,000 $ 2,820,000 $ 3,338,000
=========== =========== ===========
</TABLE>
See notes to financial statements
F-40
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
TEN MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 31, DECEMBER 31, JANUARY 31,
1995 1996 1997 1996 1998
------------ ------------ ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenue:
Telecommunication
services (Notes B[2]
and H)............... $8,197,000 $ 7,603,000 $ 8,054,000 $1,942,000 $2,849,000
---------- ----------- ----------- ---------- ----------
Operating expenses:
Cost of telecommunica-
tion services (Note
B[3])................ 5,407,000 5,070,000 6,790,000 1,274,000 2,194,000
Selling expenses (Note
B[3])................ 1,220,000 1,099,000 715,000 210,000 244,000
General and adminis-
trative
expenses............. 870,000 1,022,000 1,205,000 393,000 505,000
Officers salaries..... 332,000 493,000 256,000 123,000
---------- ----------- ----------- ---------- ----------
7,829,000 7,684,000 8,966,000 2,000,000 2,943,000
---------- ----------- ----------- ---------- ----------
Loss from operations be-
fore other income (ex-
pense)................. 368,000 (81,000) (912,000) (58,000) (94,000)
Other income (expense):
Miscellaneous......... 101,000
Consulting fee........ 113,000
Loss on sale of equip-
ment................. (22,000)
Interest income....... 8,000 12,000 28,000 7,000 12,000
Interest expense...... (11,000) (21,000) (57,000) (5,000) (15,000)
---------- ----------- ----------- ---------- ----------
INCOME (LOSS) BEFORE
INCOME TAX PROVISION... 365,000 11,000 (850,000) (56,000) (97,000)
Income tax provision
(Note F)............... 21,000 4,000 0 0 0
---------- ----------- ----------- ---------- ----------
NET INCOME (LOSS)....... $ 344,000 $ 7,000 $ (850,000) $ (56,000) $ (97,000)
========== =========== =========== ========== ==========
</TABLE>
See notes to financial statements
F-41
<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 three
months ended January
31, 1998 (unaudited)... (97,000) (97,000)
----- --- ------ --------- ---------
Balance--January 31,
1998 (unaudited)....... 1,200 $ 0 $1,000 $(879,000) $(878,000)
===== === ====== ========= =========
</TABLE>
See notes to financial statements
F-42
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
----------------------- ------------------------
TEN MONTHS
ENDED
OCTOBER 31, DECEMBER 31, JANUARY 31,
1995 1996 1997 1996 1998
------------ ----------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)..... $ 344,000 $ 7,000 $ (850,000) $(56,000) $(97,000)
Adjustments to recon-
cile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation......... 53,000 69,000 73,000 22,000 29,000
Provision for doubt-
ful accounts........ 195,000 43,000 25,000 11,000
Loss on sale of
equipment........... 22,000
Deferred taxes....... 4,000 2,000 (6,000)
Changes in:
Accounts receiv-
able............... (1,206,000) (33,000) 180,000 (239,000) (297,000)
Other assets........ 13,000 1,000 (42,000) 156,000 (210,000)
Security deposits... (107,000)
Customer advance
payments........... 129,000 38,000 (20,000) 25,000
Commissions pay-
able............... 140,000 (24,000) (20,000) 40,000 55,000
Accrued expenses.... 50,000 91,000 (74,000) (179,000) (60,000)
Accounts payable.... 901,000 108,000 1,239,000 121,000 602,000
Income taxes pay-
able............... 17,000 (16,000) (1,000)
Due to CSI.......... 236,000
Due to Sharehold-
ers................ 100,000 (19,000) (78,000)
------------ ----------- ---------- -------- --------
Net cash provided
by (used in) op-
erating activi-
ties............. 533,000 286,000 626,000 (143,000) 205,000
------------ ----------- ---------- -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of furniture
and equipment........ (152,000) (29,000) (17,000) (10,000)
Proceeds from sale of
equipment............ 259,000
------------ ----------- ---------- -------- --------
Net cash provided
by (used in) in-
vesting activi-
ties............. (152,000) (29,000) 242,000 0 (10,000)
------------ ----------- ---------- -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from (repay-
ments of) loan pay-
able................. 66,000 (63,000) (34,000)
Payments under capital
leases............... (41,000) (112,000) (175,000) (51,000) (65,000)
Repayment of loan from
shareholder.......... (180,000)
Repayment of note pay-
able................. (70,000) (140,000)
------------ ----------- ---------- -------- --------
Net cash used in
financing activi-
ties............. (291,000) (186,000) (238,000) (85,000) (65,000)
------------ ----------- ---------- -------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS....... 90,000 71,000 630,000 (228,000) 130,000
Cash and cash equiva-
lents--beginning of pe-
riod................... 57,000 147,000 218,000 446,000 848,000
------------ ----------- ---------- -------- --------
CASH AND CASH
EQUIVALENTS--END OF
PERIOD................. $ 147,000 $ 218,000 $ 848,000 $218,000 $978,000
============ =========== ========== ======== ========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid during the
period for:
Interest............ $ 11,000 $ 21,000 $ 57,000 $ 5,000 $ 15,000
Income taxes........ 26,000
SUPPLEMENTAL DISCLOSURE
OF NONCASH FINANCING
ACTIVITIES:
Equipment acquired under
capital lease obliga-
tions (Note E)......... 267,000 634,000
Note payable issued as
full settlement of
telecommunication costs
previously incurred.... 246,000
</TABLE>
See notes to financial statements
F-43
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO DATA AS OF JANUARY 31, 1998 AND FOR THE THREE-MONTH
PERIODS ENDED DECEMBER 31, 1996 AND JANUARY 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-44
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO DATA AS OF JANUARY 31, 1998 AND FOR THE THREE-MONTH
PERIODS ENDED DECEMBER 31, 1996 AND JANUARY 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 January 31,
1998, and the unaudited statements of operations and cash flows for the three
month periods ended December 31, 1996 and January 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, JANUARY 31,
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Telecommunications equipment............. $398,000 $634,000 $634,000
Furniture and fixtures................... 6,000 6,000 6,000
Office equipment......................... 69,000 87,000 96,000
-------- -------- --------
473,000 727,000 736,000
Less accumulated depreciation and amorti-
zation.................................. 130,000 87,000 115,000
-------- -------- --------
$343,000 $640,000 $621,000
======== ======== ========
</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 and January 31, 1998 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. 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
$580,000, respectively, at December 31, 1996, October 31, 1997 and January 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-45
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO DATA AS OF JANUARY 31, 1998 AND FOR THE THREE-MONTH
PERIODS ENDED DECEMBER 31, 1996 AND JANUARY 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 January 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 January 31, 1998. As a result, ITC has a deferred
tax asset of approximately $400,000 at October 31, 1997 and January 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
January 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
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 31, DECEMBER 31, JANUARY 31,
1995 1996 1997 1997 1998
------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Federal income tax pro-
vision (benefit) at
statutory rate......... $124,000 $3,000 $(289,000) $(19,000) $(33,000)
Provision (benefit) for
state income taxes--net
of U.S. federal taxes.. 4,000 1,000 (34,000) (2,000) (4,000)
Valuation allowance..... (107,000) 323,000 21,000 37,000
-------- ------ --------- -------- --------
$ 21,000 $4,000 $ 0 $ 0 $ 0
======== ====== ========= ======== ========
</TABLE>
F-46
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO DATA AS OF JANUARY 31, 1998 AND FOR THE THREE-MONTH
PERIODS ENDED DECEMBER 31, 1996 AND JANUARY 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 ended January 31, 1998 totaled $51,000, $69,000, $73,000 and
$16,000, 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>
[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 three telephone
carriers, 85% of such capacity from 3 carriers and 94% of such capacity from 5
carriers during the year ended December 31, 1996, the ten months ended October
31, 1997 and the three months ended January 31, 1998, respectively.
[4] Concentration of agents:
During the years ended December 31, 1995 and 1996, the ten months ended
October 31, 1997 and the three months ended January 31, 1998, 3 agents were
responsible for 65%, 3 agents were responsible for 66%, 3 agents were
responsible for 53% and 4 agents were responsible for 65%, of ITC's
telecommunications revenue, respectively.
F-47
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO DATA AS OF JANUARY 31, 1998 AND FOR THE THREE-MONTH
PERIODS ENDED DECEMBER 31, 1996 AND JANUARY 31, 1998)
NOTE H--TELECOMMUNICATION REVENUE:
The information below summarizes telecommunication revenue by geographic
area:
<TABLE>
<CAPTION>
TEN MONTHS THREE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 31, JANUARY 31,
1995 1996 1997 1998
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Europe....................... $ 3,429,000 $ 2,742,000 $2,416,000 $ 826,000
Africa....................... 2,525,000 2,508,000 2,511,000 855,000
Middle East.................. 1,403,000 1,095,000 1,593,000 741,000
Latin America................ 614,000 626,000 1,110,000 342,000
Asia......................... 88,000 529,000 74,000 1,000
Other........................ 138,000 103,000 350,000 84,000
----------- ----------- ---------- ----------
$ 8,197,000 $ 7,603,000 $8,054,000 $2,849,000
=========== =========== ========== ==========
</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 ended January 31, 1998, ITC incurred
telecommunications charges aggregating approximately $190,000 and recognized
telecommunications revenue of approximately $72,000 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-48
<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 Acquistions.......................................................... 21
Use of Proceeds.......................................................... 23
Dividend Policy.......................................................... 23
Price Range of Common Stock.............................................. 24
Dilution................................................................. 25
Capitalization........................................................... 26
Selected Financial Data.................................................. 27
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 28
Business................................................................. 48
Management............................................................... 66
Principal Shareholders................................................... 74
Certain Transactions..................................................... 76
Description of Securities................................................ 81
Rescission Offer......................................................... 83
Shares Eligible for Future Sale.......................................... 85
Underwriting............................................................. 86
Legal Matters............................................................ 88
Experts.................................................................. 88
Additional Information................................................... 89
Glossary of Terms........................................................ 90
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
COMMON STOCK
----------------------
P R O S P E C T U S
----------------------
Cruttenden Roth
INCORPORATED
Cohig & Associates, Inc.
, 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 SELLING SECURITYHOLDERS' PROSPECTUS]
SUBJECT TO COMPLETION, DATED APRIL 27, 1998
PRELIMINARY PROSPECTUS
SHARES
[LOGO]
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
COMMON STOCK
This Prospectus relates to the offer and sale by certain Securityholders
(collectively, the "Selling Securityholders") of a maximum of 113,600 shares of
Common Stock of Communications Systems International, Inc. that were issued in
a private placement completed in December 1997 and shares issuable upon the
exercise of certain warrants (collectively, the "Selling Securityholders'
Shares"). The Selling 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 Cohig & Associates, Inc. The
Company will not receive any proceeds from the sale of the Selling
Securityholders' Shares. See "Selling 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 April , 1998, the
last reported closing high bid price of the Common Stock was $ per share. It
is currently estimated that the offering price of the Common Stock will be
between $ and $ per share after giving effect to a proposed reverse stock
split to be effective prior to the date of this Prospectus. 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 Selling
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 Selling 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 Selling Security holders 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 of shares of Common Stock and
up to an additional 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 $ from
the sale of the shares of Common Stock included in the underwritten public
offering, and will receive approximately $ 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 SELLING SECURITYHOLDERS' PROSPECTUS]
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered......... shares
Common Stock outstanding after
the offering................ shares (1)
Use of Proceeds.............. The Combined Company will receive no
proceeds from the sale of the Selling
Securityholders' Shares. Upon exercise
of warrants underlying certain selling
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]
</TABLE>
- --------
(1) Includes shares of Common Stock to be issued in connection with an
underwritten public offering by the Combined Company and 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 $ per share of Common Stock in the
Combined Company's underwritten public offering. Does not include (i) up
to shares of Common Stock issuable upon exercise of outstanding
options, which have weighted average exercise prices of $ per share,
(ii) up to shares of Common Stock issuable upon the exercise of
outstanding warrants, which have weighted average exercise prices of $
per share, (iii) an indeterminate number of shares of Common Stock
issuable upon conversion of outstanding promissory notes in the aggregate
principal amount of $ , 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 shares of Common Stock issuable upon exercise
of the Representatives' Warrants, (v) any shares issuable in connection
with the ITC Acquisition (vi) the issuance of and shares of Common
Stock to certain holders of notes of GlobalTel (the "GlobalTel Full
Coverage Notes") to be repaid at the closing of the Combined Company's
underwritten public offering and past noteholders of GlobalTel,
respectively, assuming an initial public offering price of $ per share,
(vii) the issuance of 161,783 shares of Common Stock upon the cashless
conversion of certain warrants (the "Cashless Warrants") at the closing of
the Combined Company's public offering, assuming an initial public
offering price of $ per share, (viii) the issuance of shares of
Common Stock to an officer of GlobalTel in connection with the acquisition
of GFP Group, Inc. upon the closing of the Combined Company's underwritten
public offering, (ix) the issuance of shares of Common Stock to an
affiliate of GlobalTel in connection with services to be rendered by such
affiliate, assuming an initial public offering price of $ per share, and
(x) the conversion of certain long-term debt into shares of Common
Stock upon the closing of the Combined Company's underwritten public
offering at a price of $ per share (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 SELLING 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 of shares of Common
Stock and up to an additional 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 $ from the sale of the
shares of Common Stock included in the underwritten public offering, and will
receive approximately $ 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 SELLING SECURITYHOLDERS' PROSPECTUS]
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
Up to Selling Securityholders' Shares, comprised of 113,600 Bridge
Shares and Selling Securityholders' Warrant Shares, may be offered and
sold pursuant to this Prospectus by the Selling Securityholders. The Combined
Company has agreed to register the public offering of the Selling
Securityholders' Shares under the Securities Act concurrently with this
offering and to pay all expenses in connection therewith. The Selling
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 Selling Securityholders' Shares may be
sold by the Selling Securityholders prior to 180 days after the date of this
Prospectus without the consent of Cohig. Except as set forth below, none of
the Selling 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 Selling Securityholders' Shares by the Selling
Securityholders. The following table sets forth certain information with
respect to the Selling Securityholders:
<TABLE>
<CAPTION>
AMOUNT OF BENEFICIAL
SELLING OWNERSHIP OF
SECURITY HOLDERS' COMMON STOCK
SELLING SECURITY HOLDERS SHARES OFFERED AFTER SALE (1)
- ------------------------ ----------------- --------------
<S> <C> <C>
Lee E. Schlessman............................. 8,000 -0-
Swedbank Luxembourg S.A. ..................... 16,000 -0-
Lee Schlessman, POA Sandra Garnett............ 4,000 -0-
Susan M. Duncan............................... 4,000 -0-
Susan M. Duncan Irrevocable Gift Trust........ 4,000 -0-
The Schlessman Family Foundation.............. 4,000 -0-
Lee Schlessman, POA Gary Schlessman........... 4,000 -0-
Lee Schlessman, POA Cheryl Bennett............ 4,000 -0-
Cal J. Rickel & Amanda Mae Rickel............. 4,000 -0-
Arab Commerce Bank Ltd. ...................... 4,000 -0-
Dr. Thomas R. Phelps, M.D. ................... 3,600 -0-
Todd & Tom Rafalovich......................... 2,000 -0-
First Mortgage Income Trust................... 4,000 -0-
ProFutures Special Equities Fund, L.P. ....... 42,000 -0-
Adams 1977 Family Trust....................... 2,000 -0-
Ted Rafalovich Living Trust................... 2,000 -0-
Germaine Robineau O'Hare Trust................ 2,000 -0-
Network 1 Financial Securities, Inc. ......... (2) -0-
------
National Financial Services Group, Inc. ...... (2)
------ ---
Richard Sullivan.............................. (2)
</TABLE>
- --------
(1) Assumes all of the Bridge Shares and Selling Securityholders' Warrant
Shares are sold.
(2) Includes Selling Securityholders' Warrant Shares issuable upon exercise of
the Selling Securityholders' Warrants.
No Selling 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
Selling Securityholders' Shares registered concurrently herewith, no Selling
Securityholder other than Sullivan and National will own any of the Combined
Company's outstanding shares of Common Stock.
The Selling 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-
A-6
<PAGE>
[ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS]
current market price, or in negotiated transactions. The Selling
Securityholders' Shares may be sold by one or more of the following methods,
without limitations: (a) a block trade in which a broker or dealer so engaged
will attempt to sell the Shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction; (b) purchases by a
broker or dealer as principal and resale by such broker or dealer for 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 Selling 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 Selling
Securityholders named herein may pledge, hypothecate or grant a security
interest in some or all of the Bridge Shares and Selling Securityholders'
Warrants, 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 Selling 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 Selling 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........................................... 80,000*
Representatives' nonaccountable expense allowance................ 750,000
Miscellaneous.................................................... 193,800*
----------
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.
Note: The information contained in this Item 15 is based on the actual
current share and per share amounts. These numbers are subject to change
pursuant to the Registrant's proposed reverse stock split.
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 175,000 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
1,108,800 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
1,091,500 shares of Common Stock to accredited investors as defined under
Regulation D of the Securities Act ("Accredited Investors") at a price of $.50
per share.
On July 1, 1995, the Registrant granted options for 600,000 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 818,774 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 30,000 shares of Common Stock
to Elmo D. Murphy for $3.00 per share.
From December 1995 through March 1996, the Registrant issued 180,000 shares
of Common Stock and warrants to purchase 150,000 shares of the Registrant's
Common Stock to three persons in exchange for financial consulting services.
Warrants to purchase 50,000 shares of Common Stock are exercisable at $1.50
per share, warrants to purchase 50,000 shares of Common Stock are exercisable
at $2.50 per share, and warrants to purchase 50,000 shares of Common Stock are
exercisable at $3.50 per share. As of the date hereof, no warrants have been
exercised.
II-2
<PAGE>
From June 1996 through September 1996, the Registrant issued 61,500 shares
of Common Stock to 11 Accredited Investors at a price of $2.00 per share.
Jason Harmon received a commission of $11,800 for acting as placement agent.
In July 1996, the Registrant issued 179,076 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 140,000 shares of Common Stock to
Gary Kamienski in consideration for technological consulting services rendered
between February 1994 and July 1995.
From October 1996 to July 1997, the Registrant issued 10% convertible
promissory notes in the original aggregate principal amount of $415,000 and
warrants to purchase up to 41,500 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 1,500 shares of Common
Stock are exercisable at $.27 per share, warrants to purchase 4,000 shares of
Common Stock are exercisable at $.52 per share, warrants to purchase 4,000
shares of Common Stock are exercisable at $.53 per share, warrants to purchase
2,000 shares of Common Stock are exercisable at $.63 per share, warrants to
purchase 7,000 shares of Common Stock are exercisable at $.75 per share,
warrants to purchase 9,000 shares of Common Stock are exercisable at $.81 per
share, warrants to purchase 7,000 shares of Common Stock are exercisable at
$.88 per share and warrants to purchase 7,000 shares of Common Stock are
exercisable at $1.38 per share. From January 1997 through January 1998,
557,453 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
17,000 shares of Common Stock to three financially sophisticated investors.
Warrants to acquire 6,500 shares of Common Stock are exercisable at $.38 per
share, warrants to purchase 7,000 shares of Common Stock are exercisable at
$.63 per share and warrants to purchase 3,500 shares of Common Stock are
exercisable at $.75 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 908,641 shares
of Common Stock to 30 investors (29 of whom were Accredited Investors) for
$.55 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 4,000 shares of Common Stock for
every $100,000 invested in the Bridge Notes based on an initial offering price
of $10.00 per share. The Representative acted as placement agent in the
December 1997 private placement for which it received $312,400 and warrants to
purchase 284,000 shares of Common Stock at a price equal to 125% of the price
to public of the shares in this Offering.
In March and April 1998, the Registrant issued $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.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement between CSI and 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
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. 1 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON THEIR BEHALF BY THE UNDERSIGNED IN COLORADO SPRINGS, COLORADO, ON
APRIL , 1998.
Communications Systems
International, Inc.
/s/ Robert A. Spade
By: ____________________________
Name: Robert A. Spade
Title: Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below on this Registration Statement
hereby constitutes and appoints Robert A. Spade and Patrick R. Scanlon, and
each of them, as his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities (until revoked in writing) to sign any and
all amendments (including pre-effective amendment and post-effective
amendments and amendments thereto) to this Registration Statement on Form S-1
of Communications Systems International, Inc. and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact full
power and authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and gents, each acting alone or his
substitute, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the registration statement has been signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Ronald P. Erickson Chairman of the April , 1998
- ------------------------------------- Board designee
RONALD P. ERICKSON
/s/ Robert A. Spade
- ------------------------------------- Chief Executive April , 1998
ROBERT A. SPADE Officer and Vice
Chairman of the
Board (Principal
Executive Officer)
/s/ Patrick R. Scanlon President, Chief
- ------------------------------------- Operating Officer April , 1998
PATRICK R. SCANLON and Director
/s/ Daniel R. Hudspeth Chief Financial
- ------------------------------------- Officer and April , 1998
DANIEL R. HUDSPETH Treasurer
(Principal
Financial and
Accounting Officer)
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Dean H. Cary Director
- ------------------------------------- April , 1998
DEAN H. CARY
/s/ Richard F. Nipert Director
- ------------------------------------- April , 1998
RICHARD F. NIPERT
/s/ Charles A. Shields Director April , 1998
- -------------------------------------
CHARLES A. SHIELDS
/s/ Bruce L. Crockett Director designee April , 1998
- -------------------------------------
BRUCE L. CROCKETT
/s/ Lyman C. Hamilton Director designee April , 1998
- -------------------------------------
LYMAN C. HAMILTON
/s/ Michael S. Brownfield Director designee April , 1998
- -------------------------------------
MICHAEL S. BROWNFIELD
</TABLE>
II-8
<PAGE>
EXHIBIT 1.1
COMMUNICATION SYSTEMS INTERNATIONAL, INC.
_________________ Shares/1/
Common Stock
UNDERWRITING AGREEMENT
June ___, 1998
CRUTTENDEN ROTH INCORPORATED
COHIG & ASSOCIATES, INC.
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"), hereby confirms its 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 to the several Underwriters an aggregate of
shares (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 number of shares constituting the Firm Securities) if requested by
the Representatives as provided in Section 3 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
-2-
<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 5(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
-3-
<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
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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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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. 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 agrees to issue and sell Firm
Securities, (ii) each of the Underwriters agrees to purchase from the
Company 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, 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 9 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 3. 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 9
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 3, except
that reference therein to the Firm Securities and the Firm Closing Date
shall be deemed, for purposes of this paragraph 3(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 8(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.
4. 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.
5. 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 5(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
7(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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<PAGE>
(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.
6. 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 11 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 7 hereof
is not satisfied, because this Agreement is terminated pursuant to Section 11
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.
7. 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 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 of its 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,
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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<PAGE>
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; and
(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.
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 5(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.
8. INDEMNIFICATION AND CONTRIBUTION.
--------------------------------
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, 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 5(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 8(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 8(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) Each Underwriter, severally and not jointly, will indemnify and
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, 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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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 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 in connection therewith. The
Representatives shall not, without the prior written consent of the
Company, 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 and such controlling persons 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.
(c) Promptly after receipt by an indemnified party under this Section
8 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 8, 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.
(d) 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 8 for any legal or
other
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<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 8,
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.
(e) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 8 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 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 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 or the Underwriters, 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 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 (e). Notwithstanding any other provision of this paragraph (e),
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
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among Underwriters shall be governed by the provisions of the
Representatives' Agreement Among Underwriters. For the purposes of this
paragraph 8(e), 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, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall
have the same rights to contribution as the Company.
9. 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 10 hereof. In the event of any default by one or more Underwriters
as described in this Section 9, 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 3 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 9. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
10. SURVIVAL. The respective representations, warranties, agreements,
--------
covenants, indemnities and other statements of the Company, its officers, 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 Underwriter or any controlling person
referred to in Section 8 hereof and (ii) delivery of and payment for the
Securities. The respective agreements, covenants, indemnities and other
statements set forth in Sections 6 and 8 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.
11. 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 11 shall be
without liability of any party to any other party except as provided in
Section 10 hereof.
12. 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 for the purposes of Section 8 hereof.
The Underwriters confirm that such statements (to such extent) are correct.
13. 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>
14. SUCCESSORS. This Agreement shall inure to the benefit of and shall be
----------
binding upon the several Underwriters, 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 8 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 8 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.
15. 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.
16. 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 their respective properties, generally and unconditionally,
the nonexclusive jurisdiction of the aforesaid courts and waives any defense of
forum non conveniens and irrevocably agrees to be bound by any judgment rendered
thereby in connection with this Agreement. The Company designates and appoints
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 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 13
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 refuses to accept service, the
Company hereby agrees that service of process sufficient for personal
jurisdiction in any action against the Company 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 13 hereof, and the Company hereby
acknowledges 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 in the courts of any other jurisdiction.
17. 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>
18. 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 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 COHIG & ASSOCIATES, INC.
By: _________________________________ By: _________________________________
Name: _____________________________ Name: _____________________________
Title: ____________________________ 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........................
_________
Cohig & Associates, Inc.............................
_________
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 2.2
STOCK PURCHASE AGREEMENT
DATED AS OF APRIL 23, 1998
BY AND AMONG
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
AND
INTERNATIONAL TELEPHONE COMPANY
AND
ITS STOCKHOLDERS
<PAGE>
TABLE OF CONTENTS
PAGE NO.
-------
ARTICLE I
DEFINITIONS
Section 1.1 Certain Definitions.................................. 1
-------------------
Section 1.2 Terms Generally...................................... 6
---------------
ARTICLE II
PURCHASE AND SALE OF STOCK
Section 2.1 Transfer of Stock.................................... 6
-----------------
Section 2.2 Purchase Price....................................... 7
--------------
Section 2.3 Registration Rights.................................. 8
-------------------
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
Section 3.1 Corporate Organization............................... 11
----------------------
Section 3.2 Ownership of Stock................................... 11
------------------
Section 3.3 Authorization, Etc................................... 11
------------------
Section 3.4 No Approvals or Conflicts............................ 12
-------------------------
Section 3.5 Capital Stock........................................ 12
-------------
Section 3.6 Financial Statements................................. 13
--------------------
Section 3.7 Legal Compliance..................................... 13
----------------
Section 3.8 Litigation........................................... 13
----------
Section 3.9 Judgments, etc....................................... 14
--------------
Section 3.10 Changes.............................................. 14
-------
Section 3.11 Taxes................................................ 14
-----
Section 3.12 Employee Matters..................................... 15
----------------
Section 3.13 Labor................................................ 17
-----
Section 3.14 Title to Properties; Encumbrances.................... 17
---------------------------------
Section 3.15 Intentionally Omitted................................ 18
---------------------
Section 3.16 Leases............................................... 18
------
Section 3.17 Intentionally Omitted................................ 18
---------------------
Section 3.18 Intellectual Property................................ 18
---------------------
Section 3.19 Insurance............................................ 19
---------
Section 3.20 Agents and Customers................................. 19
--------------------
Section 3.21 Certain Environmental Matters........................ 19
-----------------------------
Section 3.22 Contracts............................................ 20
---------
Section 3.23 Affiliate Transactions............................... 20
----------------------
<PAGE>
Section 3.24 No Brokers' or Other Fees......................... 21
-------------------------
Section 3.27 Registration Statement............................ 21
----------------------
Section 3.28 Representations and Warranties Generally.......... 21
----------------------------------------
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Section 4.1 Corporate Organization............................ 23
----------------------
Section 4.2 Authorization, Etc................................ 23
------------------
Section 4.3 No Approvals or Conflicts......................... 23
-------------------------
Section 4.4 Capital Stock..................................... 24
-------------
Section 4.5 Financial Statements.............................. 24
--------------------
Section 4.6 Legal Compliance.................................. 24
----------------
Section 4.7 Litigation........................................ 25
----------
Section 4.8 Judgments, etc.................................... 25
--------------
Section 4.9 Changes........................................... 25
-------
Section 4.10 Taxes............................................. 25
-----
Section 4.11 Employee Matters.................................. 26
----------------
Section 4.12 Labor............................................. 28
-----
Section 4.13 Title to Properties; Encumbrances................. 28
---------------------------------
Section 4.14 Intentionally O................................... 29
---------------
Section 4.15 Leases............................................ 29
------
Section 4.16 Intentionally Omitted............................. 29
---------------------
Section 4.17 Intellectual Property............................. 29
---------------------
Section 4.18 Insurance......................................... 30
---------
Section 4.19 Agents and Customers.............................. 30
--------------------
Section 4.20 Certain Environmental Matters..................... 30
-----------------------------
Section 4.21 Contracts......................................... 31
---------
Section 4.22 Affiliate Transactions............................ 31
----------------------
Section 4.23 No Brokers' or Other Fees......................... 32
-------------------------
Section 4.26 Purchaser Common Stock............................ 32
----------------------
Section 4.27 Intentionally Omitted............................. 33
---------------------
Section 4.28 Representations and Warranties Generally.......... 33
----------------------------------------
ARTICLE V
COVENANTS OF THE COMPANY AND THE STOCKHOLDERS
Section 5.1 Access............................................ 35
------
Section 5.2 Ordinary Course................................... 35
---------------
Section 5.3 Representations and Warranties.................... 37
------------------------------
Section 5.4 No Breach......................................... 37
---------
Section 5.5 Financial Statements.............................. 37
--------------------
Section 5.6 Litigation........................................ 37
----------
Section 5.7 Closing Conditions................................ 37
------------------
<PAGE>
Section 5.8 Employee Benefit Plans............................ 37
----------------------
Section 5.9 Contracts......................................... 37
---------
Section 5.10 Reciprocal Telecommunications Agreement........... 37
---------------------------------------
Section 5.11 No Shop........................................... 38
-------
ARTICLE VI
PURCHASER'S COVENANTS
Section 6.1 Access............................................ 39
------
Section 6.2 Ordinary Course................................... 39
---------------
Section 6.3 Representations and Warranties.................... 41
------------------------------
Section 6.4 No Breach......................................... 41
---------
Section 6.5 Financial Statements.............................. 41
--------------------
Section 6.6 Litigation........................................ 41
----------
Section 6.7 Closing Conditions................................ 41
------------------
Section 6.8 Employee Benefit Plans............................ 41
----------------------
Section 6.9 Proposed Public Offering.......................... 41
------------------------
Section 6.10 Reciprocal Telecommunications Agreement........... 41
---------------------------------------
Section 6.11 Public Announcement............................... 41
-------------------
Section 6.12 Confidentiality................................... 42
---------------
Section 6.13 Standstill Agreement.............................. 42
--------------------
Section 6.14 Standstill Payments............................... 42
-------------------
ARTICLE VII
CONDITIONS OF PURCHASER'S OBLIGATIONS TO CLOSE
Section 7.1 Representations and Warranties True............... 43
-----------------------------------
Section 7.2 Performance....................................... 43
-----------
Section 7.3 No Material Change................................ 43
------------------
Section 7.4 Stockholder and Company Certificate.............. 43
------------------------------------
Section 7.5 No Injunction..................................... 43
-------------
Section 7.6 Employment/Consulting Agreements.................. 43
--------------------------------
Section 7.7 Stockholder Approval; Approval of Board of
------------------------------------------
Directors of the Company.......................... 43
------------------------
Section 7.8 Stockholder Action................................ 43
------------------
Section 7.9 Completion of Necessary Financing/Listing
-----------------------------------------
on Stock Market................................... 44
---------------
Section 7.10 Consents.......................................... 44
--------
Section 7.11 Disclosure Schedules.............................. 44
--------------------
Section 7.12 Conditions Generally.............................. 44
--------------------
<PAGE>
ARTICLE VIII
CONDITIONS OF THE COMPANY'S AND
THE STOCKHOLDERS' OBLIGATIONS TO CLOSE
Section 8.1 Representations and Warranties True............... 45
-----------------------------------
Section 8.2 Performance....................................... 45
-----------
Section 8.3 No Material Change................................ 45
------------------
Section 8.4 Purchaser Certificate............................. 45
---------------------
Section 8.5 No Injunction..................................... 45
-------------
Section 8.6 Employment/Consulting Agreements.................. 45
--------------------------------
Section 8.7 Purchaser Action.................................. 45
----------------
Section 8.8 Approval of Board of Directors of Purchaser....... 45
-------------------------------------------
Section 8.9 Completion of Necessary Financing/Listing on
--------------------------------------------
Stock Market...................................... 46
------------
Section 8.10 Consents.......................................... 46
--------
Section 8.11 Release of Guarantees............................. 46
---------------------
Section 8.12 Disclosure Schedules.............................. 46
--------------------
Section 8.13 Conditions Generally.............................. 46
--------------------
ARTICLE IX
DELIVERIES OF THE STOCKHOLDERS
Section 9.1 Stock Certificates................................ 47
------------------
Section 9.2 Resignations...................................... 47
------------
Section 9.3 Letters to Banks.................................. 47
----------------
Section 9.4 Stockholders Certificate.......................... 47
------------------------
Section 9.5 Good Standing Certificates........................ 47
--------------------------
Section 9.6 Secretary's Certificate........................... 47
-----------------------
Section 9.7 Employment/Consulting Agreements.................. 47
--------------------------------
Section 9.8 Other Deliveries.................................. 47
----------------
Section 9.9 Escrow Agreement.................................. 47
----------------
Section 9.10 Releases.......................................... 47
--------
Section 9.11 Personal Guarantee................................ 48
------------------
ARTICLE X
DELIVERIES OF PURCHASER ON THE CLOSING DATE
Section 10.1 Payments.......................................... 49
--------
Section 10.2 Secretary's Certificate........................... 49
-----------------------
Section 10.3 Purchaser Certificate............................. 49
---------------------
Section 10.4 Escrow Agreement.................................. 49
----------------
Section 10.5 Employment/Consulting Agreement................... 49
-------------------------------
Section 10.6 Other Deliveries.................................. 49
----------------
ARTICLE XI
<PAGE>
INDEMNIFICATION
Section 11.1 Indemnification by the Stockholders............... 50
-----------------------------------
Section 11.2 Indemnification by Purchaser...................... 50
----------------------------
Section 11.3 Procedures for Third-Party Claims................. 51
---------------------------------
Section 11.4 Direct Claim...................................... 53
------------
Section 11.5 Limitations of Indemnification Obligations........ 53
------------------------------------------
Section 11.6 Recourse for Indemnification by the Stockholders.. 54
------------------------------------------------
Section 11.7 WorldCom Dispute.................................. 56
----------------
Section 11.8 Survival of Representations, Warranties and
-------------------------------------------
Covenants......................................... 57
---------
Section 11.9 Third Parties..................................... 57
-------------
ARTICLE XII
TERMINATION
Section 12.1 Termination of this Agreement..................... 58
-----------------------------
Section 12.2 Effect of Termination............................. 58
---------------------
Section 12.3 Sole Remedy for Termination....................... 59
---------------------------
ARTICLE XIII
MISCELLANEOUS
Section 13.1 Entire Agreement................................. 60
----------------
Section 13.2 Amendments....................................... 60
----------
Section 13.3 Governing Law.................................... 60
-------------
Section 13.4 Representation by Counsel........................ 60
-------------------------
Section 13.5 Benefit of Parties; Assignment................... 60
------------------------------
Section 13.6 Expenses......................................... 60
--------
Section 13.7 Counterparts..................................... 61
------------
Section 13.8 Headings......................................... 61
--------
Section 13.9 Notices.......................................... 61
-------
Section 13.10 No Offer......................................... 62
--------
Section 13.11 Further Assurances............................... 62
------------------
Section 13.12 Access By Stockholders After Closing............. 62
------------------------------------
Section 13.13 Time of Essence.................................. 63
---------------
<PAGE>
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of April 23,
1998, is entered into by and among COMMUNICATIONS SYSTEMS INTERNATIONAL, INC., a
Colorado corporation ("Purchaser"), INTERNATIONAL TELEPHONE COMPANY, a Delaware
corporation (the "Company"), and the STOCKHOLDERS of the Company set forth on
the signature pages hereto (such STOCKHOLDERS being hereafter individually
referred to as "Stockholder" and collectively referred as the "Stockholders").
RECITALS:
A. The Stockholders own (beneficially or of record or both) all of the
issued and outstanding capital stock of the Company, consisting of 1,200 shares
of common stock, par value $.01 per share (the "Stock").
B. Purchaser desires to purchase and the Stockholders desire to sell, all
of the Stock upon the terms and conditions set forth herein.
C. The Boards of Directors of Purchaser and the Company deem it advisable
and in the best interests of their shareholders and Stockholders, respectively,
that Purchaser acquire the Company.
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the meanings set forth or as referenced below:
"Actions" shall mean any litigation and proceedings of any nature, whether
at law or in equity, before any court, arbitrator, arbitration panel, mediator
or Governmental Authority.
"Affiliate" of a Person shall mean any Person which, directly or
indirectly, controls, is controlled by or is under common control with such
Person.
"Benefit Plans" shall have the meaning set forth in Section 3.12(d).
"Business Day" shall mean any day except a Saturday, Sunday or a day on
which banking institutions in Denver, Colorado are obligated by law, regulation
or governmental order to close.
<PAGE>
"Closing" shall mean the closing of the transactions contemplated hereby,
which shall take place at the offices of Parcel, Mauro & Spaanstra, P.C., 1801
California St., Suite 3600, Denver, Colorado, on the Closing Date commencing at
10:00 A.M. local time, or at such other time or place as the parties may agree
upon in writing. It is anticipated that the Closing shall occur simultaneously
with the closing of the Proposed Public Offering.
"Closing Date" shall mean the date on which the Closing is consummated.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company" shall mean International Telephone Company, a Delaware
corporation.
"Company Balance Sheet Date" shall mean October 31, 1997.
"Company Disclosure Schedule" shall mean the disclosure schedule delivered
to Purchaser by the Company and the Stockholders on or prior to the date of this
Agreement.
"Company Financial Statements" shall have the meaning set forth in Section
3.6.
"Confidentiality Agreement" shall mean that certain Confidentiality
Agreement dated April 3, 1997, from Purchaser to the Company and the
Stockholders.
"Contracts" shall mean all contracts, agreements, indentures, licenses,
leases, commitments, arrangements, sales orders and purchase orders of every
kind, whether written or oral.
"Controlled Group" shall have the meaning set forth in Section 3.13(f).
"Damages" shall mean, collectively, losses, Liabilities, Liens, costs,
damages, claims and expenses (including reasonable fees and disbursements of
counsel, consultants or experts and expenses of investigation), and, without
limiting the generality of the foregoing, with regard to environmental matters
shall also include specifically response costs, corrective action costs, natural
resource damages, costs to comply with orders or injunctions, damages or awards
for property damage or personal injury, fines, penalties and costs for testing,
remediation or cleanup costs, including those related to administrative review
of site remediation.
"Direct Claim" shall have the meaning set forth in Section 11.4.
"Dispute" shall have the meaning set forth in Section 13.12(a).
"Dollars" and "$" shall mean United States dollars.
"Employment Laws" shall mean all federal, state, local and municipal Laws
in effect at or prior to Closing relating to employees, dependent contractors
and independent contractors and their employment, or rendition of services,
including but not limited to taxation, health, labor, labor/management
relations, occupational health and safety, pay equity, employment equity or
discrimination, employment standards, benefits and workers' compensation.
<PAGE>
"Environment" shall mean the environment or natural environment as defined
in any Environmental Laws, including, without limitation, ambient air, surface
water, groundwater, land surface or subsurface strata and any sewer system.
"Environmental Claim" shall mean any litigation, proceeding, investigation,
prosecution, order, citation, directive or notice (written or oral) by any
Person alleging potential liability for Damages arising out of, based on or
resulting from (a) the presence, or release or threatened release into the
environment, of any Hazardous Material at any location, whether or not owned or
operated by the Company or (b) circumstances forming the basis of any violation,
or alleged violation, of any Environmental Law or Damages thereunder.
"Environmental Laws" shall mean all federal, state, local and municipal
Laws in existence, enacted or in effect at or prior to Closing relating to
pollution or protection of public health and safety, the workplace and the
Environment, including, without limitation, Laws relating to emissions,
discharges, releases or threatened releases of Hazardous Materials or otherwise
relating to the generation, manufacture, processing, distribution, use,
treatment, storage, disposal, transport, labeling, advertising, sale, display or
handling of Hazardous Materials.
"Environmental Liabilities" shall mean Damages relating to or arising in
anyway from Environmental Laws or Environmental Claims, or both.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder.
"Escrow Agent" shall mean Merrill Lynch and any successor escrow agent
under the terms of the Escrow Agreement.
"Escrow Agreement" shall have the meaning set forth in Section 7.9.
"GAAP" shall mean generally accepted accounting principles, as in effect in
the United States, from time to time.
"Governmental Authority" shall mean any agency, public or regulatory
authority, instrumentality, department, commission, court, ministry, tribunal or
board of any government, whether foreign or domestic and whether national,
federal, provincial, state, regional, local or municipal.
"Hazardous Materials" shall mean those materials that are regulated by or
form the basis of liability under Environmental Laws and includes, without
limitation, (i) all substances identified under any Environmental Law as a
pollutant, contaminant, hazardous substance, liquid, industrial or solid or
hazardous waste, hazardous material or toxic substance, dangerous substance or
dangerous good, (ii) petroleum or petroleum derived substance or waste, (iii)
asbestos or asbestos-containing material, (iv) PCBs or PCB-containing materials
or fluids, (v) any other substance with respect to which a Governmental
Authority may require environmental investigation or remediation and (vi) any
radioactive material or substance.
<PAGE>
"Indemnifying Party" shall mean any Person or Persons required to provide
indemnification under this Agreement.
"Indemnitee" shall mean any Person or Persons entitled to indemnification
under Article XI of this Agreement.
"Insurance Policies" shall have the meaning set forth in Section 3.19.
"Investigation" shall mean any investigation of any nature conducted by or
before any Governmental Authority.
"Laws" shall mean statutes, common laws, rules, ordinances, regulations,
codes, licensing requirements, orders, judgments, injunctions, decrees,
licenses, permits and bylaws of a Govern-mental Authority.
"Liabilities" shall mean debts, liabilities, commitments, obligations,
duties and responsibilities of any kind and description, whether absolute or
contingent, monetary or nonmonetary, direct or indirect, known or unknown or
matured or unmatured, or of any other nature.
"Lien" shall mean any security interest, lien, mortgage, claim, charge,
pledge, restriction, equitable interest or encumbrance of any nature and in the
case of securities any put, call or similar right of a third party with respect
to such securities.
"Material Adverse Effect" shall mean, with respect to the same or any
similar events, acts, conditions or occurrences, whether individually or in the
aggregate, a material adverse effect on or change in (a) any of the business,
condition (financial or otherwise), operations, assets or liabilities, taken as
a whole of the Company or Purchaser, as the case may be, (b) the legality or
enforceability against the Stockholders of this Agreement or (c) the ability of
any Stockholder to perform its material obligations and to consummate the
transactions under this Agreement. For purposes of clause (a) of this
definition and without limiting the generality of the foregoing, an effect or
change with respect to the same or any similar event(s), act(s), condition(s) or
occurrence(s) individually or in the aggregate with respect to which the Company
or Purchaser would reasonably be expected to have $25,000 in the aggregate or
more in Damages being asserted against, imposed upon or sustained by any of them
shall constitute a "material adverse" effect or change.
"Notice of Settlement" shall have the meaning set forth in Section 11.3(c).
"Notice to Contest" shall have the meaning set forth in Section 11.3(c).
"Notice to Defend" shall have the meaning set forth in Section 11.3(a).
"Pension Plan" shall have the meaning set forth in Section 3.12(f).
"Person" shall mean any natural person, corporation, business trust, joint
venture, association, company, firm, partnership or other entity or government
or Governmental Authority.
<PAGE>
"Plans" shall have the meaning set forth in Section 3.12(f).
"Proposed GlobalTel Merger" shall mean a merger between Purchaser and
GlobalTel Resources, Inc.
"Proposed Public Offering" shall mean an underwritten public offering and
sale of securities of Purchaser with gross proceeds of at least $15,000,000 in
connection therewith.
"Proprietary Right" shall mean any trade name, trademark, service mark,
patent, copyright, proprietary technology, know how, process and industrial
design, and any application for any of the foregoing.
"Purchase Price" shall have the meaning set forth in Section 2.2.
"Purchaser" shall mean Communications Systems International, Inc., a
Colorado corporation.
"Purchaser Disclosure Schedule" shall mean the disclosure schedule
delivered to the Company and the Stockholders by Purchaser on or prior to the
date of this Agreement.
"Purchaser Balance Sheet Date" shall mean October 31, 1997.
"Purchaser Financial Statements" shall have the meaning set forth in
Section 4.6.
"Purchaser Indemnitee" shall have the meaning set forth in Section 11.1.
"Reciprocal Telecommunications Agreement" shall mean the reciprocal
telecommunications agreement dated July 14, 1997 between the Company and
Purchaser.
"Returns" shall mean all returns, declarations, reports, forms, estimates,
information returns, statements or other documents (including any related or
supporting information) filed or required to be filed with or supplied to any
Governmental Authority in connection with any Taxes.
"Standstill Agreements" shall mean the standstill agreements between
Purchaser and the Company dated April 3, 1997 and October 31, 1997.
"Standstill Payments" shall mean the payments pursuant to the Standstill
Agreements.
"Stock" shall have the meaning set forth in Recital A hereto.
"Stockholder Indemnitee" shall have the meaning set forth in Section 11.2.
"Stockholders" shall mean the Persons set forth as "Stockholders" on the
signature pages to this Agreement.
"Subsidiary" shall mean any corporation or other entity of which securities
or other ownership interests having ordinary voting power to elect a majority of
the board of directors or
<PAGE>
other persons performing similar functions are at the time directly or
indirectly owned by the Company.
"Taxes" shall mean all taxes, charges, fees, duties, levies, penalties or
other assessments, including, without limitation, income, gross receipts,
excise, real and personal property, sales, transfer, license, payroll,
withholding, social security, franchise, unemployment insurance, workers'
compensation, employer health tax or other taxes, imposed by any Governmental
Authority and shall include any interest, penalties or additions to tax
attributable to any of the foregoing.
"Third Party Claim" shall have the meaning set forth in Section 11.3(a).
"WorldCom" shall mean WorldCom, Inc. or any successor to such Person.
"WorldCom Dispute" shall mean the lawsuit entitled "Worldcom, Inc. v.
International Telephone Company d/b/a Interglobal Telephone Company" which was
filed in the Superior Court for Judicial District of New Haven or any counter-
claim, cross-claim, removal, arbitration, mediation or negotiation with respect
to the claims set forth in such lawsuit.
1.2 Terms Generally. The definitions in Section 1.1 shall apply
---------------
equally to both the singular and plural forms of the terms
defined. Whenever the context may require, any pronoun shall
include the corresponding masculine, feminine and neuter forms.
The words "include," "includes" and "including" shall be deemed
to be followed by the phrase "without limitation" even if not
followed actually by such phrase unless the context expressly
provides otherwise. With respect to any particular representation
contained in this Agreement, "knowledge" when used to apply to
the "knowledge" of Purchaser or of the Company shall mean that
any employee of Purchaser or the Company with managerial or
substantial responsibility for the subject matter of such
representation had actual knowledge and (b) "knowledge" with
respect to any Stockholder shall be deemed to mean that such
Stockholder had actual knowledge.
All references herein to Articles, Sections, paragraphs, Exhibits and
Schedules shall be deemed references to this Agreement unless the context shall
otherwise require. Unless otherwise expressly defined, terms defined in the
Agreement shall have the same meanings when used in any Annex, Exhibit or
Schedule and terms defined in any Exhibit or Schedule shall have the same
meanings when used in the Agreement or in any other Exhibit or Schedule. The
words "herein," "hereof," "hereto" and "hereunder" and other words of similar
import refer to this Agreement as a whole and not to any particular provision of
this Agreement.
ARTICLE
PURCHASE AND SALE OF STOCK
2.1 Transfer of Stock. On the Closing Date and subject to the terms
-----------------
and conditions set forth in this Agreement, the Stockholders will
sell, convey, assign, transfer and
<PAGE>
deliver all of the issued and outstanding Stock to Purchaser,
free and clear of all Liens with respect thereto.
2.2 Purchase Price.
--------------
(a) The total consideration (the "Purchase Price") to be paid and/or
provided by Purchaser to Stockholders for the Stock shall be as set forth below
which amounts shall be divided equally among the three Stockholders (i.e., one-
third (1/3/rd/) each), to be paid as follows:
(A) The Standstill Payments previously paid by Purchaser (i.e.,
$225,000 or such greater amount as actually paid);
(B) (i) Purchaser shall, on the first anniversary of the Closing
Date, deliver to the Stockholders (or their estates, in the case of
deceased Stockholders who are natural Persons) Certificates for duly
authorized, validly issued, fully paid and nonassessable shares of common
stock of Purchaser ("Purchaser Common Stock") equal in number to
$2,070,000 divided by the "Price to Public" of Purchaser Common Stock set
forth on the cover of the final prospectus relating to the Proposed Public
Offering; provided, however that the number of shares of Purchaser Common
-----------------
Stock to be issued and delivered may be reduced by set-off pursuant to
Article XI hereof. Purchaser Common Stock shall be issued (and registered
in the name of) one-third to each of the Stockholders.
(ii) If any time after the completion of the Closing but prior
to the issuance and delivery of Purchaser Common Stock pursuant to this
subsection, Purchaser increases or decreases the number of its issued and
outstanding shares of Common Stock of Purchaser, or changes in any way the
rights and privileges of such shares of Common Stock, by means of (a) the
payment of a share dividend or the making of any other distribution on
such shares of Common Stock payable in its shares of Common Stock, (b) a
split or subdivision of shares of Common Stock, or (c) a merger,
consolidation or combination of shares of Common Stock, then the number of
shares of Purchaser Common Stock to be issued pursuant to this subsection
shall be proportionately adjusted so that the number of shares of
Purchaser Common Stock shall be increased, decreased or changed in like
manner, as if Purchaser Common Stock required to be issued pursuant to
this Subsection immediately prior to the event had been issued,
outstanding, fully paid and nonassessable at the time of such event. Any
dividend paid or distributed on the shares of Common Stock in shares of
any other class of Purchaser or securities convertible into shares of
Common Stock shall be treated as a dividend paid in shares of Common Stock
to the extent shares of Common Stock are issuable on the payment or
conversion thereof. Any adjustment made pursuant to this Subsection shall,
in the case of a stock dividend or distribution, become effective as of
the record date therefor and, in the case of a split, subdivision,
consolidation or combination, be made as of the effective date thereof.
Purchaser shall not be required to deliver fractions of shares of Common
Stock; provided, however, that Purchaser shall purchase such fraction for
an amount in cash equal to the current value of such
<PAGE>
fraction computed on the basis of the closing bid price on the trading day
immediately preceding the day upon such Purchaser Common Stock is required
to be delivered.
(iii) The obligation of Purchaser to deliver Purchaser Common
Stock shall not entitle the Stockholders to any of the rights of
shareholders or to any dividend declared on the shares of Purchaser Common
Stock unless the record date fixed by the Board of Directors of Purchaser
for the determination of holders of shares of Common Stock entitled to
such dividend or other right is set after the first anniversary of the
Closing Date and the Stockholders are still holders of the Purchaser
Common Stock as of such record date.
(C) Purchaser shall pay a total of $3,300,000 (less the Standstill
Payments previously paid and the Escrow Payments) in cash, payable by wire
transfer or other immediately available funds on the Closing Date, payable
one-third to each of the Stockholders (the "Cash Payments"); and
(D) Purchaser shall pay to the Escrow Agent, in its capacity as the
Escrow Agent under the terms of the Escrow Agreement with each of the
Stockholders, a total of an amount equal to $385,430.00 in cash payable by
wire transfer or other immediately available funds on the Closing, to be
held and disbursed in accordance with the terms of the Escrow Agreement
(the "Escrow Payments").
(b) Purchaser agrees that: (a) it shall claim a tax basis in the Stock
equal only to the sum of the Standstill Payments plus the Cash Payments plus the
Escrow Payments until the Purchaser Common Stock is delivered pursuant to
Section 2.2(a)(B) hereof; (b) when the Purchaser Common Stock is delivered, it
shall increase its tax basis in the Stock by the fair market value of the
Purchaser Common Stock on such delivery date and (c) if delivery of the
Purchaser Common Stock is deferred longer than one year after the Closing Date,
Purchaser shall be required to report a portion of the Purchaser Common Stock as
an interest payment in accordance with the Code and regulations promulgated
thereunder. The Stockholders agree that they shall not report the transactions
contemplated by this Agreement in a manner inconsistent therewith.
2.3 Registration Rights.
-------------------
(a) At any time after the first anniversary of the Closing Date, any,
some or all of the Stockholders shall have the right, exercisable
by written notice to Purchaser (the "Registration Exercise
Notice") to have Purchaser prepare and file with the Securities
and Exchange Commission (the "Commission") on one occasion within
30 days of such notice, at the sole expense of Purchaser, a
Registration Statement on Form S-3 and such other documents,
including a prospectus, if necessary (in the opinion of both
counsel for Purchaser and counsel for the applicable
Stockholder), in order to comply with the provisions of the
Securities Act of 1933, as amended (the "Act"), as to permit a
public offering and sale of the Purchaser Common Stock by the
Stockholders; provided however, that Purchaser shall not be
----------------
obligated to
<PAGE>
effect any such registration if Purchaser shall furnish to the
Stockholders a certificate signed by the President of Purchaser
stating that in the good faith judgment of the Board of Directors
of Purchaser, it is currently entering into, or engaged in
discussions with respect to, a transaction for which a Form 8-K,
including financial statements, will need to be filed with the
Commission, in which event Purchaser shall have the right to
defer the filing of the Registration Statement for a period of
not more than 90 days after receipt of the request of any of the
Stockholders pursuant to this Section 2.3.
(b) For the purposes of this Section 2.3, Purchaser shall not be
deemed to have satisfied its obligations hereunder, unless
Purchaser shall have:
(i) Utilized its best efforts to cause the Registration
Statement to become effective under the Act within ninety
(90) days from the date of filing with the Commission so as
to permit a public offering and sale of the Purchaser
Common Stock;
(ii) Prepared and filed with the Commission such amendments and
supplements, prospectuses and other documents in connection
with such Registration Statement as may be necessary to
comply with the provisions of the Act with respect to the
disposition of all securities covered by the Registration
Statement;
(iii) Filed such supplements and post-effective amendments as may
be required in order that the Registration Statement shall
remain effective for such period as is necessary to permit
the Stockholders to dispose of all of the Purchaser Common
Stock without regard as to whether any shares of the
Purchaser Common Stock shall otherwise become freely
tradable without restriction under the Act by any or all of
the Stockholders pursuant to Rule 144 promulgated under the
Act;
(iv) Furnished to the Stockholders such number of copies of any
prospectus in conformity with the requirements of the Act,
and such other documents as the Stockholders may reasonably
request in order to facilitate the disposition of the
Purchaser Common Stock owned by the Stockholders;
(v) Utilized its best efforts to register and qualify the
securities covered by said Registration Statement under the
securities or Blue Sky laws of such jurisdictions as shall
be reasonably appropriate for the distribution of the
securities covered by said Registration Statement, except
no such registration shall be required in any jurisdiction
where solely as a result of such registration Purchaser
would be subject to service of general process or to
taxation or qualification as a foreign corporation doing
business in such jurisdiction.
<PAGE>
(vi) Paid any and all expenses incurred in connection with any
registration pursuant to this Section 2.3 (excluding
underwriter's discounts and brokerage or dealer
commissions), including without limitation, all
registration and qualification fees, printers' fees,
accounting fees, and fees and disbursements of counsel for
Purchaser.
(c) In the event that Purchaser has not: (a) filed the Registration
Statement with the Commission within 30 days of receipt of the Registration
Exercise Notice then Purchaser shall pay to the Stockholders a penalty of $2,500
per day for each day such Registration Statement has not been filed in excess of
such 30 days; or (b) utilized its best efforts to cause the Registration
Statement to become effective within 90 days of filing such Registration
Statement, then Purchaser shall pay to the Stockholders a penalty of $2,500 per
day for each day said effectiveness is delayed beyond the expiration of such 90
day period. Said penalties shall be payable on a monthly basis, in arrears,
commencing on the first day of the month following the expiration of such 30 or
90 day period, as the case may be, and on the first day of each month
thereafter. Any indemnification obligation of Purchaser pursuant to Article XI
hereof for breach of this Section 2.3 shall be reduced by any and all amounts
which have been paid pursuant to this Subsection 2.3(c).
2.4 Reports Under Exchange Act. Notwithstanding the availability of the
--------------------------
Registration Rights set forth in Section 2.3, Purchaser acknowledges
that in the event such Registration Statement shall not become
effective, or in the event there shall be a default in the undertaking
by Purchaser of its obligations pursuant to Section 2.3, the
Stockholders may be required to rely upon an exemption under the Act
for the purpose of disposing of the Purchaser Common Stock.
Accordingly, with a view to making available to the Stockholders the
benefits of Rule 144 promulgated under the Act, and any other rule or
regulation of the Commission that may at any time permit the
Stockholders to sell the Purchaser Common Stock to the public without
registration, Purchaser shall (a) make and keep "public information"
available, as such terms are contemplated and defined in Rule 144, (b)
file with the Commission in a timely manner all reports and other
documents required of Purchaser under the Act (if any) and the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"),
and (c) furnish to each Stockholder, so long as each Stockholder owns
any of the Purchaser Common Stock, forthwith upon request (i) a
written statement by Purchaser that it has complied with the reporting
requirements necessary to enable the Stockholders to sell the
Purchaser Common Stock pursuant to Rule 144, (ii) a copy of the most
recent annual or quarterly report of Purchaser, and (iii) such other
reports and documents so filed by Purchaser as may be reasonably
requested in availing a Stockholder of any rule or regulation of the
Commission permitting the selling of any such securities without
registration.
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
The Company and each of the Stockholders jointly and severally (except with
respect to Section 3.2 for which the Stockholders severally (but not jointly))
represent and warrant to Purchaser as follows.
3.1 Corporate Organization. The Company is a corporation duly organized,
----------------------
validly existing and in good standing under the laws of the State of
Delaware. The Company has no Subsidiaries, and does not have an
ownership interest in any Person other than as set forth in Section
3.1 of the Company Disclosure Schedule attached to this Agreement (the
"Company Disclosure Schedule"). The Company is qualified to do
business in the jurisdictions set forth in Section 3.1 of the Company
Disclosure Schedule. The Company has the corporate power and authority
to own, lease and operate its respective properties and assets and to
carry on its business as now being conducted and is duly qualified or
licensed to do business as a foreign corporation in good standing in
the jurisdictions in which the ownership, lease or operation of its
property or the conduct of its business requires such qualification,
except jurisdictions in which the failure to be so qualified or
licensed would not reasonably be expected to have a Material Adverse
Effect. The Stockholders have delivered to Purchaser complete and
correct copies of the charter documents and all amendments thereto to
the date hereof of the Company.
3.2 Ownership of Stock. Each Stockholder represents as to the Stock to be
------------------
acquired from such Stockholder that the Stock is owned by such
Stockholder free and clear of all Liens with respect thereto, other
than any restrictions imposed by federal and state securities laws.
Each Stockholder represents as to the Stock to be acquired from such
Stockholder that, upon the consummation of the transactions
contemplated hereby, Purchaser will acquire from such Stockholder good
title to the Stock that Purchaser purchases free and clear of all
Liens with respect thereto, other than any the restrictions imposed by
federal and state securities laws.
3.3 Authorization, Etc. The Company has full corporate power and
-------------------
authority to execute, deliver and perform its obligations under this
Agreement and the documents and instruments contemplated hereby and to
carry out the transactions contemplated hereby and thereby. The
Company and each of the Stockholders has duly approved and authorized
the execution and delivery of this Agreement and the documents and
instruments contemplated hereby and the consummation of the
transactions contemplated hereby and thereby, and no other corporate
proceedings or other action on the part of the Company or any of the
Stockholders are necessary to approve and authorize the execution,
delivery and performance by the Company and each of the Stockholders
of this Agreement and the documents and instruments contemplated
hereby or the consummation by the Company and the Stockholders of the
transactions contemplated hereby or thereby. This Agreement
constitutes a legal,
<PAGE>
valid and binding agreement of the Company and each of the
Stockholders, enforceable against the Company and each of the
Stockholders in accordance with its terms, except as enforcement
hereof may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally.
3.4 No Approvals or Conflicts. Except as set forth in Section 3.4 of the
-------------------------
Company Disclosure Schedule neither the execution, delivery or
performance by the Company and the Stockholders of this Agreement nor
the consummation by the Company and the Stockholders of the
transactions contemplated hereby will (a) violate, conflict with or
result in a breach of any provision of the certificate of
incorporation, bylaws or other governing documents of the Company, and
to the best of the Company's and the Stockholder's knowledge, and
subject to Purchaser obtaining any and all required consents,
approvals and authorizations from third parties and/or Government
Authorities. (b) violate, conflict with or result in a breach of any
provision of, or constitute (with or without notice or lapse of time
or both) a default (or give rise to any right of termination,
cancellation or acceleration) under, or result in the termination of,
or accelerate or alter in any material way the performance required by
or result in the creation of or give any party the right to create any
Lien on any of the assets or properties of the Company under, any
note, bond, mortgage, loan agreement, deed of trust, franchise, permit
or other instrument or Contract to which any of the Company, the
Stockholders or any of their respective properties may be bound, (c)
violate any Law applicable to any of the Company, the Stockholders or
any of their respective assets or properties, or (d) require any
consent, approval or authorization of, or notice to, or declaration,
filing or registration with, any Governmental Authority or other third
party in connection with the execution, delivery and performance of
this Agreement by the Stockholders or to enable the Company to
continue to conduct its business and operations immediately after the
Closing Date in the same manner in which they are presently conducted.
The parties acknowledge that certain consents, approvals or
authorizations of or notice to or declarations, filings or
registrations with, one or more Governmental Authorities, (including,
without limitation, the Federal Communications Commission ("FCC"))
and/or other third parties may be required in connection with the
execution, delivery and performance of this Agreement by the Company
and/or Stockholders and/or to enable the Company to continue to
conduct its business and operations immediately after the Closing Date
in the same manner in which they are presently conducted. Purchaser
shall be responsible for obtaining, giving and/or filing any and all
such consents, approvals, authorizations, notices, declarations,
filings or registrations; provided, however, the Company and the
Stockholders shall reasonably assist Purchaser with respect to same;
provided, further that if Purchaser decides not to obtain any such
consents, approvals, authorizations, notices, declarations, filings or
registrations, it shall not be required hereunder to obtain any such
consents, approvals, authorizations, notices, declarations, filings or
registrations.
3.5 Capital Stock. As of the date hereof, the authorized capital stock of
-------------
the Company consists of 1,200
<PAGE>
shares of common stock, par value $.01 per share, of which 1,200
shares of Stock are issued and outstanding and owned by the
Stockholders. Section 3.5 of the Company Disclosure Schedule sets
forth the name of each Person owning Stock and the amount of Stock
owned by such Person. Other than the Stock held by the Stockholders,
all of which are set forth and accounted for in Section 3.5 of the
Company Disclosure Schedule, there are no shares of capital stock of
the Company issued or outstanding. Except as set forth in Section 3.5
of the Company Disclosure Schedule, there are no outstanding
subscriptions, options, warrants, calls, rights, contracts,
commitments, understandings, restrictions or arrangements relating to
the issuance, sale, transfer or voting of any shares of Stock,
including any rights of conversion or exchange under any outstanding
securities or other instruments. All outstanding shares of Stock have
been validly issued and are fully paid, nonassessable and free of
preemptive or similar rights.
3.6 Financial Statements. The Company has delivered to Purchaser the
--------------------
audited balance sheets of the Company as of December 31, 1995 and 1996
and October 31, 1997 and related statements of earnings, changes in
financial position and stockholder's equity for the periods ended on
said dates. Such audited financial statements, including the notes
thereto, accompanied by the unqualified reports of Richard A. Eisner &
Company, LLP, certified public accountants are collectively referred
to herein as the "Company Financial Statements." To the best of the
Company's and Stockholders' knowledge, the Company Financial
Statements are in accordance with the books and records of the
Company, fairly present the consolidated financial position of the
Company and its results of operations as of and for the periods
indicated in accordance with GAAP and have been prepared in accordance
with GAAP consistently applied. Except as set forth in Section 3.6 of
the Company Disclosure Schedule and as disclosed in the Company
Financial Statements, the Company does not have any material
Liabilities (i.e., in excess of $25,000 as to any individual
liability), whether or not of a nature required to be reflected or
reserved against on a consolidated balance sheet in accordance with
GAAP, except for Liabilities incurred by the Company in the ordinary
course of business consistent with past practice that individually or
in the aggregate would not have a Material Adverse Effect upon or
change in any of the business, condition (financial or otherwise),
operations, assets or liabilities of the Company taken as a whole. For
purposes of this Section "Liabilities" shall not be deemed to include
Contracts.
3.7 Legal Compliance. Except as set forth in Section 3.7 of the Company
----------------
Disclosure Schedule, to the knowledge of the Company and the
Stockholders; (i) the Company has complied and is in compliance with
all Laws applicable to the Company and their business except where the
failure to be in compliance would not reasonably be expected to have a
Material Adverse Effect and (ii) the Company holds all material
licenses, permits and other authorizations of Governmental Authorities
necessary to conduct its business as now being conducted or to
continue to conduct its business as now being conducted. Except as set
forth in Section 3.7 of the Company Disclosure Schedule and except for
the transactions contemplated hereby, the Company has no knowledge of
or intention to make any changes in the conduct of its business that
will result in or cause the Company to be in noncompliance with
<PAGE>
applicable Laws or that will require changes in or a loss of any such
licenses, permits or other authorizations or an increase in any
expenses related thereto except where such noncompliance, change, loss
or increase would not reasonably be expected to have a Material
Adverse Effect. To the knowledge of the Company and the Stockholders,
such licenses, permits and other authorizations as aforesaid held by
the Company are valid and in full force and effect, and there are no
(a) Actions pending, or to the knowledge of the Company or any
Stockholder, threatened or (b) Investigations to the knowledge of the
Company or any Stockholder pending or threatened that would reasonably
be expected to result in the termination, impairment or nonrenewal
thereof.
3.8 Litigation. Section 3.8(a) of the Company Disclosure Schedule lists
----------
all (a) Actions pending, or to the knowledge of the Company and any
Stockholder, threatened or (b) Investigations to the knowledge of the
Company or any Stockholder pending or threatened against any of its
properties. Except as set forth in Section 3.8(b) of the Company
Disclosure Schedule, there are no (i) Actions pending or, to the
Company's or any Stockholder's knowledge, threatened or (ii)
Investigations to the knowledge of the Company or any Stockholder
pending or threatened against, relating to or involving the Company
(or any of its officers or directors in connection with the business
and affairs of the Company) or any properties or rights of the Company
(x) in which there is a reasonable likelihood of an adverse
determination that would reasonably be expected to have a Material
Adverse Effect, or (y) that questions or challenges the validity of
this Agreement or any action taken or to be taken by the Stockholders
pursuant to this Agreement. There is no Action pending or, to the
knowledge of each Stockholder, threatened against or involving the
Stockholders in their capacity as Stockholders, officers or directors
of the Company.
3.9 Judgments, etc. Except as set forth in Section 3.9 of the
---------------
Company Disclosure Schedule, the Company is not (a) subject to any
judgment, injunction, order or decree of a Governmental Authority that
has had or continues to have or would reasonably be expected to have a
Material Adverse Effect or (b) in default of any judgment, injunction,
order or decree of a Governmental Authority.
3.10 Changes. Since the Company Balance Sheet Date, except as
--------
disclosed in Section 3.10 of the Company Disclosure Schedule, to the
knowledge of the Company and the Stockholders: (a) the business of the
Company has in all material respects been conducted only in the
ordinary course, consistent with past practice and consistent with the
terms and conditions of this Agreement and no unusual cash payments or
bonuses have been made or agreed to be made inconsistent with past
practice; (b) there has been no direct or indirect redemption,
purchase or other acquisition by the Company of any shares of its
capital stock; (c) there has not been any declaration, setting aside
or payment of any dividend or other distribution by the Company other
than cash management procedures in the ordinary course of business
consistent with past practice; and (d) there has been no material
adverse effect or change in any of the business, condition (financial
or otherwise), operations, assets or liabilities of the Company, as a
whole (the foregoing to pertain only to matters
<PAGE>
respecting the Company in particular, as opposed to matters
generally affecting the business in which the Company is
engaged).
3.11 Taxes. (a) Except as set forth in Section 3.11(a) of the Company
------
Disclosure Schedule, to the knowledge of the Company and the
Stockholders the Company has (i) filed or will timely file with
the appropriate Governmental Authorities all Returns (including,
without limitation, those pertaining to telecommunications taxes,
interstate and federal excise taxes, sales taxes and FCC mandated
surcharges) which are required to be filed prior to the Closing
Date by or with respect to the Company, and such Returns when
filed are or will be correct and complete in all material
respects and (ii) paid or will timely pay or made or will make
provision for in the appropriate financial statements all
material Taxes of the Company required to be shown to be due on
such Returns; provided, however that the Company makes no
representation with respect to, and Purchaser accepts full
responsibility for, any unpaid federal excise taxes. There are no
Liens for Taxes upon the assets of the Company except liens for
current Taxes not yet due or Taxes being contested in good faith
by appropriate proceedings and in each case where such Lien would
not reasonably be expected to have a Material Adverse Effect.
Except as set forth in Section 3.11(a) of the Company Disclosure
Schedule, neither the Company nor the Stockholders has received
any written notice of deficiency or assessment from any taxing
Governmental Authority with respect to liabilities for Taxes of
the Company which have not been paid or finally settled, and any
such deficiency or assessment disclosed in Section 3.11(a) of the
Company Disclosure Schedule is being contested in good faith
through appropriate proceedings.
(b) Except as set forth in Section 3.11(b) of the Company
Disclosure Schedule, the Company does not have any material Liability (i.e., in
excess of $25,000) for the payment of Taxes, except such as are recorded in the
Company Financial Statements or such Taxes as are not yet due, or such Taxes as
have arisen since the Company Balance Sheet Date and for which adequate
provision in the accounts of the Company has been made, and to the knowledge of
the Company and the Stockholders the Company is not in arrears with respect to
any required withholdings or installment payments of any Tax and has not filed
any waiver or extension of the applicable statute of limitations for assessment
of Taxes for a taxation year under the Code or any foreign, state or local law.
3.12 Employee Matters.
----------------
(a) Section 3.12(a) to the Company Disclosure Schedule lists all
employment contracts and all other material contracts to
which the Company is a party with dependent and independent
contractors. Section 3.12(a) of the Company Disclosure
Schedule sets forth the position held by each employee with
the Company, and the annual salary and the length of
employment of each employee.
(b) Except as disclosed on Section 3.12(b) to the Company
Disclosure Schedule,
<PAGE>
(i) no trade union, council of trade unions, employee bargaining
agency or affiliated bargaining agent holds bargaining rights
with respect to any of the Company's employees by way of
certification, interim certification, voluntary recognition,
designation or successor rights,
(ii) the Company has not received notice that any trade union,
council of trade unions, employee bargaining agency or
affiliated bargaining agent has applied to be certified as the
bargaining agent of any of the Company's employees, and
(iii) the Company has not received notice that any trade union,
council of trade unions, employee bargaining agency or
affiliated bargaining agent has applied to have the Company
declared a related employer or successor employer pursuant to
applicable labor legislation.
(c) Except (i) as disclosed in Section 3.12(c) to the Company Disclosure
Schedule and (ii) for remuneration paid to employees and independent
contractors in the usual and ordinary course of business, no material
payments have been made or authorized since the Company Balance Sheet
Date by the Company to officers, directors, employees, or independent
contractors of the Company.
(d) Section 3.12(d) to the Company Disclosure Schedule contains a correct
and complete in all material respects list of all bonus, deferred
compensation, incentive compensation, share or stock bonus, share or
stock purchase, share or stock appreciation right, share or stock
option, severance pay or termination pay, health or other medical,
life or other insurance, death benefit, disability, medical
reimbursement, supplementary unemployment benefit, profit sharing,
pension, retirement and every other benefit plan, program, agreement
or arrangement ("Benefit Plans") maintained or contributed to or
required to be contributed to by the Company thereof for the benefit
of any current or former directors, officers, employees or independent
contractors of the Company or their respective dependents or
beneficiaries.
(e) The Company shall provide, within 15 days of request, to Purchaser
copies of the Company's Benefit Plans and all amendments thereto and
make available to Purchaser all documents in the Company's possession
pertaining to compensation practices, benefits and other terms and
conditions of employment of all directors, officers or employees of
the Company.
(f) Each "employee pension benefit plan" as defined in Section 3(2) of
ERISA that is subject to ERISA (a "Pension Plan") and that has been
maintained or contributed to within the last three years by the
Company or any trade or business (whether or not incorporated) that is
under common control with the Company (as determined in accordance
with Section 4001 of ERISA) or is
<PAGE>
a member of a "controlled group" with the Company (as defined in
Section 4971(e)(2)(B) of the Code) (the "Controlled Group") is
identified as such on Section 3.12(f) to the Company Disclosure
Schedule. Each "employee welfare benefit plan" as defined in Section
3(1) of ERISA and that is subject to ERISA and that has been
maintained or contributed to by any member of the Controlled Group is
identified as such on Section 3.12(f) to the Company Disclosure
Schedule. The Pension Plans and the employee welfare benefit plans
shall be referred to collectively as "Plans. "
(g) None of the Company's Pension Plans is subject to Title IV of ERISA or
to the minimum funding standards of Code section 412. None of the
Company's Pension Plans is a "multi-employer plan" as defined in
Section 4001(a)(3) of ERISA and neither the Company nor any member of
the Controlled Group has incurred or is expected to incur any
withdrawal liability under ERISA with respect to any "multi-employer
plan" or any single employer plan subject to Section 4063 of ERISA.
(h) Neither the Company nor any member of the Company's Controlled Group
is aware of any facts that would adversely affect the qualified status
of any Pension Plan under Section 401 of the Code.
(i) To the knowledge of the Company, there are no outstanding or pending
Actions, claims (other than routine claims for benefits) or
Investigations asserted or instituted against any of the Company's
Plans or against the Company or any member of the Controlled Group or
any fiduciary of the Plans with respect to the operation of the
Company's Plans.
(j) To the knowledge of the Company: (x) the Company's Plans have, in all
material respects, been maintained, administered and operated in
accordance with their terms and with all provisions of ERISA, the
Code, and any other statute (including rules and regulations under
ERISA, the Code and any other applicable statute) applicable thereto;
and (y) neither the Company nor any member of the Controlled Group nor
any "party in interest" or "disqualified person" within the control of
the Company or any member of the Controlled Group with respect to the
Company's Plans has engaged in a "prohibited transaction" within the
meaning of Section 4975 of the Code or Title I, Part 4 of ERISA.
(k) The Company shall furnish to Purchaser, within 15 days of request,
copies of the latest summary plan description for each Plan of the
Company. The Company shall furnish, within 15 days of request, to
Purchaser copies, including all schedules and attachments, of each
Form 5500 for each Plan of the Company for the last two years.
(l) The Company has no knowledge of any fact, condition, or circumstance
since the date of the documents provided pursuant to Section 3.12(e)
above that
<PAGE>
would materially affect the information contained therein and no
promises have been made by the Company to amend any Plan of the
Company or to provide increased benefits thereunder, except as
required by applicable law.
(m) Except as disclosed in Section 3.12(m) to the Company Disclosure
Schedule and except as would not reasonably be expected to have a
Material Adverse Effect, the Company does not have any liability
arising out of claims made or suits brought (including workers
compensation, occupational health and safety, environmental,
equal employment or nondiscrimination) for injury, sickness,
disease, death or termination of employment of any employees or
former employees of the Company to the extent attributable to an
event occurring or facts and circumstances existing at or prior
to Closing.
(n) To the Stockholders' and the Company's knowledge, no Plan of the
Company contains any term or provision that precludes or
otherwise prohibits its termination.
3.13 Labor. Except as set forth in Section 3.13 of the Company
-----
Disclosure Schedule, there are no labor strikes, disputes, slowdowns,
work stoppages or other labor troubles or grievances or claims pending
or, to the Company's or any Stockholder's knowledge, threatened
against or involving the Company with respect to Employment Laws or
collective bargaining agreements. No unfair labor practice complaint
before the National Labor Relations Board, no charges pending before
the Equal Employment Opportunity Commission and no complaint, charge
or grievance of any nature before any similar or comparable
Governmental Authority, in any case relating to the Company or the
conduct of its business, is pending or, to the knowledge of the
Company or any Stockholder, threatened. The Company has not received
notice, nor has any knowledge, of the intent of any Governmental
Authority responsible for the enforcement of labor or Employment Laws
to conduct any investigation of or relating to the Company or the
conduct of its business. Except as set forth in Section 3.13 of the
Company Disclosure Schedule to the knowledge of the Company and each
of the Stockholders, (i) no employee or independent contractor of the
Company whom the Stockholders consider to be a "key employee" or a
contractor who accounts for more than 5% of the Company's revenues for
the year ended October 31, 1997, has notified the Company of any plans
to terminate his or her employment with the Company and (ii) no union
organizing or election activities involving the Company's employees
are in progress, or threatened.
3.14 Title to Properties; Encumbrances. Section 3.14 of the Company
---------------------------------
Disclosure Schedule contains a correct and complete list of all real
property leased or regularly occupied in the conduct of business by
the Company as of the date hereof. The Company does not own any real
property. The Company has good title to or a valid leasehold interest
in all of their respective properties and assets, real, personal and
mixed property (tangible and intangible), which the Company purports
to own or lease, respectively. None of the properties and assets of
the Company owned, leased
<PAGE>
or held are subject to any material (i.e.,in excess of $25,000) Lien,
except (i) Liens reflected in the Company Financial Statements, (ii)
Liens specifically identified in Section 3.14 of the Company
Disclosure Schedule securing specified liabilities or obligations with
respect to which no known default exists and (iii) other Liens
(including, without limitation, statutory liens for current Taxes not
yet due or delinquent or which are being contested in good faith by
appropriate proceedings and mechanics', carriers', materialmens' and
similar liens imposed by law incurred in the ordinary course of
business and not delinquent or which are being contested in good faith
by appropriate proceedings) that, individually or in the aggregate,
would not reasonably be expected to have a Material Adverse Effect.
3.15 Intentionally Omitted.
---------------------
3.16 Leases. Section 3.16 of the Company Disclosure Schedule contains
------
a correct and complete list of all material leases pursuant to which
the Company is the lessee of any real or personal property. Except as
set forth in Section 3.16 of the Company Disclosure Schedule, to the
knowledge of the Company, all such leases are valid and enforceable in
accordance with their terms and are in full force and effect. Except
as set forth in Section 3.16 of the Company Disclosure Schedule, no
notice of any existing default under any lease has been received by
the Company or given by the Company to any other party thereunder.
3.17 Intentionally Omitted.
---------------------
3.18 Intellectual Property.
---------------------
(a) Material Proprietary Rights. Section 3.18(a) of the Company
---------------------------
Disclosure Schedule contains a correct and complete list of all
material Proprietary Rights which, to the knowledge of the
Stockholders and the Company, are used or owned by the Company
and registered with any Governmental Authority, and a list of all
licenses and other agreements relating thereto. The Company has
valid and enforceable rights to all such Proprietary Rights that
are necessary to permit the Company to use such Proprietary
Rights in the conduct of its business substantially as now
conducted, except where the lack of such rights would not
reasonably be expected to have a Material Adverse Effect.
(b) Infringement, etc. Except as set forth in Section 3.18(b) of the
-----------------
Company Disclosure Schedule, (i) no royalty or other payment by
the Company to any third party is required to use any Proprietary
Right described in Section 3.18(a) of the Company Disclosure
Schedule; (ii) all Proprietary Rights described in Section
3.18(a) above are valid and in full force and
<PAGE>
effect; (iii) no such Proprietary Right used by the Company
infringes valid rights of any third party and there are no (1)
pending or, to the knowledge of the Company or the Stockholders,
threatened Actions or (2) to the knowledge of the Company or the
Stockholders, pending or threatened Investigations in which any
such infringement is alleged except where the outcome of such
infringement would not reasonably be expected to have a Material
Adverse Effect; (iv) to the knowledge of the Company and the
Stockholders, none of the Proprietary Rights used or owned by the
Company is being infringed by any third party; and (v) to the
knowledge of the Company and the Stockholders, no Stockholder and
no officer, director or employee of the Company owns or has any
interest in any Proprietary Right or trade secret, process,
invention or know-how used by the Company in the conduct of its
business.
3.19 Insurance. Section 3.19 of the Company Disclosure Schedule contains
---------
an accurate and complete description of all insurance contracts
(collectively, the "Insurance Policies"), currently maintained by the
Company. To the Company's knowledge: all the Insurance Policies are in
full force and effect, all premiums with respect thereto covering all
periods up to and including the date hereof have been paid, and no
notice of cancellation or termination has been received with respect
to any such Insurance Policy; and the Company has not been refused any
insurance with respect to its assets or operations, nor has its
coverage been limited, by any insurance carrier to which it has
applied for any such insurance or with which it has carried insurance
during the last three years.
3.20 Agents and Customers. Section 3.20 of the Company Disclosure
--------------------
Schedule sets forth a correct and complete list of (a) all of the
agents of the Company and (b) all of the customers of the Company, in
each case from which the Company received 5% or more of the Company's
total revenues during each of the Company's fiscal years ended
December 31, 1995 and 1996 and for the ten months ended October 31,
1997. Except as set forth in Section 3.20 of the Company Disclosure
Schedule, to the Stockholders' and the Company's knowledge, the
Company has not received any written or oral communication that would
lead the Company to believe that any termination of (or other material
change in) the business relationship of the Company with any agent or
customer named in Section 3.20 of the Company Disclosure Schedule.
3.21 Certain Environmental Matters.
-----------------------------
(a) Except as set forth in Section 3.21(a) of the Company Disclosure
Schedule, the Company has not received any written notice from
any Governmental Authority of any outstanding violation of any
Environmental Laws. Except as set forth in Section 3.21(a) of the
Company Disclosure Schedule, to the knowledge of the Company, the
Company has all material permits, licenses and other governmental
authorizations, if any, required of the Company under applicable
Environmental Laws, and all such permits, licenses and other
governmental authorizations, if any, are in good standing and in
full force and
<PAGE>
effect, and the Company has not received any written notice from any
Governmental Authority respecting any outstanding violation of the
terms and conditions thereof. To the knowledge of the Company, all
such permits and other governmental authorizations currently held by
the Company pursuant to Environmental Laws, if any, are identified in
Section 3.21(a) of the Company Disclosure Schedule; PROVIDED, HOWEVER,
-------- -------
no warranty or representation is made as to the effect under any
Environmental Laws or upon any such permits, licenses or
authorizations of the transfer of the Stock and/or transactions
contemplated by this Agreement.
(b) No Environmental Claims have actually been asserted or initiated and
are pending or, to the knowledge of any Stockholder, threatened
against the Company.
(c) To the knowledge of the Company, there are no past or present actions,
activities, circumstances, conditions, events or incidents by or
involving the Company, including, without limitation, the Release,
threatened Release, emissions, discharge, presence or disposal of any
Hazardous Materials, that would or would reasonably be expected to
form the basis of any Environmental Claims having a Material Adverse
Effect. Except as set forth in Section 3.21(c) of the Company
Disclosure Schedule, to the knowledge of the Company, the Company is
not now, nor does the Company reasonably expect that it will be,
subject to any Environmental Liability resulting from any actions (or
omissions thereof), activities, circumstances, conditions, events or
incidents by or involving the Company prior to the Closing Date that
would reasonably be expected to have a Material Adverse Effect.
3.22 Contracts.
---------
(a) Disclosure of Certain Contracts. Except as set forth in Section
-------------------------------
3.22(a) of the Company Disclosure Schedule or elsewhere in the Company
Disclosure Schedule, the Company is not a party to, or subject to or
bound by, any material Contract (i.e., any individual contract that
involves more than $25,000 per year) that would be binding upon the
Company after the Closing Date and which is not terminable by the
Company without penalty upon not more than 60 days prior written
notice to the other party that is a (i) Contract not made in the
ordinary course of business and (ii) royalty, distribution, agency,
territorial or license agreement; (iii) Contract (other than
agreements covered by clause (ix) below) with any officer, employee,
director or Stockholder (or any Affiliate of any such officer,
employee, director or Stockholder) or any professional person or firm,
independent contractor, dependent contractor or advertising firm or
agency which involves, or has involved, more than $25,000 annually;
(iv) except as otherwise set forth in Section 3.12(b), collective
bargaining agreement with any labor union or representative of
employees; (v) Contract guaranteeing the payment or performance of the
obligations of others; (vi) note, loan agreement or other
<PAGE>
Contract under which the Company has incurred, guaranteed or otherwise
become liable for borrowed money indebtedness; (vii) except as
otherwise set forth in Section 3.12(d), group health or life
insurance, pension, profit sharing, retirement, medical, bonus,
incentive, severance, stock option or purchase plan or other similar
benefit plan, agreement or arrangement in effect with respect to its
employees or others; (viii) Contract limiting the freedom of the
Company to engage in any line of business or to compete with any
Person; (ix) except as otherwise set forth in Section 3.12(a)
consulting agreement that is not terminable at will (or with notice
not to exceed thirty days or payment not to exceed $25,000) by the
Company; (x) joint venture agreement or other Contract with respect to
the operation or management of any entity; or (xi) Contract not
otherwise identified by the foregoing clauses that involves payments
by or to at an annualized rate of more than $25,000 per annum. Within
15 days of request by Purchaser, true and complete copies of any
Contract listed on Schedule 3.22(a) shall be delivered to or otherwise
made available for review by Purchaser.
(b) Status of Contracts. Except as set forth in Section 3.22(b) of the
-------------------
Company Disclosure Schedule, (i) to the knowledge of the Company and
the Stockholders, each Contract listed in Section 3.22(a) of the
Company Disclosure Schedule is a valid Contract of the Company (except
as validity may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally), and (ii)
the Company has not received or given any written notice of default
under any such Contract and to their knowledge no other party is in
default under any such Contract such that said default could
reasonably be expected to have a Material Adverse Effect.
3.23 Affiliate Transactions. Since the Company Balance Sheet Date, except as
----------------------
disclosed in Section 3.23 of the Company Disclosure Schedule, or in the
ordinary course of business the Company has not (a) made purchases or sales
of products or services from or to any of the Stockholders or any Affiliate
of any of the Stockholders; (b) transferred any assets to or acquired any
assets from any Stockholders or any Affiliate of any Stockholders, except
for reasonable compensation and expense reimbursement in the ordinary
course of business consistent with past practice; (c) made any loan to or
borrowed any money from any Stockholder or any Affiliate of any
Stockholder, except for borrowing in the ordinary course under existing
credit facilities which amounts (together with the total outstanding amount
of consolidated indebtedness as of the date hereof) are set forth on
Schedule 3.23 of the Company Disclosure Schedule; (d) entered into, amended
or canceled any transaction, contract, agreement or commitment, except
those contemplated by this Agreement, involving any Stockholder or any
Affiliate of any Stockholder; or (e) introduced or made any change with
respect to its method or terms of payment of, accounting for or allocation
of, expenses or charges involving any of Stockholder or any Affiliate of
any of the Stockholders. The Company is not using any material property,
asset,
<PAGE>
facility, service or personnel held, owned or employed by any
Stockholder or any Affiliate of any Stockholder.
3.24 No Brokers' or Other Fees. Except with respect to a commission to be
-------------------------
paid to Eric Ottens by the Stockholders, in accordance with the terms
of a separate written agreement with Mr. Ottens, no broker, finder or
investment banker is entitled to any fee or commission in connection
with the sale of the Stock pursuant to this Agreement based upon
arrangements made by or on behalf of any Stockholder or the Company.
3.25 Certain Payments. To the Stockholders' and the Company's
----------------
knowledge, neither the Company, nor any Stockholder, officer, agent or
employee of the Company, any other person associated with, or acting
on behalf of, any of the foregoing, has, directly or indirectly, (i)
used any funds of the Company for unlawful contributions, gifts,
entertainment, or other unlawful expenses relating to political or
other activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political
parties or campaigns from corporate funds, (iii) violated any
provision of the Foreign Corrupt Practices Act of 1977, as amended,
(iv) established or maintained any unlawful or unrecorded fund of
corporate monies or other assets, (v) made any false or fictitious
entry on the books or records of the Company, (vi) made any bribe,
kickback, or other payment of a similar or comparable nature, whether
lawful or not, to any person or entity, private or public, regardless
of form, whether in money, property or services, to obtain favorable
treatment in securing business or to obtain special concessions, or to
pay for favorable treatment for business secured for special
concessions already obtained.
3.25 Florida H.B. 1771. No written notice of any existing violation of
-----------------
Florida H.B. 1771, codified as Section 517.075 of the Florida
Statutes, or any regulations promulgated thereunder relating to the
doing business with Cuba by the Company, has been received by the
Company from any Governmental Authority.
3.26 Registration Statement. The marked statements contained in Exhibit F
----------------------
hereto are true and correct in all material respects.
3.28 Representations and Warranties Generally.
----------------------------------------
(a) One Section of the Company Disclosure Schedule may specifically
cross reference other applicable Sections or parts thereof of the
Company Disclosure Schedule without repeating disclosure that
applies to more than one Section.
(b) In addition, any matters disclosed in any Section of this
Agreement or in any Section of the Company Disclosure Schedule
shall be deemed to be disclosed with respect to all Sections of
this Agreement regardless of whether any cross reference is made.
<PAGE>
(c) EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS
ARTICLE III, NEITHER THE COMPANY NOR THE STOCKHOLDERS NOR ANY OF THEIR
RESPECTIVE EMPLOYEES, AGENTS OR ANY OTHER PERSON ACTING ON THEIR
BEHALF MAKES ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS, STATUTORY
OR IMPLIED RELATING TO THE COMPANY, THE STOCKHOLDERS, THE STOCK OR ANY
OTHER MATTER THAT IS THE SUBJECT OF THIS AGREEMENT, AND THE COMPANY
AND THE STOCKHOLDERS HEREBY DISCLAIM ANY SUCH REPRESENTATION OR
WARRANTY NOT SET FORTH IN THIS AGREEMENT, INCLUDING, WITHOUT
LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
(d) Notwithstanding the foregoing, or any provisions of this Article III
or other applicable Sections of this Agreement or parts thereof, or
any statements set forth in or made part of the Company Disclosure
Schedule or any other materials or information delivered in connection
with this Agreement, the Company Disclosure Schedule or the
transactions contemplated thereby, Purchaser acknowledges and agrees
that to the extent any of such materials or information constitutes
any forward-looking statement, information or projection whatsoever,
such statements, information or projections constituting same have
been presented at the request of Purchaser for illustrative purposes
only, and Purchaser expressly acknowledges herein that other than to
the extent such statements or information either relate to or
constitute any express covenant subsequently to be undertaken by the
Company or the Stockholders pursuant to the provisions of this
Agreement, neither the Company nor the Stockholders provide any
assurances or otherwise represent or warrant in any manner whatsoever,
that the results indicated by such forward-looking statements,
information or projections will be experienced or achieved, it being
expressly acknowledged herein by Purchaser that the factors relied
upon for the purpose of such forward-looking statements, information
or projections have not been independently verified by the Company or
the Stockholders, and may differ from those assumed by the Company or
the Stockholders at the time of their respective presentation or
delivery.
(e) Except to the extent expressly set forth herein or in the Company
Disclosure Schedule, or except to the extent verified under an express
written statement to such effect by one or more of the Stockholders,
neither the Company nor the Stockholders make any representation or
warranty to Purchaser, or to any of Purchaser's representatives,
agents, advisors or underwriters, concerning the accuracy, sufficiency
or completeness of any information obtained or derived by, or
otherwise provided to Purchaser, or any of Purchaser's
representatives, agents, advisors or underwriters, including, but not
limited
<PAGE>
to, any legal, financial, technical, marketing, management or other
materials or information obtained by or delivered to Purchaser or
other such parties in the undertaking of their respective due
diligence activities.
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to the Company and the
Stockholders as follows:
4.1 Corporate Organization. Purchaser is a corporation duly organized,
----------------------
validly existing and in good standing under the laws of the State of
Colorado. Purchaser has no Subsidiaries, and does not have an
ownership interest in any Person other than as set forth in Section
4.1 of the Purchaser Disclosure Schedule attached to this Agreement
(the "Purchaser Disclosure Schedule"). Purchaser is qualified to do
business in the jurisdictions set forth in Section 4.1 of the
Purchaser Disclosure Schedule. Purchaser has the corporate power and
authority to own, lease and operate its respective properties and
assets and to carry on its business as now being conducted and is duly
qualified or licensed to do business as a foreign corporation in good
standing in the jurisdictions in which the ownership, lease or
operation of its property or the conduct of its business requires such
qualification, except jurisdictions in which the failure to be so
qualified or licensed would not reasonably be expected to have a
Material Adverse Effect.
4.2 Authorization, Etc. Purchaser has full corporate power and
------------------
authority to execute, deliver and perform its obligations under this
Agreement and the documents and instruments contemplated hereby and to
carry out the transactions contemplated hereby and thereby. Purchaser
has duly approved and authorized the execution and delivery of this
Agreement and the documents and instruments contemplated hereby and
the consummation of the transactions contemplated hereby and thereby,
and no other corporate proceedings or other action on the part of
Purchaser are necessary to approve and authorize the execution,
delivery and performance by Purchaser of this Agreement and the
documents and instruments contemplated hereby or the consummation by
Purchaser of the transactions contemplated hereby or thereby. This
Agreement constitutes a legal, valid and binding agreement of
Purchaser, enforceable against Purchaser in accordance with its terms,
except as enforcement hereof may be limited by equitable principles
and by bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights
generally.
4.3 No Approvals or Conflicts. Except as set forth in Section 4.3 of
-------------------------
the Purchaser Disclosure Schedule neither the execution, delivery or
performance by Purchaser of this Agreement nor the consummation by
Purchaser of the transactions contemplated hereby will (a) violate,
conflict with or result in a breach of any provision of the articles
of incorporation, bylaws or other governing documents of Purchaser,
and, to the best of Purchaser's knowledge, and subject to Purchaser
obtaining any and all required consents, approvals and authorization
from third parties and/or Governmental Authorities, (b) violate,
conflict with or result in a breach of any
<PAGE>
provision of, or constitute (with or without notice or lapse of time or
both) a default (or give rise to any right of termination, cancellation or
acceleration) under, or result in the termination of, or accelerate or
alter in any material way the performance required by or result in the
creation of or give any party the right to create any Lien on any of the
assets or properties of Purchaser under, any note, bond, mortgage, loan
agreement, deed of trust, franchise, permit or other instrument or Contract
to which Purchaser or any of its properties may be bound, (c) violate any
Law applicable to Purchaser or any of its assets or properties, or (d)
require any consent, approval or authorization of, or notice to, or
declaration, filing or registration with, any Governmental Authority or
other third party in connection with the execution, delivery and
performance of this Agreement by Purchaser or to enable Purchaser to
continue to conduct its business and operations immediately after the
Closing Date in the same manner in which they are presently conducted.
4.4 Capital Stock. As of the date hereof, the authorized capital stock of
-------------
Purchaser consists of (a) 25,000,000 shares of Purchaser Common Stock, no
par value per share, of which approximately 10,047,091 shares are issued
and outstanding and (b) 5,000,000 shares of preferred stock, no par value,
of which none are issued and outstanding; provided, however, that
additional shares may be issued prior to Closing pursuant to outstanding
convertible or exercisable securities and that a reverse stock split is
anticipated in connection with the Proposed Public Offering. Except as set
forth in Section 4.4 of the Purchaser Disclosure Schedule, there are no
outstanding subscriptions, options, warrants, calls, rights, contracts,
commitments, understandings, restrictions or arrangements relating to the
issuance, sale, transfer or voting of any shares of Purchaser Common Stock,
including any rights of conversion or exchange under any outstanding
securities or other instruments. Except as set forth in Section 4.4 of the
Purchaser Disclosure Schedule, all outstanding shares of Purchaser Common
Stock have been validly issued and are fully paid, nonassessable and free
of preemptive or similar rights.
4.5 Financial Statements. Purchaser has delivered to the Company the
--------------------
audited balance sheets of Purchaser as of April 30, 1996 and 1997, and the
unaudited balance sheets of Purchaser as of October 31, 1997, and related
statements of earnings, changes in financial position and shareholder's
equity for the periods ended on said dates. Such audited financial
statements, including the notes thereto, accompanied by the unqualified
reports of Stockman Kast Ryan & Scruggs, P.C., certified public
accountants, delivered to the Company by Purchaser, and the unaudited
financial statements are collectively referred to herein as the "Purchaser
Financial Statements." To the best of Purchaser's knowledge, the Purchaser
Financial Statements are in accordance with the books and records of
Purchaser, fairly present the financial position of Purchaser and its
results of operations as of and for the periods indicated in accordance
with GAAP and have been prepared in accordance with GAAP consistently
applied. Except as set forth in Section 4.5 of the Purchaser Disclosure
Schedule and as disclosed in the Purchaser Financial Statements, Purchaser
does not have any material Liabilities (i.e. in excess of $25,000 as to any
individual liability), whether or not of a nature required to be reflected
or reserved against on a
<PAGE>
consolidated balance sheet in accordance with GAAP, except for Liabilities
incurred by Purchaser in the ordinary course of business consistent with
past practice that individually or in the aggregate would not have a
Material Adverse Effect upon or change in any of the business, condition
(financial or otherwise), operations, assets or liabilities of Purchaser
taken as a whole. For purposes of this Section, "Liabilities" shall not be
deemed to include Contracts.
4.6 Legal Compliance. Except as set forth in Section 4.6 of the Purchaser
----------------
Disclosure Schedule, to the knowledge of Purchaser: (i) Purchaser has
complied and is in compliance with all Laws applicable to Purchaser and
their business except where the failure to be in compliance would not
reasonably be expected to have a Material Adverse Effect, and (ii)
Purchaser holds all material licenses, permits and other authorizations of
Governmental Authorities necessary to conduct its business as now being
conducted or to continue to conduct its business as now being conducted.
Except as set forth in Section 4.6 of the Purchaser Disclosure Schedule and
except for the transactions contemplated hereby, Purchaser has no knowledge
of or intention to make any changes in the conduct of its business that
will result in or cause Purchaser to be in noncompliance with applicable
Laws or that will require changes in or a loss of any such licenses,
permits or other authorizations or an increase in any expenses related
thereto except where such noncompliance, change, loss or increase would not
reasonably be expected to have a Material Adverse Effect. To Purchaser's
knowledge, such licenses, permits and other authorizations as aforesaid
held by Purchaser are valid and in full force and effect, and there are no
(a) Actions pending, or to the knowledge of Purchaser, threatened or (b)
Investigations to the knowledge of Purchaser pending or threatened that
would reasonably be expected to result in the termination, impairment or
nonrenewal thereof.
4.7 Litigation. Section 4.7(a) of the Purchaser Disclosure Schedule lists all
----------
(a) Actions pending, or to the knowledge of Purchaser, threatened or (b)
Investigations to the knowledge of Purchaser pending or threatened against
any of its properties. Except as set forth in Section 4.7(b) of the
Purchaser Disclosure Schedule, there are no (i) Actions pending or, to
Purchaser's knowledge, threatened or (ii) Investigations to the knowledge
of Purchaser pending or threatened against, relating to or involving
Purchaser (or any of its officers or directors in connection with the
business and affairs of Purchaser) or any properties or rights of Purchaser
(x) in which there is a reasonable likelihood of an adverse determination
that would reasonably be expected to have a Material Adverse Effect, or (y)
that questions or challenges the validity of this Agreement or any action
taken or to be taken by Purchaser pursuant to this Agreement.
4.8 Judgments, etc. Except as set forth in Section 4.8 of the Purchaser
--------------
Disclosure Schedule, Purchaser is not (a) subject to any judgment,
injunction, order or decree of a Governmental Authority that has had or
continues to have or would reasonably be expected to have a Material
Adverse Effect or (b) in default of any judgment, injunction, order or
decree of a Governmental Authority.
<PAGE>
4.9 Changes. Since the Purchaser Balance Sheet Date, except as disclosed
-------
in Section 4.9 of the Purchaser Disclosure Schedule, to the knowledge of
Purchaser: (a) the business of Purchaser has in all material respects been
conducted only in the ordinary course, consistent with past practice and
consistent with the terms and conditions of this Agreement and no unusual
cash payments or bonuses have been made or agreed to be made inconsistent
with past practice; (b) there has been no direct or indirect redemption,
purchase or other acquisition by Purchaser of any shares of its capital
stock; (c) there has not been any declaration, setting aside or payment of
any dividend or other distribution by Purchaser other than cash management
procedures in the ordinary course of business consistent with past
practice; and (d) there has been no material adverse effect or change in
any of the business, condition (financial or otherwise), operations, assets
or liabilities of Purchaser, as a whole (the foregoing to pertain only to
matters respecting Purchaser in particular, as opposed to matters generally
affecting the business in which Purchaser is engaged).
4.10 Taxes. (a) Except as set forth in Section 4.10(a) of the Purchaser
-----
Disclosure Schedule to the knowledge of Purchaser, Purchaser has (i) filed
or will timely file with the appropriate Governmental Authorities all
Returns which are required to be filed prior to the Closing Date by or with
respect to Purchaser, and such Returns (including without limitation, those
pertaining to telecommunications taxes, interstate and federal excise
taxes, sales taxes and FCC mandated surcharges) when filed are or will be
correct and complete in all material respects and (ii) paid or will timely
pay or made or will make provision for in the appropriate financial
statements all material Taxes of Purchaser required to be shown to be due
on such Returns; provided, however that Purchaser makes no representation
with respect to any unpaid federal excise taxes. There are no Liens for
Taxes upon the assets of Purchaser except liens for current Taxes not yet
due or Taxes being contested in good faith by appropriate proceedings and
in each case where such Lien would not reasonably be expected to have a
Material Adverse Effect. Except as set forth in Section 4.10(a) of the
Purchaser Disclosure Schedule, Purchaser has not received any written
notice of deficiency or assessment from any taxing Governmental Authority
with respect to liabilities for Taxes of Purchaser which have not been paid
or finally settled, and any such deficiency or assessment disclosed in
Section 4.10(a) of the Purchaser Disclosure Schedule is being contested in
good faith through appropriate proceedings.
(b) Except as set forth in Section 4.10(b) of the Purchaser Disclosure
Schedule, Purchaser does not have any material Liability (i.e., in excess of
$25,000) for the payment of Taxes, except such as are recorded in the Purchaser
Financial Statements or such Taxes as are not yet due as have arisen since the
Purchaser Balance Sheet Date and for which adequate provision in the accounts of
Purchaser has been made, and to the knowledge of Purchaser, Purchaser is not in
arrears with respect to any required withholdings or installment payments of any
Tax and has not filed any waiver or extension of the applicable statute of
limitations for assessment of Taxes for a taxation year under the Code or any
state income or franchise tax law or any other legislation imposing tax on
Purchaser.
<PAGE>
4.11 Employee Matters.
----------------
(a) Purchaser is not a party to any employment contract. Section 4.11(a)
to the Purchaser Disclosure Schedule lists all material contracts to
which Purchaser is a party with dependent and independent contractors.
Section 4.11(a) of the Purchaser Disclosure Schedule sets forth the
position held by each employee with Purchaser, and the annual salary
and the length of employment of each employee.
(b) Except as disclosed on Section 4.11(b) to the Purchaser Disclosure
Schedule,
(i) no trade union, council of trade unions, employee bargaining
agency or affiliated bargaining agent holds bargaining rights
with respect to any of Purchaser's employees by way of
certification, interim certification, voluntary recognition,
designation or successor rights,
(ii) Purchaser has not received notice that any trade union, council
of trade unions, employee bargaining agency or affiliated
bargaining agent has applied to be certified as the bargaining
agent of any of Purchaser's employees, and
(iii) Purchaser has not received notice that any trade union, council
of trade unions, employee bargaining agency or affiliated
bargaining agent has applied to have Purchaser declared a
related employer or successor employer pursuant to applicable
labor legislation.
(c) Except (i) as disclosed in Section 4.11(c) to the Purchaser Disclosure
Schedule and (ii) for remuneration paid to employees and independent
contractors in the usual and ordinary course of business, no material
payments have been made or authorized since the Purchaser Balance
Sheet Date by Purchaser to officers, directors, employees or
independent contractors of Purchaser.
(d) Section 4.11(d) to the Purchaser Disclosure Schedule contains a
correct and complete list of all Benefit Plans.
(e) Purchaser shall provide, within 15 days of request, to the Company
copies of Purchaser's Benefit Plans and all amendments thereto and
have made available to the Purchaser all documents in Purchaser's
possession pertaining to compensation practices, benefits and other
terms and conditions of employment of all directors, officers or
employees of Purchaser.
(f) Each Pension Plan that has been maintained or contributed to within
the last three years by Purchaser or any trade or business (whether or
not incorporated) that is under common control with Purchaser (as
determined in
<PAGE>
accordance with Section 4001 of ERISA) or is a member of a Controlled
Group is identified as such on Section 4.11(f) to the Purchaser
Disclosure Schedule. Each "employee welfare benefit plan" as defined
in Section 3(1) of ERISA and that is subject to ERISA and that has
been maintained or contributed to by any member of the Controlled
Group is identified as such on Section 4.11(f) to the Purchaser
Disclosure Schedule.
(g) None of Purchaser's Pension Plans is subject to Title IV of ERISA or
to the minimum funding standards of Code section 412. None of the U.S.
Pension Plans is a "multi-employer plan" as defined in Section
4001(a)(3) of ERISA and neither Purchaser nor any member of the
Controlled Group has incurred or is expected to incur any withdrawal
liability under ERISA with respect to any "multi-employer plan" or any
single employer plan subject to Section 4063 of ERISA.
(h) Neither Purchaser nor any member of Purchaser's Controlled Group is
aware of any facts that would adversely affect the qualified status of
any Pension Plan under Section 401 of the Code.
(i) To the knowledge of Purchaser, there are no outstanding or pending
Actions, claims (other than routine claims for benefits) or
Investigations asserted or instituted against any of Purchaser's Plans
or against Purchaser or any member of the Controlled Group or any
fiduciary of Purchaser's Plans with respect to the operation of
Purchaser's Plans.
(j) To the knowledge of Purchaser, (x) Purchaser's Plans have, in all
material respects, been maintained, administered and operated in
accordance with their terms and with all provisions of ERISA, the
Code, and any other statute (including rules and regulations under
ERISA, the Code and any other applicable statute) applicable thereto,
and (y) neither Purchaser nor any member of the Controlled Group nor
any "party in interest" or "disqualified person" within the control of
Purchaser or any member of the Controlled Group with respect to
Purchaser's Plans has engaged in a "prohibited transaction" within the
meaning of Section 4975 of the Code or Title I, Part 4 of ERISA.
(k) Purchaser shall furnish, within 15 days of request, to the Company
copies of the latest summary plan description for each of Purchaser's
Plans. Purchaser shall, within 15 days of request, furnish to the
Company copies, including all schedules and attachments, of each Form
5500 for each Plan of Purchaser for the last two years.
(l) Purchaser has no knowledge of any fact, condition, or circumstance
since the date of the documents provided pursuant to Section 4.11(e)
above that would materially affect the information contained therein
and no promises have
<PAGE>
been made by Purchaser to amend any of Purchaser's Plan or to provide
increased benefits thereunder, except as required by applicable law.
(m) Except as disclosed in Section 4.11(m) to the Purchaser Disclosure
Schedule and except as would not reasonably be expected to have a
Material Adverse Effect, Purchaser does not have any liability arising
out of claims made or suits brought (including workers compensation,
occupational health and safety, environmental, equal employment or
nondiscrimination) for injury, sickness, disease, death or termination
of employment of any employees or former employees of Purchaser to the
extent attributable to an event occurring or facts and circumstances
existing at or prior to Closing.
(n) To Purchaser's knowledge, no Plan of Purchaser contains any term or
provision that precludes or otherwise prohibits its termination.
4.12 Labor. Except as set forth in Section 4.12 of the Purchaser Disclosure
-----
Schedule, there are no labor strikes, disputes, slowdowns, work stoppages
or other labor troubles or grievances or claims pending or, to Purchaser's
knowledge, threatened against or involving Purchaser with respect to
Employment Laws or collective bargaining agreements. No unfair labor
practice complaint before the National Labor Relations Board, no charges
pending before the Equal Employment Opportunity Commission and no
complaint, charge or grievance of any nature before any similar or
comparable Governmental Authority, in any case relating to Purchaser or the
conduct of its business, is pending or, to the knowledge of Purchaser,
threatened. Purchaser has not received notice, nor has any knowledge, of
the intent of any Governmental Authority responsible for the enforcement of
labor or Employment Laws to conduct any investigation of or relating to
Purchaser or the conduct of its business. Except as set forth in Section
4.12 of the Purchaser Disclosure Schedule, to the knowledge of Purchaser,
(i) no employee or independent contractor of Purchaser it considers to be a
"key employee" or a contractor who accounts for more than 5% of Purchaser's
revenues for the year ended October 31, 1997, notified Purchaser of any
plans to terminate his or her employment with Purchaser and (ii) no union
organizing or election activities involving Purchaser's employees are in
progress, or threatened.
4.13 Title to Properties; Encumbrances. Section 4.13 of the Purchaser
---------------------------------
Disclosure Schedule contains a correct and complete list of all real
property leased or regularly occupied in the conduct of business by
Purchaser as of the date hereof. Purchaser has good and marketable title to
or a valid leasehold interest in all of their respective properties and
assets, real, personal and mixed property (tangible and intangible), which
the Company purports to own or lease respectively. None of the properties
and assets of Purchaser owned, leased or held are subject to any material
Lien (i.e., in excess of $25,000), except (i) Liens reflected in the
Purchaser Financial Statements, (ii) Liens specifically identified in
Section 4.13 of the Purchaser Disclosure Schedule securing specified
liabilities or obligations with respect to which no default exists and
(iii) other Liens (including, without limitation, statutory liens
<PAGE>
for current Taxes not yet due or delinquent or which are being contested in
good faith by appropriate proceedings and mechanics', carriers',
materialmens' and similar liens imposed by law incurred in the ordinary
course of business and not delinquent or which are being contested in good
faith by appropriate proceedings) that, individually or in the aggregate,
would not reasonably be expected to have a Material Adverse Effect .
4.14 Intentionally Omitted.
---------------------
4.16 Leases. Section 4.15 of the Purchaser Disclosure Schedule
------
contains a correct and complete list of all material leases pursuant to
which Purchaser is the lessee of any real or personal property. Except as
set forth in Section 4.15 of the Purchaser Disclosure Schedule, to the
knowledge of Purchaser, all such leases are valid and enforceable in
accordance with their terms and are in full force and effect. Except as set
forth in Section 4.15 of the Purchaser Disclosure Schedule, no notice of
any existing default under any lease has been received by Purchaser or give
by Purchaser to any other party thereunder.
4.17 Intentionally Omitted.
---------------------
4.13 Intellectual Property.
---------------------
(a) Material Proprietary Rights. Section 4.17(a) of the Purchaser
---------------------------
Disclosure Schedule contains a correct and complete list of all
material Proprietary Rights which, to the knowledge of Purchaser are
used or owned by Purchaser and registered with any Governmental
Authority, and a list of all licenses and other agreements relating
thereto. Purchaser has valid and enforceable rights to all such
Proprietary Rights that are necessary to permit Purchaser to use such
Proprietary Rights in the conduct of its business substantially as now
conducted, except where the lack of such rights would not reasonably
be expected to have a Material Adverse Effect.
(b) Infringement, etc. Except as set forth in Section 4.17(b) of the
-----------------
Purchaser Disclosure Schedule, (i) no royalty or other payment by
Purchaser to any third party is required to use any Proprietary Right
described in Section 4.17(a) of the Purchaser Disclosure Schedule;
(ii) all Proprietary Rights described in Section 4.17(a) above are
valid and in full force and effect; (iii) no such Proprietary Right
used by Purchaser infringes valid rights of any third party and there
are no (1) pending or, to the knowledge of Purchaser, threatened
Actions or (2) to the knowledge of Purchaser, pending or threatened
Investigations in which any such infringement is alleged except where
the outcome of such infringement would not reasonably be expected to
have a Material Adverse Effect; (iv) to the knowledge of Purchaser,
none of the Proprietary Rights used or owned by Purchaser is being
infringed by any third party; and (v) to the knowledge of Purchaser,
no officer, director or employee of Purchaser owns or has any interest
in any Proprietary Right or trade secret,
<PAGE>
process, invention or know-how used by Purchaser in the
conduct of its business.
4.18 Insurance. Section 4.18 of the Purchaser Disclosure Schedule
---------
contains an accurate and complete description of all Insurance
Policies currently maintained by Purchaser. To Purchaser's knowledge:
all the Insurance Policies are in full force and effect, all premiums
with respect thereto covering all periods up to and including the date
hereof have been paid, and no notice of cancellation or termination
has been received with respect to any such Insurance Policy; and
Purchaser has not been refused any insurance with respect to its
assets or operations, nor has its coverage been limited, by any
insurance carrier to which it has applied for any such insurance or
with which it has carried insurance during the last three years.
4.19 Agents and Customers. Section 4.19 of the Purchaser Disclosure
--------------------
Schedule sets forth a correct and complete list of (a) all of the
customers of Purchaser and (b) all of the customers of Purchaser in
each case from which Purchaser received 5% or more of Purchaser's
total revenues during each of Purchaser's fiscal years ended April 30,
1996 and 1997 and the six months ended October 31, 1997. Except as set
forth in Section 4.19 of the Purchaser Disclosure Schedule, to
Purchaser's knowledge, Purchaser has not received any written or oral
communication that would lead the Purchaser to believe that any
termination of (or other material change in) the business relationship
of Purchaser with any agent or customer named in Section 4.19 of the
Purchaser Disclosure Schedule.
4.20 Certain Environmental Matters.
-----------------------------
(a) Except as set forth in Section 4.20(a) of the Purchaser
Disclosure Schedule, Purchaser has not received any written notice from any
Governmental Authority of any outstanding violation of any Environmental Laws.
Except as set forth in Section 4.20(a) of the Purchaser Disclosure Schedule, to
the knowledge of Purchaser, Purchaser has all material permits, licenses and
other governmental authorizations, if any, required of Purchaser under
applicable Environmental Laws, and all such permits, licenses and other
governmental authorizations, if any, are in good standing and in full force and
effect, and Purchaser has not received any written notice from any Governmental
Authority respecting any outstanding violation of the terms and conditions
thereof. To the knowledge of Purchaser, all such permits and other governmental
authorizations currently held by Purchaser pursuant to Environmental Laws, if
any, are identified in Section 4.20(a) of the Purchaser Disclosure Schedule;
PROVIDED, HOWEVER, no warranty or representation is made as to the effect under
- -------- -------
any Environmental Laws or upon any such permits, licenses or authorizations of
the transfer of the Stock and/or transactions contemplated by this Agreement.
(b) No Environmental Claims have actually been asserted or initiated
and are pending or, to the knowledge of Purchaser, threatened against Purchaser.
(c) To the knowledge of Purchaser, there are no past or present
actions, activities, circumstances, conditions, events or incidents by or
involving Purchaser, including, without limitation, the Release, threatened
Release, emissions, discharge, presence or disposal of any
<PAGE>
Hazardous Materials, that would or would reasonably be expected to form the
basis of any Environmental Claims having a Material Adverse Effect. Except as
set forth in Section 4.20(c) of the Purchaser Disclosure Schedule, to the
knowledge of Purchaser, Purchaser is not now, nor does Purchaser reasonably
expect that it will be, subject to any Environmental Liability resulting from
any actions (or omissions thereof), activities, circumstances, conditions,
events or incidents by or involving Purchaser prior to the Closing Date that
would reasonably be expected to have a Material Adverse Effect.
4.21 Contracts.
---------
(a) Disclosure of Certain Contracts. Except as set forth in Section
-------------------------------
4.21(a) of the Purchaser Disclosure Schedule, Purchaser is not a
party to, or subject to or bound by, any material Contract (i.e.,
any individual contract that involves more than $25,000 per year)
that would be binding upon Purchaser after the Closing Date and
which is not terminable by Purchaser without penalty upon not
more than 60 days prior written notice to the other party and
that is a (i) Contract not made in the ordinary course of
business; (ii) royalty, distribution, agency, territorial or
license agreement; (iii) Contract (other than agreements covered
by clause (ix) below) with any officer, employee, director or
shareholder (or any Affiliate of any such officer, employee,
director or shareholder) or any professional person or firm,
independent contractor, dependent contractor or advertising firm
or agency which involves, or has involved, more than $25,000
annually; (iv) except as otherwise set forth in Section 4.11(b),
collective bargaining agreement with any labor union or
representative of employees; (v) Contract guaranteeing the
payment or performance of the obligations of others; (vi) note,
loan agreement or other Contract under which Purchaser has
incurred, guaranteed or otherwise become liable for borrowed
money indebtedness; (vii) except as otherwise set forth in
Section 4.11(d), group health or life insurance, pension, profit
sharing, retirement, medical, bonus, incentive, severance, stock
option or purchase plan or other similar benefit plan, agreement
or arrangement in effect with respect to its employees or others;
(viii) Contract limiting the freedom of Purchaser to engage in
any line of business or to compete with any Person; (ix) except
as otherwise set forth in Section 4.11(a) consulting agreement
that is not terminable at will (or with notice not to exceed
thirty days or payment not to exceed $25,000) by Purchaser; (x)
joint venture agreement or other Contract with respect to the
operation or management of any entity; or (xi) Contract not
otherwise identified by the foregoing clauses that involves
payments by or to at an annualized rate of more than $25,000 per
annum. Within 15 days of request by Purchaser, true and complete
copies of any Contract listed on Schedule 4.21(a) shall be
delivered to or otherwise made available for review by the
Company and the Stockholders.
(b) Status of Contracts. Except as set forth in Section 4.21(b) of
-------------------
the Purchaser Disclosure Schedule, (i) to the knowledge of
Purchaser, each Contract listed in Section 4.21(a) of the
Purchaser Disclosure Schedule is a valid Contract
<PAGE>
of Purchaser (except as validity may be limited by equitable
principles and by bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally), and (ii) Purchaser has
not received or given any written notice of default under any
such Contract and to their knowledge no other party is in default
under any such Contract such that said default could reasonably
be expected to have a Material Adverse Effect.
4.22 Affiliate Transactions. Since the Purchaser Balance Sheet Date,
----------------------
except as disclosed in Section 4.22 of the Purchaser Disclosure
Schedule or in the ordinary course of business, Purchaser has not (a)
made purchases or sales of products or services from or to any
Affiliate of Purchaser; (b) transferred any assets to or acquired any
assets from any Affiliate of Purchaser, except for reasonable
compensation and expense reimbursement in the ordinary course of
business consistent with past practice; (c) made any loan to or
borrowed any money from any Affiliate of Purchaser, except for
borrowing in the ordinary course under existing credit facilities
which amounts (together with the total outstanding amount of
consolidated indebtedness as of the date hereof) are set forth on
Schedule 4.22 of the Purchaser Disclosure Schedule; (d) entered into,
amended or canceled any transaction, contract, agreement or
commitment, except those contemplated by this Agreement, involving any
Affiliate of Purchaser; or (e) introduced or made any change with
respect to its method or terms of payment of, accounting for or
allocation of, expenses or charges involving any Affiliate of
Purchaser. Purchaser is not using any material property, asset,
facility, service or personnel held, owned or employed by any
Affiliate of Purchaser.
4.23 No Brokers' or Other Fees. Except with respect to commission to be
-------------------------
paid to Eric Ottens by the Stockholders, no broker, finder or
investment banker is entitled to any fee or commission in connection
with the sale of the Stock pursuant to this Agreement based upon
arrangements made by or on behalf of Purchaser.
4.24 Certain Payments. To Purchaser's knowledge, neither Purchaser, nor
-----------------
any officer, director, agent or employee of Purchaser, or any other
person associated with, or acting on behalf of, any of the foregoing,
has, directly or indirectly, (i) used any corporate funds for unlawful
contributions, gifts, entertainment, or other unlawful expenses
relating to political or other activity, (ii) made any unlawful
payment to foreign or domestic government officials or employees or to
foreign or domestic political parties or campaigns from corporate
funds, (iii) violated any provision of the Foreign Corrupt Practices
Act of 1977, as amended, (iv) established or maintained any unlawful
or unrecorded fund of corporate monies or other assets, (v) made any
false or fictitious entry on the books or records of Purchaser, (vi)
made any bribe, kickback, or other payment of a similar or comparable
nature, whether lawful or not, to any person or entity, private or
public, regardless of form, whether in money, property or services, to
obtain favorable treatment in securing business or to obtain special
concessions, or to pay for favorable treatment for business secured
for special concessions already obtained.
<PAGE>
4.25 Florida H.B. 1771. No written notice of any existing violation of
------------------
Florida H.B. 1771, codified as Section 517.075 of the Florida
Statutes, or any regulations promulgated thereunder relating to the
doing business with Cuba by the Purchaser has been received by the
Purchaser from any Governmental Authority.
4.26 Purchaser Common Stock. The issuance and delivery by Purchaser of
----------------------
shares of Purchaser Common Stock pursuant to Section 2.2 hereof, shall
be duly and validly authorized by all necessary corporate action on
the part of Purchaser prior to Closing. The shares of Purchaser Common
Stock to be issued pursuant to Section 2.2 hereof, when issued and
delivered in accordance with the terms of this Agreement, will be duly
authorized, validly issued, fully paid and nonassessable. Purchaser is
solely responsible for the content of the prospectus, Registration
Statement and all other materials or reports filed or provided in
connection with the Proposed Public Offering; provided, however that
-------- -------
the parties hereto agree that Purchaser may rely on the
representations and warranties contained in Article III hereof and the
Company Disclosure Schedule in preparing such materials; provided,
--------
further, that Purchaser may not rely on any other information provided
-------
by the Company or the Stockholders in preparing such materials unless
such information is in writing and explicitly authorizes such
reliance.
4.27 Intentionally Omitted.
---------------------
4.28 Representations and Warranties Generally.
----------------------------------------
(a) One Section of the Purchaser Disclosure Schedule may specifically
cross reference other applicable Sections or parts thereof of the
Purchaser Disclosure Schedule without repeating disclosure that
applies to more than one Section.
(b) In addition, any matters disclosed in any Section of this
Agreement or in any Section of the Company Disclosure Schedule
shall be deemed to be disclosed with respect to all Sections of
this Agreement regardless of whether any cross reference is made.
(c) EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS
ARTICLE IV, NEITHER PURCHASER NOR ANY OF THEIR RESPECTIVE
EMPLOYEES, AGENTS OR ANY OTHER PERSON ACTING ON THEIR BEHALF
MAKES ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS, STATUTORY OR
IMPLIED RELATING TO PURCHASER, THE PURCHASER COMMON STOCK OR ANY
OTHER MATTER THAT IS THE SUBJECT OF THIS AGREEMENT, AND PURCHASER
HEREBY DISCLAIMS ANY SUCH REPRESENTATION OR WARRANTY NOT SET
FORTH IN THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, ANY
IMPLIED WARRANTY OF
<PAGE>
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
(d) Notwithstanding the foregoing, or any provisions of this Article
IV or other applicable Sections of this Agreement or parts
thereof, or any statements set forth in or made part of the
Purchaser Disclosure Schedule or any other materials or
information delivered in connection with this Agreement, the
Purchaser Disclosure Schedule or the transactions contemplated
thereby, Company acknowledges and agrees that to the extent any
of such materials or information constitutes any forward-looking
statement, information or projection whatsoever, such
statements, information or projections constituting same have
been presented at the request of the Company for illustrative
purposes only, and the Company and the Stockholders expressly
acknowledge herein that other than to the extent such statements
or information either relate to or constitute any express
covenant subsequently to be undertaken by the Purchaser pursuant
to the provisions of this Agreement, provides no assurances or
otherwise represent or warrant in any manner whatsoever, that
the results indicated by such forward-looking statements,
information or projections will be experienced or achieved, it
being expressly acknowledged herein by the Company and the
Stockholders that the factors relied upon for the purpose of
such forward-looking statements, information or projections have
not been independently verified by the Purchaser and may differ
from those assumed by the Purchaser at the time of their
respective presentation or delivery.
(e) Except to the extent expressly set forth herein or in the
Purchaser Disclosure Schedule, or except to the extent verified
under an express written statement to such effect by one or more
of the executive officers of Purchaser makes no representation
or warranty to the Company, the Stockholders, or to any of the
Company's representatives, agents, advisors or underwriters,
concerning the accuracy, sufficiency or completeness of any
information obtained or derived by, or otherwise provided to the
Company, the Stockholders, or any of the Company's
representatives, agents, advisors or underwriters, including,
but not limited to, any legal, financial, technical, marketing,
management or other materials or information obtained by or
delivered to the Company, the Stockholders or other such parties
in the undertaking of their respective due diligence activities.
<PAGE>
ARTICLE
COVENANTS OF THE COMPANY AND THE STOCKHOLDERS
From and after the date hereof and until the Closing Date (except as
hereinafter otherwise provided), unless Purchaser shall otherwise agree in
writing, but only so long as this Agreement is in full force and effect and
Purchaser is not in default of its obligations hereunder:
5.1 Access. Subject in all events to the terms of the
------
Confidentiality Agreement, the Company shall permit:
(a) Purchaser and its advisers to have reasonable access to
all properties, books, accounts, records, Contracts,
files, correspondence, tax records, and documents of or
relating to the Company, and to discuss such matters
with the Stockholders; the Company shall make available
to Purchaser and its advisers a copy of all other
information concerning its business and properties as
Purchaser may reasonably request;
(b) Purchaser, at its sole cost and expense, to conduct, or
cause its agents to conduct, such reasonable reviews,
inspections, surveys, tests, and investigations of the
assets of the Company as Purchaser deems reasonably
necessary or advisable;
(c) Purchaser, and its advisers to consult with the
accountants for the Company, and said accountants are
hereby authorized to disclose all information in their
possession to Purchaser and its advisers with respect to
the Company and the businesses thereof;
(d) subject in each case to the prior approval of the
Company, Purchaser, and its advisers to discuss the
proposed acquisition with the employees of the Company;
provided that representatives of the Company may be
present during any such discussions and provided that
such discussions are coordinated with representatives of
the Company as to the content of such proposed
discussions to assure that such discussions do not
interfere unreasonably with the business and operations
of the Company or harm the relationship which the
Company has with its employees; and
(e) Purchaser to have such additional access as is
reasonably necessary to permit Purchaser to prepare its
registration statement, and any amendments thereto,
relating to its Proposed Public Offering;
provided, however, any investigation pursuant to this Section shall be conducted
- -------- -------
in such manner as not to interfere unreasonably with the businesses and
operations of the Company.
5.2 Ordinary Course. Except as set forth in Exhibit 5.2, and except
---------------
for any actions required to be performed by the Company, or
otherwise permitted pursuant to this
<PAGE>
Agreement, the Company shall conduct its business generally in
the ordinary and usual course in all material respects and use
all reasonable efforts to preserve its business organizations
intact and its existing relations with customers, suppliers,
employees, independent contractors and business associates, and
the Company shall not do any of the following without the
approval of Purchaser (which approval shall not be unreasonably
withheld):
(a) amend its Certificate of Incorporation (or like charter
documents) or By-laws;
(b) subdivide, split, combine, consolidate, or reclassify
any of its outstanding shares of capital stock;
(c) declare, set aside or pay any dividend or make any other
distribution payable in cash, shares, stock, securities
or property with respect to any of its shares of capital
stock; provided, however, that the Company shall
continue to have the right to distribute Standstill
Payments among the Stockholders;
(d) repurchase, redeem, or otherwise acquire, directly or
indirectly, any of its capital stock or any securities
convertible into or exchangeable or exercisable into any
of its capital stock;
(e) enter into any material transaction not in the ordinary
course of its business consistent with past practice;
(f) issue, sell, pledge, dispose of, or encumber, or
authorize or propose the issuance, sale, pledge,
disposition, or encumbrance of, any of its capital
stock, or any securities convertible into or
exchangeable or exercisable for, or options, puts,
warrants, calls, commitments or rights of any kind to
acquire, any of its shares of capital stock;
(g) transfer, lease, license, sell, mortgage, pledge,
encumber, or dispose of any material property or assets
or incur, guarantee, assume, or increase any
indebtedness or other liability in excess of $25,000
other than in the ordinary and usual course of business
consistent with past practice;
(h) authorize capital expenditures in excess of $25,000
other than in the ordinary and usual course of business
consistent with past practice; provided, however, that
--------- --------
the nothing in this Agreement shall be construed to
prohibit (or require any consent from Purchaser for) the
Company taking any of the following actions (including,
without limitation, making any capital expenditure in
connection therewith): the satisfaction and termination
of the Company's credit line with Merrill Lynch; the
termination (and payment of any outstanding balance) of
the Company's corporate credit card; any payments to
Zion Credit Corporation or the landlord's of the
Company's Connecticut and Florida locations in
connection with the obtaining of releases of any
personal guarantees by the Stockholders or John Lynch of
the Company's
<PAGE>
obligations to such persons or entities; provided,
---------
further, that the Stockholders shall promptly notify
--------
Purchaser of such actions.
(i) make any material acquisition of, or investment in,
assets, shares, capital stock or other securities of any
other person or entity other than in the ordinary and
usual course of business consistent with past practice;
(j) except as may be required to satisfy contractual
obligations existing as of the date hereof and the
requirements of applicable Laws, establish, adopt, enter
into, make, amend in any material respect, or make any
material elections under any collective bargaining
agreement or Employee Plan;
(k) implement any change in its accounting principles,
practices, or methods, other than as may be required by
generally accepted accounting principles; and
(l) authorize or enter into any agreement to take any of the
actions referred to in this Section.
5.3 Representations and Warranties. The Company and the
------------------------------
Stockholders shall not knowingly and intentionally do, or cause
to be done, anything that would cause any of the representations
and warranties set forth in Article III from being true,
complete, and accurate in all material respects on the Closing
Date as if made on such date (except to the extent that such
representations and warranties are, by their terms, made
expressly as of the date of this Agreement).
5.4 No Breach. The Company and the Stockholders shall not knowingly
---------
and intentionally do any act or omit to do any act, or permit
any act or omission to act, which will cause a material breach
of this Agreement.
5.5 Financial Statements. The Company shall furnish to Purchaser
--------------------
within 60 days after the end of each fiscal quarter ending after
the date hereof an unaudited balance sheet and income statement
of the Company for each such period.
5.6 Litigation. The Company shall promptly notify Purchaser in
----------
writing of any action, written investigation, claim, audit,
action, suit, or proceeding which is commenced against, by or
relating to the Company or this Agreement by or before any court
or Governmental Authority, commission, board, bureau, agency, or
instrumentality.
5.7 Closing Conditions. The Company and the Stockholders shall use
------------------
reasonable efforts to cause all of the conditions to the
obligations of Purchaser under this Agreement to be satisfied on
or prior to the Closing Date (but only to the extent the
satisfaction of such conditions is within the control of the
Company or the Stockholders).
5.8 Employee Benefit Plans. The Company and the Stockholders agree
----------------------
to use their reasonable efforts to coordinate the conversion or
merger of any employee benefit
<PAGE>
plans of the Company into Purchaser plans, to the extent that
such plans may exist, to provide any and all employees of the
Company who become employees of Purchaser with the same employee
benefits uniformly offered to employees of Purchaser.
5.9 Contracts. The Company shall use reasonable efforts to cause
---------
the Company to consult with Purchaser prior to entering into any
Contract not in the ordinary course of business.
5.10 Reciprocal Telecommunications Agreement. Subject to any right of
---------------------------------------
offset of sums owing by the Company to Purchaser, relating to
sums due and owing to the Company's accountants and other
professionals from Purchaser, the Company shall not knowingly
and intentionally take any action that would cause it to be in a
state of default beyond notice and opportunity to cure under the
Reciprocal Telecommunications Agreement.
5.11 No Shop. In consideration for the Standstill Payments made by
-------
Purchaser under the October 31, 1997 Standstill Agreement (a)
from and after the date hereof until the Closing Date, but only
so long as this Agreement remains in full force and effect and
has not been terminated, the Company and the Stockholders shall
not, and shall not permit the respective officers, employees,
representatives, and other advisors of the Company on behalf of
the Company to (1) actively pursue discussions or negotiations
with any person, other than Purchaser, relating to the possible
acquisition of, or business combination with, the Company
(whether by way of merger, consolidation, take-over bid, tender
offer, purchase of shares, purchase of assets, or otherwise) or
any material portion of its or their shares of capital stock or
assets (with any such efforts by any such person, including a
firm proposal to make such an acquisition or combination, herein
referred to as a "Competing Transaction"), (2) make or authorize
any public statement, recommendation, or solicitation in support
of any possible Competing Transaction by any Person other than
by Purchaser, or (3) enter into a binding written agreement with
any person, other than Purchaser, providing for a possible
Competing Transaction. The Company and its respective directors,
officers, employees, representatives, and other advisors and
each of the Stockholders shall immediately cease any and all
active, discussions, or negotiations with any parties conducted
heretofore with respect to any Competing Transaction.
<PAGE>
ARTICLE
PURCHASER'S COVENANTS
From and after the date hereof and until the Closing Date (except as
hereinafter otherwise provided), unless the Company shall otherwise agree in
writing, but only so long as this Agreement is in full force and effect and
neither the Company nor the Stockholders are in default of their obligations
hereunder:
6.1 Access. Purchaser shall permit:
------
(a) the Company, the Stockholders and their respective
advisers to have reasonable access to all properties,
books, accounts, records, Contracts, files,
correspondence, tax records, and documents of or
relating to Purchaser and to discuss such matters with
the executive officers of Purchaser; Purchaser shall
make available to the Company and the Stockholders and
their respective advisers, prior to the filing of same,
a copy of any materials, reports or statement to be
filed with the SEC or any other Governmental Authority,
and all other information concerning its business and
properties as the Company and the Stockholders may
reasonably request;
(b) the Company and the Stockholders, at their sole cost and
expense, to conduct, or cause its agents to conduct,
such reasonable reviews, inspections, surveys, tests,
and investigations of the assets of Purchaser as the
Company or the Stockholders deem reasonably necessary or
advisable;
(c) the Company and the Stockholders and their respective
advisers to consult with the accountants for Purchaser,
and said accountants are hereby authorized to disclose
all information in their possession to the Company, the
Stockholders and their advisers with respect to
Purchaser and the businesses thereof; and
(d) subject in each case to the prior approval of Purchaser,
the Company, the Stockholders and their respective
advisers to discuss the proposed acquisition with the
employees of Purchaser; provided that representatives of
Purchaser may be present during any such discussions and
provided that such discussions are coordinated with
representatives of Purchaser as to the content of such
proposed discussions to assure that such discussions do
not interfere unreasonably with the business and
operations of Purchaser or harm the relationship which
Purchaser has with its employees;
provided, however, any investigation pursuant to this Section shall be conducted
- -------- -------
in such manner as not to interfere unreasonably with the businesses and
operations of Purchaser.
6.2 Ordinary Course. Except for the Proposed Public Offering, the
---------------
Proposed GlobalTel Merger and as set forth in Exhibit 6.2, and
except for any actions required to be
<PAGE>
performed by Purchaser or otherwise permitted pursuant to this
Agreement, Purchaser shall conduct its business generally in the
ordinary and usual course in all material respects and use all
reasonable efforts to preserve its business organizations intact
and its existing relations with customers, suppliers,
independent contractors, employees, and business associates, and
Purchaser shall not do any of the following without the approval
of the Stockholders (which approval shall not be unreasonably
withheld):
(a) amend its Articles of Incorporation (or like charter
documents) or By-laws or subdivide, split, combine,
consolidate, or reclassify any of its outstanding shares
of capital stock; provided, however, that nothing in
this Agreement shall be construed to prohibit Purchaser
effectuating a reverse split of its capital stock or
amending its By-Laws to allow additional directors in
contemplation of the Proposed GlobalTel Merger ;
(b) repurchase, redeem, or otherwise acquire, directly or
indirectly, any of its capital stock or any securities
convertible into or exchangeable or exercisable into any
of its capital stock except in the ordinary course of
business;
(c) reclassify any of its outstanding shares of capital
stock; provided, however, that nothing in this agreement
shall be construed to prohibit Purchaser from
effectuating a reverse split of its capital stock;
(d) enter into any material transaction not in the ordinary
course of its business consistent with past practice
other than the Proposed Public Offering and the Proposed
GlobalTel Merger;
(e) transfer, lease, license, sell, mortgage, pledge,
encumber, or dispose of any material property or assets
or incur, guarantee, assume, or increase any
indebtedness or other liability in excess of $25,000
other than in the ordinary and usual course of business
consistent with past practice;
(f) authorize capital expenditures in excess of $25,000
other than in the ordinary and usual course of business
consistent with past practice or in connection with
Proposed Public Offering or the Proposed GlobalTel
Merger;
(g) make any material acquisition of, or investment in,
assets, shares, capital stock or other securities of any
other person or entity other than in the ordinary and
usual course of business consistent with past practice
or in connection with the Proposed GlobalTel Merger;
(h) except as may be required to satisfy contractual
obligations existing as of the date hereof and the
requirements of applicable Laws, establish, adopt, enter
into, make, amend in any material respect, or make any
material elections under any collective bargaining
agreement or Employee Plan;
<PAGE>
(i) implement any change in its accounting principles,
practices, or methods, other than as may be required by
generally accepted accounting principles; and
(j) authorize or enter into any agreement to take any of the
actions referred to in this Section.
6.3 Representations and Warranties. Purchaser shall not knowingly
------------------------------
and intentionally do, or cause to be done, anything that would
cause any of the representations and warranties set forth in
Article IV from being true, complete, and accurate in all
material respects on the Closing Date as if made on such date
(except to the extent that such representations and warranties
are, by their terms, made expressly as of the date of this
Agreement).
6.4 No Breach. Purchaser shall not knowingly and intentionally do
---------
any act or omit to do any act, or permit any act or omission to
act, which will cause a material breach of this Agreement.
6.5 Financial Statements. Purchaser shall furnish to the Company and
--------------------
each Stockholder within 60 days after the end of each fiscal
quarter ending after the date hereof an unaudited consolidated
balance sheet and income statement of Purchaser for each such
period.
6.6 Litigation. Purchaser shall promptly notify the Company and each
----------
Stockholder in writing of any action, written investigation,
claim, audit, action, suit, or proceeding which is commenced
against, by or relating to Purchaser or this Agreement by or
before any court or Governmental Authority, commission, board,
bureau, agency, or instrumentality.
6.7 Closing Conditions. Purchaser shall use reasonable efforts to
------------------
cause all of the conditions to the obligations of the Company
under this Agreement to be satisfied on or prior to the Closing
Date (but only to the extent the satisfaction of such conditions
is within the control of Purchaser).
6.8 Employee Benefit Plans. Purchaser agrees to use its reasonable
----------------------
efforts to coordinate the conversion or merger of any employee
benefit plans of the Company into Purchaser plans, to the extent
that such plans may exist, to provide any and all employees of
the Company who become employees of Purchaser with the same
employee benefits uniformly offered to employees of Purchaser.
6.9 Proposed Public Offering. Purchaser shall use its best efforts
------------------------
to cause the registration statement relating to the Proposed
Public Offering to be declared effective by the Commission prior
to the Termination Date.
<PAGE>
6.10 Reciprocal Telecommunications Agreement. Purchaser shall not
---------------------------------------
knowingly and intentionally take any action that would cause it to be
in a state of default beyond notice and opportunity to cure under the
Reciprocal Telecommunications Agreement.
6.11 Public Announcement. Purchaser shall not make any public announcement
-------------------
regarding this Agreement or the transactions contemplated hereby
without the prior written consent of the Company and the Stockholders,
which consent shall not be unreasonably withheld; provided, however
that nothing in this Agreement shall be construed to prohibit
Purchaser from filing and distributing all information relating to
this Agreement and the transactions contemplated hereby as is
necessary to complete the Proposed Public Offering.
6.12 Confidentiality. Purchaser shall comply and cause its
---------------
"Representatives" to comply with the terms of the Confidentiality
Agreement, which are hereby ratified, confirmed and incorporated
herein by reference as though fully set forth herein as obligations of
Purchaser under this Agreement.
6.12 Standstill Agreement. Purchaser shall not knowingly and intentionally
--------------------
take any action that would cause it to be in a state of default beyond
notice and opportunity to cure under the Standstill Agreement dated
October 31, 1997.
6.14 Standstill Payments. On each of May 1, 1998 and June 1, 1998,
-------------------
Purchaser shall make Standstill Payments in the amount of $25,000 each
(and the failure to timely make such payments shall be a material
breach by Purchaser under this Agreement), except if the Closing has
occurred on or prior to either of such dates, then the respective
Standstill Payment shall not be required to be made.
<PAGE>
ARTICLE VII
CONDITIONS OF PURCHASER'S OBLIGATIONS TO CLOSE
The obligations of Purchaser to close under this Agreement are subject to
satisfaction of the following conditions, unless waived in writing by Purchaser:
7.1 Representations and Warranties True. The representations and
-----------------------------------
warranties of the Company and the Stockholders contained in this
Agreement shall be true and correct in all material respects (or
where any statement in a representation or warranty expressly
contains a standard of materiality such statement shall be true
and correct in all respects) on and as of the Closing Date,
except to the extent that a representation or warranty is made
as of a specific earlier date, in which case such representation
or warranty shall be true and correct in the manner specified
above as of such earlier date and shall be deemed to have been
made on and as of the Closing Date.
7.2 Performance. The Company and the Stockholders shall have
-----------
performed and complied in all material respects with all
agreements and conditions required by this Agreement to be
performed or complied with by them on or prior to the Closing.
7.3 No Material Change. Since the Company Balance Sheet Date, there
------------------
shall have been no material adverse effect on or material
adverse change in (i) any of the business, condition (financial
or otherwise), operations, prospects, assets or liabilities of
the Company taken as a whole, (ii) the legality or
enforceability against Stockholders or the Company of this
Agreement or (iii) the ability of any Stockholder or the Company
to perform its obligations and to consummate the transactions
under this Agreement.
7.4 Stockholder and Company Certificate. Purchaser shall have
------------------------------------
received a certificate dated the Closing Date and executed by
each Stockholder and the Company, substantially in the form of
Exhibit D hereto, to the effect that the conditions expressed in
Sections 7.1, 7.2 and 7.3 have been fulfilled.
7.5 No Injunction. On the Closing Date there shall be no Laws or
-------------
effective injunction, preliminary restraining order or any order
of any nature issued by a court of competent jurisdiction that
prevents or makes illegal the consummation of the transaction
contemplated hereby.
7.6 Employment/Consulting Agreements. John Lynch shall have entered
--------------------------------
into the consulting agreement with Purchaser in form of Exhibit
B hereto. Philip Thomas and Sean Thomas shall have entered into
the employment agreements with Purchaser in the form of Exhibit
C hereto.
7.7 Stockholder Approval; Approval of Board of Directors of the
-----------------------------------------------------------
Company. Purchaser shall have received copies of resolutions of
-------
the Stockholders and the Board of
<PAGE>
Directors of the Company, certified by the Secretary or
Assistant Secretary of the Company approving this Agreement and
the transactions contemplated hereby.
7.8 Stockholder Action. Each Stockholder shall have executed and
------------------
delivered to Purchaser this Agreement and the Escrow Agreement
among Purchaser, such Stockholder and the escrow agent named
therein substantially in the form attached hereto as Exhibit B
(the "Escrow Agreement").
7.9 Completion of Necessary Financing/Listing on Stock Market.
---------------------------------------------------------
Purchaser shall have completed new financings of not less than
$15,000,000 to enable Purchaser to complete the transactions
contemplated hereby. Purchaser's Common Stock shall be approved
for listing on the Nasdaq Stock Market, the American Stock
Exchange or the New York Stock Exchange.
7.10 Consents. All consents, approvals or authorizations listed as
--------
being required to execute, deliver and perform this Agreement
and the transactions contemplated hereby in Section 3.4 of the
Company Disclosure Schedule shall have been obtained by the
Company.
7.11 Disclosure Schedules. The Company and Purchaser shall have
--------------------
agreed upon forms of Company Disclosure Schedule, Purchaser
Disclosure Schedule and Exhibit F hereof within 20 days of the
date hereof.
7.12 Conditions Generally. If any of the foregoing conditions are
--------------------
not fulfilled at the time set forth herein for Closing,
Purchaser may only, at Purchaser's option, either:
(a) Waive the unfulfilled condition or conditions and
consummate Closing hereunder; or
(b) Terminate this Agreement pursuant to Article XII hereof.
It is agreed that if Purchaser is informed in writing by the Stockholders
or the Company at or before the time of Closing of any breach or non-fulfillment
of any warranty, representation or covenant by the Stockholders or the Company
or non-fulfillment of any condition, and Purchaser does not elect to terminate
this Agreement and proceeds to consummate Closing hereunder, then Purchaser
shall be deemed to have waived its rights with respect to the applicable
warranty, representation, covenant or condition.
<PAGE>
ARTICLE VIII
CONDITIONS OF THE COMPANY'S AND
THE STOCKHOLDERS' OBLIGATIONS TO CLOSE
The obligation of the Company and the Stockholders to close under this
Agreement is subject to satisfaction of the following conditions, unless waived
in writing by the Stockholders.
8.1 Representations and Warranties True. The representations and
-----------------------------------
warranties of Purchaser contained in this Agreement shall be
true and correct in all material respects (or where any
statement in a representation or warranty expressly contains a
standard of materiality such statement shall be true and correct
in all respects) on and as of the Closing Date, except to the
extent that a representation or warranty is made as of a
specific earlier date, in which case such representation or
warranty shall be true and correct in the manner specified above
as of such earlier date and shall be deemed to have been made on
and as of the Closing Date.
8.2 Performance. Purchaser shall have performed and complied in all
-----------
material respects with all agreements and conditions required by
this Agreement to be performed or complied with by it on or
prior to the Closing.
8.3 No Material Change. Since the Purchaser Balance Sheet Date,
------------------
there shall have been no material adverse effect on or material
adverse change in (i) any of the business, condition (financial
or otherwise), operations, prospects, assets or liabilities of
Purchaser taken as a whole, (ii) the legality or enforceability
against Purchaser of this Agreement or (iii) the ability of
Purchaser to perform its obligations and to consummate the
transactions under this Agreement.
8.4 Purchaser Certificate. The Company and the Stockholders shall
---------------------
have received a certificate dated the Closing Date and executed
by an executive officer of Purchaser, substantially in the form
of Exhibit E hereto, to the effect that the conditions expressed
in Sections 8.1, 8.2 and 8.3 have been fulfilled.
8.5 No Injunction. On the Closing Date there shall be no Law or
-------------
effective injunction, preliminary restraining order or any order
of any nature issued by a court of competent jurisdiction that
prevents or makes illegal the consummation of the transaction
contemplated hereby.
8.6 Employment/Consulting Agreements. Purchaser shall have entered
--------------------------------
into a consulting agreement with John Lynch in the form of
Exhibit B hereto. Purchaser shall have entered into employment
agreements with Philip Thomas and Sean Thomas in the form of
Exhibit C hereto.
8.7 Purchaser Action. Purchaser shall have (i) executed and
----------------
delivered to the each Stockholder this Agreement and the Escrow
Agreement and (ii) paid to each Stockholder the Purchase Price
in accordance with Section 2.2 hereof.
<PAGE>
8.8 Approval of Board of Directors of Purchaser. The Company and
-------------------------------------------
the Stockholders shall have received copies of resolutions of
the Board of Directors of the Purchaser, certified by the
Secretary or Assistant Secretary of the Purchaser, approving
this Agreement and the transactions contemplated hereby.
8.9 Completion of Necessary Financing/Listing on Stock Market.
---------------------------------------------------------
Purchaser shall have completed new financings of not less than
$15,000,000 to enable Purchaser to complete the transactions
contemplated hereby. Purchaser's Common Stock shall be approved
for listing on the Nasdaq Stock Market, the American Stock
Exchange or the New York Stock Exchange.
8.10 Consents. All consents, approvals or authorizations listed as
--------
being required to execute, deliver and perform this Agreement
and the transactions contemplated hereby in Exhibit G shall have
been obtained by the Company or the Purchaser.
8.11 Release of Guarantees. The Company shall have obtained the
---------------------
release of the personal guarantees provided by the Stockholders
and/or John Lynch of the Company's real estate leases in
Connecticut and Florida and of the Company's obligations to
Zions Credit Corporation.
8.12 Disclosure Schedules. The Company and Purchaser shall have
--------------------
agreed upon forms of Company Disclosure Schedule, Purchase
Disclosure Schedule and Exhibit F hereof within 20 days of the
date hereof.
8.13 Conditions Generally. If any of the foregoing conditions are
--------------------
not fulfilled at the time set forth herein for Closing, the
Company and the Stockholders may only, at their option, either:
(a) waive the unfilled condition or conditions and
consummate Closing hereunder; or
(b) terminate this Agreement pursuant to Article XII hereof.
It is agreed that if the Stockholders are informed in writing by Purchaser
at or before the time of Closing of any breach or non-fulfillment of any
warranty, representation or covenant by Purchaser or non-fulfillment of any
condition, and the Company and the Stockholders do not elect to terminate this
Agreement and proceed to consummate Closing hereunder, then the Company and the
Stockholders shall be deemed to have waived their rights with respect to the
applicable warranty, representation, covenant or condition.
<PAGE>
ARTICLE
DELIVERIES OF THE STOCKHOLDERS
The Stockholders agree on the Closing Date to deliver or cause to be
delivered to Purchaser the following:
9.1 Stock Certificates. Certificates evidencing the Stock properly
------------------
endorsed for transfer or accompanied by duly executed stock
powers, in either case executed in blank and otherwise in form
acceptable for transfer on the books of the Company.
9.2 Resignations. Written resignations of each of the directors of
------------
the Company.
9.3 Letters to Banks. If requested by Purchaser, letters to banks
----------------
at which the Company maintains accounts or borrows funds
revoking the authority of existing signatories and authorizing
signatories designated by Purchaser.
9.4 Stockholders Certificate. The certificate of the Stockholders
------------------------
referenced in Section 7.4.
9.5 Good Standing Certificates. Good standing certificates,
--------------------------
certificates of foreign qualification, certificates of status or
certificates of compliance, dated no more than ten (10) days
prior to the Closing Date, from the appropriate authorities in
the jurisdiction of incorporation of the Company and in each
jurisdiction in which the Company is qualified to do business,
showing the Company to be in good standing in the applicable
jurisdiction.
9.6 Secretary's Certificate. Certificate of the Secretary or an
-----------------------
Assistant Secretary of the Company as to Certificate of
Incorporation and Bylaws of the Company, the resolutions adopted
by the Board of Directors of the Company authorizing and
approving this Agreement and the consummation of the
transactions contemplated hereby, and the incumbency of
officers.
9.7 Employment/Consulting Agreements. An original executed
--------------------------------
counterpart of the consulting agreement between John Lynch and
Purchaser in the form of Exhibit B hereto. Original executed
counterparts of the employment agreements between Purchaser and
each of Philip Thomas and Sean Thomas in the form of Exhibit C
hereto.
9.8 Other Deliveries. All previously undelivered documents required
----------------
to be delivered pursuant to this Agreement and such other
documents or instruments as Purchaser or its counsel may
reasonably request.
9.9 Escrow Agreement. An original executed counterpart of the
----------------
Escrow Agreement with each of the Stockholders.
<PAGE>
9.10 Releases. The Company and the Stockholders shall have exchanged
---------
general releases, containing an exclusion for the Stockholder's
rights under any Plans and such other exclusions as may be
reasonably requested by the Stockholders and agreed to by
Purchaser (which agreement shall not be unreasonably withheld).
9.11 Personal Guarantee. John Lynch shall deliver his personal
-------------------
guarantee, in a form reasonably acceptable to Purchaser and its
counsel, of the obligations of Lynch Family, LLC pursuant to
Section 11.6(e) hereof.
<PAGE>
ARTICLE
DELIVERIES OF PURCHASER ON THE CLOSING DATE
Purchaser agrees on the Closing Date to deliver to the Stockholders the
following:
10.1 Payments. Subject to Section 11.6 and the Escrow Agreement,
--------
payment of the Purchase Price pursuant to and in accordance with
Section 2.2.
10.2 Secretary's Certificate. A certificate of the Secretary or an
-----------------------
Assistant Secretary of Purchaser setting forth a copy of the
resolutions adopted by the Board of Directors of Purchaser
authorizing and approving the execution and delivery of this
Agreement and the consummation of the transactions contemplated
hereby.
10.3 Purchaser Certificate. The officer's certificate of Purchaser
---------------------
referenced in Section 8.3.
10.4 Escrow Agreement. An original counterpart of the Escrow
----------------
Agreement with each Stockholder duly executed by the Purchaser.
10.5 Employment/Consulting Agreement. Original executed counterpart
-------------------------------
of the consulting agreement between John Lynch and Purchaser in
the form of Exhibit B hereof. Original executed counterpart of
the employment agreements between Purchaser and each of Philip
Thomas and Sean Thomas in the form of the Exhibit C hereof.
10.6 Other Deliveries. All previously undelivered documents required
----------------
to be delivered pursuant to this Agreement and such other
documents or instruments as the Stockholders or their counsel
may reasonably request.
<PAGE>
ARTICLE
INDEMNIFICATION
11.1 Indemnification by the Stockholders.
-----------------------------------
From and after the completion of the Closing, subject to the terms,
conditions and limitations set forth herein, each of the Stockholders,
proportionately as set forth below (except with respect to breaches of the
representations and warranties contained in Section 3.2, for which the
Stockholders severally (and not jointly)), agrees to indemnify Purchaser and its
Affiliates (and their respective officers and directors) of Purchaser (which
shall specifically include the Company) (each a "Purchaser Indemnitee") against
and hold them harmless from any and all Damages which may be asserted against,
imposed upon or sustained by a Purchaser Indemnitee by reason of or arising out
of the breach, default, inaccuracy or failure of any of the warranties,
representations, covenants or agreements of the Company or the Stockholders
contained in this Agreement or in any certificate or instrument required to be
delivered pursuant hereto.
Notwithstanding anything contained in this Agreement to the contrary;
(i) the representations and warranties in Section 3.2 are made by each
Stockholder only with respect to himself and not any other Stockholder; (ii) as
to other indemnification obligations of the Stockholders, the liability of the
Stockholders shall be proportionate (i.e., each Stockholder shall only be liable
for one-third (1/3rd) thereof); and (iii) subject to the right of the Purchaser
to recover fees from the Company, pursuant to Section 12.2 hereof, the
Stockholders shall have no liability of any sort under this Agreement unless and
until the Closing under this Agreement is actually consummated, (which post
Closing liabilities shall be limited as set forth herein). The Purchaser shall
be responsible for any and all reasonable legal and other costs and expenses
paid or incurred by the Stockholders (or any of them) in enforcing the foregoing
limitation on liability.
11.2 Indemnification by Purchaser.
----------------------------
(a) From and after Closing, subject to the terms, conditions
and limitations set forth herein, Purchaser agrees to
indemnify each Stockholder and every Affiliate of such
Stockholder (each a "Stockholder Indemnitee") and hold
them harmless from and against any and all Damages which
may be asserted against, imposed upon or sustained by a
Stockholder Indemnitee at any time by reason of or
arising out of (i) the breach, default, inaccuracy or
failure of any warranties, representations, conditions,
covenants or agreements of Purchaser contained in this
Agreement or in any certificate, instrument or document
delivered pursuant hereto, or (ii) the ownership of the
Purchaser Common Stock by the Stockholders after Closing
solely from such ownership.
(b) The Purchaser shall further indemnify and hold harmless
the Stockholders, the Company and its officers,
directors, employees, and each person, if any, who
controls the Company within the meaning of the Act,
against, and pay
<PAGE>
or reimburse any such person for, any and all losses,
claims, damages or liabilities or expenses whatsoever
(or actions, proceedings or investigations in respect
thereof) to which the Company or any such person may
become subject under the Act or otherwise (which will,
for all purposes of this Agreement, include, but not be
limited to, all costs of defense and investigation and
all reasonable attorneys' fees, including appeals),
whether such losses, claims, damages, liabilities or
expenses shall result from (A) any claim of the Company,
any of its officers, directors, employees, or any person
who controls the Company within the meaning of the Act
or any third party, insofar as such losses, claims,
damages or liabilities are based upon any untrue
statement or alleged untrue statement of any material
fact contained in any registration statement, amendment,
supplement, prospectus or other disclosure, including
those relating to the Proposed Public Offering, or filed
by the Purchaser upon exercise of the Registration
Rights set forth in Section 2.3 hereof, unless such
untrue statement or alleged untrue statements were made
in such registration statement, amendment, supplement,
prospectus or other disclosure primarily in reliance (to
the extent permitted by this Agreement) upon information
furnished to Purchaser in connection therewith by the
Company or a Stockholder, or (B) any violations by the
Purchaser of the Act or state securities laws. The
Purchaser shall reimburse the Company or any such person
for any legal or other expenses reasonably incurred in
connection with investigating or defending against any
such claim, damage, liability or action, proceeding or
investigation to which such indemnity obligation
applies, and such indemnity obligations shall be in
addition to any liability of the Purchaser herein or
otherwise at law or equity. The obligations of the
Purchaser under this Section 11.2(b) shall survive the
termination of this Agreement for any reason prior to
Closing.
11.3 Procedures for Third-Party Claims.
---------------------------------
(a) If any Indemnitee receives written notice of the
assertion of any claim or of the commencement of any
action or proceeding by any Governmental Authority or
any person or entity who is not a party to this
Agreement (a "Third Party Claim") against or affecting
such Indemnitee, and if such assertion were presumed to
be true (regardless of the actual outcome) then a party
could be obligated to provide indemnification under this
Agreement as a result of or in connection with such
claim, action or proceeding, such Indemnitee will give
such Indemnifying Party reasonably prompt written notice
thereof, but in any event no later than thirty (30)
calendar days after receipt of such written notice of
such Third Party Claim; provided however, that failure
to give notice as provided in this paragraph (a) shall
not relieve the Indemnifying Party of its
indemnification obligations under this Article XI except
to the extent that such Indemnifying Party is actually
prejudiced by such failure. Said written notice to the
Indemnifying Party shall set forth the basis of the
Third Party Claim in reasonable detail and include
copies of all pertinent correspondence relating to such
Third Party
<PAGE>
Claim. The Indemnifying Party (which, in the case of any matter for
which the Stockholders are severally liable and for purposes of this
Section 11.3 shall act as a single group) will have the right to
assume and control the defense of any Third Party Claim at such
Indemnifying Party's sole expense and by such Indemnifying Party's own
counsel (which counsel must be reasonably satisfactory to the
Indemnitee), by giving written notice to the Indemnitee (the "Notice
to Defend") no later than thirty (30) calendar days after receipt of
the above-described notice of such Third Party Claim. The Indemnitee
also will have the right to participate in the defense of any Third
Party Claim assisted by counsel of its own choosing, but all fees and
expenses of such counsel shall be paid by the Indemnitee. The
Indemnifying Party and the Indemnitee will reasonably cooperate with
each other in good faith in such defense and make available all
employees and books and records in its control as reasonably deemed
necessary with respect to such defense (but not to the extent that
would require waiver of any privilege). If the Indemnitee does not
receive from the Indemnifying Party a Notice to Defend with respect to
a Third Party Claim or a written notice of objection to the claim for
indemnification specifying in reasonable detail the basis for the
objection within the thirty (30) day period described above, the
Indemnitee may, at its option, elect to solely defend the Third Party
Claim assisted by counsel of its own choosing, and the Indemnifying
Party will be liable for all reasonable costs and expenses, and all
settlement amounts (subject to and in accordance with paragraph (c)
below of this Section 11.3) or other liabilities, losses, damages and
injuries paid or incurred in connection therewith to the extent such
claim is or would have been indemnifiable under this Agreement if such
claim is or had been proved.
(b) If, within the thirty (30) day period set forth in paragraph (a) above
of this Section 11.3, an Indemnitee receives a Notice to Defend from
an Indemnifying Party with respect to any Third Party Claim, the
Indemnifying Party will not be liable for any legal expenses of the
Indemnitee incurred after receipt by the Indemnitee of such Notice to
Defend.
(b) In the event there is a dispute between the Indemnifying Party and
Indemnitee concerning whether a Third Party Claim should be contested,
settled or compromised, it shall be settled, compromised or contested,
in accordance with the next succeeding sentences; provided, however,
-------- -------
that the Indemnitee, or its respective successors or assigns, shall
neither be required to refrain from paying or satisfying any claim
which has matured by court judgment or decree, unless appeal is taken
thereafter and proper appeal bond posted by the Indemnifying Party,
nor shall the Indemnitee be required to refrain from paying or
satisfying any Third Party Claim after and to the extent that such
Third Party Claim has resulted in an unstayed injunction. The
Indemnifying Party shall not, without the Indemnitee's prior written
consent, not to be unreasonably withheld, settle or compromise any
action or claim or consent to the entry of any judgment with respect
to any action, claim or proceeding.
<PAGE>
Subject to the foregoing, in the event that the Indemnifying Party, on
the one hand, or the Indemnitee, on the other hand, has reached a good
faith, bona fide settlement, agreement or compromise, subject only to
approval hereunder, with any claimant regarding a matter which may be
the subject of indemnification hereunder and desires to settle on the
basis of such agreement or compromise, such party who desires to so
settle or compromise shall notify the other party in writing of its
desire setting forth the terms of such settlement or compromise (the
"Notice of Settlement"). The Third Party Claim may be settled or
compromised on such basis unless within twenty (20) days of the
receipt of the Notice of Settlement the party who issued the Notice of
Settlement receives a notice from the other party of its desire to
continue to contest the matter (the "Notice to Contest") and, in such
case:
(i) Should the Indemnitee deliver a Notice to Contest, the claim
shall be so contested and the liability of the Indemnifying
Party shall be limited as provided in clause (iii) below;
(ii) If the settlement or compromise could result in a further claim
for indemnification being made against the Indemnifying Party
and if the Indemnifying Party delivers the Notice to Contest,
the claim shall be so contested and the liability of the
Indemnitee shall be limited as provided in clause (iii) below;
and
(iii) If a matter is contested as provided in clauses (i) or (ii)
above and is later adjudicated, settled, compromised or
otherwise disposed of and such adjudication, compromise,
settlement or disposition results in a liability, loss, damage
or injury in excess of the amount for which one party desired
previously to settle the matter, then the liability of such
party shall be limited to such lesser proposed settlement amount
(plus attorney's fees and expenses to the date of the proposed
but unapproved settlement to the extent provided for in
paragraphs (a) and (b) above) and the party contesting the
matter shall be solely responsible for any additional amount.
11.4 Direct Claim. Any claim for which an Indemnitee intends to assert a
------------
right to indemnifiable Damages under this Agreement which does not
result from a Third-Party Claim (a "Direct Claim") shall be asserted
by giving each Indemnifying Party reasonably prompt written notice
thereof, and each Indemnifying Party shall have a period of thirty
(30) calendar days within which to respond to such Direct Claim. If
any Indemnifying Party does not so respond within such thirty (30)
calendar day period, such Indemnifying Party shall be deemed to have
rejected such claim, in which event the Indemnitee shall be free to
pursue such remedies as may be available to the Indemnitee pursuant to
this Agreement. A failure to give timely notice as provided in this
Section 11.4 shall not affect the rights or obligations of any party
hereunder except and only to the extent that, as a result of such
failure, any party which was entitled to receive such notice was
deprived of its right to recover any
<PAGE>
payment under its applicable insurance coverage, incurred an
obligation or liability which otherwise would have been avoided, or
was otherwise actually prejudiced.
11.5 Limitations of Indemnification Obligations.
------------------------------------------
(a) All warranties, representations, conditions, covenants,
agreements and undertakings of the parties under this Agreement
shall survive the consummation of the Closing hereunder;
provided, however, claims by the Purchaser Indemnitees against
the Stockholders for the breach of any warranty or representation
contained in Article III hereof and claims by Stockholder
Indemnitees against Purchaser for the breach of any warranty or
representation contained in Article IV hereof shall survive only
for 12 months following the Closing Date. All other obligations
shall be unlimited as to duration. Any claims for indemnification
based upon any such breach which are pending on or asserted or
identified prior to the expiration of the 12 month time period
specified above may continue to be made and indemnified against
pursuant to this Agreement and the Escrow Agreement and the
related obligation to indemnify shall not terminate.
(b) Losses Net of Insurance, Etc. The amount of any Damages suffered
----------------------------
as a result of an injury to an Indemnitee for which
indemnification is available hereunder, shall be net of any
insurance proceeds, if any, actually received by the Indemnitee
in respect of such injury and (i) increased to take account of
any net tax cost incurred by the Indemnitee arising from the
receipt of indemnity payments hereunder (grossed up for such
increase and any tax consequences resulting from any payments
pursuant to this Section 11.5(b)) and (ii) reduced to take
account of any net tax benefit realized by the Indemnitee arising
from the incurrence or payment of any such Damage. In computing
the amount of any such tax cost or tax benefit, the Indemnitee
shall be deemed to recognize all other items of income, gain,
loss, deduction or credit before recognizing any item arising
from the receipt of any indemnity payment hereunder or the
incurrence or payment of any indemnified Damages. Any indemnity
payment under this Agreement shall be treated as an adjustment to
the Purchase Price for tax purposes, unless a final determination
(which shall include the execution of a Form 870-AD or successor
form) with respect to the Indemnitee or any Affiliate of such
Indemnitee causes any such payment not to be treated as an
adjustment to the Purchase Price for Federal tax purposes. The
purpose of this Section 11.5(b) is to put the Indemnitee in such
a position as if the Damage for which indemnification is provided
hereunder had not occurred.
(c) Exclusive Remedy. The parties acknowledge and agree that after
----------------
the Closing the indemnities set forth in this Article XI shall be
the sole and exclusive remedy for breach, default, inaccuracy or
failure of any of the warranties, representations, conditions,
covenants or agreements contained in this Agreement and in any
certificates or documents delivered pursuant hereto,
<PAGE>
except in the case of judicially determined fraud, intentional or
willful misrepresentation or breach, equitable remedies and
except that the Stockholders shall have the right to seek
specific performance and/or to pursue any and all remedies
available at law or in equity (all of which shall be cumulative)
in connection with any failure of the Purchaser to perform its
obligations under Sections 2.2(a)(B), 2.3 and/or 2.4. The
foregoing is not intended to limit or in any way affect the
respective rights and obligations of the parties under the Escrow
Agreement and/or the employment agreements and consulting
agreement entered into by the Purchaser.
(d) No Lost Profits. Notwithstanding anything to the contrary in
---------------
this Agreement, except for any breach of Purchaser's obligations
under Sections 2.2(a)(B), 2.3 and 2.4 hereof, in no event will
any party hereto have any liability under this Agreement to any
other party hereto for consequential, indirect or incidental
damages of any kind or nature or lost profits.
(e) Maximum Indemnification by Purchaser. With respect only to claims
------------------------------------
by Stockholder Indemnitees against Purchaser for indemnification
based upon breaches defaults or inaccuracies of the warranties
and representations contained in Article IV, there shall be an
aggregate limitation of $2,070,000.00. There shall be no
limitation on Purchaser's liability for, or in connection with,
any of its other obligations under this Agreement.
11.6 Recourse for Indemnification by the Stockholders.
------------------------------------------------
(a) To induce the Purchaser and the Stockholders to enter into this
Agreement and to serve as the sole recourse for the indemnity obligations of the
Stockholders under this Article XI (except as set forth in Sections 11.6(e) and
11.7), the Purchaser shall have a right of set-off against the shares of
Purchaser Common Stock to be issued to the Stockholders (to be exercised prior
to their issuance) to enforce the Stockholders' obligations and the Purchaser
Indemnitees collective rights. Except for breaches referred to in Section
11.6(e), said right of set-off shall be exercised equally with respect to each
of the Stockholders (i.e., one-third (1/3/rd/) against the Purchaser Common
Stock to be issued to each Stockholder.
(b) Notwithstanding anything contained in this Agreement (or in any
instrument or document delivered pursuant hereto; provided, however that the
-----------------
parties agree and acknowledge that Purchaser shall have rights against the
Escrow Payment (to the extent and as provided in the Escrow Agreement) and
Purchaser shall have certain indemnification rights under the related Employment
Agreements and the Consulting Agreement) to the contrary, Purchaser hereby
acknowledges and agrees as follows, except as and to the extent provided in (e)
below with respect to any breach of the representations and warranties contained
in Section 3.2 hereof, that:
(i) the Stockholders shall have no personal liability of any
sort under or in connection with this Agreement and/or any
related instrument or document;
<PAGE>
(ii) after the Closing, the sole and exclusive right, remedy and
recourse of the Purchaser, any Purchaser Indemnitee and/or
any other person claiming by, through or under the
Purchaser for the enforcement of breach, default,
inaccuracy or failure of any of the warranties,
representations, conditions, covenants or agreements on the
part of any of the Company or the Stockholders (and/or for
any other obligation of any of the Company or the
Stockholders) in, under, pursuant to or in connection with
this Agreement and/or any instrument or document made or
delivered pursuant thereto, whether for Damages or other
legal or equitable relief, and whether based upon contract,
tort, fraud, or upon any other theory of law, shall be said
right of set-off against the Purchaser Common Stock to be
issued pursuant to Section 2.2(a)(B).
(iii) the Purchaser, for itself and its successors and assigns,
and any Purchaser Indemnitees hereby irrevocably waive and
relinquish any and all right to pursue any Action relating
to this Agreement of any kind or nature against the
Stockholders or any of their respective assets other than
an Action against the Purchaser Common Stock as aforesaid;
(iv) the limitations on the liability of the Stockholders set
forth herein were a material inducement to the Stockholders
entering into this Agreement, and but for said limitations,
the Stockholders would not have entered into this
Agreement; and
(v) Purchaser shall be responsible for any and all reasonable
legal and other costs and expenses paid or incurred by the
Stockholders (or any of them) in enforcing the foregoing
limitations on liability.
(c) Purchaser shall have the right (pending judicial determination or
mutual agreement as to the amount of claimed Damages for which set-off may be
made) to set-off from the number of shares owed to the Stockholders pursuant to
Section 2.2(a)(B) hereto a number of shares equal to (x) any and all Damages
which may be asserted against, imposed upon or sustained by a Purchaser
Indemnitee by reason of or arising out of the breach, default, inaccuracy or
failure of any of the warranties, representations, covenants or agreements of
the Company or the Stockholders contained in this Agreement or in any
certificate or instrument required to be delivered pursuant hereto divided by
(y) the Fair Market Value of the shares of Purchaser Common Stock as of the
first anniversary of the Closing Date
(d) For purposes of this Agreement, shares of Purchaser Common Stock
shall be deemed to have a "Fair Market Value" per share equal to the daily
average of the volume-weighted average trading price per share of Purchaser
Common Stock as quoted by Bloomberg (or if Bloomberg service is not available,
the daily average closing bid price per share as reported on the Nasdaq) for
each trading day of the most recent period of twenty consecutive trading days
ending prior to the date of determination.
<PAGE>
(e) In the event any Stockholder breaches any of such Stockholder's
representations or warranties contained in Section 3.2, such Stockholder (but
not any of the other Stockholders) shall be liable for any and all Damages which
are actually sustained by a Purchaser
Indemnitee by reason of such breach. With respect to such Damages only,
Purchaser shall have the right to recover against the Purchaser Common Stock and
against such Stockholder personally.
11.7 WorldCom Dispute.
----------------
(a) Unless on or prior to the first anniversary of the Closing Date the
WorldCom Dispute has been adjudicated, arbitrated or settled in the favor of the
Company or in the favor of WorldCom for an amount less than or equal to
$365,000, then, as an adjustment of the Purchase Price, Purchaser shall have the
right to recover against certain portions of the Escrow Payment and set-off from
the Purchaser Common Stock to be issued to the Stockholders as follows:
(i) If on the first anniversary of the Closing Date the
WorldCom Dispute has not been adjudicated, arbitrated or settled then Purchaser
shall be entitled to $770,860.35 ($1,135,860.35 less $365,000) to be recovered
pursuant to Section 11.7(a)(iii) below.
(ii) If on or prior to the first anniversary of the Closing Date
the WorldCom Dispute has been adjudicated, arbitrated or settled in favor of
WorldCom for an amount greater than $365,000 then Purchaser shall be entitled to
the amount of such adjudication, arbitration or settlement plus reasonable
attorneys' fees and costs and related consulting fees less $365,000 to be
recovered pursuant to Section 11.7(a)(iii) below as of the date of such
adjudication, arbitration or settlement.
(iii) Any amount to be recovered pursuant to Section (i) and (ii)
shall be exclusively recovered equally (i.e., one-half) from the Escrow Payments
and from set-offs from the Purchaser Common Stock based on the Fair Market Value
of the Purchaser Common Stock.
(b) Said right of recovery against the Escrow Payment and right of set-off
from the Purchaser Common Stock to be issued shall be the sole remedy for
Purchaser, and in no case shall any Stockholder be personally liable with
respect to any such amounts recoverable in connection with the WorldCom
Dispute.
(c) The obligations of the Stockholders and the rights of the Purchaser
under this Section 11.7 are conditioned upon (i) Purchaser vigorously defending
the WorldCom Dispute and vigorously pursuing its counterclaims in connection
therewith, all with counsel reasonably acceptable to the Stockholders (it being
agreed that Parcel, Mauro & Spaanstra, P.C. is acceptable to the Stockholders),
and (ii) John Lynch being authorized to pursue the settlement of the WorldCom
Dispute with WorldCom on terms reasonably acceptable to Purchaser, and (iii)
Purchaser shall not settle the WorldCom Dispute prior to the first anniversary
of the Closing Date without the prior written consent of the Stockholders, which
consent shall not be unreasonably withheld.
(d) If WorldCom offers or agrees (or otherwise indicates its willingness)
to settle the WorldCom Dispute for the payment of a sum certain, regardless of
whether the Purchaser or the Company accepts said offer or agreement or
consummates said settlement, then, at the option of the
<PAGE>
Stockholders, the WorldCom Dispute shall be deemed to have been settled for said
sum certain; provided, however that if such offer, agreement or indication of
-----------------
settlement contains additional conditions (i.e. other than the payment of money
and delivery of a release) that Purchaser reasonably deems commercially
unreasonable, then the Stockholders shall not have the option to deem the
WorldCom Dispute settled unless such offer, agreement or indication of
settlement is actually accepted by Purchaser or the Company; provided, further
--------- -------
that if the Company or Purchaser attempts on a timely basis to settle with
WorldCom based on such offer, agreement or indication of WorldCom, Inc.'s
willingness to settle the WorldCom Dispute for the payment of a sum certain and
the Company or Purchaser is unable to complete such settlement solely because
WorldCom withdraws or materially changes such offer, agreement or indication,
then the Stockholders shall not have the option to deem the WorldCom Dispute
settled.
(e) In the event that after the first anniversary of the Closing Date, but
before the second anniversary of the Closing Date, the WorldCom Dispute is
settled or otherwise satisfied for less than $1,135,860.35, then the Purchaser
shall promptly (but in any event within 30 days) pay and provide to the
Stockholders the sums recovered from the Escrow Payment and the number of shares
of Purchaser Common Stock set-off against in excess of such amounts as Purchaser
would have been entitled to recover and set-off had the WorldCom Dispute been
settled for said amount prior to said first anniversary. In the event the
Stockholders have exercised their demand registration right under Section 2.3
prior to the issuance and delivery of such additional shares of Purchaser Common
Stock pursuant to this Subsection, then the Stockholders shall not be entitled
to a second demand registration right with respect to such shares of Purchaser
Common Stock.
11.8 Survival of Representations, Warranties and Covenants. The
-----------------------------------------------------
representations, warranties, covenants, indemnities, conditions and
agreements contained herein are and will be deemed to be continuing
representations, warranties, covenants, indemnities, conditions and
agreements that survive the Closing and remain in full force and
effect regardless of any investigations or knowledge of or on behalf
of any party, but subject to the applicable limitations contained in
this Article XI.
11.9 Third Parties. It is the intention and agreement of the parties that
-------------
the obligations of the Stockholders to the Purchaser under this
Article XI do not and will not create any rights whatsoever in any
third parties other than the Purchaser Indemnitees and Stockholder
Indemnitees; provided, however that the Purchaser Indemnitees and
Stockholder Indemnitees shall not have any rights or remedies under
this Agreement beyond those granted to the Purchaser and the
Stockholders, respectively.
<PAGE>
ARTICLE XII
TERMINATION
12.1 Termination of this Agreement.
-----------------------------
(a) In the event that for any reason the Closing shall not have
occurred on or before June 30, 1998 (the "Termination Date"),
then the Company and the Stockholders or Purchaser shall have the
right (regardless of whether such person or persons is in
material breach of its obligations under this Agreement),
exercisable at any time after such date by notice in writing, to
terminate this Agreement and its obligations hereunder.
(b) In the event that, on or prior to the Termination Date, any Party
(the "Breaching Party") is in material breach of its or their
obligations under this Agreement (and such breach cannot
reasonably be expected to be cured by the Breaching Party prior
to the Termination Date, or the Breaching Party is not taking
reasonable efforts to cure such breach, and, in either event,
such breach is not waived), then, so long as any other Party (the
"Non-Breaching Party") entitled to the benefit of such
obligations is not in default of its or their obligations under
this Agreement, the Non-Breaching Party shall have the right, as
its sole and exclusive remedy in event of such breach, to
terminate this Agreement pursuant to this Article XII (unless
such breach is or has been cured prior to the giving of such
notice of termination). The failure of the Proposed Public
Offering to be completed shall not constitute a material breach
of this Agreement so long as Purchaser uses its best efforts to
cause such Registration Statement to become effective. The sole
remedy of the Company and the Stockholders in the event of such a
failure of the Proposed Public Offering to be completed shall
that described in Section 12.2(a)(i). Failure by the Purchaser to
timely pay any Standstill Payment shall constitute material
breach by the Purchaser.
(c) If any party attempts to terminate this Agreement for any reason
other than those contained in Section 12.1(a) or (b), such
termination shall constitute a material breach of this Agreement
by the terminating party.
12.2 Effect of Termination.
---------------------
(a) Termination by Stockholders or the Company. Notwithstanding
------------------------------------------
anything contained in this Agreement or in the Standstill
Agreements to the contrary, if this Agreement is terminated by
any of the Stockholders or the Company: (i) pursuant to Section
12.1(a) then Purchaser shall forfeit and the Company shall retain
any Standstill Payments paid by Purchaser as liquidated damages
to the Company, or (ii) pursuant to Section 12.1(b) then
Purchaser shall forfeit and the Company shall retain any
Standstill Payments paid by
<PAGE>
Purchaser and Purchaser shall pay to the Company a fee equal to
$150,000 as liquidated damages to the Company; and thereupon, in
each such case, the parties shall be released of all further
liabilities under this Agreement.
(b) Termination by Purchaser. Notwithstanding anything contained in
------------------------
this Agreement or in the Standstill Agreements to the contrary,
if this Agreement is terminated by Purchaser: (i) pursuant to
Section 12.1(a) then Purchaser shall forfeit and the Company
shall retain any Standstill Payments paid by Purchaser as
liquidated damages to the Company, or (ii) pursuant to Section
12.1(b) then the Company shall return all Standstill Payments to
Purchaser and the Company shall pay to Purchaser a fee equal to
$150,000 as liquidated damages to Purchaser; and thereupon, in
each case, the parties shall be released of all further
liabilities under this Agreement.
12.3 Sole Remedy for Termination. The remedies provided in Section 12.2(a)
---------------------------
and (b) shall constitute the sole and exclusive rights and remedies of
the Purchaser, on one hand, and of the Company and the Stockholders,
on the other, against the other in the event of any termination of
this Agreement by any party for any reason and/or breach of this
Agreement by any party prior to the consummation of the Closing under
this Agreement. Notwithstanding anything contained in this Agreement
to the contrary, except for the right of Purchaser to terminate this
Agreement under Section 12.1(b) above and to receive the return of the
Standstill Payments and receive payment of $150,000 from the Company
as provided in Section 12.2 above, Purchaser hereby acknowledges and
agrees that it shall have no right to seek or pursue damages, specific
performance and/or any other rights or remedies, whether at law or in
equity, against the Company and/or against any of the Stockholders for
or on account of or in connection with any breach of or failure or
refusal to perform any of their respective obligations under this
Agreement (regardless of whether such breach or failure or refusal to
perform is intentional or unintentional). Notwithstanding anything
contained in this Agreement to the contrary, except for the right of
the Company or the Stockholders to terminate this Agreement under
Section 12.1(a) or (b) above and to retain the Standstill Payments
and/or receive payment of $150,000, as the case may be, from Purchaser
as provided in Section 12.2 above, the Company and the Stockholders
hereby acknowledge and agree that it shall have no right to seek or
pursue damages, specific performance and/or any other rights or
remedies, whether at law or in equity, against Purchaser for or on
account of or in connection with any breach of or failure or refusal
to perform any of its obligations under this Agreement (regardless of
whether such breach or failure or refusal to perform is intentional or
unintentional). The parties acknowledge that the foregoing limitations
on the liability of the parties hereto and on the rights and remedies
of the other parties are a material inducement to the parties entering
into this Agreement. Purchaser shall be responsible for any and all
reasonable legal and other costs and expenses paid or incurred by the
Company or the Stockholders (or any of them) in enforcing the
foregoing limitations on their liability. The Company and the
Stockholders shall be responsible for any and all reasonable legal and
other costs and expenses paid or incurred by the Purchaser in
enforcing the foregoing limitations on its liability.
<PAGE>
ARTICLE XIII
MISCELLANEOUS
13.1 Entire Agreement. This Agreement, which also includes the Exhibits
----------------
and Schedules hereto, sets forth the entire agreement and
understanding among the parties and merges and supersedes all prior
discussions, agreements and understandings of every kind and nature
among them as to the subject matter hereof, and no party shall be
bound by any condition, definition, warranty or representation other
than as expressly provided for in this Agreement or as may be on a
date on or subsequent to the date hereof duly set forth in writing
signed by each party which is to be bound thereby. Except as otherwise
expressly provided herein, the foregoing is not intended to supersede
or otherwise affect the respective rights and obligations of the
parties under the Standstill Agreement dated October 31, 1997, the
Reciprocal Telecommunications Agreement or the Confidentiality
Agreement.
13.2 Amendments. This Agreement (including the Exhibits and Schedules
----------
hereto) shall not be changed, modified or amended except by a writing
signed by each party to be charged, and this Agreement may not be
discharged except by performance in accordance with its terms or by a
writing signed by each party to be charged. The rights and remedies of
the parties hereunder are cumulative and not exclusive of any other
right or remedy any party may have. No failure or delay by any party
hereto in exercising any right, power or privilege shall operate as a
waiver of any such right, power or privilege, except as expressly set
forth in this Agreement. No waiver of any default shall constitute a
waiver of any other or any subsequent default. No single or partial
exercise of any right, power or privilege shall preclude the further
or other exercise of the same or other right, power or privilege.
13.3 Governing Law. THIS AGREEMENT AND ITS VALIDITY, CONSTRUCTION AND
-------------
PERFORMANCE SHALL BE GOVERNED IN ALL RESPECTS BY THE LAWS OF THE STATE
OF DELAWARE WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
13.4 Representation by Counsel. Each party and its counsel cooperated in
-------------------------
the drafting and preparation of this Agreement and the documents
referred to herein. Accordingly, any rule of law or any legal decision
that would require interpretation of any ambiguities in this Agreement
against the party that drafted it is of no application and is hereby
expressly waived by each party.
13.5 Benefit of Parties; Assignment. This Agreement shall be binding upon
------------------------------
and shall inure to the benefit of the parties hereto and their
respective successors, legal representatives and permitted assigns.
The Agreement may not be assigned by any party except with the prior
written consent of other parties hereto. Nothing herein contained
shall confer or is intended to confer on any third party or entity
which is not a party to this Agreement any rights under this
Agreement, except as provided in Section 11.8.
<PAGE>
13.6 Expenses. Except as specifically provided otherwise in this
--------
Agreement, or as otherwise agreed in writing by any party (e.g., the
Purchaser has previously agreed, in writing, to pay certain fees to
Richard A. Eisner & Company, LLP, Trager & Trager, P.C. and Neal
Simmons, CPA, and the failure by the Purchaser to timely pay any such
sums in accordance with said agreement shall be a material default by
the Purchaser under this Agreement), each party will pay its own
expenses incident to this Agreement and the transactions contemplated
hereby, including legal and accounting fees.
After the date hereof, the Company shall not incur any material fees or
expenses on behalf of the Stockholders in connection with the transactions
contemplated by this Agreement; provided, however that nothing contained in this
or any other Section of this Agreement shall prohibit or affect the right of the
Company to pay, after the date hereof and prior to or at the Closing, any of the
following: (i) accounting and other reasonable fees to Richard A. Eisner &
Company, LLP and/or Neal Simmons, CPA; or (ii) up to a total of $50,000 of the
legal fees incurred by the Company and/or the Stockholders in connection with
this Agreement and/or the transactions contemplated hereby which are payable to
Berkowitz & Balbirer, P.C. and/or Trager & Trager, P.C.
13.7 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed to be an original instrument and all of which
shall constitute one and the same instrument.
13.8 Headings. The headings in the Sections, paragraphs, Schedules and
--------
Exhibits of this Agreement are inserted for convenience of reference
only and shall not constitute a part hereof.
13.9 Notices. All notices, requests, demands and other communications
-------
provided for by this Agreement shall be in writing and shall be deemed
to have been given when hand delivered, when received if sent by
telecopier or by same day or overnight recognized commercial courier
service or three business days after being mailed in any general or
branch office of the United States Postal Service, enclosed in a
registered or certified postpaid envelope, addressed to the address of
the parties stated below or to such changed address as such party may
have fixed by notice:
<PAGE>
To a Stockholder: Lynch Family, LLC
c/o John Lynch
10 Braeloch Way
Huntington, CT 06484
Philip Thomas
3216 N.E. 13th Street, #12
Pompano Beach, FL 33063
Sean Thomas
119 Division Avenue
Shelton, CT 06484
To the Company: International Telephone Company
110 Broward Boulevard, Suite 610
Fort Lauderdale, FL 33301
Attention: John Lynch
Telephone: (954) 525-0240
Facsimile: (954) 525-0221
with a copy to: Berkowitz & Balbirer, P.C.
253 Post Road West
P.O. Box 808
Westport, CT 06881
Attention: Howard Komisar, Esq.
Telephone: (203) 226-1001
Facsimile: (203) 226-3801
To Purchaser: Communications Systems International, Inc.
8 S. Nevada Ave., #200
Colorado Springs, Colorado 80903
Attention: Robert Spade
Telephone: (719) 471-3332
Facsimile: (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.
Telephone: (303) 292-6400
Facsimile: (303) 295-3040
provided, that any notice of change of address shall be effective only upon
receipt.
13.10 No Offer. This Agreement is submitted to the parties for examination
--------
only and it shall not be considered an offer and shall not bind any
party in any way unless and
<PAGE>
until (a) Purchaser has duly executed and delivered duplicate
originals of this Agreement to the Company and the Stockholders, and
(b) the Company and the Stockholders have duly executed and delivered
at least one of said originals to the Purchaser.
13.11 Further Assurances. After the Closing, each party hereto shall from
time to time, at the request of any other party hereto and without
further cost or expense to such other party, execute and deliver such
other instruments of conveyance and transfer and take such other
actions as such other party may reasonably request in order to more
effectively consummate the transactions contemplated hereby and
perfect such party's rights and interests hereunder.
13.12 Access By Stockholders After Closing. Subject to applicable
------------------------------------
securities laws, from and after the Closing, until such time as the
Stockholders no longer own any Purchaser Common Stock, Purchaser will
give the Stockholders and their respective attorneys, accountants and
representatives, reasonable access to all properties, documents,
contracts, books and records of the Company for any reasonable
purpose, (which, to the extent commercially reasonable, Purchaser
hereby agrees to keep and maintain for a period of at least five
years after the Closing), and will furnish the Stockholders with
copies of such documents and with such other information respecting
the Company as Seller may from time to time reasonably request;
provided, however that prior to granting such access the Stockholders
-------- -------
shall enter into such confidentiality agreements as Purchaser may
reasonably request with respect to such documents and information.
13.13 Time of Essence. Time is of the essence under this Agreement.
---------------
<PAGE>
IN WITNESS WHEREOF, Purchaser, the Company and each of the Stockholders
have caused this Agreement to be duly executed on the day and year first above
written.
COMMUNICATIONS SYSTEMS
INTERNATIONAL, INC.
By:_________________________________
Name:____________________________
Title:___________________________
INTERNATIONAL TELEPHONE COMPANY
By:_________________________________
Name:____________________________
Title:___________________________
STOCKHOLDERS:
LYNCH FAMILY, LLC
By:_________________________________
John H. Lynch, Manager
____________________________________
Philip A. Thomas
____________________________________
Sean M. Thomas
<PAGE>
Exhibit A
Form of Escrow Agreement
<PAGE>
Exhibit B
Form of Consulting Agreement
<PAGE>
Exhibit C
Form of Employment Agreement
<PAGE>
Exhibit D
Officer's Certificate
<PAGE>
Exhibit E
Officer's Certificate
<PAGE>
Exhibit F
Registration Statement Information
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
ARTICLE I
OFFICES
-------
SECTION 1. OFFICES:
- ------------------
The principal office of the Corporation shall be at 8 South Nevada
Avenue, Suite 101, Colorado Springs, CO 80903, and the Corporation shall have
other offices at such places as the Board of Directors may from time to time
determine.
ARTICLE II
STOCKHOLDER'S MEETINGS
----------------------
SECTION 1. PLACE:
- ----------------
The place of stockholders' meetings shall be the principal office of the
Corporation unless some other place either within or without the State of
Colorado shall be determined and designated from time to time by the Board of
Directors.
SECTION 2. ANNUAL MEETING:
- -------------------------
The annual meeting of the stockholders of the Corporation for the
election of directors to succeed those whose terms expire, and for the
transaction of such other business as may properly come before the meeting,
shall be held each year on a date to be determined by the Board of Directors
beginning in the year 1996. If the annual meeting of the stockholders be not
held, or if held and directors shall not have been elected for any reason, then
the election of directors may be held at any meeting of stockholders thereafter
called pursuant to these Bylaws and the laws of Colorado.
SECTION 3. SPECIAL MEETINGS:
- ---------------------------
Special meetings of the stockholders for any purpose or purposes may be
called by the President, the Board of Directors, or the holders of ten percent
(10%) or more of all the shares entitled to vote at such meeting, by the giving
of notice in writing as hereinafter described.
SECTION 4. VOTING:
- -----------------
At all meetings of stockholders, voting may be viva voce; but any
qualified voter may demand a stock vote, whereupon such vote shall be taken by
ballot and the Secretary shall record the name of the stockholder voting, the
number of shares voted, and, if such vote shall be by proxy, the name of the
<PAGE>
proxy holder. Voting may be in person or by proxy appointed in writing, manually
signed by the stockholder or his duly authorized attorney-in-fact. No proxy
shall be valid after eleven months from the date of its execution, unless
otherwise provided therein.
Each stockholder shall have such rights to vote as the Articles of
Incorporation provide for each share of stock registered in his name on the
books of the Corporation, except where the transfer books of the Corporation
shall have been closed or a date shall have been fixed as a record date, not to
exceed, seventy days before the meeting or action requiring determination by the
shareholders. The Secretary of the Corporation shall make, at least ten (10)
days before each meeting of stockholders, a complete list of the stockholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each,
which list, for a period of ten (10) days prior to such meeting, shall be kept
on file at the principal office of the Corporation and shall be subject to
inspection by any stockholder at any time during usual business hours. Such list
shall also be produced and kept open at the time and place of the meeting and
shall be subject to the inspection of any stockholder during the whole time of
the meeting.
SECTION 5. ORDER OF BUSINESS:
- ----------------------------
The order of business at any meeting of stockholders shall be as follows:
1. Calling the meeting to order.
2. Calling of roll.
3. Proof of notice of meeting.
4. Report of the Secretary of the stock represented at the meeting
and the existence or lack of a quorum.
5. Reading of minutes of last previous meeting And disposal of any
unapproved minutes.
6. Reports of officers.
7. Reports of committees.
8. Election of directors, if appropriate.
9. Unfinished business.
10. New business.
11. Adjournment.
12. To the extent that these Bylaws do not apply, Roberts' Rules of order
shall prevail.
-2-
<PAGE>
SECTION 6. NOTICES:
- ------------------
Written or printed notice stating the place, day, and hour of the meeting
and, in case of a special meeting, the purpose or purposes for which the meeting
is called, shall be delivered no fewer than ten nor more than sixty days before
the date of the meeting, either personally or by mail, by or at the direction of
the President, the Secretary, or the officer or persons calling the meeting, to
each stockholder of record entitled to vote at such meeting, except that, if the
authorized capital stock is to be increased, at least thirty (30) days' notice
shall be given. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail addressed to the shareholder at his address
as it appears on the stock transfer books of the Corporation, with postage
thereon prepaid.
SECTION 7. QUORUM:
- -----------------
A quorum at any annual or special meeting shall consist of the
representation in person or by proxy of a majority in number of shares of the
outstanding capital stock of the Corporation entitled to vote at such meeting.
In the event a quorum be not present, the meeting may be adjourned by those
present for a period not to exceed sixty (60) days at any one adjournment; and
no further notice of the meeting or its adjournment shall be required. The
stockholders entitled to vote, present either in person or by proxy at such
adjourned meeting, shall, if equal to a majority of the shares entitled to vote
at the meeting, constitute a quorum, and the votes of a majority of those
present in numbers of shares entitled to vote shall be deemed the act of the
shareholders at such adjourned meeting.
SECTION 8. ACTION BY SHAREHOLDERS WITHOUT A MEETING:
- ---------------------------------------------------
Any action required to be or which may be taken at a meeting of the
shareholders of the Corporation may be taken without a meeting if a consent in
writing, setting forth the action so taken, shall be signed by all of the
shareholders entitled to vote with respect to the subject matter thereof.
ARTICLE III
BOARD OF DIRECTORS
------------------
SECTION 1. ORGANIZATION AND POWERS:
- ----------------------------------
The Board of Directors shall constitute the policy-making or legislative
authority of the Corporation. Management of the affairs, property, and business
of the Corporation shall be vested in the Board of Directors. The Board shall
consist of not less than five nor more than nine members, the specific number of
members within that range will be determined by the Board. Directors shall be
elected at the annual meeting of stockholders by a plurality vote for a term of
one (1) year, and shall hold office until their successors are elected and
qualify. Directors need not be stockholders. Directors shall have all powers
with respect to the management, control, and determination of policies of the
Corporation that are not limited by these Bylaws, the Articles of Incorporation,
or the statutes of the State of Colorado, and the enumeration of any power shall
not be considered a limitation thereof.
-3-
<PAGE>
SECTION 2. VACANCIES:
- --------------------
Any vacancy in the Board of Directors, however caused or created, shall be
filled by the affirmative vote of a majority of the remaining directors, though
less than a quorum of the Board, or at a special meeting of the stockholders
called for that purpose. The directors elected to fill vacancies shall hold
office for the unexpired term and until their successors are elected and
qualify.
SECTION 3. REGULAR MEETINGS:
- ---------------------------
A regular meeting of the Board of Directors shall be held, without other
notice than this Bylaw, immediately after and at the same place as the annual
meeting of stockholder or any special meeting of stockholders at which a
director or directors shall have been elected. The Board of Directors may
provide by resolution the time and place, either within or without the State of
Colorado, for the holding of additional regular meetings without other notice
than such resolution.
SECTION 4. SPECIAL MEETINGS:
- ---------------------------
Special meetings of the Board of Directors may be held at the principal
office of the Corporation, or such other place as may be fixed by resolution of
the Board of Directors for such purpose, at any time on call of the President or
of any member of the Board, or may be held at any time and place without notice,
by unanimous written consent of all the members, or with the presence and
participation of all members at such meeting. A resolution in writing signed by
all the directors shall be as valid and effectual as if it had been passed at a
meeting of the directors duly called, constituted, and held.
SECTION 5. NOTICES:
- ------------------
Notices of both regular and special meetings, save when held by unanimous
consent or participation, shall be mailed by the Secretary to each member of the
Board not less than three (3) days before any such meeting and notices of
special meetings may state the purposes thereof. No failure or irregularity of
notice of any regular meeting shall invalidate such meeting or any proceeding
thereat.
SECTION 6. QUORUM AND MANNER OF ACTING:
- --------------------------------------
A quorum for any meeting of the Board of Directors shall be a majority of
the Board of Directors as then constituted. Any act of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors. Any action of such majority, although not at a regularly
called meeting, and the record thereof, if assented to in writing by all of the
other members of the Board, shall always be as valid and effective in all
respects as if otherwise duly taken by the Board of Directors.
-4-
<PAGE>
SECTION 7. EXECUTIVE COMMITTEE:
- ------------------------------
The Board of Directors may by resolution of a majority of the Board
designate two (2) or more directors to constitute an executive committee, which
committee, to the extent provided in such resolution, shall have and may
exercise all of the authority of the Board of Directors in the management of the
Corporation; but the designation of such committee and the delegation of
authority thereto shall not operate to relieve the Board of Directors, or any
member thereof, of any responsibility imposed on it or him by law.
SECTION 8. ORDER OF BUSINESS:
- ----------------------------
The order of business S at any regular or special meeting of the Board of
Directors, unless otherwise prescribed for any meeting by the Board, shall be as
follows:
1. Reading and disposal of any unapproved minutes.
2. Reports of officers and committees.
3. Unfinished business.
4. New business.
5. Adjournment.
6. To the extent that these Bylaws do not apply, Roberts' Rules of
order shall prevail.
SECTION 9. REMUNERATION:
- -----------------------
No stated salary shall be paid to directors for their services as such,
but, by resolution of the Board of Directors, a fixed sum and expenses of
attendance, if any, may be allowed for attendance at each regular or special
meeting of the Board. Members of special or standing committees may be allowed
like compensation for attending meetings. Nothing herein contained shall be
construed to preclude any director from receiving compensation for serving the
corporation in any other capacity, subject to such resolutions of the Board of
Directors as may then govern receipt of such compensation.
ARTICLE IV
OFFICERS
--------
SECTION 1. TITLES:
- -----------------
The officers of the Corporation shall consist of a President, one or more
vice Presidents, a Secretary, and a Treasurer, the last two of which offices
may be combined and held by one person, who shall 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
-5-
<PAGE>
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. PRESIDENT:
- --------------------
The President shall preside at all meetings of stockholders and, in the
absence of a, or the, Chairman of the Board of Directors, at all meetings of the
directors. He shall be generally vested with the power of the chief executive
officer of the Corporation and shall countersign all certificates, contracts,
and other instruments of the Corporation as authorized by the Board of Directors
or required by law. He shall make reports to the Board of Directors and
stockholders and shall perform such other duties and services as may be required
of him from time to time by the Board of Directors.
SECTION 3. 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 his duties and
shall have such other duties as the Board of Directors shall authorize or
direct.
SECTION 4. 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. He shall have custody and control of the corporate records and
books, excluding the books of account, together with the corporate seal. He
shall make such reports and perform such other duties as may be consistent with
his office or as may be required of him from time to time by the Board of
Directors.
SECTION 5. TREASURER:
- --------------------
The Treasurer shall have custody of all moneys and securities of the
Corporation and shall have supervision over the regular books of account. He
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 his transactions as may be
required of him by the President or the Board of Directors from time to time and
shall otherwise perform such duties as may be required of him 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 his
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.
-6-
<PAGE>
SECTION 6. 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 his 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 7. COMPENSATION:
- -----------------------
No officer shall receive any salary or compensation for his services
unless and until the Board of Directors authorizes and fixes the amount and
terms of such salary or compensation.
ARTICLE V
STOCK
-----
SECTION 1. CERTIFICATES OF SHARES:
- ---------------------------------
Each holder of stock of the Corporation shall be entitled to a stock
certificate signed by the President or Vice President and also by the Secretary
or an assistant secretary of the Corporation. The certificates of shares shall
be in such form, not inconsistent with the Certificate of Incorporation or
Articles of Incorporation, as shall be prepared or approved by the Board of
Directors. (All certificates shall be prepared or approved by the Board of
Directors). All certificates shall be consecutively numbered. Each certificate
shall state upon its face that the Corporation is organized under the laws of
this state; the name of the person to whom issued; the number and class of
shares; and the designation of the series, if any, which such certificate
represents; the par value of each share represented by the certificate, or a
statement that the shares are without par value. The name of the person owning
the shares represented thereby, with the number of such shares and the date of
issue, shall be entered on the Corporation's books, and no certificate shall be
valid unless it be signed by the President or Vice President and by the
secretary or an assistant secretary of the Corporation. The seal of the
Corporation affixed to stock certificates may be a facsimile. The signatures of
officers as above described on any such certificate may be a facsimile if the
certificate is countersigned by a transfer agent, or registered by a registrar,
other than the Corporation itself or an employee of the Corporation.
SECTION 2. NEW CERTIFICATES:
- ---------------------------
All certificates surrendered to the Corporation shall be canceled and no
new certificate shall be issued, except to evidence transfer of stock from the
unissued stock or treasury of the Corporation, or, in the case of a lost
certificate, except upon posting a bond of indemnity in such form and with such
surety or sureties and for such amount as shall be satisfactory to the directors
and upon producing by affidavit or otherwise such evidence of loss
-7-
<PAGE>
or destruction as the Board may require, until the former certificates for the
same number of shares have been surrendered and canceled.
SECTION 3. TRANSFER OF SHARES:
- -----------------------------
Shares in the capital stock of the Corporation shall be transferred only
on the books of the Corporation by the holder thereof in person, or by his
attorney, upon surrender and cancellation of certificates for a like number of
shares. The delivery of a certificate of stock of this Corporation to a bona
fide purchaser or pledgee for value, together with a written transfer of the
same or a written power of attorney to sell, assign, and transfer the same,
signed by the owner of the certificate, shall be a sufficient delivery to
transfer the title against all persons except the Corporation. No transfer of
stock shall be valid against the Corporation until it shall have been registered
upon the books of the Corporation.
SECTION 4. CLOSING OF TRANSFER BOOKS OR PROVISIONS FOR RECORD DATE:
- ------------------------------------------------------------------
The stock transfer books may be closed by the Board of Directors not more
than seventy days before the meeting or action requiring a determination of
shareholders; or the Board of Directors may fix in advance a day not more than
seventy days prior to the holding of any such meeting of stockholders or payment
of dividends as the day as of which stockholders entitled to notice of and to
vote at such meeting or to payment of dividends, as the case may be, shall be
determined; and only stockholders of record on such day shall be entitled to
notice or to vote at such meeting, or to receive dividends, as the case may be.
SECTION 5. REGULATIONS:
- ----------------------
The Board of Directors shall have power and authority to take all such
rules and regulations as they deem expedient concerning the issue, transfer, and
registration of certificates for shares of the capital stock of the Corporation.
The Board of Directors may appoint a Transfer Agent and a Registrar and may
require all stock certificates to bear the signature of such Transfer Agent or
such Registrar.
SECTION 6. RESTRICTIONS ON STOCK:
- --------------------------------
The Board of Directors may restrict any stock issued by giving the
Corporation or any stockholder "first right of refusal to purchase" the stock,
by making the stock redeemable or by restricting the transfer of the stock,
under such terms and in such manner as the directors may deem necessary and as
are not inconsistent with the Articles of Incorporation or the laws of the State
of Colorado. Any stock so restricted must carry a stamped legend setting out the
restriction or conspicuously noting the restriction and stating where it may be
found in the records of the Corporation.
-8-
<PAGE>
ARTICLE VI
DIVIDENDS AND FINANCES
----------------------
SECTION 1. DIVIDENDS:
- --------------------
Dividends may be declared by the directors and paid out of any funds
legally available therefor under the laws of Colorado, as may be deemed
advisable from time to time by the Board of Directors of the Corporation. Before
declaring any dividends, the Board of Directors may set aside out of net profits
or earned or other surplus such sums as the Board may think proper as a reserve
fund to meet contingencies or for other purposes deemed proper and to the best
interests of the Corporation.
SECTION 2. MONIES:
- -----------------
The monies, securities, and other valuable effects of the Corporation
shall be deposited in the name of the Corporation in such banks or trust
companies as the Board of Directors shall designate and shall be drawn out or
removed only as may be authorized by the Board of Directors from time to time.
SECTION 3. FISCAL YEAR:
- ----------------------
Unless and until the Board of Directors by resolution shall determine
otherwise, the fiscal year shall begin on the 1st day of May and end on the 30th
day of April.
ARTICLE VII
SEAL
----
The Board of Directors may adopt a corporate seal which shall be in the
form of a circle and shall have inscribed thereon the name of the Corporation
and the words "SEAL, Colorado," and shall be entrusted in the care of the
Secretary or such other officer of the Corporation as the Board of Directors
shall designate.
ARTICLE VIII
NOTICES
-------
SECTION 1. REQUIREMENTS:
- -----------------------
Whenever a notice shall be required by the statutes of the State of
Colorado or by these Bylaws, such notice may be given in writing by depositing
the same in the United states mails in a postpaid, sealed envelope addressed to
the person for whom such notice is intended to his or her home or other address,
as the same shall appear on the stock transfer books of the Corporation. The
time of mailing shall be deemed to be the time of giving such notice. A waiver
of any notice in writing, signed by a stockholder, director,
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<PAGE>
or officer, whether before, at, or after the time stated in such waiver for
holding a meeting, shall be deemed the equivalent of duly giving such notice.
SECTION 2. PRESENCE:
- -------------------
The presence of any officer at a meeting, or the presence of any
stockholder or director at a meeting, unless such presence is for the sole
purpose of objecting to the holding of such meeting on the ground that it is not
duly held or convened, shall in all events be considered a waiver of notice
thereof; and failure to vote thereat shall not defeat the effectiveness of such
waiver.
SECTION 3. RATIFICATION:
- -----------------------
The ratification or approval in writing of the minutes of any meeting of
officers, stockholders, or directors shall have the same force and effect as if
the ratifying or approving officer, director, or stockholder were present in
person at said meeting.
ARTICLE IX
AMENDMENTS
----------
These Bylaws may be altered, amended, or repealed by the Board of
Directors by resolution of a majority of the Board.
ARTICLE X
INDEMNIFICATION
---------------
The Corporation shall indemnify any and all of its directors or officers,
or former directors or officers, or any person who may have served at its
request as a director or officer of another corporation in which this
Corporation owns shares of capital stock or of which it is a creditor and the
personal representatives of all such persons, against expenses actually and
necessarily incurred in connection with the defense of any action, suit, or
proceeding in which they, or any of them, were made parties, or a party, by
reason of being or having been directors or officers or a director or officer of
the Corporation, or of such other corporation, except in relation to matters as
to which any such director or officer or person shall have been adjudged in such
action, suit, or proceeding to be liable for negligence or misconduct in the
performance of any duty owed to the Corporation. Such indemnification shall not
be deemed exclusive of any other rights to which those indemnified may be
entitled, independently of this Article X, by law, under any Bylaw agreement,
vote of stockholders, or otherwise.
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<PAGE>
ARTICLE XI
CONFLICTS OF INTEREST
---------------------
No contract or other transaction of the Corporation with any other
persons, firms or corporations, or in which the Corporation is interested, shall
be affected or invalidated by the fact that any one or more of the directors or
officers of the Corporation is interested in or is a director or officer of such
other firm or corporation; or by the fact that any director or officer of the
Corporation, individually or jointly with others, may be a party to or may be
interested in any such contract or transaction; and relieves every person who
may become a director or officer of the Corporation from any liability that
might otherwise arise by reason of his contracting with the Corporation for the
benefit of himself or any firm or corporation in which he may in any way be
interested.
CERTIFICATE
-----------
I do hereby certify that I was Secretary of the meeting of the Board of
Directors duly called and held on the 6th day of August, 1993, and I do hereby
certify that the above and foregoing Bylaws were duly adopted as the Bylaws of
said Corporation at such meeting.
/s/ ANTHONY THOMASON
__________________________________
Anthony Thomason, Secretary
(SEAL)
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<PAGE>
EXHIBIT 4.2
WARRANT AGREEMENT
This WARRANT AGREEMENT ("Agreement") dated as of June ___, 1998 is by
and between among Communications Systems International, Inc., a Colorado
corporation (the "Company"), and Cruttenden Roth Incorporated and Cohig &
Associates, Inc. ( the "Representatives").
WHEREAS, the Representatives have agreed pursuant to the Underwriting
Agreement dated June ___, 1998 (the "Underwriting Agreement") to act as the
representative of the several underwriters in connection with the proposed
public offering by the Company of up to ________ shares of Common Stock, _______
of such shares covered by an over-allotment option (the "Public Offering"); and
WHEREAS, pursuant to Section 5(n) of the Underwriting Agreement, the
Company has agreed to issue warrants to the Representatives (the "Warrants") to
purchase, at a price of $0.001 per warrant, up to an aggregate of ______ shares
(hereinafter, and as the number thereof may be adjusted hereto, the "Warrant
Shares"), of the Company's Common Stock, no par value per share (the "Common
Stock"), each Warrant initially entitling the holder thereof to purchase one
share of Common Stock.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein and in the Underwriting Agreement the parties hereto agree as follows:
1. ISSUANCE OF WARRANTS: FORM OF WARRANT. The Company will issue and
-------------------------------------
deliver to the Representatives, Warrants to purchase ________ Warrant Shares on
the Closing Date referred to in the Underwriting Agreement in consideration for,
and as part of the Representatives' compensation in connection with, the
Representatives acting as the representative of the several underwriters for the
Public Offering pursuant to the Underwriting Agreement. The text of the Warrants
and of the form of election to purchase shares shall be substantially as set
forth in Exhibit A attached hereto. The Warrants shall be executed on behalf of
the Company by the manual or facsimile signature of the present or any future
Chairman of the Board, President or Chief Executive Officer of the Company,
under its corporate seal, affixed or in facsimile, attested by the manual or
facsimile signature of the Secretary or an Assistant Secretary of the Company.
Warrants bearing the manual or facsimile signatures of individuals who were
at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any one of them shall have ceased to
hold such offices prior to the delivery of such Warrants or did not hold such
offices on the date of this Agreement. Warrants shall be dated as of the date of
execution thereof by the Company either upon initial issuance or upon division,
exchange, substitution or transfer.
2. REGISTRATION. The Warrants shall be numbered and shall be registered
------------
on the books of the Company (the "Warrant Register") as they are issued. The
Company shall be entitled to treat the registered holder of any Warrant on the
Warrant Register (the "Holder") as the owner in fact therefor for all purposes
and shall not be bound to recognize any equitable or other claim to or interest
in such Warrant on the part of any other person, and shall not be liable for any
registration or transfer of Warrants which are registered or are to be
registered in the name of a fiduciary or the nominee of a fiduciary unless made
with the actual knowledge that a fiduciary or nominee is committing a breach of
trust in requesting such registration or transfer, or with the knowledge of
<PAGE>
such facts that its participation therein amounts to bad faith. Warrants to
purchase the initial Warrant Shares shall be registered initially in the names
of "Cruttenden Roth Incorporated" or "Cohig & Associates, Inc." or in such
other denominations as the Representatives may request in writing to the
Company.
3. EXCHANGE OF WARRANT CERTIFICATES. Subject to any restriction upon
--------------------------------
transfer set forth in this Agreement, each Warrant certificate may be exchanged
for another certificate or certificates entitling the Holder thereof to purchase
a like aggregate number of Warrant Shares as the certificate or certificates
surrendered then entitled such Holder to purchase. Any Holder desiring to
exchange a Warrant certificate or certificates shall make such request in
writing delivered to the Company, and shall surrender, properly endorsed, the
certificate or certificates to be so exchanged. Thereupon, the Company shall
execute and deliver to the person entitled thereto a new Warrant certificate or
certificates, as the case may be, as so requested.
4. TRANSFER OF WARRANTS. Until June ___, 1999, the Warrants will not
--------------------
be sold, transferred, assigned or hypothecated except to bona fide officers of
the Representatives who agree in writing to be bound by the terms hereof. The
Warrants shall be transferable only on the Warrant Register upon delivery
thereof duly endorsed by the Holder or by the Holder's duly authorized attorney
or representative, or accompanied by proper evidence of succession, assignment
or authority to transfer. In all cases of transfer by an attorney, the original
power of attorney, duly approved, or an official copy thereof, duly certified,
shall be deposited with the Company. In case of transfer by executors,
administrators, guardians or other legal representatives, duly authenticated
evidence of their authority shall be produced and may be required to be
deposited with the Company in its discretion. Upon any registration of transfer,
the Company shall deliver a new Warrant or Warrants to the person entitled
thereto.
5. TERM OF WARRANTS; EXERCISE OF WARRANTS.
--------------------------------------
5.1(a) Each Warrant entitles the registered owner thereof to
purchase one share of Common Stock at any time from 10:00 a.m.,
Mountain time, on June ___, 1999 (the "Initiation Date") until 6:00
p.m., Mountain time, on December ___, 2003 (the "Expiration Date") at a
purchase price of [$_____], subject to adjustment (the "Warrant
Price"). Payment may be in cash, wire transfer or by check payable to
the order of the Company. Notwithstanding the foregoing, if at 6:00
p.m., Mountain time on the Expiration Date, any Holder or Holders of
the Warrants have not exercised their Warrants and the Closing Price
(as defined below) for the Common Stock on the Expiration Date is
greater than the Warrant Price, then each such unexercised Warrant
shall be automatically converted into a number of shares of Common
Stock of the Company equal to: (A) the number of shares of Common Stock
then issuable upon exercise of a Warrant multiplied by (B) a fraction
(1) the numerator of which is the difference between the Closing Price
for the Common Stock on the Expiration Date and the Warrant Price and
(2) the denominator of which is the Closing Price for the Common Stock
on the Expiration Date.
5.1(b) Upon written request of any Holder, and in lieu of payment
of the Warrant Price, any Holder may exercise the Warrants (or any
portion thereof held by such Holder) for and receive the number of
Warrant Shares equal to a fraction, the numerator of which equals (i)
the difference between the Warrant Price per share and
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<PAGE>
the average of the Closing Price of the Common Stock for the ten (10)
trading days preceding the date of exercise (the "Current Market
Price"), multiplied by (ii) the number of Warrant Shares to be
purchased; and the denominator of which equals the Current Market
Price. This provision shall apply solely in the event a public
trading market exists with respect to the Common Stock. The rights
granted to each Holder in this Section 5.1(b) are exercisable at any
time after the Initiation Date and up to the Expiration Date at the
sole election of each Holder. The provisions of Section 5.1(a) will
apply as of the Expiration Date.
5.2 The Warrant Price and the number of Warrant Shares issuable upon
exercise of Warrants are subject to adjustment upon the occurrence of
certain events, pursuant to the provisions of Section 11 of this Agreement.
Subject to the provisions of this Agreement, each Holder of Warrants shall
have the right, which may be exercised as expressed in such Warrants, to
purchase from the Company (and the Company shall issue and sell to such
Holder of Warrants) the number of fully paid and nonassessable Warrant
Shares specified in such Warrants, upon surrender to the Company, or its
duly authorized agent, of such Warrants, with the form of election to
purchase on the reverse thereof duly filled in and signed, and upon payment
to the Company of the Warrant Price, as adjusted in accordance with the
provisions of Section 11 of this Agreement, for the number of Warrant
Shares in respect of which such Warrants are then exercised. All Warrants
surrendered in the exercise of the rights thereby evidenced shall be
cancelled. No adjustment shall be made for any dividends on any Warrant
Shares of stock issuable upon exercise of a Warrant.
5.3 Upon such surrender of Warrants, and payment of the Warrant Price
as aforesaid, the Company shall issue and cause to be delivered with all
reasonable dispatch to or upon the written order of the Holder of such
Warrants and in such name or names as such registered Holder may designate,
a certificate or certificates for the number of full Warrant Shares so
purchased upon the exercise of such Warrants, together with cash, as
provided in Section 12 of this Agreement, in respect of any fraction of a
share otherwise issuable upon such surrender and, if the number of Warrants
represented by a Warrant Certificate shall not be exercised in full, a new
Warrant Certificate, executed by the Company for the balance of the number
of whole Warrant Shares represented by the Warrant Certificate.
5.4 If permitted by applicable law, such certificate or certificates
shall be deemed to have been issued and any person so designated to be
named therein shall be deemed to have become a holder of record of such
shares as of the date of the surrender of such Warrants and payment of the
Warrant Price as aforesaid. The rights of purchase represented by the
Warrants shall be exercisable, at the election of the registered Holders
thereof, either as an entirety or from time to time for only part of the
shares specified therein.
6. COMPLIANCE WITH GOVERNMENT REGULATIONS. The Company covenants that if
--------------------------------------
any shares of Common Stock required to be reserved for purposes of exercise or
conversion of Warrants require, under any Federal or state law or applicable
governing rule or regulation of any national securities exchange, registration
with or approval of any governmental authority before such shares may be issued
upon exercise, the Company will in good faith and as expeditiously as possible
endeavor to cause such shares to be duly registered or approved, as the case may
be; provided that (except to the extent legally permissible with respect to
Warrants of which the Representatives is the
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<PAGE>
Holder) in no event shall such shares of Common Stock be issued, and the Company
is hereby authorized to suspend the exercise of all Warrants, for the period
during which such registration, approval or listing is required but not in
effect.
7. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes, if
----------------
any, attributable to the initial issuance of Warrant Shares upon the exercise of
Warrants; provided that the Company shall not be required to pay any tax or
taxes which may be payable in respect of any transfer involved in the issue or
delivery of any Warrants or certificate for Warrant Shares in a name other than
that of the registered Holder of such Warrants or for any Warrants issued
pursuant to Section 8 of this Agreement.
8. MUTILATED OR MISSING WARRANTS. In case any of the Warrants shall be
-----------------------------
mutilated, lost, stolen or destroyed, the Company shall issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest; but only
upon receipt of evidence reasonably satisfactory to the Company of such loss,
theft or destruction of such Warrant and, if requested, indemnity or bond also
reasonably satisfactory to the Company. An applicant for such substitute
Warrants shall also comply with such other reasonable regulations and pay such
other reasonable charges as the Company may prescribe.
9. RESERVATION OF WARRANT SHARES. There have been reserved out of the
-----------------------------
authorized and unissued shares of Common Stock a number of shares sufficient to
provide for the exercise of the rights of purchase represented by the Warrants
and the transfer agent for the Common Stock ("Transfer Agent") and every
subsequent Transfer Agent for any shares of the Company's capital stock issuable
upon the exercise of any of the rights of purchase aforesaid are hereby
irrevocably authorized and directed at all times until the Expiration Date to
reserve such number of authorized and unissued shares as shall be required for
such purpose. The Company will keep a copy of this Agreement on file with the
Transfer Agent and with every subsequent Transfer Agent for any shares of the
Company's capital stock issuable upon the exercise of the rights of purchase
represented by the Warrants. The Company will supply such Transfer Agent with
duly executed stock certificates for such purposes and will itself provide or
otherwise make available any cash which may be issuable as provided in Section
12 of this Agreement. The Company will furnish to such Transfer Agent a copy of
all notices of adjustments, and certificates related thereto, transmitted to
each Holder pursuant to Section 11.2 of this Agreement.
10. OBTAINING STOCK EXCHANGE LISTINGS. The Company will from time to time
---------------------------------
take all action which may be necessary so that the Warrant Shares, immediately
upon their issuance upon the exercise of Warrants, will be listed on the
principal securities exchanges and markets within the United States of America,
if any, on which other shares of Common Stock are then listed.
11. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF WARRANT SHARES. The number
--------------------------------------------------------
and kind of securities purchasable upon the exercise of each Warrant and the
Warrant Price shall be subject to adjustment from time to time upon the
happening of certain events as hereinafter defined. For purposes of this Section
11, "Common Stock" means shares now or hereafter authorized of any class of
common stock of the Company and any other stock of the Company, however
designated, that has the right (subject to any prior rights of any class or
series of preferred stock) to participate in any distribution of the assets or
earnings of the Company without limit as to per share amount.
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<PAGE>
11.1 MECHANICAL ADJUSTMENTS. The number of Warrant Shares
purchasable upon the exercise of each Warrant and the Warrant Price shall
be subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock, (ii)
subdivide its outstanding shares of Common Stock, (iii) combine its
outstanding shares of Common Stock or (iv) issue by reclassification
of its shares of Common Stock other securities of the Company
(including any such reclassification in connection with a
consolidation or merger in which the Company is the surviving
corporation), the number of Warrant Shares purchasable upon exercise
of each Warrant immediately prior thereto shall be adjusted so that
the Holder of each Warrant shall be entitled to receive the kind and
number of Warrant Shares or other securities of the Company which the
holder would have owned or would have been entitled to receive after
the happening of any of the events described above, had such Warrants
been exercised immediately prior to the happening of such event or any
record date with respect thereto. An adjustment made pursuant to this
paragraph (a) shall become effective immediately after the effective
date of such event retroactive to the record date, if any, for such
event. Such adjustment shall be made successively whenever any event
listed above shall occur.
(b) In case the Company shall distribute to all holders of its
shares of Common Stock (including any such distribution made in
connection with a consolidation or merger in which the Company is the
surviving corporation) evidences of its indebtedness or assets
(including securities, but excluding cash dividends or distributions
payable out of consolidated earnings or earned surplus and dividends
or distributions referred to in paragraph (a) above or in the
paragraph immediately following this paragraph) or rights, options or
warrants, or convertible or exchangeable securities containing the
right to subscribe for or purchase shares of Common Stock, then in
each case the number of Warrant Shares thereafter purchasable upon the
exercise of each Warrant shall be determined by multiplying the number
of Warrant Shares theretofore purchasable upon the exercise of each
Warrant by a fraction, the numerator of which shall be the then
current market price per share of Common Stock (as defined in
paragraph (c) below) on the date of such distribution, and the
denominator of which shall be the then current market price per share
of Common Stock on the date of such distribution, less the then fair
value (as reasonably determined by the Board of Directors of the
Company) of the portion of the assets or evidences of indebtedness so
distributed or of such subscription rights, options or warrants, or of
such convertible or exchangeable securities applicable to one share of
Common Stock. Subject to paragraph (d) below, such adjustment shall be
made whenever any such distribution is made and shall become effective
on the date of distribution retroactive to the record date for the
determination of stockholders entitled to receive such distribution.
In the event of a distribution by the Company to all holders of
its shares of Common Stock of a subsidiary or securities convertible
into or exercisable for such stock, then in lieu of an adjustment in
the number of Warrant Shares purchasable upon the exercise of each
Warrant, the Holder of each Warrant, upon the exercise thereof at any
time after such distribution, shall be entitled to receive from the
-5-
<PAGE>
Company, such subsidiary or both, as the Company shall determine, the
stock or other securities to which such Holder would have been
entitled if such Holder had exercised such Warrant immediately prior
thereto, all subject to further adjustment as provided in this Section
11.1; provided, however, that no adjustment in respect of dividends or
interest on such stock or other securities shall be made during the
term of a Warrant or upon the exercise of a Warrant.
(c) For the purpose of any computation under paragraph (b) of
this Section, the current market price per share of Common Stock at
any date shall be the average of the daily Closing Prices for 20
consecutive trading days commencing 30 trading days before the date of
such computation. The selling price for each day (the "Closing Price")
shall be the last such reported sales price regular way or, in case no
such reported sale takes place on such day, the average of the closing
bid and asked prices regular way for such day, in each case on the
principal national securities exchange on which the shares of Common
Stock are listed or admitted to trading or, if not listed or admitted
to trading, the average of the closing bid and asked prices of the
Common Stock in the over-the counter market as reported by the Nasdaq
National Market System or Nasdaq SmallCap System or if not approved
for quotation on the Nasdaq National Market System or Nasdaq SmallCap
Market, the average of the closing bid and asked prices as furnished
by two members of the National Association of Securities Dealers, Inc.
selected from time to time by the Company for that purpose.
(d) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of
Warrant Shares purchasable upon the exercise of each Warrant;
provided, however, that any adjustments which by reason of this
paragraph (d) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations
shall be made to the nearest one-thousandth of a share.
(e) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Warrant
Price payable upon exercise of each Warrant shall be adjusted by
multiplying such Warrant Price immediately prior to such adjustment by
a fraction, the numerator of which shall be the number of Warrant
Shares purchasable upon the exercise of each Warrant immediately prior
to such adjustment, and the denominator of which shall be the number
of Warrant Shares purchasable immediately thereafter.
(f) No adjustment in the number of Warrant Shares purchasable
upon the exercise of each Warrant need be made under paragraph (b) if
the Company issues or distributes to each Holder of Warrants the
rights, options, warrants or convertible or exchangeable securities,
or evidences of indebtedness or assets referred to in those paragraphs
which each Holder of Warrants would have been entitled to receive had
the Warrants been exercised prior to the happening of such event or
the record date with respect thereto. No adjustment need be made for a
change in the par value of the Warrant Shares.
-6-
<PAGE>
(g) In the event that at any time, as a result of an adjustment
made pursuant to paragraph (a) above, the Holders shall become
entitled to purchase any securities of the Company other than shares
of Common Stock, thereafter the number of such other shares so
purchasable upon exercise of each Warrant and the Warrant Price of
such shares shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Warrant Shares contained in this
Section 11, and the other provisions of this Agreement, with respect
to the Warrant and Warrant Shares, shall apply as nearly equivalent as
practicable on like terms to such other securities.
(h) Upon the expiration of any rights, options, warrants or
conversion or exchange privileges for which an adjustment was made
hereunder, if any thereof shall not have been exercised, the Warrant
Price and the number of shares of Common Stock purchasable upon the
exercise of each Warrant shall, upon such expiration, be readjusted
and shall thereafter be such as it would have been had it been
originally adjusted (or had the original adjustment not been required,
as the case may be) as if (i) the only shares of Common Stock so
issued were the shares of Common Stock, if any, actually issued or
sold upon the exercise of such rights, options, warrants or conversion
or exchange rights and (ii) such shares of Common Stock, if any, were
issued or sold for the consideration actually received by the Company
upon such exercise plus the aggregate consideration, if any, actually
received by the Company for the issuance, sale or grant of all such
rights, options, warrants or conversion or exchange rights whether or
not exercised; provided, however, that no such readjustment shall have
the effect of increasing the Warrant Price or decreasing the number of
shares of Common Stock purchasable upon the exercise of each Warrant
by an amount in excess of the amount of the adjustment initially made
in respect to the issuance, sale or grant of such rights, options,
warrants or conversion or exchange rights.
11.2 NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
purchasable upon the exercise of each Warrant or the Warrant Price of such
Warrant Shares is adjusted, as herein provided, the Company shall promptly
mail by first class, postage prepaid, to each Holder notice of such
adjustment or adjustments and a certificate of a firm of independent public
accountants selected by the Board of Directors of the Company (who may be
the regular accountants employed by the Company) setting forth the number
of Warrant Shares purchasable upon the exercise of each Warrant and the
Warrant Price of such Warrant Shares after such adjustment, setting forth a
brief statement of the facts requiring such adjustment and setting forth
the computation by which such adjustment was made.
11.3 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in Section
11.1, no adjustments in respect of any dividends shall be made during the
term of a Warrant or upon the exercise of a Warrant.
11.4 PRESERVATION OF PURCHASE RIGHTS UPON MERGER, CONSOLIDATION ETC.
In case of any consolidation of the Company with or merger of the Company
into another corporation or in case of any sale, transfer or lease to
another corporation of all or substantially all the property of the
Company, the Company or such successor or purchasing corporation, as the
case may be, shall execute with each Holder an agreement that each
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<PAGE>
Holder shall have the right thereafter upon payment of the Warrant Price in
effect immediately prior to such action to purchase upon exercise of each
Warrant the kind and amount of shares and other securities, cash and
property which he would have owned or would have been entitled to receive
after the happening of such consolidation, merger, sale, transfer or lease
had such Warrant been exercised immediately prior to such action; provided,
however, that no adjustment in respect of dividends, interest or other
income on or from such shares or other securities, cash and property shall
be made during the term of a Warrant or upon the exercise of a Warrant.
Such agreement shall provide for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Section 11. The provisions of this Section 11.4 shall similarly apply to
successive consolidations, mergers, sales transfer or leases.
11.5 STATEMENTS ON WARRANTS. Irrespective of any adjustments in the
Warrant Price or the number or kind of shares purchasable upon the exercise
of the Warrants, Warrants theretofore or thereafter issued may continue to
express the same price and number and kind of shares as are stated in the
Warrants initially issuable pursuant to this Agreement.
12. FRACTIONAL INTERESTS. The Company shall not be required to issue
--------------------
fractional Warrant Shares on the exercise of Warrants. If more than one Warrant
shall be presented for exercise in full at the same time by the same holder, the
number of full Warrant Shares which shall be issuable upon the exercise thereof
shall be computed on the basis of the aggregate number of Warrant Shares
purchasable on exercise of the Warrants so presented. If any fraction of a
Warrant Share would, except for the provisions of this Section 12, be issuable
on the exercise of any Warrant (or specified portion thereof), the Company shall
pay an amount in cash equal to the closing price for one share of the Common
Stock, as defined in paragraph (c) of Section 11.1, on the trading day
immediately preceding the date the Warrant is presented for exercise, multiplied
by such faction.
13. REGISTRATION UNDER THE SECURITIES ACT OF 1933.
---------------------------------------------
(a) The Holder understands that the Warrants and the Warrant Shares
purchasable hereunder constitute "Restricted Securities" under the federal
securities laws since they are, or will be, acquired from the Company in
transactions not involving a public offering and accordingly may not, under
such laws and applicable regulations, be resold or transferred without
registration under the Act or an applicable exemption from such
registration. In this connection, the Holder acknowledges that Rule 144 of
the Commission may not in the future be available for resales of the
Warrants or Warrant Shares. Unless the Warrant Shares are subsequently
registered pursuant to Section 15, the Holder further acknowledges that the
securities legend in Section 14 hereof shall be placed on any Warrant
Shares issued to the Holder upon exercise of this Warrant.
(b) Unless a current registration statement under the Act shall be in
effect with respect to the securities to be issued upon exercise of this
Warrant, the Holder covenants and agrees that, at the time of exercise
hereof, it will deliver to the Company a written certification executed by
the Holder that the securities acquired by him upon exercise hereof are for
the account of such Holder and acquired for investment purposes only and
that such securities are not acquired with a view to, or for sale in
connection with, any distribution thereof in violation of applicable
securities law.
-8-
<PAGE>
(c) Holder hereby agrees not to make any disposition of any Warrant
Shares purchased hereunder unless and until:
(i) Holder shall have complied with all requirements of this
Warrant applicable to the disposition of the Shares; and
(ii) Holder shall have provided the Company with written
assurances, in form and substance reasonably satisfactory to legal
counsel of the Company, that (i) the proposed disposition does not
require registration of the Warrant Shares under the Act or (ii) all
appropriate action necessary for compliance with registration
requirements of the Act or of any exemption from registration
available under the Act has been taken.
(d) The Company shall not be required to transfer on its books any
Warrant Shares which have been sold or transferred in violation of the
provisions of this Section 13.
14. CERTIFICATE TO BEAR LEGENDS. The Warrant shall be subject to a stop-
---------------------------
transfer order and the certificate or certificates therefore shall bear the
following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED UNTIL
___________, 1999. THEREAFTER, SAID SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM
UNDER SAID ACT.
The Warrant Shares or other securities issued upon exercise of the Warrant
shall be subject to a stop-transfer order and the certificate or certificates
evidencing any such Warrant Shares or securities shall bear the following
legend:
THE SHARES OR OTHER SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAW. THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
TRANSFERRED UNTIL ________, 1999. THEREAFTER, SAID SECURITIES MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT.
15. REGISTRATION RIGHTS.
-------------------
15.1 DEMAND REGISTRATION RIGHTS. The Company covenants and agrees
with the Representatives and any subsequent Holders of the Warrants and/or
Warrants Shares that, on two occasions, within 60 days after receipt of a
written request from the Representatives or from Holders of more than 50%
in interest of the aggregate of Warrants and/or Warrant Shares issued
pursuant to this Agreement that the Representatives or such Holders of the
Warrants and/or Warrant Shares desire and intend to transfer more than 50%
in interest of the aggregate number of the Warrant Shares under such
circumstances that a public offering, within the meaning of the Act, will
be involved, the Company shall, on those two occasions, file a registration
statement (and use its reasonable best efforts to cause such registration
-9-
<PAGE>
statement to become effective under the Act at the Company's expense) with
respect to the offering and sale or other disposition of the Warrant Shares
(the "Offered Warrant Shares"); provided, however, that the Company shall
have no obligation to comply with the foregoing provisions of this Section
15.1 if in the opinion of counsel to the Company reasonably acceptable to
the Holder or Holders, from whom such written requests have been received,
registration under the Act is not required for the transfer of the Offered
Warrant Shares in the manner proposed by such person or persons or that a
post-effective amendment to an existing registration statement would be
legally sufficient for such transfer (in which latter event the Company
shall promptly file such post-effective amendment (and use its reasonable
best efforts to cause such amendment to become effective under the Act)).
Notwithstanding the foregoing, the Company shall not be obligated to file a
registration statement with respect to the Offered Warrant Shares on more
than two occasions.
The Company may defer the preparation and filing of a registration
statement for up to 120 days after the request for registration is made if
the Board of Directors determines in good faith that such registration or
post-effective amendment would materially adversely affect or otherwise
materially interfere with a proposed or pending transaction by the Company,
including without limitation a material financing or a corporate
reorganization, or during any period of time in which the Company is in
possession of material inside information concerning the Company or its
securities, which information the Company determines in good faith is not
ripe for disclosure.
The Company shall not honor any request to register Warrant Shares
pursuant to this Section 15.1 received later than five (5) years from the
effective date of the Company's registration statement on Form S-1 (File
No. 333-47045) (the "Effective Date"). The Company shall not be required
(i) to maintain the effectiveness of the registration statement beyond the
earlier to occur of 90 days after the effective date of the registration
statement or the date on which all of the Offered Warrant Shares have been
sold (the "Termination Date"); provided, however, that if at the
Termination Date the Offered Warrant Shares are covered by a registration
statement which also covers other securities and which is required to
remain in effect beyond the Termination Date, the Company shall maintain in
effect such registration statement as it relates to Offered Warrant Shares
for so long as such registration statement (or any substitute registration
statement) remains or is required to remain in effect for any such other
securities, or (ii) to cause any registration statement with respect to the
Warrant Shares to become effective prior to the Initiation Date. All
expenses of registration pursuant to this Section 15.1 shall be borne by
the Company (excluding underwriting discounts and commissions on Warrant
Shares not sold by the Company).
The Company shall be obligated pursuant to this Section 15.1 to
include in the registration statement Warrant Shares that have not yet been
purchased by a Holder of Warrants so long as such Holder of Warrants
submits an undertaking to the Company that such Holder intends to exercise
Warrants representing the number of Warrant Shares to be included in such
registration statement prior to the consummation of the public offering
with respect to such Warrant Shares. In addition, such Holder of Warrants
is permitted to pay the Company the Warrant Price for such Warrant Shares
upon the consummation of the public offering with respect to such Warrant
Shares.
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<PAGE>
15.2 PIGGY-BACK REGISTRATION RIGHTS. The Company covenants and
agrees with the Holders and any subsequent Holders of the Warrants and/or
Warrant Shares that in the event the Company proposes to file a
registration statement under the Act with respect to any class of security
(other than in connection with an exchange offer, a non-cash offer or a
registration statement on Form S-4 or Form S-8 or other unsuitable
registration statement form) which becomes or which the Company believes
will become effective at any time after the Initiation Date then the
Company shall in each case give written notice of such proposed filing to
the Holders of Warrants and Warrant Shares at least 30 days before the
proposed filing date and such notice shall offer to such Holders the
opportunity to include in such registration statement such number of
Warrant Shares as they may request, unless, in the opinion of counsel to
the Company reasonably acceptable to any such holder of Warrants or Warrant
Shares who wishes to have Warrant Shares included in such registration
statement, registration under the Act is not required for the transfer of
such Warrant Shares in the manner proposed by such Holders. The Company
shall not honor any such request to register any such Warrant Shares if the
request is received later than six (6) years from the Effective Date, and
the Company shall not be required to honor any request (a) to register any
such Warrant Shares if the Company is not notified in writing of any such
request pursuant to this Section 15.2 within at least 20 days after the
Company has given notice to the Holders of the filing, or (b) to register
Warrant Shares that represent in the aggregate fewer than 50% of the
aggregate number of Warrant Shares. The Company shall permit, or shall
cause the managing underwriter of a proposed offering to permit, the
Holders of Warrant Shares requested to be included in the registration (the
"Piggy-back Shares ") to include such Piggy-back Shares in the proposed
offering on the same terms and conditions as applicable to securities of
the Company included therein or as applicable to securities of any person
other than the Company and the Holders of Piggy-back Shares if the
securities of any such person are included therein. Notwithstanding the
foregoing, if any such managing underwriter shall advise the Company in
writing that it believes that the distribution of all or a portion of the
Piggy-back Shares requested to be included in the registration statement
concurrently with the securities being registered by the Company would
materially adversely affect the distribution of such securities by the
Company for its own account, then the Holders of such Piggy-back Shares
shall delay their offering and sale of Piggyback Shares (or the portion
thereof so designated by such managing underwriter) for such period, not to
exceed 120 days, as the managing underwriter shall request; provided that
no such delay shall be required as to Piggy-back Shares if any securities
of the Company are included in such registration statement for the account
of any person other than the Company and the Holders of Piggy-back Shares.
In the event of such delay, the Company shall file such supplements, post-
effective amendments or separate registration statements, and take any such
other steps as may be necessary to permit such Holders to make their
proposed offering and sale for a period of 90 days immediately following
the end of such period of delay ("Piggy-back Termination Date"); provided,
however, that if at the Piggy-back Termination Date the Piggyback Shares
are covered by a registration statement which is, or required to remain, in
effect beyond the Piggy-back Termination Date, the Company shall maintain
in effect the registration statement as it relates to the Piggy-back Shares
for so long as such registration statement remains or is required to remain
in effect for any of such other securities. All expenses of registration
pursuant to this Section 15.2 shall be borne by the Company, except that
underwriting commissions and expenses attributable to the Piggy-back Shares
and fees and disbursements of counsel (if any) to the Holders requesting
that such Piggy-back Shares be offered will be borne by such Holders.
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<PAGE>
The Company shall be obligated pursuant to this Section 15.2 to
include in the Piggy-back Offering, Warrant Shares that have not yet been
purchased by a holder of Warrants so long as such Holder of Warrants
submits an undertaking to the Company that such Holder intends to exercise
Warrants representing the number of Warrant Shares to be included in such
Piggy-back Offering prior to the consummation of such Piggy-back Offering.
In addition, such Holder of Warrants is permitted to pay the Company the
Warrant Price for such Warrant Shares upon the consummation of the Piggy-
back Offering.
If the Company decides not to proceed with a Piggy-back Offering, the
Company has no obligation to proceed with the offering of the Piggy-back
Shares, unless the Holders of the Warrants and/or Warrant Shares otherwise
comply with the provisions of Section 15.1 hereof (without regard to the 60
days' written request required thereby). Notwithstanding any of the
foregoing contained in this Section 15.2, the Company's obligation to offer
registration rights to the Piggy-back Shares pursuant to this Section 15.2
shall terminate two (2) years after the Expiration Date.
15.3 In connection with the registration of Warrants Shares in
accordance with Section 15.1 and 15.2 above, the Company agrees to:
(a) Use its reasonable best efforts to register or qualify the
Warrant Shares for offer or sale under the state securities or Blue
Sky laws of such states which the Holders of such Warrant Shares shall
designate, until the dates specified in Section 15.1 and 15.2 above in
connection with registration under the Act; provided, however, that in
no event shall the Company be obligated to quality to do business in
any jurisdiction where it is not now so qualified or to take any
action which would subject it to general service of process in any
jurisdiction where it is not now so subject or to register or get a
license as a broker or dealer in securities in any jurisdiction where
it is not so registered or licensed or to register or qualify the
Warrant Shares for offer or sale under the state securities or Blue
Sky laws of any state other than the states in which some or all of
the shares offered or sold in the Public Offering were registered or
qualified for offer and sale.
(b) (i) In the event of any post-effective amendment or
other registration with respect to any Warrant Shares pursuant to
Section 15.1 or 15.2 above, the Company will indemnify and hold
harmless any Holder whose Warrant Shares are being so registered,
and each person, if any, who controls such Holder within the
meaning of the Act, against any losses, claims, damages or
liabilities, joint or several, to which such Holder or such
controlling person may be 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 any
untrue statement or alleged untrue statement of any material fact
contained, on the effective date thereof, in any such
registration statement, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement
thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading; and will reimburse each such Holder and each such
controlling person for any legal or other expenses reasonably
incurred by
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<PAGE>
such Holder or such controlling person in connection with
investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not
be liable in 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 any such registration statement, any preliminary
prospectus or final prospectus, or any amendment or supplement
thereto, in reliance upon and in conformity with written
information furnished by such Holder expressly for use in the
preparation thereof. The Company will not be liable to a claimant
to the extent of any misstatement corrected or remedied in any
amended prospectus if the Company timely delivers a copy of such
amended prospectus to such indemnified person and such
indemnified person does not timely furnish such amended
prospectus to such claimant. The Company shall not be required to
indemnify any Holder or controlling person for any payment made
to any claimant in settlement of any suit or claim unless such
payment is approved by the Company.
(ii) Each Holder of Warrants and/or Warrant Shares who
participates in a registration pursuant to Section 15.1 or 15.2
will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed any such
registration statement, and each person, if any, who controls the
Company within the meaning of the Act, against any losses,
claims, damages or liabilities to which the Company, or any such
director, officer or 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 any untrue or alleged untrue statement of any material
fact contained in any such registration statement, any
preliminary prospectus or final prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact
required to be stated therein 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 any such
registration statement, any preliminary prospectus or final
prospectus, or any amendment or supplement thereto, in reliance
upon and in conformity with written information furnished by such
Holder expressly for use in the preparation thereof; and will
reimburse any legal or other expenses reasonably incurred by the
Company, or any such director, officer or controlling person in
connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the
indemnity agreement contained in this subparagraph (ii) shall not
apply to amounts paid to any claimant in settlement of any suit
or claim unless such payment is first approved by such Holder.
(iii) In order to provide for just and equitable
contribution in any action in which a claim for indemnification
is made pursuant to this clause (b)(iii) of Section 15.3 but is
judicially determined (by the entry of a final judgment or decree
by a court of competent jurisdiction and the expiration
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<PAGE>
of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case
notwithstanding the fact that this clause (b)(iii) of Section
15.3 provides for indemnification in such case, all the parties
hereto shall contribute to the aggregate losses, claims, damages
or liabilities to which they may be subject (after contribution
from others) in such proportion so that each Holder whose Warrant
Shares are being registered is responsible pro rata for the
portion represented by the public offering price received by such
Holder from the sale of such Holder's Warrant Shares, and the
Company is responsible for the remaining portion; provided,
however, that (i) no Holder shall be required to contribute any
amount in excess of the public offering price received by such
Holder from the sale of such Holder's Warrant Shares and (ii) no
person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. This subsection (b)(iii) shall not be
operative as to any Holder of Warrant Shares to the extent that
the Company has received indemnity under this clause (b)(iii) of
Section 15.3.
16. NO RIGHTS AS STOCKHOLDER; NOTICES TO HOLDERS. Nothing contained in
--------------------------------------------
this Agreement or in any of the Warrants shall be construed as conferring upon
the Holders or their transferee(s) the right to vote or to receive dividends or
to consent to or receive notice as stockholders in respect of any meeting of
stockholders for the election of directors of the Company or any other matter or
any rights whatsoever as stockholders of the Company. If, however, at any time
prior to the expiration of the Warrants and prior to their exercise, any of the
following events shall occur:
(a) the Company shall declare any dividend payable in any securities
upon its shares of Common Stock or make any distribution (other than a cash
dividend) to the holders of its shares of Common Stock; or
(b) the Company shall offer to the holders of its shares of Common
Stock any additional shares of Common Stock or securities convertible into
or exchangeable for shares of Common Stock or any right to subscribe to or
purchase any thereof; or
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation, merger, sale, transfer or lease of
all or substantially all of its property, assets and business as an
entirety) shall be proposed,
then in any one or more of said events the Company shall (i) give notice in
writing of such event to the Holders, as provided in Section 17 hereof and (ii)
if there are more than 100 Holders, issue a press release providing notice of
such event to a national business wire service, such giving of notice and
publication to be completed at least 20 days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution or subscription rights, or
for the determination of stockholders entitled to vote on such proposed
dissolution, liquidation or winding up. Such notice shall specify such record
date or the date of closing the transfer books, as the case may be. Failure to
publish, mail or receive such notice or any defect therein or in the publication
or mailing thereof shall not affect the validity of any action taken in
connection with such dividend, distribution or subscription rights, or such
proposed dissolution, liquidation or winding up.
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<PAGE>
17. NOTICES. Any notice pursuant to this Agreement to be given or made by
-------
the registered Holder of any Warrant to or on the Company shall be sufficiently
given or made if sent by first-class mail, postage prepaid, addressed as
follows:
Communications Systems International, Inc.
8 South Nevada Avenue
Suite 200
Colorado Springs, Colorado 80903
Attn: President
Notices or demands authorized by this Agreement to be given or made by the
Company to the registered Holder of any Warrant shall be sufficiently given or
made (except as otherwise provided in this Agreement) if sent by first-class
mail, postage prepaid, addressed to such Holder at the address of such Holder as
shown on the Warrant Register.
18. GOVERNING LAW. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California without giving effect to
principles of conflicts of laws.
19. SUPPLEMENTS AND AMENDMENTS. The Company and the Representatives may
--------------------------
from time to time supplement or amend this Agreement in order to cure any
ambiguity or to correct or supplement any provision contained herein which may
be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Representatives may deem necessary or desirable and which shall
not be inconsistent with the provisions of the Warrants and which shall not
adversely affect the interests of the Holders. This Agreement may also be
supplemented or amended from time to time by a writing executed by or on behalf
of the Company and all of the Holders.
20. SUCCESSOR. All the covenants and provisions of this Agreement by or
---------
for the benefit of the Company or the Holders shall bind and inure to the
benefit of their respective successors and assigns hereunder. Assignments by the
Holders of their rights hereunder shall be made in accordance with Section 4
hereof.
21. MERGER OR CONSOLIDATION OF THE COMPANY. So long as Warrants remain
--------------------------------------
outstanding, the Company will not merge or consolidate with or into, or sell,
transfer or lease all or substantially all of its property to, any other
corporation unless the successor or purchasing corporation, as the case may be
(if not the Company), shall expressly assume, by supplemental agreement executed
and delivered to the Holders, the due and punctual performance and observance of
each and every covenant and condition of this Agreement to be performed and
observed by the Company.
22. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
--------------------------
construed to give to any person or corporation other than the Company and the
Holders, any legal or equitable right, remedy or claim under this Agreement, but
this Agreement shall be for the sole and exclusive benefit of the Company and
the Holders of the Warrants and Warrant Shares.
23. CAPTIONS. The captions of the sections and subsections of this
--------
Agreement have been inserted for convenience only and shall have no substantive
effect.
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<PAGE>
24. COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts each of which when so executed shall be deemed to be an original;
but such counterparts together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day, month and year first above written.
CRUTTENDEN ROTH INCORPORATED
Attest:
By:___________________________
_________________________ Name:_________________________
Title:________________________
COHIG & ASSOCIATES, INC.
Attest:
By:___________________________
_________________________ Name:_________________________
Title:________________________
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
Attest:
By:___________________________
_________________________ Name:_________________________
Title:________________________
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<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
EXERCISABLE ON OR BEFORE JUNE __, 2003
NO. _______ WARRANTS
WARRANT CERTIFICATE
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
This Warrant Certificate certifies that _____________________, or
registered assigns, is the registered holder of Warrants expiring June __,
2003 (the "Warrants") to purchase Common Stock, no par value per share (the
"Common Stock"), of Communications Systems International, Inc., a Colorado
corporation (the "Company"). Each Warrant entitles the holder upon exercise to
receive from the Company from 10:00 a.m., Mountain time, on June __, 1999
through and until 6:00 p.m., Mountain time, on June ____, 2003, one fully
paid and nonassessable share of Common Stock (a "Warrant Share") at the initial
exercise price (the "Warrant Price") of [$_____] payable in lawful money of the
United States of America upon surrender of this Warrant Certificate and payment
of the Warrant Price at the office of the Company designated for such purpose,
but only subject to the conditions set forth herein and in the Warrant Agreement
referred to on the reverse hereof. The Warrant Price and number of Warrant
Shares issuable upon exercise of the Warrants are subject to adjustment upon the
occurrence of certain events set forth in the Warrant Agreement.
No Warrant may be exercised after 6:00 p.m., Mountain time, on June
__, 2003 (the "Expiration Date"). Notwithstanding the foregoing, if at 6:00
p.m., Mountain time on the Expiration Date, any Holder or Holders of the
Warrants have not exercised their Warrants and the Closing Price (as defined in
the Warrant Agreement) for the Common Stock on the Expiration Date is greater
than the Warrant Price, then each such unexercised Warrant shall be
automatically converted into a number of shares of Common Stock of the Company
equal to: (A) the number of shares of Common Stock then issuable upon exercise
of a Warrant multiplied by (B) a fraction (1) the numerator of which is the
difference between the Closing Price for the Common Stock on the Expiration Date
and the Warrant Price and (2) the denominator of which is the Closing Price for
the Warrant Stock on the Expiration Date.
Reference is hereby made to the further provisions of this Warrant
Certificate set forth on the reverse hereof and such further provisions shall
for all purposes have the same effect as though fully set forth at this place.
This Warrant Certificate shall not be valid unless countersigned by
the Company.
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<PAGE>
IN WITNESS WHEREOF, Communications Systems International, Inc. has
caused this Warrant Certificate to be signed by its President and by its
Secretary and has caused its corporate seal to be affixed hereunto or imprinted
hereon.
Dated: __________, 1998 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
Attest:
By:___________________________
_________________________ Name:_________________________
Title:________________________
RWW\CSI\WARRANT.CLN
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<PAGE>
[FORM OF WARRANT CERTIFICATE]
[REVERSE]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring June __, 2003 entitling the holder on
exercise to receive shares of Common Stock, no par value per share, of the
Company (the "Common Stock"), and are issued or to be issued pursuant to a
Warrant Agreement, dated as of June __, 1998 (the "Warrant Agreement"), duly
executed and delivered by the Company, which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Warrants. A copy of the Warrant Agreement may be obtained by the holder
hereof upon written request to the Company.
The Warrants may be exercised at any time on or before June __, 2003.
The holder of Warrants evidenced by this Warrant Certificate may exercise them
by surrendering this Warrant Certificate, with the form of election to purchase
set forth hereon properly completed and executed, together with payment of the
Warrant Price in cash at the office of the Company designated for such purpose.
In the event that upon any exercise of Warrants evidenced hereby the number of
Warrants exercised shall be less than the total number of Warrants evidenced
hereby, there shall be issued to the holder hereof or his assignee a new Warrant
Certificate evidencing the number of Warrants not exercised. No adjustment shall
be made for any dividends on any Common Stock issuable upon exercise of this
Warrant.
The Warrant Agreement provides that upon the occurrence of certain events
the number of shares of Common Stock issuable upon the exercise of each Warrant
shall be adjusted. If the number of shares of Common Stock issuable upon such
exercise is adjusted, the Warrant Agreement provides that the Warrant Price set
forth on the face hereof may, subject to certain conditions, be adjusted. No
fractions of a share of Common Stock will be issued upon the exercise of any
Warrants but the Company will pay the cash value thereof determined as provided
in the Warrant Agreement.
The holders of the Warrants are entitled to certain registration rights
with respect to the Common Stock purchasable upon exercise thereof. Said
registration rights are set forth in full in the Warrant Agreement.
Warrant Certificates, when surrendered at the office of the Company by the
registered holder thereof in person or by legal representative or attorney duly
authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
Upon due presentation for registration of transfer of this Warrant
certificate at the office of the Company, a new Warrant certificate or Warrant
certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued to other transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.
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<PAGE>
The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, of any distribution to the holder(s) hereof and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
Neither the Warrants nor this Warrant Certificate entitles any holder hereof to
any rights of a stockholder of the Company.
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<PAGE>
[FORM OF ELECTION TO PURCHASE]
(TO BE EXECUTED UPON EXERCISE OF WARRANT)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive ___________ shares of
Common Stock and herewith tenders payment for such shares to the order of
Communications Systems International, Inc., in the amount of $___________ in
accordance with the terms hereof. The undersigned requests that a certificate
for such shares be registered in the name of ___________________________, whose
address is ___________________________________________________ and that such
shares be delivered to ____________________________________ whose address is
__________________________________. If said number of shares is less than all
of the shares of Common Stock purchasable hereunder, the undersigned requests
that a new Warrant certificate representing the remaining balance of such shares
be registered in the name of ______________________________________, whose
address is ___________________________________________, and that such Warrant
certificate be delivered to _______________________________, whose address is
_____________________________________________.
Signature:
Date:
Signature Guaranteed:
RWW\CSI\WARRANT.CLN
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<PAGE>
Exhibit 10.5
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
1998 STOCK OPTION PLAN
On September 14, 1995, the stockholders of Communications Systems
International, Inc. (the "Corporation") approved the Corporation's 1995
Incentive Stock Option Plan (the "1995 Incentive Stock Option Plan"). The
effective date of the 1995 Incentive Stock Option Plan was August 7, 1995. The
maximum number of shares authorized to be granted pursuant to Incentive Stock
Options (as defined below) under the 1995 Incentive Stock Option Plan was
500,000. As of January 22, 1998, no shares were subject to outstanding
Incentive Stock Options or had been granted pursuant to the exercise of
Incentive Stock Options under the 1995 Incentive Stock Option Plan. Incentive
Stock Options granted prior to January 16, 1998 shall be governed by the 1995
Incentive Stock Option Plan.
On September 14, 1995, the stockholders of the Corporation approved the
Corporation's 1995 Non-Qualified Stock Option Plan (the "1995 Non-Qualified
Stock Option Plan"). The effective date of the 1995 Non-Qualified Stock Option
Plan was August 7, 1995. The maximum number of shares authorized to be granted
pursuant to Non-Qualified Stock Options (as defined below) under the 1995 Non-
Qualified Stock Option Plan was 500,000. As of December 12, 1997, 487,900
shares were subject to outstanding Non-Qualified Stock Options or had been
granted pursuant to the exercise of Non-Qualified Stock Options under the 1995
Non-Qualified Stock Option Plan. Non-Qualified Stock Options granted prior to
January 16, 1998, except those Non-Qualified Stock Options conditionally
granted, shall be governed by the 1995 Non-Qualified Stock Option Plan.
On January 22, 1998, the stockholders of the Corporation approved a
proposal to combine the 1995 Incentive Stock Option Plan and the 1995 Non-
Qualified Stock Option Plan. The effective date of this combined plan (the
"1998 Stock Option Plan" or the "Plan") is January 16, 1998. On January 22,
1998, the stockholders also approved a proposal to increase the aggregate number
of authorized shares for Options (as defined below) to be granted under the Plan
to 3,000,000. The total number of shares that may be issued pursuant to Options
under the Plan is 2,512,100. The Board conditionally approved the granting of
Non-Qualified Stock Options representing 528,400 shares upon the stockholders
approval of the proposal to combine the Original Plans and approval of the
proposal to increase the number of authorized shares under the Plan. These
conditionally granted Non-Qualified Stock Options shall be governed by this
Plan. Options granted on or after January 16, 1998 shall be governed by this
Plan.
1.) Purposes. The principal purpose of the Corporation's 1998 Stock
--------
Option Plan is to advance the interests of the Corporation and its stockholders
by affording officers, directors and other key persons upon whose judgment,
initiative, and efforts the Corporation may rely for the successful conduct of
its business an opportunity for investment in the Corporation and the incentive
advantages inherent in stock ownership in the Corporation.
Options granted under this Plan may either be Incentive Stock Options (as
defined below) or Non-Qualified Stock Options (as defined below).
2.) Definitions. For purposes of this Plan, the following terms shall
-----------
have the meanings indicated below:
<PAGE>
(01) "Board" - the Board of Directors of Communications Systems
International, Inc..
(02) "Code" - the Internal Revenue Code of 1986, as amended from time to
time.
(03) "Committee" - a committee appointed by the Board consisting solely of
not less than two members of the Board who are "disinterested" within the
meaning of and to the extent required by the General Rules and Regulations
promulgated pursuant to Section 16 of the Exchange Act (the "Section 16
Regulations"). To the extent permitted by the Section 16 Regulations, the
Board may serve as the Committee.
(04) "Common Stock" - any of the Corporation's shares of voting common
stock.
(05) "Corporation" - the Corporation and any of its Subsidiaries or
Parents.
(06) "Exchange Act" - the Securities Exchange Act of 1934, as amended.
(07) "Fair Market Value" - the price per share determined as follows: (a)
if the security is listed for trading on one or more national securities
exchanges (including the Nasdaq National Market System), the reported last
sales price on such principal exchange on the date in question, or if such
security shall not have been traded on such principal exchange on such
date, the reported last sales price on such principal exchange on the first
day prior thereto on which such security was so traded; or (b) if the
security is not listed for trading on a national securities exchange
(including the Nasdaq National Market System) but is traded in the over-
the-counter market, the mean of the highest and lowest bid prices for such
security on the date in question, or if there are no such bid prices for
such security on such date, the mean of the highest and lowest bid prices
on the first day prior thereto on which such prices existed; or (c) if
neither (a) nor (b) is applicable, by any means deemed fair and reasonable
by the Committee, which determination shall be final and binding on all
parties. Fair Market Value shall be determined without regard to any
restriction other than a restriction which by its terms will never lapse.
(08) "Incentive Stock Option" - an "incentive stock option" as that term
is defined in Subsection 422(b) of the Code, to purchase shares of Common
Stock. An Incentive Stock Option shall only be granted pursuant to an
"Incentive Stock Option Agreement."
(09) "Non-Qualified Stock Option" - an option, not intended to qualify as
an Incentive Stock Option, to purchase Common Stock. A Non-Qualified Stock
Option shall only be granted pursuant to a "Non-Qualified Stock Option
Agreement."
(10) "Option" - an Incentive Stock Option or a Non-Qualified Stock Option
granted under the Plan.
2
<PAGE>
(11) "Option Agreement" - a written agreement pursuant to which the
Corporation grants an option to an Optionee and which sets the terms and
conditions of the option. The term shall refer to an Option Agreement
pertaining to an Incentive Stock Option ("Incentive Stock Option
Agreement") or an Option Agreement pertaining to a Non-Qualified Stock
Option ("Non-Qualified Stock Option Agreement").
(12) "Option Date" - the date on which an Option is granted under the
Plan, which shall be the date upon which an Option Agreement is duly
executed by or on behalf of the Corporation.
(13) "Option Stock" - the Common Stock (subject to adjustment as described
in Section 8), or any other class of stock of the Corporation which may be
substituted therefor by exchange, stock split or otherwise.
(14) "Optionee" - the person to whom an option to purchase Common Stock,
which has not expired, has been granted by means of an Incentive Stock
Option or a Non-Qualified Stock Option.
(15) "Original Plans" - the 1995 Incentive Stock Option Plan and the 1995
Non-Qualified Stock Option Plan.
(16) "Plan" - the Corporation' 1998 Stock Option Plan.
(17) A "Subsidiary" - any corporation in an unbroken chain of corporations
beginning with the Corporation, if, at the time of granting the option,
each of the corporations other than the last corporation in the chain owns
stock possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock in one of the other corporations in such
chain. The term shall include any subsidiaries which become such after
adoption of this Plan.
(18) "Successor" - the legal representative of the estate of a deceased
Optionee or the person or persons who have acquired the right to exercise
an Option by the Optionee's will or by the laws of descent and
distribution.
(19) A "Parent" - a corporation that directly, or indirectly through
related corporations, owns more than 50 percent of the voting power of the
shares entitled to vote for directors of the Corporation. The term shall
include a corporation which becomes such after adoption of this Plan.
3.) Shares Available Under the Plan. The aggregate number of shares that
-------------------------------
may be issued pursuant to Options granted under the Plan is 3,000,000. As of
December 12, 1997, 487,900 shares were subject to outstanding Options or had
been granted pursuant to the exercise of Options under the Original Plans. The
number of shares that may be subject to Options granted under the Plan is
2,512,100. The aggregate number of shares available under this Plan shall be
subject to adjustment
3
<PAGE>
on the occurrence of any of the events and in the manner set forth in Section 8.
The shares of Common Stock issued upon the exercise of Options may be authorized
but unissued shares, shares issued and reacquired by the Corporation or shares
purchased on the market for the purposes of the Plan. If an Option shall expire
or terminate for any reason without having been exercised in full, the
unpurchased shares, shall (unless the Plan shall have been terminated) become
available for other Options under the Plan.
4.) Administration. The Plan shall be administered by the Board provided
--------------
that the Board may appoint, from time to time, the Committee. If a Committee
should be appointed, the Committee shall report all action taken by it to the
Board and the Committee shall have full and final authority in its discretion,
subject to the provisions of the Plan.
The Corporation shall grant Options pursuant to the Plan upon
determinations of the Committee as to which of the eligible persons shall be
granted Options, the number of shares to be Optioned, the exercise price of the
Option and the term during which any such Options may be exercised. The
Committee may from time to time adopt rules and regulations for carrying out the
Plan and interpretations and constructions of any provision of the Plan. All
such determinations and interpretations by the Committee shall be conclusively
binding for all purposes and upon all persons.
5.) Eligibility for Incentive Stock Options. All employees of the
---------------------------------------
Corporation are eligible to receive Incentive Stock Options. Incentive Stock
Options shall be granted in connection with the Optionee's employment with the
Corporation. A director of the Corporation who is not also an employee and a
consultant to the Corporation who is not also an employee, shall not be eligible
to receive an Incentive Stock Option.
In selecting the employees to whom Options shall be granted, as well as
determining the number of shares subject to each Option, the Committee shall
take into consideration such factors as it deems relevant in connection with
accomplishing the purposes of the Plan. For any calendar year, the aggregate
Fair Market Value (determined at the Option Date) of the stock with respect to
which any Incentive Stock Options are exercisable for the first time by any
individual employee (under all stock option plans of the Corporation) shall not
exceed $100,000. An employee who has been granted an Option may, if he or she
is otherwise eligible, be granted an additional Option or Options if the
Committee shall so determine.
6.) Eligibility for Non-Qualified Stock Options. Non-Qualified Stock
-------------------------------------------
Options may be granted to any employee, director, advisor or consultant of the
Corporation, provided however that bona fide services shall be rendered by such
advisor or consultant and such services must not be in connection with the offer
or sale of securities in a capital-raising transaction. No further restrictions
are placed on the Committee in determining eligibility for granting Non-
Qualified Stock Options.
7.) Terms and Conditions of Options. Whenever the Committee shall
-------------------------------
designate an Optionee, it shall communicate to the Secretary of the Corporation
the name of the Optionee, the number of shares to be subject to the Option, the
nature of the Option (Incentive Stock Option or
4
<PAGE>
Non-Qualified Stock Option) and such other terms and conditions as it shall
determine, not inconsistent with the provisions of this Plan. The President or
other officer of the Corporation shall then enter into an Option Agreement with
the Optionee, complying with and subject to the following terms and conditions
and setting forth such other terms and conditions of the Option as determined by
the Committee:
(01) The Option Agreement shall state whether it is an Incentive Stock
Option or a Non-Qualified Stock Option.
(02) Number of Shares and Option Price. The Option Agreement shall state
---------------------------------
the total number of shares to which it pertains. The price of the Option
Stock subject to an Incentive Stock Option shall be not less than one
hundred percent (100%) of the Fair Market Value of the Option Stock at the
Option Date. The price of the Option Stock subject to a Non-Qualified
Stock Option shall be determined by the Committee and may be less than the
Fair Market Value of the Option Stock at the Option Date but shall in no
instance be less than the par value of the Option Stock. In the event an
Incentive Stock Option is granted to an employee who, at the Option Date,
owns more than ten percent (10%) of the voting power of all classes of the
Corporation's stock then outstanding, the price of the Option Stock covered
by such Option shall be not less than one hundred ten percent (110%) of the
Fair Market Value of the Option Stock at the Option Date. The Option price
shall be subject to adjustment as provided in Section 8 hereof.
(03) Time and Manner of Exercise of Option. The vesting and time of
-------------------------------------
exercise of each Option shall be determined from time to time by the
Committee and shall be set forth in the Option Agreement with each
Optionee. An Option, by its terms, shall be exercisable only by the
Optionee during the Optionee's lifetime.
(a) No Option may be exercised after ten (10) years from the Option
Date; provided that no Incentive Stock Option granted to an
owner of more than ten percent (10%) of the voting power of all
classes of the Corporation's stock then outstanding may be
exercised after five (5) years from the Option Date.
(04) Termination of Employment, Except Death or Disability. In the event
-----------------------------------------------------
that an Optionee shall cease to be employed by the Corporation for any
reason other than his or her death, disability or "for cause," such
Optionee shall have the right to exercise any outstanding Options which
were exercisable at the time of termination of employment at any time
within three (3) months after the termination of employment or until the
earlier expiration of the Option under this Plan or the Option Agreement.
Any exercisable Options not exercised within the three (3) month period
shall expire at the end of such period. In the event that the Optionee
shall be terminated "for cause" including but not limited to: (i) willful
breach of any agreement entered into with the Corporation; (ii)
misappropriation of the Corporation's property, fraud, embezzlement, other
acts of dishonesty against the Corporation; or (iii)
5
<PAGE>
conviction of any felony or crime involving moral turpitude, the Option
shall expire immediately upon the Optionee's termination of employment.
(05) Death or Disability of Optionee. If the Optionee shall die or become
-------------------------------
disabled within the definition of Section 22(e)(3) of the Code while in the
employ of the Corporation and in either case shall not have fully exercised
his or her Options, any Options granted pursuant to the Plan which were
exercisable at the date of termination of employment shall be exercisable
only within twelve (12) months following his or her death or date of
disability or until the earlier originally stated expiration thereof. Any
exercisable Options not exercised within the twelve (12) month period shall
expire at the end of such period. In the case of death, such Options shall
be exercised pursuant to subparagraph (07) of this Section by the Successor
and only to the extent that such Options were exercisable at the time of
the Optionee's death.
(06) Transfer of Option. Each Option granted hereunder shall, by its
------------------
terms, be not transferable by the Optionee other than by will or by the
laws of descent and distribution, and shall be, during the Optionee's
lifetime, exercisable only by the Optionee or the Optionee's legally
appointed personal representative in the event the Optionee has been found
legally incompetent to handle his or her affairs. Except as permitted by
the preceding sentence, each Option granted under the Plan and the rights
and privileges thereby conferred shall not be transferred, assigned or
pledged in any way (whether by operation of law or otherwise), and shall
not be subject to execution, attachment or similar process except with the
express consent of the Committee. Upon any attempt to so transfer, assign,
pledge, or otherwise dispose of the Option, or of any right or privilege
conferred thereby, contrary to the provisions of the Option Agreement or
the Plan, or upon levy of any attachment or similar process upon such
rights and privileges without the express consent of the Committee, the
Option, and such rights and privileges, shall immediately become null and
void.
(07) Manner of Exercise of Options. An Option shall be exercisable only
-----------------------------
by: (i) written notice to the Corporation of intent to exercise the Option
with respect to a specified number of shares of Option Stock; (ii)
tendering the original Option Agreement to the Corporation; and (iii)
payment to the Corporation of the amount of the Option purchase price for
the number of shares of stock with respect to which the Option is then
exercised. Payment of the Option purchase price may be made in cash, by
certified bank check, by delivery of shares of Common Stock with a Fair
Market Value equal to the Option purchase price, by a combination of cash,
certified bank check and such shares, whose value together with such cash
and certified bank check shall equal the Option purchase price or by any
other method of payment which the Committee shall approve and, in the case
of an Incentive Stock Option, which shall not be inconsistent with the
provisions of Section 422 of the Code. An Option may be exercised in whole
or in part; provided, however, that there shall be no such exercise at any
one time as to fewer than one hundred (100) shares or all of the remaining
shares then purchasable by the Optionee or person exercising the Option.
When shares of Option Stock are issued to the Optionee pursuant to the
exercise of an Option, the fact of such issuance
6
<PAGE>
shall be noted on the Option Agreement by the Corporation before the Option
Agreement is returned to the Optionee. When all shares of Optioned stock
covered by the Option Agreement have been issued to the Optionee, or the
Option shall expire, the Option Agreement shall be canceled and retained by
the Corporation. When shares of Option Stock are issued to the Optionee
pursuant to the exercise of an Incentive Stock Option, the Corporation may
(but shall not be required to) notify the Optionee of the period the
Optionee must hold the shares to obtain the preferred tax treatment of the
Incentive Stock Option.
(08) Delivery of Certificate. Except where shares are held for unpaid
-----------------------
withholding taxes, between fifteen (15) and thirty (30) days after receipt
of the written notice and payment specified above, the Corporation shall
deliver to the Optionee certificates for the number of shares with respect
to which the Option has been exercised, issued in the Optionee's name;
provided, however, that such delivery shall be deemed effected for all
purposes when the Corporation, or the stock transfer agent for the
Corporation, shall have deposited such certificates in the United States
mail, postage prepaid, addressed to the Optionee at the address specified
in the written notice of exercise.
(09) Certain Dispositions of Option Stock. Any Incentive Stock Options
------------------------------------
granted pursuant to this Plan shall be conditioned such that if an Optionee
or Successor shall dispose of Option Stock by way of sale, exchange, gift,
transfer of legal title, or otherwise within (i) the two-year period
beginning on the Option Date, or (ii) the one-year period beginning on the
date on which the Option Stock was transferred to such individual pursuant
to the exercise of an Incentive Stock Option, such individual shall
promptly report the disposition to the Corporation in writing and shall
furnish to the Corporation such details concerning the disposition as the
Corporation may reasonably request.
(10) Other Provisions. The Option Agreements under this Section shall
----------------
contain such other provisions as the Committee shall deem advisable.
8.) Adjustments. In the event that the outstanding shares of the Common
-----------
Stock are changed into or exchanged for a different number or kind of shares or
other securities of the Corporation or of another corporation by reason of any
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, combination of shares or dividends payable in Common Stock,
appropriate adjustment shall be made in the number and kind of shares as to
which Options may be granted under the Plan and as to which outstanding Options
or portions thereof then unexercised shall be exercisable, to the end that the
proportionate interest of the participant shall be maintained as before the
occurrence of such event; such adjustment in outstanding Options shall be made
by the Committee without change in the total price applicable to the unexercised
portion of such Options and with a corresponding adjustment in the Option Price
per share. The Committee's determination shall be conclusive. No such
adjustment shall be made which shall, within the meaning of any applicable
sections of the Code, constitute a modification, extension or renewal of an
Option or a grant of additional benefits to a participant.
7
<PAGE>
If the Corporation does not exercise its right under Section 13 hereof to
accelerate the date of any Options and is a party to a merger, consolidation,
reorganization or similar corporate transaction and if, as a result of that
transaction, its shares of Common Stock are exchanged for: (i) other securities
of the Corporation or (ii) securities of another corporation which has assumed
the outstanding Options under the Plan or has substituted for such Options its
own options, then each Optionee shall be entitled (subject to the conditions
stated herein or in such substituted options, if any), in respect of that
Optionee's Options, to purchase that amount of such other securities of the
Corporation or of such other corporation as is sufficient to ensure that the
value of the Optionee's Options immediately before the corporate transaction is
equivalent to the value of such options immediately after the transaction,
taking into account the Option Price of the Option before such transaction, the
Fair Market Value per share of the Common Stock immediately before such
transaction and the Fair Market Value immediately after the transaction of the
securities then subject to that Option (or to the option substituted for that
Option, if any). Upon the happening of any such corporate transaction, the
class and aggregate number of shares subject to the Plan which have been
heretofore or may be hereafter granted under the Plan shall be appropriately
adjusted to reflect the events specified in this clause.
9.) Rights as Stockholder. Neither an Optionee nor a Successor shall, by
---------------------
reason of any Option granted hereunder, have any right of a stockholder of the
Corporation with respect to the shares covered by his or her Option until such
shares shall have been issued to the Optionee or the Successor.
10.) No Obligation to Exercise Option. The granting of an Option
--------------------------------
shall impose no obligation upon the Optionee to exercise such Option. Neither
shall the Plan confer upon the Optionee any rights respecting continued
employment nor limit the Optionee's rights or the Corporation's rights to
terminate such employment.
11.) Withholding Taxes. Whenever under the Plan shares of Option Stock
-----------------
are to be issued upon exercise of the Options granted hereunder and prior to the
delivery of any certificate or certificates for said shares by the Corporation,
the Corporation shall have the right to require the Optionee to remit to the
Corporation an amount sufficient to satisfy any federal and state withholding or
other employment taxes resulting from such exercise. In the event that
withholding taxes are not paid within five days after the date of exercise, to
the extent permitted by law the Corporation shall have the right, but not the
obligation, to cause such withholding taxes to be satisfied by reducing the
number of shares of Option Stock deliverable or by offsetting such withholding
taxes against amounts otherwise due from the Corporation to the Optionee. If
withholding taxes are paid by reduction of the number of shares deliverable to
the Optionee, such shares shall be valued at the Fair Market Value as of the
fifth business day following the date of exercise.
12.) Purchase for Investment; Rights of Holder on Subsequent
-------------------------------------------------------
Registration. Unless the shares to be issued upon exercise of an Option granted
- ------------
under the Plan have been effectively registered under the Securities Act of 1933
as now in force or hereafter amended (the "1933 Act"), the Corporation shall be
under no obligation to issue any shares covered by any Option unless the
8
<PAGE>
person who exercises such Option, whether such exercise is in whole or in part,
shall give a written representation and undertaking to the Corporation which is
satisfactory in form and scope to counsel for the Corporation and upon which, in
the opinion of such counsel, the Corporation may reasonably rely, that he or she
is acquiring the shares issued to him or her pursuant to such exercise of the
Option for his or her own account as an investment and not with a view to, or
for sale in connection with, the distribution of any such shares, and that he or
she will make no transfer of the same except in compliance with any rules and
regulations in force at the time of such transfer under the 1933 Act, or any
other applicable law. Such shares may be disposed of by an Optionee in the
following manner only: (1) pursuant to an effective registration statement
covering such resale or reoffer, (2) pursuant to an applicable exemption from
registration as indicated in a written opinion of counsel acceptable to the
Company, or (3) in a transaction that meets all the requirements of Rule 144 of
the Securities and Exchange Commission. If shares of stock covered by the Plan
have been registered with the Securities and Exchange Commission, no such
restrictions on resale shall apply, except in the case of Optionees who are
directors, officers, or principal shareholders of the Company. Such persons may
dispose of shares only by one of the three aforesaid methods. In the event that
the Corporation shall, nevertheless, deem it necessary or desirable to register
under the 1933 Act or other applicable statutes any shares with respect to which
an Option shall have been exercised, or to qualify any such shares for exemption
from the 1933 Act or other applicable statutes, then the Corporation shall take
such action at its own expense and may require from each participant such
information in writing for use in any registration statement, prospectus,
preliminary prospectus or offering circular as is reasonably necessary for such
purpose and may require reasonable indemnity to the Corporation and its officers
and directors from such holder against all losses, claims, damages and
liabilities arising from such use of the information so furnished and caused by
any untrue statement of any material fact required to be stated therein or
necessary to make the statement therein not misleading in light of the
circumstances under which they were made.
13.) Modification of Outstanding Options. The Committee, without the
-----------------------------------
consent of the Optionee, may accelerate the exercisability of an outstanding
Option upon the merger, consolidation, reorganization or similar transaction
with another entity and shorten the time period within which an Optionee must
exercise his or her Options. In addition, the Committee, at any time, may
authorize modification of any outstanding Option with the consent of the
participant when and subject to such conditions as are deemed to be in the best
interests of the Corporation and in accordance with the purposes of the Plan.
14.) Approval of Shareholders. This Plan is expressly subject to approval
------------------------
of holders of the majority of the outstanding shares of common stock of the
Corporation, and if it is not so approved on or before twelve (12) months after
the date of adoption of this Plan by the Board, this Plan shall not come into
effect and the Original Plans shall remain in effect.
15.) Liquidation. Upon the complete liquidation of the Corporation,
-----------
any unexercised Options theretofore granted under this Plan shall be deemed
canceled, except as otherwise provided in Section 8 in connection with a merger,
consolidation or reorganization of the Corporation.
9
<PAGE>
16.) Effective Date of the Plan. The effective date of this Plan is
--------------------------
January 16, 1998.
17.) Termination and Amendment of the Plan. This Plan shall terminate on
-------------------------------------
January 16, 2008 or at such earlier time as the Board shall determine. Any
termination shall not affect any Options then outstanding under this Plan.
The Board may make such modifications of the Plan as it shall deem
advisable, but may not, without further approval of the stockholders of the
Corporation, except as provided in Section 8 hereof, (a) abolish the Committee,
change the qualification of its members, or withdraw the administration of the
Plan from its supervision, (b) make any material change in the class of eligible
employees as defined in Sections 5 (for Incentive Stock Options) or 6 (for Non-
Qualified Stock Options), (c) increase the total number of shares reserved for
purposes of this Plan provided in Section 3, except as provided in Section 8,
(d) increase the total number of shares for which an option or options may be
granted to any one employee, (e) extend the term of the Plan or the maximum
option periods provided in Section 7, (f) decrease the minimum option price
provided in Section 7, except as provided in Section 8, or (g) materially
increase the benefits accruing to employees participating under this Plan.
18.) Governing Law. The Plan shall be governed by the laws of the State of
-------------
Colorado.
19.) Expenses of Administration. All costs and expenses incurred in the
--------------------------
operation and administration of this Plan shall be borne by the Corporation.
20.) Use of Proceeds. The proceeds received by the Corporation from the
---------------
sale of Common Stock pursuant to the exercise of Options granted under the Plan
shall be added to the Corporation's general funds and used for general corporate
purposes.
21.) Limitations. Every right of action by or on behalf of the Corporation
-----------
or by any stockholder against any past, present or future member of the Board,
or any officer or employee of the Corporation arising out of or in connection
with this Plan shall, irrespective of the place where such action may be brought
and irrespective of the place of residence of any such director, officer or
employee cease and be barred by the expiration of one year from whichever is the
later of (a) the date of the act or omission in respect of which such right of
action arises; or (b) the first date upon which there has been made generally
available to stockholders an annual report of the Corporation or any proxy
statement for the annual meeting of stockholders following the issuance of such
annual report, which annual report and proxy statement alone or together set
forth, for the related period, the number of shares issuable upon the exercise
of the options granted pursuant to this Plan; and any and all right of action by
any employee (past, present or future) against the Corporation arising out of or
in connection with this Plan shall, irrespective of the place where such action
may be brought, cease and be barred by the expiration of one year from the date
of the act or omission in respect of which such right of action arises.
10
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
INCENTIVE STOCK OPTION AGREEMENT
[DATE]
[NAME AND ADDRESS OF THE OPTIONEE]
Dear [OPTIONEE]:
At the direction of the Board of Directors of Communications Systems
International (the "Corporation"), you are hereby notified that the Board of
Directors has granted you an Incentive Stock Option under the Corporation's 1998
Stock Option Plan. Set forth below are the terms of this Incentive Stock
Option.
The Incentive Stock Option granted to you is to purchase [INSERT NUMBER OF
SHARES] shares of Common Stock (the "Stock") of the Corporation at an exercise
price of $[INSERT EXERCISE PRICE] per share. The fair market value of a share
of the Corporation's Stock on this date is $[INSERT FAIR MARKET VALUE ON DATE OF
THE GRANT -- THE EXERCISE PRICE MUST BE GREATER THAN OR EQUAL TO THIS AMOUNT].
In setting the exercise price for each share of Corporation Stock subject to
this Incentive Stock Option, it is the Corporation's understanding that you, as
of the date of this Incentive Stock Option, do not own stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Corporation or a parent or a subsidiary of the Corporation pursuant
to the attribution rules of section 424(d) of the Internal Revenue Code.
The date of the grant of this Incentive Stock Option is [INSERT DATE OF THE
GRANT]. This Incentive Stock Option expires on [INSERT DATE NO MORE THAN TEN
YEARS FROM THE DATE OF THE GRANT OF THIS INCENTIVE STOCK OPTION].
[INSERT VESTING SCHEDULE, IF ANY] You may exercise this Incentive Stock
Option with respect to all or part of the shares at any time prior to the date
on which this Incentive Stock Option expires, subject to the conditions
contained in the Corporation's 1998 Stock Option Plan and this Incentive Stock
Option Agreement.
This Incentive Stock Option is further limited as follows:
This Incentive Stock Option is administered by the Board of Directors of
the Corporation, which has final and conclusive authority to administer this
Incentive Stock Option and determine all questions arising under it.
The purchase price of any shares purchased pursuant to exercise of this
Incentive Stock Option (the "Exercise Price") may be paid in cash; by certified
bank check; by delivery of shares of Common Stock of the Corporation with a fair
market value equal to the Exercise Price; by a combination of cash, certified
bank check and such shares; or by any other method approved by the Board of
Directors.
<PAGE>
[OPTIONEE]
[DATE]
Page 2
This Incentive Stock Option may be exercised by you, but only by you, at
any time during your lifetime prior to three (3) months after you cease to be an
employee of the Corporation for any reason other than death, disability or
termination "for cause."
In the event of your death or your total disability during your service to
the Corporation, this Incentive Stock Option may be exercised at any time within
twelve (12) months following the date of your disability by you or your legally
appointed personal representative, or at any time within twelve (12) months
following the date of your death by your estate or a person who acquired this
Incentive Stock Option by will or by the laws of descent and distribution.
In the event that you are terminated "for cause," which includes but is not
limited to: (i) willful breach of any agreement entered into with the
Corporation; (ii) misappropriation of the Corporation's property, fraud,
embezzlement, breach of fiduciary duty, other acts of dishonesty against the
Corporation; or (iii) conviction of any felony or crime involving moral
turpitude, this Incentive Stock Option shall expire immediately upon your
termination from the Corporation.
In no event will this Incentive Stock Option be exercisable after the
expiration of ten (10) years from the date it was granted. You may not
transfer, sell, pledge, assign, or otherwise dispose of this Incentive Stock
Option, other than at death, by will or by the laws of descent and distribution,
and this Incentive Stock Option is exercisable during your lifetime only by you.
This Incentive Stock Option shall not be subject to execution, attachment or
similar process except with the express consent of the Committee.
Unless a registration statement under the Securities Act of 1933, as
amended, and applicable state securities laws as in effect with respect to this
Incentive Stock Option or the shares of Stock you acquire upon exercise of this
Incentive Stock Option (the "Incentive Stock Option Stock"), you agree with, and
represent to, the Corporation that you are acquiring the Incentive Stock Option
and the Incentive Stock Option Stock for the purpose of investment and not with
a view to transfer, sell, or otherwise dispose of the Incentive Stock Option
Stock. The Corporation may require an opinion of counsel satisfactory to it
prior to the transfer of any Incentive Stock Option Stock to you to assure at
all times that it will be in compliance with applicable federal and state
securities laws.
A copy of the Corporation's 1998 Stock Option Plan is enclosed for your
information.
Dated:_______________ __________________________________________________
[PRESIDENT OR OTHER OFFICER OF THE CORPORATION]
<PAGE>
[OPTIONEE]
[DATE]
Page 3
ACCEPTANCE:
I hereby accept the terms and provisions of the above Incentive Stock Option
Agreement. I also agree to accept as binding, conclusive, and final all
decisions or interpretations of the Corporation's Board of Directors upon any
questions arising under this Incentive Stock Option.
Dated:_______________ __________________________________________________
[OPTIONEE]
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
[DATE]
[NAME AND ADDRESS OF THE OPTIONEE]
Dear [OPTIONEE]:
At the direction of the Board of Directors of Communications Systems
International (the "Corporation"), you are hereby notified that the Board of
Directors has granted you a Non-Qualified Stock Option under the Corporation's
1998 Stock Option Plan. Set forth below are the terms of this Non-Qualified
Stock Option.
The Non-Qualified Stock Option granted to you is to purchase [INSERT NUMBER
OF SHARES] shares of Common Stock (the "Stock") of the Corporation at an
exercise price of $[INSERT EXERCISE PRICE] per share. The date of the grant of
this Non-Qualified Stock Option is [INSERT DATE OF GRANT]. This Non-Qualified
Stock Option expires on [INSERT DATE NOT MORE THAN TEN YEARS FROM THE DATE OF
THE GRANT OF THIS NON-QUALIFIED STOCK OPTION].
[INSERT VESTING SCHEDULE, IF ANY] This Non-Qualified Stock Option may not
be exercised after the date on which it expires.
This Non-Qualified Stock Option is limited as follows:
a) This Non-Qualified Stock Option is administered by the Board of Directors
of the Corporation, which has final and conclusive authority to administer this
Non-Qualified Stock Option and determine all questions arising under it.
b) The purchase price of any shares purchased pursuant to exercise of this
Non-Qualified Stock Option (the "Exercise Price") may be paid in cash; by
certified bank check; by delivery of shares of Common Stock of the Corporation
with a fair market value equal to the Exercise Price; by a combination of cash,
certified bank check and such shares; or by any other method approved by the
Board of Directors.
c) This Non-Qualified Stock Option may be exercised by you, but only by you,
at any time during your lifetime prior to three (3) months after you cease to be
an employee of the Corporation for any reason other than death, disability or
termination "for cause."
d) In the event of your death or your total disability during your service to
the Corporation, this Non-Qualified Stock Option may be exercised at any time
within twelve (12) months following the date of your disability by you or your
legally appointed personal representative, or at any time within twelve (12)
months following the date of your death by your estate or a person who acquired
this Non-Qualified Stock Option from you by will or by the laws of descent and
distribution.
<PAGE>
[OPTIONEE]
[DATE]
Page 2
e) In the event that you are terminated "for cause," which includes but is not
limited to: (i) willful breach of any agreement entered into with the
Corporation; (ii) misappropriation of the Corporation's property, fraud,
embezzlement, breach of fiduciary duty, other acts of dishonesty against the
Corporation; or (iii) conviction of any felony or crime involving moral
turpitude, this Non-Qualified Stock Option shall expire immediately upon your
termination from the Corporation.
f) You may not transfer, sell, pledge, assign or otherwise dispose of this
Non-Qualified Stock Option, except at death by will or by the laws of descent
and distribution. This Non-Qualified Stock Option shall not be subject to
execution, attachment or similar process except with the express consent of the
Committee.
g) Unless a registration statement under the Securities Act of 1933, as
amended, and applicable state securities laws is in effect with respect to this
Non-Qualified Stock Option or the shares of Stock you acquire upon exercise of
this Non-Qualified Stock Option ("Non-Qualified Stock Option Stock"), you agree
with, and represent to, the Corporation that you are acquiring this Non-
Qualified Stock Option and the Non-Qualified Stock Option Stock for the purpose
of investment and not with a view to transfer, sell, or otherwise dispose of the
Non-Qualified Stock Option Stock. The Corporation may require an opinion of
counsel satisfactory to it prior to the transfer of any Non-Qualified Stock
Option Stock to you to assure at all times that it will be in compliance with
applicable federal and state securities laws.
A copy of the Corporation's 1998 Stock Option Plan is enclosed for your
information.
Dated: ________ _______________________________________________
[PRESIDENT OR OTHER OFFICER OF THE CORPORATION]
ACCEPTANCE:
I hereby accept the terms and provisions of the above Non-Qualified Stock Option
Agreement. I also agree to accept as binding, conclusive, and final all
decisions or interpretations of the Corporation's Board of Directors upon any
questions arising under this Non-Qualified Stock Option.
Dated: ____________________ _______________________________________________
[OPTIONEE]
<PAGE>
Exhibit 10.l0
CARRIER AGREEMENT
BETWEEN
AT&T CORP.
AND
COMMUNICATION SYSTEMS INTERNATIONAL INC.
AVAILABLE: October 24, 1997 and November 30, 1997
--------------------------------------
CONFIDENTIAL AND PROPRIETARY
BETWEEN AT&T AND CS INTL
<PAGE>
TABLE OF CONTENTS
-----------------
Section 1 Acceptance of Offer
Section 2: Service Rates, Terms and Conditions
Section 3. Representations and Warranties of Customer
Section 4. Responsibilities of AT&T
Section 5. Responsibilities of Customer
Section 6. General Terms and Conditions
Schedule A International Outbound Rates
Schedule B Determination of Rates and Charges
Schedule C Connections of Customer Premises Equipment
-i-
CONFIDENTIAL AND PROPRIETARY
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___________________ _____________
CUSTOMER'S INITIALS AT&T INITIALS
<PAGE>
THIS CARRIER AGREEMENT ("Agreement") is made and entered into by and
between AT&T Corp., a corporation organized and existing under the laws of the
State of New York and having an office at 295 North Maple Avenue, Basking Ridge,
New Jersey 07920 ("AT&T) and Communications Systems International, Inc. (CS
INTL), 8 South Nevada, Suite 101, Colorado Springs, Colorado 80903 ("Customer").
The terms and conditions herein constitute an offer that may be accepted by
Customer between October 24, 1997 and November 30, 1997 by its signature below,
but which thereafter expires and is null and void, and may be accepted only
once. This Agreement shall become effective when signed by both parties
("Effective Date") in accordance with the Release and Settlement between the
parties dated ___, 1997.
SECTION 1: ACCEPTANCE OF OFFER
-------------------
AT&T and Customer, acting through their duly authorized representatives,
hereby agree to the terms set forth in Sections 1 through 6 of this Agreement,
together with its Schedules A through C, as of the last signature date below.
CUSTOMER AT&T CORP.
BY___________________________ BY____________________________
_____________________________ ______________________________
Printed or Typed Name Printed or Typed Name
_____________________________ ______________________________
TITLE TITLE
_____________________________ ______________________________
DATE DATE
-1-
CONFIDENTIAL AND PROPRIETARY
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CUSTOMER'S INITIALS AT&T INITIALS
<PAGE>
CARRIER AGREEMENT SECTION 2, PAGE 1 OF 6
BETWEEN AT&T AND CS INTL SERVICE, RATES, TERMS AND CONDITIONS
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CARRIER AGREEMENT
BETWEEN AT&T AND CS INTL
==============================================================================
SECTION 2. SERVICE RATES, TERMS AND CONDITIONS
-----------------------------------
2.1. SERVICES PROVIDED. The following Services are provided under this
----------------
Agreement.
2.1.1. AT&T CARRIER SERVICE - AT&T CARRIER SERVICE ("Carrier Service")
is a virtual private network service that permits outward calling from
designated Central Offices to all Customer-dialed domestic and international
locations. Carrier Service provides only basic calling capabilities. Carrier
Service is furnished for the outbound transmission of voice communications but
may also be used for data, facsimile,.signaling, metering, or other similar
communications, subject to the transmission capabilities of Carrier service, and
the terms and conditions of Section 4. Carrier Service calls are dialed and
completed on a one-plus (1+) basis, without the assistance of an AT&T operator,
and do not include:
. Calling Card calls,
. Person-to-person calls,
. Collect calls,
. Third-number billed calls,
. Conference calls,
. Calls to 500, 700, 800 or 900 Special Service Codes,
. Domestic Intrastate IntraLATA, local toll or local calls,
. INMARSAT and AT&T Maritime Service calls, or
. Audiotext calls.
Types of calling not provided hereunder, but nonetheless routed over the Carrier
Service platform, shall be billed at the applicable AT&T F.C.C. or state tariff
rates. For example, Domestic Outbound Intrastate IntraLATA, local toll, and
local calls that are routed over the Carrier Service platform shall be billed at
the rates specified in the applicable AT&T state tariffs for virtual private
network service.
Carrier Service is provided on a monthly basis. Carrier Service can only be
accessed via DS-1 and/or DS-3 type access. Obtaining access to the Carrier
Service Central Office is the responsibility of Customer.
2.1.2. ACCESS CONNECTION AND LOCAL CHANNEL SERVICE. AT&T ACCUNET Office
Functions and Channel Options, including ISDN Service ("AT&T ACCUNET Service")
is provided as specified in AT&T Tariff F.C.C. No. 9, as it may be amended
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<PAGE>
CARRIER AGREEMENT SECTION 2, PAGE 2 OF 6
BETWEEN AT&T AND CS INTL SERVICE, RATES, TERMS AND CONDITIONS
- ------------------------------------------------------------------------------
from time to time, and AT&T Terrestrial 1.544 Mbps Local Channel Service ("AT&T
Local Channel Service") is provided as specified in AT&T Tariff F. C. C. No. 11,
as amended from time to time, except that these Services are provided hereunder
only for interconnection with the same IXC Switch(es) to which Customer
interconnects its Carrier Service provided hereunder.
2.1.3. MEANING OF "TARIFF". As used herein, "AT&T Tariff F.C.C." shall be
deemed to refer to any generally applicable documentation that replaces the
named tariff pursuant to In re Policy and Rules Concerning the Interstate,
Interexchange Marketplace, CC Docket No. 96-61, FCC 96-424 (October 31, 1996),
or otherwise in accordance with the Telecommunications Act of 1996, if such
replacement occurs.
2.2. SERVICE TERM. The Term of this Agreement is thirteen (13) months
------------
beginning with the first day of the first full billing month on or after
Effective Date of this Agreement (hereinafter referred to as the Customer's
Initial Service Date or CISD) for the Services provided under this Carrier
Agreement. There is no renewal option.
2.3. CARRIER SERVICE INTERNATIONAL COMMITMENTS, RATES AND DISCOUNTS.
--------------------------------------------------------------
2.3.1. CARRIER SERVICE INTERNATIONAL OUTBOUND MINIMUM COMMITMENT (IMC).
Customer shall meet an IMC of $2,400,000 of billing, after all discounts (if
any) have been applied ("Net Billing") for Service Term. The IMC may be
satisfied only by Carrier Service International Outbound usage charges incurred
during those months. If Customer fails to satisfy the IMC by the end of the
Service Term, Customer will be billed a shortfall charge equal to the difference
between the IMC and Customer's actual total Net Billing.
2.3.2. CARRIER SERVICE INTERNATIONAL OUTBOUND MINIMUM QUARTERLY COMMITMENT
(IMQC). Customer shall meet an IMQC of $600,000 of Net Billing per Quarterly
Period as described in Table A, below. If Customer fails to satisfy the IMQC by
the end of each Quarterly Period, Customer will be billed a shortfall charge
equal to the difference between the IMQC and Customer's actual Net Billing for
usage for such Quarterly Period.
Table A
------------------------------------
Quarterly Periods
------------------------------------
Months 1-4
------------------------------------
Months 5-7
------------------------------------
Months 8-10
------------------------------------
Months 11-13
------------------------------------
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CARRIER AGREEMENT SECTION 2, PAGE 3 OF 6
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- ------------------------------------------------------------------------------
2.3.3. CONDITIONS FOR REFUND OF AT&T CARRIER SERVICE - INTERNATIONAL
OUTBOUND SHORTFALL CHARGES. If by the end of the Service Term the Customer has
satisfied the IMC, excluding any paid international outbound shortfall charges,
AT&T will apply as a credit to the Customer's final bill an amount equal to the
shortfall charges paid by Customer during the Service Term.
2.3.4. CARRIER SERVICE INTERNATIONAL OUTBOUND USAGE RATES. Base usage rates
("Base Rates") for Carrier Service International Outbound are specified in
Schedule A.
These rates will apply as set forth below.
2.3.5. Carrier Service International Outbound Volume Discounts. Customer
will receive the following volume discounts off the Base Rates in each month in
which the following conditions are met:
2.3.5.1. For calling to international destinations other than
Countries specified in Table I, up to the applicable Minute Caps, Customer will
receive a discount off the Base Rates in accordance with Table II, below, in any
month in which Customer's International Outbound Gross usage exceeds the
specified Revenue Level:
TABLE I COUNTRIES
WITH MONTHLY MINUTE CAPS: M=MILLIONS, K=THOUSANDS
- --------------------------------------------------------------------------------
BRAZIL- 1M DENMARK KOREA (So.) PHILIPPINES THAILAND
- --------------------------------------------------------------------------------
CHINA INDONESIA MEXICO SPAIN
- --------------------------------------------------------------------------------
TABLE II
---------------------------------------------------
REVENUE LEVEL DISCOUNT LEVEL
----------------------------------------------------
> $250,000 2.5%
----------------------------------------------------
> $350,000 5%
----------------------------------------------------
>$2,500,000 0%
---------------------------------------------------
2.3.5.2 Customer will receive a 2.5% discount on its usage to the
Table I Countries, up to the applicable Minute Cap(s), in any month in which
Customer's Carrier service International Outbound Gross usage exceeds $250,000,
but does not exceed $2,500,000 per month. All incremental minutes of calling
above the applicable Minute Cap, if any, will not be subject to any discount,
but shall be billed at the Base Rate for calling to such country.
2.3.6. RATE INCREASE; CUSTOMER'S RIGHT TO RE-NEGOTIATE. AT&T shall have the
right to increase the rates hereunder on 30 days' written notice to Customer at
any time over the course of the Service Term. Except for rate changes pursuant
to Section 2.3.6.1.
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<PAGE>
CARRIER AGREEMENT SECTION 2, PAGE 4 OF 6
BETWEEN AT&T AND CS INTL SERVICE, RATES, TERMS AND CONDITIONS
- ------------------------------------------------------------------------------
below, in the event that AT&T increases rates to any of the countries specified
in Table III below ("Table III Countries") , Customer may request re-negotiation
of other terms and conditions of the Agreement so as to compensate for the rate
increase. If no agreement is reached within 15 days after AT&T's notice was
provided hereunder, Customer shall have the right to reduce the IMC and IMQC by
the dollar value of the affected Table III Country(ies) . The new IMQC shall be
based on subtracting Customer's average Net Billing for usage to the affected
country, for the three months immediately preceding the notice. The new IMC
shall be the total of the original IMQC multiplied by the number of quarters
completed at the time the new IMQC is to go into effect, plus the new IMQC
multiplied by the remaining quarters in the Agreement. Customer must notify AT&T
in writing of its intent to change the IMC and IMQC within the Agreement no
later than 15 days after AT&T provision of such notice. The new IMQC shall
become effective for the first complete billing month after the month in which
such notice is given.
TABLE III COUNTRIES
- ------------------------------------------------------------------------------
BRAZIL- 1M DENMARK KOREA (So.) PHILIPPINES THAILAND
- ------------------------------------------------------------------------------
CHINA INDONESIA MEXICO SPAIN
- ------------------------------------------------------------------------------
2.3.61. PAYPHONE EXCEPTION. Notwithstanding the foregoing, AT&T
reserves the right to increase from time to time the rates for the Services
provided under this Agreement, regardless of any provisions in this Agreement
that would otherwise stabilize rates or limit rate increases, as a result of
charges imposed on AT&T stemming from an order, rule or regulation of the
Federal Communications Commission or a court having competent jurisdiction
relating to compensation of payphone service providers. Exercise by AT&T of its
rights pursuant to this Section shall not trigger any right by Customer to
renegotiate or terminate the Agreement.
2.3.7. NO OTHER DISCOUNTS. Customer will not receive any other discounts,
credits, or bonuses that are not expressly provided for in this Agreement.
2.3.8. INTERNATIONAL BILLING. AT&T will calculate the length of each Carrier
Service International Outbound call to destinations other than Mexico based upon
rounding to the next higher 6 second period with a minimum billing period of 18
seconds. The total minutes (including any fractional portion) per country will
be multiplied by that country's rate per minute. AT&T will calculate the length
of each Carrier Service International Outbound call to Mexico based upon one (1)
minute timing. The country sub-totals will be added to determine the Customer's
total usage for purposes of calculation of the Customer's attainment levels. The
Customer's total usage will be compared to the volume discount thresholds. Any
applicable volume discounts will be applied in the same month in which the
minutes occurred.
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<PAGE>
CARRIER AGREEMENT SECTION 2, PAGE 5 OF 6
BETWEEN AT&T AND CS INTL SERVICE, RATES, TERMS AND CONDITIONS
- ------------------------------------------------------------------------------
2.4. CARRIER SERVICE DOMESTIC RATES AND DISCOUNTS.
--------------------------------------------
2.4.1. Carrier Service Outbound Domestic Usage Rates. The usage rate for
Carrier Service Outbound Domestic usage is $0.0177 for the initial 18 seconds
and $0.0059 for each additional 6 seconds or fraction thereof for all day parts
and mileage bands.
2.4.2. NO OTHER DISCOUNTS. Customer will not receive any other discounts,
credits, or bonuses whatsoever that are not expressly provided for in this
Agreement.
2.4.3. DOMESTIC BILLING. AT&T will calculate the length of each Carrier
Service Outbound Domestic call based upon rounding to the next higher 6 second
with a minimum billing period of 18 seconds.
2.5. ACCESS AND LOCAL CHANNEL RATES, CREDITS AND WAIVERS.
---------------------------------------------------
2.5.1. RATES. The rate for AT&T ACCUNET Service is the same as specified in
AT&T Tariff F.C.C. No. 9, as amended from time to time. The rate for AT&T Local
Channel Service is the same as specified in AT&T Tariff F.C.C. No. 11, as
amended from time to time.
2.5.2. CREDITS FOR NON-RECURRING AND RECURRING CHARGES. Customer will
receive the following credits against certain tariffed charges paid by Customer
and identified in this paragraph, provided the Customer is current in payment to
AT&T for all Services provided under this Agreement, at the time a credit is to
be applied. If the Customer is not current, the credit will not be applied until
payment is made. AT&T will waive the Nonrecurring Installation Charges for the
AT&T ACCUNET T1.5 or AT&T ACCUNET T.45 Local Channels, Access Connections and
the associated Access Coordination Function Charges ordered in the Total Service
Option provided such service components: (1) are ordered and installed on or
after the CISD; (2) remain in service for at least 12 months. AT&T will also
waive the non-recurring and recurring Access Connection charges on AT&T ACCUNET
T1.5 or AT&T ACCUNET T.45 services when the customer arranges local access with
a local access provider. If the service component is disconnected for any reason
prior to the 12 months, the waived nonrecurring charges will be billed at the
time of disconnect. The waived Nonrecurring and Recurring charges may not exceed
a total of $25,000 for the Service Term.
2.5.3. NO OTHER CREDITS OR DISCOUNTS. The credits provided in this
Subsection are in lieu of any other credits, waivers, promotional offerings or
discounts for the same Services and Functions which may be filed in AT&T F.C.C.
Tariff Nos. 1, 9 and 11.
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CARRIER AGREEMENT SECTION 2, PAGE 6 OF 6
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2.6. EFFECT OF EARLY TERMINATION.
---------------------------
2.6.1. TERMINATION BY CUSTOMER. If Customer terminates this Agreement before
expiration of the Service Term, Customer will be immediately liable for the
difference between the IMQC multiplied by four and Customer's actual usage
charges (less any shortfall charges) through the date of termination, unless 1.)
Customer must provide written notice of termination to AT&T, 2. ) Customer must
be current in payments to AT&T at the time of such notice, and 3.) (a)
concurrent with the termination of this Agreement, Customer must replace this
Agreement with a new carrier agreement for International AT&T Outbound Service
of equal or greater term, volume and revenue commitment and of at least a one
year term, OR (b) Customer must have completed at least six months of the
Service Term and incurred international usage charges sufficient to meet the
IMC.
2.6.2. TERMINATION BY AT&T. If AT&T terminates this Agreement or the
Services provided pursuant to this Agreement, due to Customer's breach of this
Agreement prior to the expiration of the Service Term, Customer will be billed
for and shall pay within 30 days a Termination Charge equal to the IMQC
multiplied by the number of quarters (and/or portion of) remaining in the
Service Term and Customer's actual usage charges (less any shortfall charges),
through the date of termination minus actual usage charges.
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<PAGE>
CARRIER AGREEMENT SECTION 3, PAGE 1 OF 3
BETWEEN AT&T AND CS INTL CUSTOMER REPRESENTATIONS AND WARRANTIES
- --------------------------------------------------------------------------------
CARRIER AGREEMENT
BETWEEN AT&T AND CS INTL
================================================================================
SECTION 3: CUSTOMER REPRESENTATIONS AND WARRANTIES
---------------------------------------
3.1. REPRESENTATIONS AND WARRANTIES. The rates, terms and conditions herein
------------------------------
are expressly conditioned upon the following representations and warranties by
Customer. Customer is an interexchange telecommunications common carrier which
warrants as follows;
3.1.1. Customer has obtained the required operating authority in all
states in which it conducts business, as well as all authority required by the
FCC for resale of telecommunications services, including but not limited to
authority required pursuant to Section 214 of the Communications Act of 1934, 47
U.S.C. (S)214.
3.1.2. Customer complies and will continue to comply at all times with
all federal and state laws and regulations applicable to the sale and provision
of service to its Users and End-users, including but not limited to those laws
and regulations applicable to the authorization and proof of authorization
necessary to convert an End-user's former service to Customer's service as the
End-user's Primary Interexchange Carrier.
3.1.3. Customer has no outstanding balances for any AT&T service as of
the Effective Date. This requirement includes affiliates, parents, subsidiaries,
predecessors and successors of Customer and any entity owned 20% or more by any
person or entity which also has an ownership interest of 20% or more in Customer
on the Effective Date.
3.1.4. Customer will utilize the Service offered hereunder only for
lawful purposes, including but not limited to resale of the Service or
components thereof. In the event that Customer resells the service provided
hereunder, it will do so only under its own names, tradenames, logos, trademarks
or service marks. Customer will not publish or use any advertising, sales
promotions, press releases, or other publicity matters which use AT&T's
corporate or trade names, logos, trade marks, service marks, trade dress, or
other symbols that serve to identify and distinguish AT&T from its competitors
(or which use confusingly similar corporate or trade names, logos, trademarks,
service marks, trade dress or other symbols), and will not conduct business
under AT&T's corporate or trade names, logos, trademarks, service marks, trade
dress, or other symbols that serve to identify and distinguish AT&T from its
competitors (or under any confusingly similar corporate or trade names, logos,
trademarks, service marks, trade dress or other symbols). Customer (including
its agents, representatives and independent contractors) will not indicate or
imply to any person or entity that it is AT&T which is selling or providing
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CARRIER AGREEMENT SECTION 3, PAGE 2 OF 3
BETWEEN AT&T AND CS INTL CUSTOMER REPRESENTATIONS AND WARRANTIES
- --------------------------------------------------------------------------------
service to Customer's End-users, or that it is affiliated or authorized by AT&T
to sell or provide such service to them or that it is selling or providing such
service to them jointly or in collaboration or partnership with AT&T, or as the
agent of AT&T. Customer will not be deemed to violate the provisions of this
Section 3.1.4. by making statements or by publishing or disseminating written
materials that include the phrase "[customer] utilizes the AT&T Network to carry
a portion of its traffic," provided that said phrase is not used as a headline
or part of Customer's logo " is used only once in any written document, does not
appear more prominently than the surrounding text in said document, or, in the
case of a verbal statement, is not used in such a manner as to confuse the
listener concerning whether it is AT&T or Customer that is selling or providing
service to Customer's end-users, and is true at the time of publication or
utterance. Said phrase may not appear in any document, nor be made in any
statement in which Customer's name does not appear prominently, or in which
Customer is not clearly identified as the carrier providing service to the
End-user.
3.1.5. Customer has had no complaints or proceedings brought against
it, within 18 months prior to its execution of this Agreement, by the FCC, by
any state public utilities commission, by any state Attorney General, or by any
other federal or state authority charging Customer with misrepresenting its
affiliation or relationship to AT&T or to any other carrier whose service it has
resold, and no such complaints or proceedings are pending as of Customer's
execution of this Agreement.
3.1.6. Customer shall initiate use of Carrier Service provided hereunder
only to and from an IXC switch or switches owned and operated by Customer. An
IXC Switch is a telecommunications switch with the following characteristics:
(a) it is capable of being used for the transmission of calls that are routed by
a Local Exchange Carrier to the IXC Switch using Feature Group D Access, or a
functional equivalent; (b) it is capable of interconnecting circuits or
transferring calling between circuits; (c) it has a maximum capacity of not less
than 100,000 access lines; (d) it is used by the Customer to provide Common
Carrier service to end users and (e) is not used to provide switching functions
directly to end users without an interconnecting access arrangement between end
user and IXC switch.
3.1.7 Customer shall have an Average Length of Call ("ALOC") for Carrier
Service of at least 3.0 minutes.
3.1.8. Customer must not exceed a total of 3 dedicated access locations.
3.1.9. All the Customer's usage must be generated from dedicated access
locations.
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CARRIER AGREEMENT SECTION 3, PAGE 3 OF 3
BETWEEN AT&T AND CS INTL CUSTOMER REPRESENTATIONS AND WARRANTIES
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3.2. AT&T REMEDIES. If at any time during the term of this Agreement Customer
------------
is in breach or fails to comply with the representations and warranties
contained in Subsection 3.1, above, such breach or failure shall constitute a
material breach of this Agreement which shall entitle AT&T to the following
remedies.
3.2.1. TERMINATION. If Customer fails to comply with any representation or
warranty in Subsections 3.1.1. through 3.1.6., AT&T may terminate this Agreement
and the Service provided hereunder on thirty (30) days written notice. Customer
shall have the opportunity to cure such failure during the thirty (30) day
period following such notice, and, if such cure is demonstrated to the
satisfaction of AT&T, no termination pursuant to this Paragraph shall occur. In
the event of such termination, Customer shall indemnify, defend and hold
harmless AT&T from any and all complaints, causes or action or other claims
brought against AT&T by any of Customer's End-users due to said termination.
3.2.2. 15% USAGE SURCHARGE. AT&T shall monitor Customer's compliance with
the representations and warranties contained in Section 3.1.7 through 3.1.9 at
the end of each month following the CISD ("Monitoring Periods"). If, at the end
of each such Monitoring Period, the Customer has failed to satisfy any of such
representations and warranties, AT&T will notify the Customer in writing of the
specific failure(s) and the Customer will be billed an amount equal to the
Discounts and Credits specified in Sections 2.3 an 2.5, preceding, and a 15%
surcharge on all International usage billed for the Service as to which Customer
has failed to comply with the representation or warranty during the applicable
monitoring Period (s).
3.2.2.1 CURE PERIOD. As to the representations and warranties in
Section 3.1.7 only, if Customer is found to be non-compliant with such
Section, Customer shall have one opportunity to cure one instance of such
noncompliance by maintaining an ALOC of at least 3 minutes for a Cure Period
of one month immediately following the Monitoring Period during which Customer
was not in compliance, so long as (1): the ALOC during the Monitoring Period
for which Customer was out of compliance with Section 3.1.7 was over 2 minutes
and 10 seconds; and (2): Customer is current in payments to AT&T at the time
of completion of the Cure Period. If Customer's ALOC is at least 3 minutes for
the Cure Period, Customer will receive a one-time Credit in the amount of the
15% surcharge applied in the preceding Monitoring Period. Customer shall be
able to invoke the Cure Period specified herein only once during the term of
this Agreement.
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CARRIER AGREEMENT SECTION 4, PAGE 1 OF 2
BETWEEN AT&T AND CS INTL RESPONSIBILITIES OF AT&T
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CARRIER AGREEMENT
BETWEEN AT&T AND CS INTL
================================================================================
SECTION 4: RESPONSIBILITIES OF AT&T
------------------------
4.1. PROVISION OF SERVICE. Subject to its Correspondent Agreements and
--------------------
regulation by Federal and State authorities, AT&T shall provide Service in
accordance with its standard practices and procedures for the operation of its
network. Service shall be available 24 hours per day, seven days per week.
AT&T is responsible for the provision of Service from station to station, but is
not responsible for the quality of transmission or signaling on the Customer's
side of the interface at a Customer's premises. Service is furnished subject to
the availability of the service components required. Customer acknowledges that
it has been advised by AT&T that temporary capacity constraints may exist in
some areas with respect to the availability of Interoffice Channels for ACCUNET
T45 Service as described and defined in AT&T Tariff F.C.C. No. 9. In the event
that, during the term of this Agreement, Customer orders services which are
impacted by such constraints, AT&T will provide Customer with a good-faith
estimate of the availability date for such services.
4.2. INSTALLATION. Upon execution of this Agreement AT&T shall establish a due
------------
date for commencement of installation of Service and confirm said date with the
Customer (CISD). Customer may delay said due date for commencement of
installation when the Customer's written request for said delay is received by
AT&T at least five (5) business days prior to said due date, provided that the
delay of said due date shall not exceed 30 cumulative calendar days. AT&T will
make every reasonable effort to commence installation of Service by the due
date, but Customer acknowledges that in some cases a delay in commencement of
installation may be unavoidable. If commencement of installation is delayed for
more than 30 days beyond the due date, and such delay is not requested or caused
in whole or in part by the Customer, the Customer may cancel its order for
Service pursuant to this Agreement and shall not thereby be considered to have
breached this Agreement; such cancellation shall be Customer's sole remedy for
such delay.
4.3. MAINTENANCE. AT&T will maintain Service in conformity with its standard
-----------
network operating procedures.
4.4. LIMITATION OF LIABILITY. AT&T (including its subsidiaries, affiliates,
-----------------------
predecessors, successors and assigns) makes no warranties, express or implied,
and specifically disclaims any warranty of merchantability or fitness for a
particular purpose with respect to services or products provided pursuant to
this agreement. AT&T's liability for service interruptions for any service
provided pursuant to this agreement shall not exceed an
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amount equal to a pro-rated portion of the recurring charges provided for under
this agreement for the service affected for the period(s) during which said
service was affected. This limitation of liability shall apply regardless of the
form of action, whether in contract, tort, warranty, strict liability, or
negligence (including without limitation active and passive negligence). In no
event shall AT&T be liable for consequential, special or indirect damages or
lost profits sustained by reason of its performance or non-performance of this
Agreement, or for any failure, breakdown, or interruption of service, whatever
shall be the cause, or however long it shall last, and regardless of whether
anyone has been advised of the possibility of such damages. AT&T shall have no
liability for damages caused (1) by Customer's failure to perform its
responsibilities under this agreement, or (2) by the acts of third parties
(including without limitation Customer's users or end users). AT&T does not
guarantee or make any warranty with respect to the service provided pursuant to
this agreement when used in an explosive atmosphere. This agreement does not
create any claim or right of action, nor is it intended to confer any benefit on
any third party, including but not limited to any user or end-user of Customer.
The limitations of liability set forth in this agreement shall survive failure
of an exclusive remedy.
4.5. SERVICE, CHANNELS OR EQUIPMENT OF OTHERS. AT&T is not liable for damages
----------------------------------------
associated with service, channels, or equipment that it does not furnish. AT&T
does not provide Customer equipment.
4.6. NO PATENT OR SOFTWARE LICENSE. No license under patents or software
----------------------------
copyrights (other than a limited license to use) is granted by AT&T or shall be
implied or arise by estoppel, with respect to Service offered under this
Agreement.
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BETWEEN AT&T AND CS INTL RESPONSIBILITIES OF CUSTOMER
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CARRIER AGREEMENT
BETWEEN AT&T AND CS INTL
SECTION 5: RESPONSIBILITIES OF CUSTOMER
----------------------------
5.1. PLACEMENT OF ORDERS AND COMPLIANCE WITH REGULATIONS. Customer is
---------------------------------------------------
responsible for timely payment for all calls placed using service provided
hereunder, for placing any necessary orders and for assuring that it, its Users
and its End-users comply with the provisions of this Agreement and with all
applicable federal and state laws and regulations utilizing in part end-user
certification for verification of compliance. Customer's obligations include
payment for Service calls or services:
- Originated at the Customer's number(s),
- Accepted at the Customer's number(s) (e.g., Collect Calls),
- Billed to the Customer's number(s) via Third Number Billing if the
Customer is found to be responsible for such call or service, the use of a
Calling Card, the use of AT&T EasyReach Service, or the use of a Company-
assigned Special Billing Number, and
- Incurred at the specific request of the Customer.
5.2. BILLING; PAYMENT DUE DATES; RESTRICTION OR DISCONNECTION OF SERVICE;
-------------------------------------------------------------------
COLLECTION CHARGES; INTEREST. Customer is liable for all amounts due to AT&T
- ----------------------------
hereunder, subject to the following. AT&T will provide to Customer a monthly
bill for each of the Services provided under this Agreement, separately or
consolidated at AT&T's option. Said bill or bills will be sent to one Customer
location designated by the Customer. Payment is due on the 20th calendar day
from the Customer's receipt of a given bill ("Due Date"). Customer shall pay
each such bill on or before the due date by wire transfer in accordance with
AT&T's instructions. If full payment by wire transfer is not received by AT&T
on the Due Date, AT&T will notify Customer that such Service will be
disconnected unless payment is received by the 5th calendar day following the
Due Date ("Disconnect Date"). If payment is not received by the Disconnect Date
and AT&T disconnects customer for non-payment, AT&T will again notify Customer
on the day after the Disconnect Date that the disconnect order was issued.
Customer shall reimburse AT&T for reasonable attorneys fees and any other costs
associated with collecting delinquent payments from Customer. At AT&T's option,
interest charges may be added to any past due amounts at the rate of one and
one-half per cent (1 1/2%) per month, unless such interest rate exceeds the
maximum allowed by applicable law, in which case interest shall be at the
maximum lawful rate.
5.2.1. DATE OF RECEIPT OF BILL. Receipt by Customer of a given bill shall be
presumed to have occurred on the date reflected in the business records of
any outside
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overnight delivery service utilized by AT&T, or three business days from the
date of mailing by AT&T via first-class U.S. mail, depending on the delivery
method selected by AT&T. AT&T shall utilize overnight delivery service whenever
practicable, based on its internal business procedures. Upon agreement between
the parties, AT&T shall attempt to provide Customer within 48 hours with a call
detail in a paper form, for the given month, if requested by the Customer and
only if the Customer experiences an emergency requiring such call detail in a
paper form.
5.2.2. WEEKLY BILLING AND PAYMENT OPTION. Notwithstanding the provisions of
Section 5.2 and 5.2.1 above and 5.2.3 following, Customer shall pay its bills in
accordance with this Section 5.2.2. AT&T shall provide to Customer every Monday
an Interim Statement covering the past week's usage. Payments for Services shall
be made by Customer every Wednesday morning based on such Interim Statement.
Monthly bills will continue to be rendered pursuant to Section 5.2.
5.2.2.1 SUSPENSION OF SERVICE. If full payment for actual usage plus
Commitment Shortfall, if any, is not received by AT&T by Wednesday noon in any
given week, AT&T shall have the right to suspend Service hereunder that day upon
oral or faxed notice to Customer. AT&T shall restore service promptly upon
receipt of such past due amounts, subject to its rights under Section 5.2 above.
5.2.3. MEANS OF PAYMENT. Payment shall be effected by wire transfer to
AT&T's account at Mellon Bank, 3 Mellon Bank Center, Room 153-2614, Pittsburgh,
PA 15259-0001, Account No. 1265748, ABA/Trans Routing No. 043000261, or any
other bank or account that AT&T shall identify in writing to Customer from time
to time.
5.3. BILLING AND COLLECTION FROM END-USERS. Customer shall be solely
-------------------------------------
responsible for rendering of bills to and collection of charges from its End
users. Failure of Customer to bill and collect charges from its end-users shall
not excuse in whole or in part Customer's responsibilities to AT&T under this
Agreement, including but not limited to the responsibility to render to AT&T
timely payment of charges.
5.4. INTERFACING AND COMMUNICATING WITH END-USERS. Interfacing and
--------------------------------------------
communicating with End-users shall be the sole responsibility of Customer with
respect to any use that Customer may make of the Service provided pursuant to
this Agreement to in turn provide service to other persons or entities. Such
interfacing and communicating shall include without limitation installation of
service, termination of service, placing of orders, billing and billing
inquiries, reporting of service outages and problems, collection of charges and
handling and resolution of all disputes.
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BETWEEN AT&T AND CS INTL RESPONSIBILITIES OF CUSTOMER
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5.5. DEPOSITS. AT&T may require the Customer, prior to or during the provision
--------
of Service pursuant to this Agreement, to tender a deposit in an amount to be
determined by AT&T in its reasonable discretion to be held by AT&T as a
guarantee for the payment of charges. To determine the financial responsibility
of Customer and/or the specific amount of any deposit required, AT&T may rely
upon commercially reasonable factors to assess and manage the risk of
non-payment, including but not limited to payment history for telecommunications
service (including such service purchased from AT&T), number of years in
business, bankruptcy or insolvency history, current AT&T account treatment
status, financial statement analysis, and commercial credit bureau rating. It
shall be Customer's responsibility to provide to AT&T upon request such
information as is necessary for AT&T to determine the financial responsibility
of Customer, including but not limited to Customer's tax returns, audited or
unaudited financial statements and loan applications. A deposit does not relieve
Customer of the responsibility for the prompt payment of bills on presentation
or the due date appearing on the face of the bills. In lieu of a cash deposit,
AT&T will accept Bank Letters of Credit and Surety Bonds which have been
approved by AT&T. Interest will be paid to Customer for the period that a cash
deposit is held by AT&T. The interest rate used will be compound interest
compounded monthly at the rate of six percent annually unless a different rate
has been established by the appropriate legal authority in the state where the
Service offering is located. The failure of Customer to post a deposit as
required by AT&T pursuant to this paragraph shall constitute a material breach
of this Agreement by Customer which shall entitle AT&T to terminate this
Agreement and the Service provided hereunder upon five (5) business days written
notice to Customer. When the Service for which the deposit has been required is
discontinued, the deposit will be applied to the final bill and any credit
balance will be refunded to the Customer with applicable interest accrued.
5.6. CUSTOMER'S USE OF SERVICE. Customer may use the Services provided pursuant
-------------------------
to this Agreement for any lawful purpose consistent with the transmission and
switching parameters of the telecommunications network, and may resell its use
(or the use of any part thereof) to a third party in the normal course of the
Customer's business, subject to the following:
5.6.1. ABUSE. The abuse of Service is prohibited. The following activities
-----
constitute abuse:
5.6.1.1. Using Service to make calls that might reasonably be
expected to frighten, abuse, torment, or harass another, or
5.6.1.2. Using Service in such a way that it interferes unreasonably
with the use of Service or AT&T's network by others.
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In any instance in which AT&T believes in good faith that there is abuse
of Service as set forth above, AT&T may, upon 5 days prior written notice
to the Customer, and without liability on the part of AT&T, restrict,
suspend or discontinue providing Service, unless Customer cures such
abuse to AT&T's reasonable satisfaction within such period.
5.6.2. FRAUDULENT USE. The fraudulent use of, or the intended or
--------------
attempted fraudulent use of, Service is prohibited. The following
activities constitute fraudulent use:
5.6.2.1. Using Service to transmit any message or code, locate a person,
or otherwise give or obtain information, without payment for Service, or
5.6.2.2. Using or attempting to use Service with the intent to avoid the
payment, either in whole or in part, of any charges by any means or
device, or
5.6.2.3. Using Service to carry calls that originate on the network of a
facilities-based interexchange carrier other than AT&T and terminate
disproportionately to locations for which the cost to AT&T of terminating
switched access is above the average cost of terminating switched access,
based on the published access tariffs of local exchange companies.
In any instance in which AT&T believes in good faith that there is
fraudulent use of Service as set forth above, AT&T may, immediately and
upon written notice to the Customer, and without liability on the part of
AT&T, restrict, suspend or discontinue providing Service.
5.6.3. INTERFERENCE, IMPAIRMENT OR IMPROPER USE. Customer may not use
Service in any manner that subjects AT&T personnel or non-AT&T personnel to
hazardous conditions or results in immediate harm to the AT&T network or other
AT&T services. In any instance in which AT&T believes in good faith that Service
is being used in such manner, AT&T may immediately restrict Service on a
temporary basis. In such cases, AT&T will make a reasonable effort to give the
Customer prior notice. In the event that Customer does not provide to AT&T
within five (5) business days of the temporary restriction of Service acceptable
proof that said use has ceased and that appropriate measures have been taken to
prevent its recurrence, AT&T may immediately and without further notice
terminate Service.
5.7. ACCESS TO CUSTOMER'S PREMISES. The Customer is responsible for arranging
-----------------------------
premises access at any reasonable time so that AT&T personnel may install,
repair,
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BETWEEN AT&T AND CS INTL RESPONSIBILITIES OF CUSTOMER
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maintain, inspect or remove Service components. Premises access must be made
available at a time mutually agreeable to the Customer and AT&T.
5.8. DUTY TO INDEMNIFY AND DEFEND. Customer shall indemnify, defend, and hold
----------------------------
harmless AT&T and its directors, officers, employees, agents, parent,
subsidiaries, successors, and assigns from all claims, damages and expenses
(including reasonable attorneys' fees) arising out of or resulting from, in
whole or in part, the acts or omissions of Customer or its End-users, their
employees, agents or contractors affiliated companies and their employees,
agents or contractors, including but not limited to claims for libel, slander,
invasion of privacy, or infringement of copyright arising from any communication
and claims for patent infringement arising from combining or using facilities or
equipment furnished by AT&T in connection with facilities or equipment furnished
by others. Customer shall also indemnify, defend and hold AT&T harmless for all
causes of action, claims, liabilities or expenses asserted or incurred by any of
Customer's Users or End-users arising out of any failure, breakdown, or
interruption of service provided to Customer by AT&T or to End-users by
Customer. Customer shall indemnify, defend and hold AT&T harmless for all causes
of action, claims, liabilities or expenses asserted or incurred by Customer's
End-users due to Customer's marketing efforts, including but not limited to
Customer's violation of laws and regulations applicable to the authorization and
proof of authorization necessary to convert an End-user's former service to
customer's service as the End-user's Primary Interexchange Carrier. AT&T shall
be indemnified, defended, and held harmless by the Customer, Users and End-users
against all claims, losses, or damages by any person relating to such service
when used in an explosive atmosphere.
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BETWEEN AT&T AND CS INTL GENERAL TERMS AND CONDITIONS
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CARRIER AGREEMENT
BETWEEN AT&T AND CS INTL
SECTION 6: GENERAL TERMS AND CONDITIONS
----------------------------
6.1. ASSIGNMENT. Customer may not assign this Agreement in whole or in part
----------
without the prior written consent of AT&T, which shall not be unreasonably
withheld. AT&T may, in its discretion, condition its consent to such
assignment upon the posting of an appropriate deposit by the assignee pursuant
to Paragraph 5.5. of this Agreement. AT&T reserves the right to deny or revoke
its consent to such assignment at any time if the assignee proves unwilling or
unable to comply with the representations and warranties set forth in Section 3
of this Agreement, in which event the Customer shall remain or again become
responsible for performance of all terms of this Agreement. This provision shall
not affect the Customer's right to resell Service. Further, any resale or
assignment shall not release the original Customer from its obligations under
this Agreement.
6.2. COMBINATION WITH OTHER SERVICES OR OFFERS. The terms and conditions of
-----------------------------------------
this AT&T Carrier Agreement do not apply to services that may be purchased by
Customer pursuant to any other AT&T Carrier Agreement, any AT&T Contract Tariff,
or any AT&T F.C.C. or state tariff not specifically referred to herein.
Similarly, except as specified herein, Customer may not apply or take the
benefit of any discounts, credits or promotions available through any other AT&T
Carrier Agreement, any AT&T Contract Tariff or other AT&T F.C.C. or state tariff
in conjunction with the Services provided hereunder.
6.3. INDEPENDENT PARTIES. The relationship established by this Agreement
-------------------
shall in no way constitute AT&T (or its agents or employees) as a partner, agent
or fiduciary of Customer. The relationship established by this Agreement shall
in no way constitute the Customer (or its agents or employees) as a partner,
agent or fiduciary of AT&T. The provision of Service described in this Agreement
does not establish any joint undertaking, joint venture, or fiduciary
relationship between AT&T and Customer.
6.4. ACKNOWLEDGMENT OF RIGHT TO COMPETE. Customer acknowledges and understands
----------------------------------
that it remains at all times solely responsible for the success and profits of
its business, and that AT&T makes no promises, warranties or representations
regarding the Customer's business success or prospects of business success in
connection with the provision of service pursuant to this Agreement. Customer
acknowledges and understands that AT&T will continue to market AT&T services
directly to the public and that such marketing may from time to time bring AT&T
into direct or indirect competition with Customer, and that AT&T may also market
its services to competitors
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BETWEEN AT&T AND CS INTL GENERAL TERMS AND CONDITIONS
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of Customer. Customer acknowledges and understands that nothing in this
Agreement diminishes or restricts in any way the rights of AT&T to engage in
competition with Customer or to market its services to competitors of Customer.
6.5. USE OF PROPRIETARY INFORMATION. In the event that either Customer or
------------------------------
AT&T, in the course of performance of their obligations to each other under this
Agreement, obtains or receives proprietary information from the other, each
agrees to use such information only for the purpose of complying with its
obligations under this Agreement and in particular not to use such information
for its own marketing purposes. Customer acknowledges that AT&T may use for its
own marketing purposes any and all information that it obtains from sources
other than Customer, including but not limited to information that AT&T may have
regarding Customer's End-users as a result of the past or present sale or
provision by AT&T of telecommunications services or equipment to said End-users.
6.6. FORCE MAJEURE. Neither party nor its affiliates, subsidiaries,
-------------
subcontractors, or parent corporation shall be liable in any way for delay,
failure in performance, loss or damage due to any of the following: fire,
strike, embargo, explosion, power blackout, earthquake, volcanic action, flood,
war, water, the elements, labor disputes, civil or military authority, acts of
God, acts of the public enemy, inability to secure raw materials, inability to
secure products, acts or omissions of carriers, or other causes beyond its
reasonable control, whether or not similar to the foregoing.
6.7. SEVERABILITY. If any portion of this Agreement shall be found to be
------------
invalid or unenforceable, such portion shall be void and of no effect, but the
remainder of the Agreement shall continue in full force and effect unless the
Agreement fails of its essential purpose without the voided portion.
6.8. NOTICES. All notices, identifications, formal requests or other formal
-------
communications required or desired to be given in connection with this
Agreement, shall be in writing and shall be effective when delivered in person,
mailed by registered or certified post or sent by Telex or facsimile ("FAX") to
the recipient party, unless the parties otherwise agree in writing. Notice
shall be addressed to the following:
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CARRIER AGREEMENT SECTION 6, PAGE 3 OF 5
BETWEEN AT&T AND CS INTL GENERAL TERMS AND CONDITIONS
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If to AT&T: If to Customer:
Mr. Thomas Nelson Mark Lyons
General Manager Marketing Manager
AT&T Carrier Solutions CS International
7979 East Tufts Ave. Rm. 340 8 South Nevada, Suite 101
Denver, CO Colorado Springs, CO 80903
Voice: 719-471-3332
Fax: 719-471-2893
6.9. MODIFICATION AND WAIVER. This Agreement may be modified only by a writing
----------------------
signed by both parties. The failure of a party to enforce any right under this
Agreement at any particular point in time shall not constitute a continuing
waiver of any such right with respect to the remaining term of this Agreement,
or the waiver of any other right under this Agreement.
6.10. COMPLIANCE WITH LAWS. Each party is responsible for its own compliance
--------------------
with al1 laws and regulations affecting its business, including but not limited
to the collection and remittance of all taxes and other levies imposed by law.
6.11. CHOICE OF LAW. The domestic law of the State of Colorado, except its
-------------
conflict-of-laws rules, shall govern the construction, interpretation, and
performance of this Agreement.
6.12. CONFIDENTIALITY. The terms, conditions, and rates contained in this
---------------
Agreement are confidential, and shall remain so unless and until it shall be
determined by the Federal Communications Commission ("Commission") that legal
requirements, including the Communications Act of 1934 (or any subsequent
legislation) and the regulations promulgated thereunder require the filing of
this Agreement with the Commission, or unless the Commission (or other
government entity with applicable jurisdiction) orders the filing of this
Agreement pursuant to authority granted by law or regulation. In such event,
the party charged with such filing shall file the Agreement as required or
ordered and shall request confidential treatment in connection with such filing.
Absent such a filing requirement coupled with a denial of confidential
treatment, neither party shall disclose the terms or conditions of this
Agreement to any third party, nor issue any public statements relating to this
Agreement without the written consent of the other party, unless such disclosure
or statement is reasonably believed by the party to be compelled by governmental
authority or legal process or is made in connection with the enforcement of this
Agreement. A disclosing party shall furnish reasonable prior notice to the
other party before making the statement or disclosure unless prohibited by law
from doing so.
6.13. DISPUTE RESOLUTION. If a dispute arises out of or relates to this
------------------
Agreement, or its breach, the parties agree to submit the dispute to a sole
mediator selected by the parties
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or, at any time at the option of a party, to mediation by the American
Arbitration Association ("AAA"), to be held at a mutually agreed location. If
not resolved by mediation, it shall be referred to a sole arbitrator selected by
the parties within thirty (30) days of the mediation or, in the absence of such
selection, to AAA arbitration which shall be governed by the United States
Arbitration Act and judgment on the award may be entered in any court having
jurisdiction. The referral shall be to three arbitrators in the event that the
aggregate claims of any party with respect to a dispute exceed $20,000,000.00.
The arbitrator(s) may not limit, expand or otherwise modify the terms of this
Agreement. The Arbitrator(s) shall not have the authority to award punitive or
other non-compensatory damages to either party. The non-prevailing party, as
determined by the arbitrator or mediator, shall pay the attorneys fees and
related costs and expenses of mediation and arbitration of the prevailing party.
The parties, their representatives, other participants and the mediator and
arbitrator shall hold the existence, content and results of mediation and
arbitration in confidence.
6.14. TRADE NAMES, TRADEMARKS, SERVICE MARKS AND REGISTERED MARKS. Neither
-----------------------------------------------------------
Customer nor AT&T shall use the other's trade names, trademarks or service marks
("Marks") without the prior written approval of the other party. Neither shall
display or use the other's Marks, nor permit the same to be displayed or used by
third parties. Nothing in this Agreement creates in a party rights in the marks
of the other.
6.15. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the
----------------
parties with respect to the subject matter hereof and supersedes all prior
written or oral agreements, proposals or understandings.
6.16. DEFINITIONS. As used in this Agreement, the definitions set forth in
-----------
AT&T Tariff F.C.C. Nos. 1. 9 and 11 shall apply except to the extent that they
are modified or supplemented as follows or elsewhere in this Agreement
6.16.1. "USERS" OR "END-USERS": Those persons or entities to which
Customer provides service as a telecommunications common carrier utilizing the
Service provided to Customer by AT&T pursuant to this Agreement.
6.16.2. "DISPUTE": Any controversy or claim between the parties under this
Agreement or which relates directly or indirectly to this Agreement or the
Services provided hereunder, whether based on contract, product liability,
statute, tort (including negligence or strict liability) or other legal or
equitable theory, whenever brought, between the parties or any of their
employees or agents.
4
CONFIDENTIAL AND PROPRIETARY
BETWEEN AT&T AND CS INTL
___________________ _____________
Customer's Initials AT&T Initials
<PAGE>
CARRIER AGREEMENT SECTION 6, PAGE 5 OF 5
BETWEEN AT&T AND CS INTL GENERAL TERMS AND CONDITIONS
- ------------------------------------------------------------------------------
6.17. DEFAULT. If at any time during the term of this Agreement either party
-------
shall commit an act of bankruptcy within the meaning of the United States
Federal Bankruptcy Act, or bankruptcy, receivership, insolvency, reorganization,
dissolution, liquidation, or other ]proceedings shall be instituted by or
against either party or all or any substantial part of its property under an
applicable law of the United States or any state thereof, and such proceeding
shall not be dismissed within ninety (90) calendar days, the non-defaulting
party shall have the right to terminate this Agreement.
5
CONFIDENTIAL AND PROPRIETARY
BETWEEN AT&T AND CS INTL
___________________ _____________
Customer's Initials AT&T Initials
<PAGE>
Exhibit 10.19
ONE WILSHIRE ARCADE IMPERIAL, LTD.
FIRST AMENDMENT TO LEASE RE LICENSE
FOR USE OF TELECOMMUNICATIONS CONDUIT
AND SPECIAL CONDUIT INTERCONNECTION ROOM
PARTIES: ONE WILSHIRE ARCADE IMPERIAL, LTD,
a California Limited Partnership
624 S. Grand Avenue, Suite 1207
Los Angeles, CA 90017
("Landlord")
PRIMECALL, INC.
a Washington corporation
624 So. Grand Avenue
Suite 2840
Los Angeles, California 90017
("Tenant")
DATE: June 24, 1997
PLACE: Los Angeles, California
RECITALS
--------
A. Landlord is the owner of the One Wilshire Building, located at 624 S.
Grand Avenue, Los Angeles, California 90017 (the "Building"). Landlord leases to
Tenant Suite 2840 in the Building (the"Premises") pursuant to a written lease
dated June 10, 1996, as amended to date (the "Lease").
B. Landlord has set aside a portion of the fourth floor of the Building
for use as a special conduit room (the "Conduit Room") and has set aside a
portion of the Building's parking elevator shaft for use as a special conduit
shaft (the "Conduit Shaft"). The purpose of the Conduit Room and the Conduit
Shaft will be to facilitate interconnections between various telecommunications
company tenants in the Building who elect to participate.
C. Tenant wishes to obtain a license from Landlord for use of the Conduit
Room, in common with others, and use of certain conduit space (the "Connecting
Conduit") running from the Premises through the Conduit Shaft to the Conduit
Room. Landlord is willing to give Tenant a non-exclusive license, revocable by
Landlord at will under the circumstances described in Section 5 below, for use
of the Conduit Room and the Connecting Conduit on the terms and conditions set
forth below.
NOW THEREFORE, the parties hereby agree as follows:
1
<PAGE>
AGREEMENT
---------
1. License for Use of Conduit. Landlord hereby grants to Tenant a
--------------------------
non-exclusive license, revocable by Landlord at will under the circumstances
described in Section 5 below, for use of the Conduit Room and the Connecting
Conduit. Such use shall be on the terms and conditions set forth in this
Amendment. Tenant shall have the right to commence such use on or after the date
Landlord first makes the Conduit Room available for use by Landlord's licensees
following Landlord's construction of the Conduit Room and installation of the
Connecting Conduit (the "Effective Date"). If for any reason the Conduit Room
has not been constructed or the Connecting Conduit has not been installed by
the estimated Effective Date of August 1, 1997, Landlord shall have no liability
to Tenant for such delay. However, in such event, Tenant, as Tenant's sole and
exclusive remedy, shall have no obligation for the monthly license fee described
in Section 2 until the Conduit Room has been constructed, the Connecting Conduit
has been installed, and the Effective Date has occurred.
In connection with Tenant's use of the Conduit Room, Tenant shall be
provided with use of the following items ("Landlord Installations") in the
Conduit Room in the quantities indicated:
______ 22-inch relay racks
1 2' by 2' lockable cabinets
------
______ 4' by 6' lockable cages
The Connecting Conduit shall run from the Premises and through the Conduit
Shaft to one of Tenant's racks, cages or cabinets in the Conduit Room, as
designated by Tenant. Landlord, in its reasonable discretion, shall designate
which conduit in the Conduit Shaft shall be used for the Connecting Conduit. The
Connecting Conduit shall consist of conduit in the following quantities and
sizes:
1 1-inch conduits
------
______ 4-inch conduits
Tenant acknowledges that other tenants and licensees in the Building will
also be using similar Landlord Installations in the Conduit Room. Tenant agrees
to use the Conduit Room only for the purpose of facilitating interconnections
between Tenant's telecommunications system and the telecommunications systems of
other tenants and licensees who reserve Landlord Installations in the Conduit
Room and who consent in writing to such an interconnection. Tenant agrees not to
store, install or use any equipment, conduit, cable, connecting lines or other
property of Tenant in the Conduit Room for any other purpose. Tenant shall
cooperate in keeping the Conduit Room locked and in restricting access to the
Conduit Room to employees, contractors and other persons who need access in
order to facilitate such interconnections. In no event shall Tenant cause (or
permit its employees, representatives, contractors or invitees to cause) any
interference with or damage to the Landlord Installations, equipment, conduits,
cable, wiring or connecting lines owned or used by other tenants in the Conduit
Room. Landlord shall equip the Conduit Room with security cameras and a 24-hour
security access system. Landlord shall also provide all tenants and licenses of
Landlord who use the Conduit Room with standard specifications for all wiring,
cabling and connecting lines to be installed in the Conduit Room by such tenants
or licensees. Landlord also shall have the right, in Landlord's reasonable
discretion, to enforce such other security measures and installation guidelines
as Landlord deems appropriate. However, Landlord shall have no liability to
Tenant for any damage or in terference caused by any person to the Landlord
Installations assigned to Tenant or to the cable, wiring, connecting lines,
equipment or other property of Tenant in the Conduit Room or the Connecting
Conduit.
Landlord's only obligation to Tenant regarding the installation of
facilities pursuant to this Amendment shall be to install the Landlord
Installations assigned to Tenant in the Conduit Room and the Connecting Conduit.
The cost of such work, together with Landlord's related administrative fee, is
included in Tenant's installation payment to Landlord described in item
2
<PAGE>
(b) in Section 2 below. Tenant's share of Landlord's cost of constructing the
Conduit Room and the Conduit Shaft themselves is included in Tenant's one-time
participation payment described in item (a) in Section 2.
All installation of wiring or cabling that Tenant wishes installed in the
Connecting Conduit shall be installed by Landlord's designated contractor at
Tenant's expense. Tenant agrees to pay Landlord the cost of such work, together
with Landlord's 10% administrative fee, within 10 days after receipt of a
billing from Landlord. Landlord shall have the right, at Landlord's election, to
require Tenant to pay for the work in advance.
All installation of wiring, cabling and connections for Tenant's use within
the Conduit Room, including but not limited to any wiring, cabling or
connections in or about the Landlord Installations, shall be performed at
Tenant's sole expense by a qualified, duly licensed contractor selected by
Tenant. Landlord shall have no obligation or liability with respect to such work
by Tenant's contractors. Tenant shall cause all such work by Tenant's
contractors to be completed and paid for promptly to prevent any mechanic's
liens being filed. Tenant shall also cause all such work by Tenant's contractors
to comply with Landlord's rules and regulations in effect from time to time for
work in the Building, as well as the requirements in Landlord's Special Conduit
Room Rules in effect from time to time. (The Special Conduit Room Rules
initially shall be as set forth in Exhibit A.) Such requirements include, but
shall not be limited to, the requirement that, prior to starting the work, the
contractor or Tenant must provide to Landlord (i) evidence of insurance coverage
for the work in conformity with the standards in Landlord's rules, (ii) copies
of all legally required permits for the work, and (iii) a copy of the written
consent of any other licensee in the Conduit Room with whose facilities a
connection will be made as part of the work. Tenant shall notify Landlord in
writing before Tenant's contractor commences any such work, so that Landlord
may, if Landlord so elects, post notices of nonresponsibility.
Tenant's ongoing use of the Conduit Room, the Connecting Conduit and
Tenant's cable, wiring, and connecting lines shall comply with all applicable
laws, the other provisions of the Lease, and the Building's rules (including but
not limited to the Special Conduit Room Rules) adopted by Landlord from time to
time. Tenant's use shall not interfere in any way with the operation of the
Building or with the occupancy or activities of any other tenant.
2. License Fees. Tenant agrees to pay Landlord a license fee for use of
------------
the Conduit Room and the Connecting Conduit, which initially shall be (a) a
one-time participation fee of $12,000 for use of the Conduit Room, plus (b)
installation costs in the amount of $11,100 for the Connecting Conduit and for
the Landlord Installations assigned to Tenant in the Conduit Room (not including
Tenant's cable, wiring, or connecting lines in the Connecting Conduit and the
Conduit Room). The additional installation amounts of section b shall be due and
payable within 30 days of the actual installation date. (No portion of such
amounts shall be refundable if the Lease or this license is terminated for any
reason.)
After Tenant's initial payment, the license fee for the Conduit Room and
the Connecting Conduit shall be $500 per month, subject to adjustment as
provided below. Such license fee shall be due and payable to Landlord on the
first day of each month or portion of a calendar month throughout the balance of
the Lease term, unless and until this license is revoked by Landlord in
accordance with Section 5 below. (Any such revocation shall not affect the
balance of the Lease, except that Landlord may treat any default by Tenant
hereunder as a default under the Lease.) Such license fee shall be paid together
with Tenant's Base Rent and other monthly charges, with the first such
installment of the license fee due on the Effective Date. The monthly license
fee for any partial calendar month shall be equitably prorated, as calculated by
Landlord in its reasonable discretion. In addition to the monthly charges stated
above, Tenant shall be obligated to pay for any power usage on a monthly basis
if Tenant requires equipment to be hooked up to a power source.
The amount of the monthly license fee shall be adjusted as of each January
1 during the Lease term. For purposes of calculating such adjustment, the
Consumer Price Index for All Urban Consumers, U.S. City Average, All Items
(1967=100), unadjusted (herein the "Index") published by the Bureau of Labor
Statistics of the United States Department of Labor for the month during which
the Effective Date occurs shall be the base Index figure (the "Base Index"). The
Base Index shall be compared to the Index figure for December of each year
during the term of the Lease, including the initial partial calendar year during
which the Effective Date occurs. In the event that the Index figure for December
of any year during the term of the Lease shall be greater than the Base Index,
then in addition to the monthly license fee, Tenant shall pay to Landlord a
monthly amount equal to the same percentage increase in the monthly license fee
as the percentage increase in the Index for
3
<PAGE>
such December over the Base Index. Such amount shall be payable monthly
commencing with the payment of the license fee for the January immediately
following such December.
In the event that the Index for any December during the term of the Lease
is not yet available upon the date that any installment of the monthly license
fee is due, Tenant shall continue paying the monthly license fee, as previously
adjusted, in the amount applicable for such December until the Index for that
month is published, whereupon Tenant shall immediately pay Landlord the
adjustments which would have been due in the months following such December had
the Index for such December been available. In the event that publication of the
Index is discontinued, Landlord and Tenant agree that the index of consumer
prices which is most closely analogous to the Index shall be used in place of
the Index for calculation of the adjustments payable hereunder. In the event
that the referents or techniques employed in the calculation of the Index shall
be modified and such modification would have resulted in a different figure for
the Base Index, Landlord and Tenant agree that the Base Index shall be
appropriately adjusted and that the Index, as modified, shall be used as
provided hereunder.
3. INDEMNITY AND WAIVER. Tenant hereby agrees to indemnify and hold
--------------------
harmless Landlord and its partners, its agent Paramount Group, Inc. and their
respective officers, directors, shareholders, agents and employees
(collectively, the "Landlord Group") from and against any and all claims
(including but not limited to claims for bodily injury or property damage),
actions, mechanic's liens, losses, liabilities, and expenses (including
reasonable attorney fees and costs of defense by Landlord's legal counsel)
(collectively, "Claims"), which may arise from the installation, operation, use,
maintenance or removal of conduit, cable, wiring, connecting lines, equipment or
other property pursuant to this Amendment or from Tenant's use of the Conduit
Room, the Connecting Conduit, or the Landlord Installations. Similarly, Tenant
shall pay upon demand by Landlord the costs to repair any physical damage to the
Building caused by such installation, operation, use, maintenance or removal.
Tenant hereby waives and releases the Landlord Group from any Claims Tenant may
have at any time (including but not limited to Claims relating to interruptions
in services) arising out of or relating in any way to the installation,
operation, use, maintenance, or removal of conduit, cable, wiring, connecting
lines, equipment or other property described in this Amendment or Tenant's use
of the Conduit Room, the Connecting Conduit, or the Landlord Installations,
whether or not caused by the negligence of any member of the Landlord Group or
Landlord's contractors. Such waiver and release shall not apply to Claims to the
extent caused by Landlord's wilful misconduct. However, in no event shall
Landlord or any member of the Landlord Group be liable to Tenant for lost
profits or consequential, incidental or punitive damages of any kind.
4. REMOVAL OF CABLE, WIRING AND CONNECTING LINES. Tenant agrees that,
---------------------------------------------
upon the termination of this license as described in Section 5 below, Tenant
(or, at Landlord's election, the contractor designated by Landlord) shall
promptly remove, at Tenant's sole cost and expense, all cable, wiring,
connecting lines, and other installations, equipment or property installed or
placed by or for Tenant in the Conduit Room or the Connecting Conduit (excepting
the Connecting Conduit itself and the Landlord Installations, which shall remain
the property of Landlord), and restore those portions of the Building damaged by
such removal to their condition immediately prior to the installation or
placement of such items. If Tenant fails to promptly remove all such items
pursuant to this Section 4, or if Landlord elects to have such work performed by
Landlord's contractor, Landlord may remove such items and restore those portions
of the Building damaged by such removal to their condition immediately prior to
the installation or placement of such items, in which case Tenant agrees
promptly to pay Landlord's reasonable costs of removal and restoration,
including Landlord's administrative fee.
5. NO LEASE OR EASEMENT OF CONDUIT ROOM OR CONNECTING CONDUIT:
-----------------------------------------------------------
TERMINATION OF LICENSE. Tenant acknowledges that the rights granted to Tenant
- ----------------------
hereunder do not constitute a lease of any portion of the Conduit Room, the
Connecting Conduit or the Landlord Installations nor an easement, but rather
constitute a non-exclusive license for use in common with others. Such license
is revocable by Landlord in Landlord's sole discretion upon any default by
Tenant under the Lease which is not cured within the applicable cure period.
Landlord shall retain such rights of revocation notwithstanding any expenditure
of money on the installations described herein or other actual or alleged
reliance by Tenant. Such revocation shall be made by written notice from
Landlord to Tenant. The license shall terminate in any event, without notice
from Landlord, upon the expiration or termination of the Lease. Such license is
personal to Tenant, and Tenant's rights hereunder may not be assigned (except in
connection with a permitted assignment of Tenant's entire interest in the
Lease), sub-licensed, or otherwise transferred in any fashion, regardless of
whether such an arrangement is called an assignment, a sub-license, a co-
location agreement or any other name. Tenant agrees not to permit any third
party to place, use or operate their own equipment, wiring, cabling or
connecting lines in or about Tenant's Landlord Installations or Connecting
Conduit. Any default by Tenant under this Amendment shall be deemed to be a
default under the Lease. The license fee described in Section 2 above shall be
deemed to be additional rent for the Premises described in the Lease, and Tenant
acknowledges that the availability of the license enhances the value of those
Premises. Tenant shall remain obligated for such additional rent for the balance
of
4
<PAGE>
the Lease term, and shall remain obligated for Tenant's other obligations under
this Amendment, regardless of whether Tenant actually makes use of the license,
or whether Tenant surrenders the license, or whether the license is terminated
due to Tenant's default under the Lease.
6. Applicability of Other Provisions. Except as explicitly provided
---------------------------------
otherwise herein, Tenant's obligations under the Lease for the protection of the
Building, Landlord, the Landlord Group, and third parties, including but not
limited to Tenant's obligations regarding maintenance, repairs, mechanic's
liens, insurance, attorneys' fees and costs of suit, shall apply in the same
fashion with respect to Tenant's use of the Conduit Room, the Connecting Conduit
and the Landlord Installations as they do with respect to Tenant's use of the
Premises.
7. Miscellaneous. This Amendment supersedes all prior or contemporaneous
-------------
understandings, negotiations, or agreements between the parties, whether written
or oral, with respect to its subject matter. The Lease, as amended herein, may
be further amended only in a writing signed by both Landlord and Tenant.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
and at the place first written above.
LANDLORD: ONE WILSHIRE ARCADE IMPERIAL, LTD.
a california Limited partnership
By: Paramount Group, Inc., Its Agent
By: /s/ Daniel K. Brown
--------------------------------------------
Daniel K. Brown
Its Director Property Management Western Region
-------------------------------------------
By:_____________________________________________
Its ___________________________________________
TENANT: PRIMECALL, INC.
a Washington corporation
BY: /s/ Mike Sims
---------------------------------------------
Mike Sims
Its COO
----------------------------------------------
By:________________________________________________
Its _______________________________________________
5
<PAGE>
[LOGO OF PARAMOUNT GROUP, INC. APPEARS HERE]
ONE WILSHIRE BUILDING
---------------------
CONDUIT ("MEET POINT") ROOM RULES
---------------------------------
The Meet Point Room is a conduit room located on the fourth floor of the
One Wilshire Building located at 624 S. Grand Avenue, Los Angeles, California
90017 (the "Building") for the special purpose of facilitating interconnections
between various telecommunications providers and users who currently hold
licenses with the Building for the use of such facilities ("Participants"). As
a condition to maintaining their license and to the ongoing use of the Meet
Point Room, all Participants must comply with the Meet Point Room set forth
herein and as may be adopted or revised by the Building in its reasonable
discretion from time to time.
These Meet Point Room Rules are in addition to the terms, convenants, and
conditions of any agreement (including but not limited to a lease) between
Participant and the Building for use of the Meet Point Room. In the event these
Rules conflict with any provision of such agreement, such agreement shall
control.
The Building may waive any one or more of these Meet Point Room Rules for
the benefit of a Participant, but no such waiver by the Building shall be
construed as a waiver of such Rules in favor of anyone other than such
Participant for whose benefit such waiver was expressly intended, nor prevent
the Building from thereafter enforcing such Rules against such Participant or
any or all of the other Participants.
The Building reserves the right to make such other and reasonable Meet
Point Room Rules as, in its judgement, may from time to time be necessary or
desirable. Participant agrees to abide by all such Meet Point Room Rules as
stated herein and any additional rules and regulations which are adopted.
1. Participants must furnish the Building with the names (and other necessary
identification as Building may require) of its personnel who are authorized
by Participant to enter the Meet Point Room. Participants are responsible
for keeping such authorized user list current.
2. Participants wishing to enter into the Meet Point Room must sign in at the
Meet Point Room log book located at the Building Security Desk.
3. Each person wishing to enter the Meet Point Room must be on the authorized
user list. Positive proof of identity is required before entrance to the
Meet Point Room is permitted. A driver's license or other authenticated
photograph identification is the only acceptable form of positive proof.
Such form of identification will be held as security until Participant
completes Participant's activities in the Meet Point Room.
4. Each person wishing to enter the Meet Point Room must obtain a security
access card from Building Security each time he or she wishes to enter. On
entering or leaving the Meet Point Room, Participant must make sure the
door is shut and not left ajar.
5. If Participant intends to perform cross-connect work in the Meet Point
Room, upon entry Participant must submit a fully executed (by Participant
and the Building's authorized representative) Cross-Connect Authority Form
in the form provided by the Building.
6. Upon leaving the Meet Point Room, Participant must sign out in the Meet
Point Room log book at which time Participant's photo identification will
be returned.
7. All activities in the Meet Point Room must be in compliance with the law
including all applicable local, state, and federal laws, rules, codes and
regulations.
CRR-1
<PAGE>
8. Participants desiring to interconnect to another Participant's cross-
connect array must negotiate such interconnection directly with such other
Participant and the Building shall have no obligations in that regard.
9. All cross-connects must be accomplished utilizing Building-standard cable
and wire and following approved procedures.
10. All wiring shall be routed through the furnished channels, raceways, etc.
All cable shall be dressed-in and secured so as to ensure a professional
appearance, run straight and level, with 90 degree corners where possible.
Where to wraps are used, the end shall be cut to preserve the professional
appearance.
11. Groups of cable routed to the Meet Point Room shall remain bundled together
to the degree possible for easy indentification.
12. All cables must be clearly labeled utilizing Building-provided tags.
13. The Meet Point Room must be kept clean and free of debris at all times.
14. Tampering in any way with other Participants' circuits and cross-connects
is not permissible and is grounds for immediate revocation of Participant's
Meet Point Room rights. All other infractions of Meet Point Room Rules must
be corrected within 24 hours of notification.
15. If circuit tampering is detected at any time by any Participant, it must be
reported immediately to the Building Security Desk.
16. Notification of infraction is accomplished by Building Management's
delivery of a written warning to the Participant.
17. Receipt of three (3) warnings within a six-month period is cause for
immediate revocation of Meet Point Room participation rights.
18. Meet Point Room participation rights are subject to revocation for any
default under the agreement between the Building and Participant regarding
Participant's use of the Meet Point Room.
19. Upon expiration or revocation of Meet Point Room participation rights,
Participant must make arrangements to vacate the Meet Point Room and remove
all cross-connects associated with Participant's assigned array(s) within
30 calender days of notification.
CRR-2
<PAGE>
Amendment for Conduit Use
7/7/97
Meet Room
Pay one time $12,000.00 participation fee plus installation costs of $11,000.00.
Due 30 Days after actual installation date. The above fees are non refundable.
After above payment, a $500.00 a month license fee will be due on the 1st of
each month, through term of lease will be due.
The license fee rate will be review in the month of January yearly using factors
outlined in the agreement.
<PAGE>
PARAMOUNT GROUP, INC.
OFFICE LEASE
(CALIFORNIA)
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY OF LEASE TERMS...................................................... 1
AGREEMENT................................................................... 3
1. PREMISES......................................................... 3
2. TERM............................................................. 3
3. RENT............................................................. 3
4. RENT ESCALATION.................................................. 3
5. TAX ON TENANT'S PROPERTY; OTHER TAXES............................ 6
6. SECURITY DEPOSIT................................................. 7
7. LATE PAYMENTS.................................................... 7
8. USE OF PREMISES.................................................. 7
9. BUILDING SERVICES................................................ 8
10. CONDITION OF PREMISES............................................ 9
11. DAMAGE TO PREMISES OR BUILDING................................... 9
12. EMINENT DOMAN.................................................... 10
13. DEFAULT.......................................................... 11
14. REMEDIES UPON DEFAULT............................................ 12
15. SURRENDER OF PREMISES; REMOVAL OF PROPERTY....................... 13
16. COSTS OF SUIT; ATTORNEYS' FEES; WAIVER OF JURY TRIAL............. 14
17. ASSIGNMENT AND SUBLETTING........................................ 15
18. TRANSFER OF LANDLORD'S INTEREST.................................. 18
19. HOLDING OVER..................................................... 18
20. NOTICES.......................................................... 18
21. QUIET ENJOYMENT.................................................. 18
22. TENANT'S FURTHER OBLIGATIONS..................................... 18
23. ESTOPPEL CERTIFICATE BY LESSEE................................... 19
24. SUBORDINATION AND ATTORNMENT..................................... 19
25. RIGHTS RESERVED TO LANDLORD...................................... 19
26. FORCE MAJEURE.................................................... 20
27. WAIVER OF CLAIMS; INDEMNITY...................................... 20
28. INSURANCE........................................................ 21
29. FIXTURES, TENANT IMPROVEMENTS AND LATERATIONS.................... 22
30. MECHANIC'S LIENS................................................. 23
31. ALTERNATE SPACE.................................................. 23
32. HAZARDOUS MATERIALS.............................................. 23
33. MISCELLANEOUS.................................................... 24
34. "AS IS" CONDITION................................................ 26
35. TENANT'S SUPPLEMENTAL AIR-CONDITIONING........................... 27
</TABLE>
EXHIBITS AND RIDERS
<PAGE>
PARAMOUNT GROUP, INC
--------------------
OFFICE LEASE
------------
(California)
THIS LEASE is made as of the 10th day of June, 1996, between One
Wilshire Arcade Imperial, Ltd., a California Limited Partnership, by Paramount
Group, Inc., a Delaware corporation, its agent (hereinafter called "Landlord"),
and Primecall, Inc., a Washington corporation (hereinafter called "Tenant").
SUMMARY OF LEASE TERMS
----------------------
A. Addresses:
1. Tenant's Premises and Notice Address: 624 South Grand Avenue, Suite
2840, Los Angeles,
CA 90017
2. Landlord's Notice Address: 642 South Grand Avenue, Suite
1207, Los Angeles, CA 90017
With copy to: Paramount Group, Inc., 1633
Broadway, Suite 1801, New
York, NY 10019
3. Landlord's Address for Rent Payments: One Wilshire Arcade Imperial,
Ltd., File #53077, Los
Angeles, CA 90074-3077
B. Approximate Rentable Area of the Premises:
1,500 rentable square feet. The parties agree that such figure is only a
reasonable estimate of the area of the Premises. The figures in items E, G,
H, and J below and the other provisions of this Lease shall not be adjusted
due to any difference between the actual area of the Premises and the
estimated area shown above.
C. Lease Term: 10 years, 0 months.
D. 1. Estimated Commencement Date: July 1, 1996.
2. Commencement Date: The later of the following 2 dates:
(a) July 1, 1996; or
(b) The date upon which Landlord tenders possession of the Premises
to Tenant.
<PAGE>
E. Schedule of Monthly Base Rents:
The following schedule of monthly Base Rents shall apply during the term of
the Lease, subject to adjustments pursuant to the Rent Escalation Rider to the
Lease regarding increases in the Consumer Price Index:
<TABLE>
<CAPTION>
Monthly Monthly
Period Base Rent Rent Credit
------ --------- -----------
<S> <C> <C>
From July 1, 1996 to Sept. 30, 1996 $3,375.00 $3,375.00
From Oct 1, 1996 to June 30, 2006 $3,375.00 None
</TABLE>
The Base Rent for the period from October 1, 1996 to December 31, 1996,
shall be prepaid by Tenant upon execution of this Lease. If the actual
Commencement Date is before or after the Estimated Commencement Date, then all
dates set forth above shall be correspondingly accelerated or delayed, as the
case may be. Base Rent for any partial calendar month shall be equitably
prorated as calculated by Landlord in its reasonable discretion. In the event of
any default by Tenant under this Lease which is not cured within the applicable
cure period set forth in Section 13.2, Tenant shall be obligated to pay to
Landlord, without any further notice from Landlord, a sum equal to all rent
credits previously credited to Tenant pursuant to the above schedule, and no
further rent credits shall be applicable for the balance of the Lease term.
F. Base Years for Expenses: Real Estate Taxes-1996-1997; Operating and
Utility Costs-1996.
G. Tenant's "Percentage Share" of Real Estate Taxes, Operating and
Utility Costs: 0.2634%
H. Security Deposit: $3,375.00.
I. Permitted Use: Telecommunications business.
J. Maximum Tenant Improvement Allowance: None. Tenant to take space "as
is" as described in Section 34.
K. Tenant's Parking Allotment: 1 parking space.
L. Landlord's Brokers: None.
M. Riders:
The following exhibits, riders and addenda are attached to and are
part of this Lease:
Exhibit A - Floor Plan of Premises
Exhibit B - Rules and Regulations
Parking Space Rider
Rent Escalation Rider
Telecommunications Conduit Rider
Emergency Generator Rider
Extension Option Rider
N. Guaranty: Not applicable.
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AGREEMENT
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1. PREMISES. Landlord hereby leases the Premises to Tenant and Tenant
hereby hires and takes the Premises from Landlord. The Premises are located at
the address set forth in Section A(1) on page 1 and are more particularly shown
on Exhibit "A" attached hereto and incorporated herein by this reference. The
office building in which the Premises are located is referred to herein as the
"Building."
2. TERM.
2.1 The term of this Lease shall commence on the "Commencement Date"
indicated in Section D on Page 1 and shall extend for the period set forth in
Section C on Page 1. In the event that Landlord, for any reason, cannot tender
possession of the Premises to Tenant on or before the "Estimated Commencement
Date" indicated in Section D on Page 1, this Lease shall not be void or
voidable, nor shall Landlord be liable to Tenant in any way as a result of such
failure to tender possession. In the event that Landlord cannot tender
possession of the Premises to Tenant for any reason other than the acts or
omissions of Tenant, Tenant's obligation to pay rent hereunder shall be deferred
by a period of time equal to the delay in Landlord's delivery of possession not
caused by Tenant. If such inability to tender possession of the Premises for
reasons other than the acts or omissions of Tenant continues for a period in
excess of 90 days after the Estimated Commencement Date, Tenant shall have the
right, exercisable by notice to Landlord, to terminate this Lease, but the
suspension of rent obligations and the right of termination pursuant to this
Section 2.1 shall be Tenant's sole remedies in the circumstances herein
described.
2.2 In the event that Tenant is allowed to enter into possession of the
Premises prior to the Commencement Date, such possession shall be deemed to be
pursuant to, and shall be governed by, the terms, covenants and conditions of
this Lease, including without limitation the covenant to pay rent, as though the
Commencement Date occurred upon the date of taking of possession by Tenant.
2.3 In the event that the Commencement Date falls on other than the first
day of a month, rent for any initial partial month of the term hereof shall be
appropriately prorated; and if the date of commencement of Tenant's rent
obligations is delayed, pursuant to Section 2.1, the end of the term hereof
shall be correspondingly delayed. At the request of either party hereto, both
parties shall execute a memorandum confirming the date of commencement of
Tenant's rent obligations.
3. RENT. Beginning on the Commencement Date (subject to adjustment
pursuant to Section 2.1 above), the base rent ("Base Rent") for the Premises
shall be in accordance with the Schedule of Monthly Base Rents set forth in
Section E on Page 2. Each installment of Base Rent shall be payable in advance
on the first day of each and every month throughout the term of this Lease.
Tenant agrees to pay all rent, without offset, demand or deduction of any kind,
to Landlord by mail to the address set forth in Section A(3) on page 1 or in
such manner, to such other person or at such other place as Landlord may from
time to time designate. Tenant agrees that no payment made to Landlord by check
or other instrument shall contain a restrictive endorsement of any kind; and if
any such instrument should contain a restrictive endorsement in violation of the
foregoing, that endorsement shall have no legal effect whatever, notwithstanding
that such item is processed for payment.
4. RENT ESCALATION.
4.1 Tenant shall pay, as monthly rent hereunder, in addition to the Base
Rent, the sums provided in this Section 4. Tenant shall be advised of any
change, from time to time, in rent escalation payments required hereunder by
written notice from Landlord, which shall include information in such detail as
Landlord may reasonably determine to be necessary in support of such change.
Tenant shall have 30 days after the receipt of any such notice to protest the
change indicated therein, and Tenant's failure to make such protest in a written
notice to Landlord within such 30-day period shall be conclusively deemed to be
Tenant's agreement to such charges. Notwithstanding any such protest all rent
escalation payments falling due after service of such notice shall be made in
accordance with such notice until the protest has been resolved, whereupon any
necessary adjustment shall be made between Landlord and Tenant. Any audit
arising out of such a protest by Tenant shall be done, at Tenant's expense, in
accordance with generally accepted auditing and management standards by a major
public accounting firm selected by Tenant and approved by Landlord in its
reasonable discretion. Such audit shall be performed at the offices of Paramount
Group, Inc. in New York City or at such other location in the United States as
Landlord may select from time to time for the maintenance of its accounting
records for the Building.
4.2 Following the first December 31 during the term of the Lease, Tenant
shall pay Landlord in a single lump sum upon billing therefor, Tenant's
Percentage Share (as defined in Section G on Page 2 of the Lease) of each of the
following amounts: (1) the amount (if any) by which Real Estate Taxes for the
then current tax fiscal year exceed the Real
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Estate Taxes for the Base Year for Real Estate Taxes set forth in Section F on
Page 2; (2) the amount (if any) by which Operating Costs for the just completed
calendar year exceed the Operating Costs for the Base Year for Operating Costs
set forth in Section F on Page 2; and (3) the amount (if any) by which Utility
Costs for the just completed calendar year exceed the Utility Costs for the Base
Year for Utility Costs set forth in Section F on Page 2. At the same time Tenant
shall also pay to Landlord one-twelfth of Tenant's Percentage Share of such
amounts for each month that has commenced since December 31 as estimated
payments towards Tenant's share of the Real Estate Taxes, Operating Costs, and
Utility Costs for the following year. Following each succeeding December 31,
Landlord again shall determine in the same fashion the increase or decrease (if
any) in annual Real Estate Taxes, Operating Costs, and Utility Costs over or
under those for the previous year. If there is an increase in one or more of the
three categories, Tenant shall pay to Landlord in a single lump sum upon billing
Tenant's Percentage Share of the increase plus one-twelfth of Tenant's
Percentage Share of such increase for each month that has then commenced in the
new calendar year. If there is a decrease in one or more of the three
categories, Landlord shall refund to Tenant or, at Landlord's option, credit
against the next rent falling due under the Lease the amount of the overpayment
made by Tenant during the preceding calendar year, provided that the amount of
such refund or credit shall in no event exceed the total payments previously
made by Tenant for such calendar year toward Tenant's Percentage Share of excess
charges for the category in question. Thereafter, with each month's Base Rent
until the next adjustment hereunder, Tenant shall pay one-twelfth of Tenant's
Percentage Share of each of the following amounts: (I) the excess (if any) of
annual Real Estate Taxes (based on the then-current fiscal year) over the Base
Year Real Estate Taxes; (II) the excess (if any) of annual Operating Costs
(based on the preceding calendar year) over the Base Year Operating Costs; and
(III) the excess (if any) of annual Utility Costs (based on the preceding
calendar year) over Base Year Utility Costs. The Real Estate Taxes for any
partial fiscal year at the end of the Lease term and the Operating Costs and
Utility Costs for any partial calendar year at the end of the Lease term shall
be appropriately prorated.
For purposes hereof, "Real Estate Taxes" shall include any form of
assessment, license fee, license tax, business license fee, commercial rental
tax, levy, penalty, charge, tax or similar imposition (other than net income,
inheritance or estate taxes) imposed by any authority having the direct or
indirect power to tax, including any city, county, state or federal government,
or any school, agricultural, lighting, drainage, flood control or other special
district thereof, as against any legal or equitable interest of Landlord in the
Premises or in the real property of which the Premises and the Building are a
part, including, but not limited to, the following:
(i) Any tax on Landlord's "right" to rent or "right" to other
income from the Premises or as against Landlord's business of leasing the
Premises;
(ii) Any assessment, tax, fee, levy or charge in substitution,
partially or totally, of any assessment, tax, fee, levy of charge previously
included within the definition of Real Estate Taxes, it being acknowledged by
Tenant and Landlord that Proposition 13 was adopted by the voters of the State
of California in the June, 1978 Election and that assessments, taxes, fees,
levies and charges may be imposed by governmental agencies for such services as
fire protection, street, sidewalk and road maintenance, refuse removal and for
other governmental services formerly provided without charge to property owners
or occupants. It is the intention of Tenant and Landlord that all such new and
increased assessments, taxes, fees, levies and charges be included within the
definition of "Real Property Taxes" for the purpose of this Lease;
(iii) Any assessment, tax, fee, levy or charge allocable to or
measured by the area of the Premises or the rent payable hereunder, including,
without limitation, any gross income tax or excise tax levied by the State, City
or Federal government, or any political subdivision thereof, with respect to the
receipt of such rent, or upon or with respect to the possession, leasing,
operating, management, maintenance, alteration, repair, use or occupancy by
Tenant of the Premises, or any portion thereof;
(iv) Any assessment, tax, fee, levy or charge upon this transaction
or any document to which Tenant is a party, creating or transferring an interest
or an estate in the Premises;
(v) Any assessment, tax, fee, levy or charge by any governmental
agency related to any transportation plan, fund or system instituted within the
geographic area of which the Building is a part; or
(vi) Reasonable legal and other professional fees, costs and
disbursements incurred in connection with proceedings to contest, determine or
reduce real property taxes.
The definition of "Real Estate Taxes," including any additional tax the
nature of which was previously included within the definition of "Real Estate
Taxes," shall include any increases in such taxes, levies, charges or
assessments occasioned by increases in tax rates or increases in assessed
valuations, whether occurring by sale or otherwise.
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As used in this Lease, the term "Operating Costs" shall mean all costs and
expenses of management, operation, maintenance, overhaul, improvement or repair
of the Building, the common areas and the site, as determined by standard
accounting practices, including the following costs by way of illustration but
not limitation:
(a) Any and all assessments imposed with respect to the Building,
common areas, and/or the site on which the Building is located, pursuant to any
covenants, conditions and restrictions affecting the site, common areas or
Building;
(b) Any costs, levies or assessments resulting from statutes or
regulations promulgated by any governmental authority in connection with the
use or occupancy of the Building or the Premises;
(c) Costs of all insurance obtained by Landlord;
(d) Wages, salaries and other labor costs (including but not
limited to social security taxes, unemployment, taxes, other payroll taxes
and governmental charges and the costs, if any, of providing disability,
hospitalization, medical welfare, pension, retirement or other employee
benefits, whether or not imposed by law) of employees, independent contractors
and other persons engaged in the management, operation, maintenance, overhaul,
improvement or repair of the Building;
(e) Building management office and storage rental;
(f) Management and administrative fees (which Tenant acknowledges
are presently 6% of accured gross revenues of the Building and which may be
adjusted from time to time);
(g) Supplies, materials, equipment and tools;
(h) Costs of, and appropriate reserves for, repair, painting,
resurfacing, and maintenance of the Building, the common areas, the site and
the parking facilities, and their respective fixtures and equipment systems,
including but not limited to the elevators, the structural portions of the
Building, and the plumbing, heating, ventilation, air-conditioning, telephone
cable riser, and electrical systems installed or furnished by Landlord;
(i) Depreciation on a straight-line basis and rental of personal
property used in maintenance;
(j) Amortization on a straight-line basis over the useful life
(together with interest at the interest rate defined in Subsection 33.9
of this Lease on the unamortized balance) of all costs of a capital nature
(including, without limitation, capital improvements, capital replacements,
capital repairs, capital equipment and capital tools);
(1) reasonably intended to produce a reduction in Operating
Costs, Utility Costs or energy consumption; or
(2) required under any governmental or quassi-governmental law,
rule, order, ordinance or regulation that was not applicable to the Building at
the time it was originally constructed; or
(3) for repair or replacement of any Building equipment needed
to operate the Building at the same quality levels as prior to the replacement;
(k) Costs and expenses of gardening and landscaping;
(l) Maintenance of signs (other than signs of tenants of the
Building);
(m) Personal property taxes levied on or attributable to personal
property used in connection with the Building, the common areas, or the site;
(n) Costs of all service contracts pertaining to the Premises, the
Building or the site;
(o) Reasonable accounting, audit, verification, legal and other
consulting fees;
(p) Costs and expenses of lighting, janitorial service, cleaning,
refuse removal, security and similar items, including appropriate reserves;
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(q) Any costs incurred with respect to a transportation system
manager, rider share coordinator or any private transportation system
established for the benefit of tenants in the Building, whether or not imposed
by any governmental authority;
(r) If the Building has a helipad, it costs to the extent not covered
by users fees; and
(s) Fees imposed by any federal, state or local government for fire
and police protection, trash removal or other similar services which do not
constitute Real Estate Taxes.
The following shall be excluded from Operating Costs: federal and state
income taxes imposed on Landlord's net income; any and all costs or expenses to
procure tenants for the Building, including but not limited to brokerage
commissions, legal fees,and costs of remodeling suites; mortgage or debt
service; and depreciation, except that amortization or improvements of the type
specified in Subsection (j)above shall in no event be considered "depreciation".
For purposes hereof, "Utility Costs": shall include all charges, surcharges
and other costs of all utilities paid for by Landlord in connection with the
Premises and/or Building, cost of furnishing gas, electricity and other fuels or
power sources to the Premises and/or Building, and costs of furnishing water and
sewer services to the Premises and/or Building.
The term "Building" as used in this Section 4.2 shall be deemed to include
not only the Building but also any parking facility owned, leased or operated by
Landlord in order to meet the parking requirements of the Building.
If the average occupancy of the rentable area of the Building during the
Tenant's Base Year for Operating and Utility Costs as set forth in Section F on
page 2 or during any other calender year of the lease term is less than 90 % of
the total rentable area of the Building, the Operating Costs and Utility Costs
shall be adjusted by Landlord for such calendar year, prior to the pass-through
of Operating Costs and Utility Costs to Tenant pursuant to this Section 4.2, to
reflect what they would have been had 90% of the rentable area been occupied
during that year. In making such calculation, the Landlord's reasonable opinion
of what portion, if any, of each costs and affected by changes in occupancy
shall be binding upon the parties.
5. TAX ON TENANT'S PROPERTY; OTHER TAXES.
5.1 Tenants shall be liable for, and shall pay at least 10 days before
delinquency, and Tenant hereby indemnifies and holds Landlords harmless from
and against any personal property, fixtures, machinery, equipment, apparatus
systems and appurtenances placed by Tenant in or about, or utilized by Tenant
in, upon or in connection with, the Premises ("Equipment Taxes"). If any
Equipment Taxes are levied against Landlord or Landlord's property or if the
assessed value of Landlords property is increased by the inclusion therein of a
value placed upon such personal property, fixtures, machinery, equipment,
apparatus, systems or appurtenances of Tenant, and if Landlord, after written
notice to Tenant, pays the Equipment Taxes or taxes based upon such an increased
assessment (which Landlord shall have the right to do regardless of the validity
of such levy, but only under proper protest if requested by Tenant prior to such
payment and if payment under protest is permissible). Tenant shall pay to
Landlord upon demand, as additional rent hereunder, the taxes so levied against
Landlord or the proportion of such taxes resulting from such increased in the
assessment; provided however, that in any such event Tenant shall have the
right, in the name of Landlord and with Landlord's full cooperation, but at no
cost to Landlord, to bring suit in any court of competent jurisdiction to
recover the amount of such tax so paid under protest, and any amount so
recovered shall belong to Tenants.
5.2 If the tenant improvements in the Premises, whether installed and/or
paid for by Landlord or Tenant and whether or not affixed to the real property
so as to become a part thereof, are assessed for real property tax purposes at a
valuation higher than the valuation at which tenant improvements conforming to
Landlord's building standards in other space in the Building are assessed, then
the real property taxes and assessments levied against Landlord or Landlord's
property by reason of such excess assessed valuation shall be deemed to be
Equipment Taxes and shall be governed by the provisions of Section 5.1. Any such
amounts, and any similar amounts attributable to excess improvements by other
tenants of the Building and Recovered by Landlords from such other tenants under
comparable lease provisions, shall not be included in Real Estate Taxes for
purposes of rent escalation under Section 4 of this Lease.
5.3 Tenant shall pay, as additional rent hereunder, upon demand and in
such manner and at such times as Landlord shall direct from time to time by
written notice to Tenant, any excise, sales, privilege or other tax, assessment
or other charge (other than income or franchise taxes) imposed, assessed or
levied by any governmental or quasi-governmental authority or agency upon
Landlord on account of this Lease, the rent or other payments made by Tenant
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hereunder, any other benefit received by Landlord hereunder, Landlord's business
as a lessor hereunder, or otherwise in respect of or as a result of the
agreement or relationship of Landlord and Tenant hereunder.
6. SECURITY DEPOSIT.
6.1 A deposit (the "Security Deposit") in the amount set forth in Section
H on page 2 shall be paid by Tenant upon execution of this Lease and shall be
held by Landlord without liability for interest and as security for the
performance by Tenant of Tenant's covenants and obligations under this Lease, it
being expressly understood that the Security Deposit shall not be considered an
advance payment of rent or a measure of Landlord's damages in case of default by
Tenant. Upon the occurrence of any breach or default under this Lease by Tenant,
Landlord may, from time to time, without prejudice to any other remedy, use the
Security Deposit or any portion thereof to the extent necessary to make good any
arrearages of rent or any other damage, injury, expense, or liability caused to
Landlord by such breach or default. Following any application of the Security
Deposit, Tenant shall pay to Landlord on demand an amount to restore the
Security Deposit to its original amount. In the event of bankruptcy or other
debtor relief proceedings by or against Tenant, the Security Deposit shall be
deemed to be applied first to the payment of rent and other charges due
Landlord, in the order that such rent or charges become due and owing, for all
periods prior to filing of such proceedings. Landlord shall not be required to
keep the Security Deposit separate from its general funds. Upon termination of
this Lease any remaining balance of the Security Deposit shall be returned by
Landlord to Tenant within 14 days after termination of Tenant's tenancy.
6.2 (Intentionally deleted.)
7. LATE PAYMENTS. All covenants and agreements to be performed by Tenant
under any of the terms of this Lease shall be performed by Tenant at Tenant's
sole cost and expense and without any abatement of rent. Tenant acknowledges
that the late payment by Tenant to Landlord of any sums due under this Lease
will cause Landlord to incur costs not contemplated by this Lease, the exact
amount of such cost being extremely difficult and impractical to fix. Such costs
include, without limitation, processing and accounting charges, and late charges
that may be imposed on Landlord by terms of any note or other obligation secured
by any encumbrance covering the Premises or the Building of which the Premises
are a part. Therefore, if any monthly installment of rent is not received by
Landlord by the date when due, or if Tenant fails to pay any other sum of money
due hereunder, Tenant shall pay to Landlord, as additional rent, the sum of ten
percent (10%) of the overdue amount as a late charge. Landlord's acceptance of
any late charge, or interest pursuant to Section 33.9, shall not be deemed to be
liquidated damages, nor constitute a waiver of Tenant's default with respect to
the overdue amount, nor prevent Landlord from exercising any of the other rights
and remedies available to Landlord under this Lease or any law now or hereafter
in effect. Further, in the event such late charge is imposed by Landlord for 2
consecutive months for whatever reason, Landlord shall have the option to
require that, beginning with the first payment of rent due following the
imposition of the second consecutive late charge, rent shall no longer be paid
in monthly installments but shall be payable 3 months in advance.
8. USE OF PREMISES. Tenant, and any permitted subtenant or assignee,
shall use the Premises only for the use described in Section 1 on page 2. Any
other use of the Premises is absolutely prohibited. Tenant shall not use or
occupy the Premises in violation of any recorded covenants, conditions and
restrictions affecting the land on which the Building is located nor of any law,
ordinance, rule and regulation. Tenant shall not do or permit to be done
anything which will invalidate or increase the cost of any fire, extended
coverage or any other insurance policy covering the Building or property located
therein and shall comply with all rules, orders, regulations and requirements of
any applicable fire rating bureau or other organization performing a similar
function. Tenant shall promptly upon demand reimburse Landlord as additional
rent for any additional premium charged for any issuance policy by reason of
Tenant's failure to comply with the provision of this Section 8. Tenant shall
not do or permit anything to be done in or about the Premises which will in any
way obstruct or interfere with the rights of other tenants of occupants of the
Building, or injure or annoy them, or use or allow the Premises to be used for
any improper, immoral, unlawful or objectionable purpose, nor shall Tenant
cause, maintain or permit any nuisance in, on or about the Premises. Tenant
shall not commit or suffer to be committed any waste in or upon the Premises and
shall keep the Premises in first class repair and appearance. Tenant shall not
place a load upon the Premises exceeding the average pounds of live load per
square foot of floor area specified for the Building by Landlord's architect,
with any partitions to be considered a part of the live load. Landlord reserves
the right to prescribe the weight and position of all safes, files and heavy
equipment which Tenant desires to place in the Premises so as to distribute
properly the weight thereof. Tenant's business machines and mechanical equipment
which cause vibration or noise that may be transmitted to the Building structure
or to any other space in the Building shall be so installed, maintained and used
by Tenant as to eliminate such vibration or noise. Tenant shall be responsible
for the cost of all structural engineering required to determine structural
load. In any event, unless specifically authorized herein, Tenant shall not
prepare or serve, or authorize the preparation or service of, food or beverages
in the Premises, except only the occasional preparation of coffee, tea, hot
chocolate and other such common refreshments for Tenant and its employees.
Tenant shall not conduct any auction in or about the Premises or the Building
without Landlord's prior written consent.
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9. BUILDING SERVICES.
9.1 Throughout the term of this Lease, subject to shortage and accidents
beyond Landlord's reasonable control, and subject to reimbursement pursuant to
Section 4.2, Landlord shall repair and maintain all structural elements of the
Building and common areas (including, without limitation, the structural walls,
doors, floor, ceilings, roof, elevators, stairwells, lobby, heating system, air
conditioning system, telephone cable riser for Building-standard service from
the Building's main terminal to the terminal box on the same floor as the
Premises [but excluding Tenant's telephone equipment and the cable and wiring
from such equipment to the terminal box], plumbing and electrical wiring) and
maintain the exterior of the Premises, including grounds, walks, drives and
loading area, if any. Tenant shall reimburse Landlord upon demand as additional
rent hereunder, for the cost of any repairs or extraordinary maintenance
necessitated by acts of Tenant or Tenant's employees, contractors, agents,
licensees or invitees.
9.2 Provided that Tenant is not in default hereunder, subject to
shortages and accidents beyond Landlord's reasonable control, Landlord shall
furnish building standard heating and air conditioning service Monday through
Friday from 8:00 A.M. to 6:00 P.M., and Saturday from 8:00 A:M. to 1:00 P.M.,
except for holidays. No heating or air conditioning will be furnished by
Landlord on Sundays, holidays or during hours other than as set forth above,
except upon prior arrangement with Tenant and at an extra charge as may be
agreed to between Landlord and Tenant. For purposes of this Section 9.2,
"holidays" shall mean and refer to the holidays of Christmas, New Year's Day,
President's Day, Memorial Day, the Fourth of July, Labor Day, Thanksgiving and
the day after Thanksgiving, as those holidays are defined, recognized or
established by governmental authorities or agencies from time to time and such
other days the New York Stock Exchange is closed. Tenant shall install, at its
expense, such additional air conditioning equipment as may be reasonably
determined by Landlord to be necessary in order to maintain building air
conditioning standards resulting from Tenant's installation and operation of
computer equipment or other special equipment or facilities placing a greater
burden on the air conditioning system than would general office use. Landlord
shall furnish electric current to the Premises in amounts reasonably sufficient
for normal business use, including operation of building standard lighting and
operation of typewriters and standard fractional horsepower office machinery.
Tenant agrees that, at all times during the term of this Lease, Tenant's use of
electric current shall never exceed the capacity of the feeders to the Building
or the risers or wiring installation in the Building. Tenant shall not install
or use or permit the installation or use upon or about the Premises of any
computer or electronic data processing or other equipment using current in
excess of 110 volts or requiring power in excess of 500 watts, without the
express prior written consent of Landlord. Tenant shall pay monthly upon billing
as additional rent under this Lease such sums as Landlord's building engineer
may reasonably determine to be necessary in order to reimburse Landlord for the
additional cost of utilities (including, without limitation, electricity, gas
and other fuels or power sources, and water, and Landlord's reasonable costs of
administration) attributable to the operation of additional air conditioning
equipment and any other requirements in excess of those for normal office use by
reason of the operation of computer equipment or other special equipment or
facilities, or attributable to Tenant's conducting business beyond the business
hours described in the first sentence of this Section 9.2. Moreover, at
Landlord's election, Landlord may separately meter at Tenant's expense the
electrical usage of some or all of Tenant's equipment, facilities or Premises.
In such event Tenant shall pay the charges for all such separately metered
electrical usage within 10 days after receipt of a billing therefor. Any such
amounts billed directly to Tenant shall not be included in the Building's
"Utility Costs" for purposes of Section 4 above. Any extra maintenance charges
or service calls attributable to the actions of Tenant (e.g., continual
---
adjustments of the thermostats or the failure to keep window coverings closed as
necessary) shall be payable by Tenant to Landlord upon demand, as additional
rent hereunder.
9.3 Landlord shall furnish unheated water from mains for drinking,
lavatory and toilet purposes drawn through fixtures installed by Landlord, or by
Tenant with Landlord's express prior written consent, and heated water for
lavatory purposes from regular building supply in such quantities as required in
Landlord's judgement for the comfortable and normal use of the Premises. Tenant
shall pay Landlord for additional water which is furnished for any other
purpose. The amount that Tenant shall pay Landlord for such additional water
shall be the average price per gallon charged to the Landlord for the Building
by the entity providing water, increased by 25% to cover Landlord's
administrative expense.
9.4 Landlord shall furnish janitor service (including washing of windows
with reasonable frequency as determined by Landlord) in and about the Premises,
to the extent necessitated by normal office use of the Premises, Monday through
Friday, holidays excepted. Landlord shall have no obligation to furnish janitor
service for any portion of the Premises which is occupied after 7:00 p.m., is
locked or may be used (to the extent permitted under this Lease) for the
preparation, dispensing or consumption of food or beverages or for any purpose
other than general office use, and Tenant shall keep all such portions of the
Premises in a clean and orderly condition at Tenant's sole cost and expense. In
the event that Tenant shall fail to keep such portions of the Premises in a
clean and orderly condition, Landlord may do so and any costs incurred by
Landlord in connection therewith shall be payable by Tenant to Landlord upon
demand, as additional rent hereunder. Tenant shall also pay to Landlord, as
additional rent hereunder, amounts equal to any increase in cost of janitor
service in and about the Premises if such increase in costs is due to (a) use of
the Premises by Tenant during hours other
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than normal business hours, or (b) location in or about the Premises of any
fixtures, improvements, materials or finish items (including without limitation
wall coverings and floor coverings) other than those which are of the standard
type adopted by Landlord for the Building. Only those persons who have been
approved by Landlord may perform janitorial services.
9.5 Landlord shall furnish passenger and freight elevator service in
common with Landlord and other tenants Monday through Friday from 8:00 A.M. to
6.00 P.M. and Saturday from 8:00 A.M. to 1:00 P.M. Landlord shall provide
limited passenger elevator service daily at all times such normal passenger
service is not furnished.
9.6 Landlord does not warrant that any service will be free from
interruptions caused by repairs, renewals, improvements, changes of service,
alterations, strikes, lockouts, labor controversies, accidents, inability to
obtain fuel, steam, water or supplies or other cause, provided the cause is
beyond the reasonable control of Landlord. Landlord agrees to give Tenant notice
of any extended interruptions of which Landlord has prior knowledge. No
interruption of service shall be deemed an eviction or disturbance of Tenant's
use and possession of the Premises or any part thereof, nor relieve Tenant from
performance of Tenant's obligations under this Lease. Landlord shall not be
liable for any failure to make such repairs or furnish such services unless the
failure shall be reasonably curable by Landlord and nonetheless shall persist
for an unreasonable time after written notice from Tenant of the need for such
repairs or the failure to furnish such service. There shall be no abatement of
rent and no liability of Landlord by reason of any injury to or interference
with Tenant's business arising from the making of any repairs, alterations or
improvements, or provision of any service in or to any portion of the Building,
including the Premises, or in or to the fixtures, appurtenances and equipment
therein; provided that in making such repairs, alterations or improvements or
providing such service Landlord shall interfere as little as reasonably
practicable with the conduct of Tenant's business in the Premises, without,
however, being obligated to incur liability for overtime or other premium
payment to its agents, employees or contractors in connection therewith. If
Tenant's beneficial use of all or a substantial portion of the Premises is
prevented for a period in excess of 3 consecutive business days (excluding
Saturdays, Sundays, and holidays), the Base Rent shall be equitably abated
commencing with the fourth business day and continuing until such use is no
longer prevented. Such abatement, to the extent provided above, shall be
Tenant's sole remedy. Except as provided above, Tenant shall not be entitled to
any abatement or reduction of rent or other remedy by reason of Landlord's
failure to furnish any of the services or Building systems called for by this
Lease when such failure is caused by accident, breakage, repairs, strikes,
lockouts or other labor disturbances or labor disputes of any character, or any
other cause. As a material inducement to Landlord's entry into this Lease,
Tenant waives and releases any rights it may have to make repairs at Landlord's
expense under Sections 1941 and 1942 of the California Civil Code.
10. CONDITIONS OF PREMISES. By occupying the Premises, Tenant shall be
deemed to accept the same and acknowledge that they comply fully with Landlord's
covenants and obligations hereunder, subject to completion of any items which it
is Landlord's responsibility hereunder to furnish and which are listed by
Landlord and Tenant upon inspection of the Premises. Tenant acknowledges that
neither Landlord nor any agent, employee or representative of Landlord has made
any representation or warranty with respect to any matter, including but not
limited to any matter regarding the Building or Premises, the applicable zoning
or the effect of other applicable laws, or the suitability or fitness of the
Building or Premises for the conduct of Tenant's business or any other purpose.
Tenant is relying solely on its own investigations with respect to all such
matters. During the term of this Lease, Tenant shall maintain the Premises in as
good condition as when Tenant took possession, ordinary wear and tear and
repairs which are specifically made the responsibility of Landlord hereunder
excepted, and shall repair all damage or injury to the Building or to fixtures,
appurtenances and equipment of the Building caused by Tenant's installation or
removal of its property or resulting from the negligence or tortious conduct of
Tenant, its employees, contractors, agents, licensees and invitees. In the event
of failure by Tenant to perform its covenants of maintenance and repair
hereunder, Landlord may perform such maintenance and repair, and any amounts
expended by Landlord in connection therewith shall be payable by Tenant to
Landlord upon demand, as additional rent hereunder.
11. DAMAGE TO PREMISES OR BUILDING.
11.1 In the event that the Building should be totally destroyed by fire or
other casualty, this Lease shall terminate. In the event the Premises or a
substantial portion of the Building should be so damaged or destroyed that
rebuilding or repairs cannot, in Landlord's opinion, be completed within 180
days after the date of such damage or Landlord will not receive insurance
proceeds sufficient to cover the costs of such repairs, reconstruction and
restoration (including proceeds from Tenant and/or Tenant's insurance which
Tenant is required to deliver to Landlord pursuant to Subsection 11.2 below),
Landlord may at its option terminate this Lease upon notice to Tenant, or
Landlord may proceed to restore the Building. In the event that such rebuilding
or repairs can, in Landlord's opinion, be completed within 180 days after the
date of such damage and Landlord will receive insurance proceeds sufficient to
cover the costs of such repairs, reconstruction and restoration (including
proceeds from Tenant and/or Tenant's insurance which Tenant is required to
deliver to Landlord pursuant to Subsection 11.2 below), Landlord shall restore
the Building. In the event that Landlord is obligated or elects to restore the
Building, Landlord shall commence to rebuild or repair the Building reasonably
promptly after such
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damage or destruction and shall proceed with reasonable diligence to restore it
to substantially the condition in which it was immediately prior to the
casualty, except that Landlord shall not be required to rebuild, repair or
replace any part of the partitions, fixtures, alterations, decorations or other
Improvements which may have been constructed by or specifically for Tenant
(except the improvements built by Landlord pursuant to the Landlord's
Improvement Construction Rider, which Landlord shall restore), or by or for
other tenants within the Building. In such event this Lease shall remain in full
force and effect, provided that if Tenant is dispossessed by reason of such
casualty from all or a substantial portion of the Premises for more than 3
consecutive business days, Tenant shall be entitled to a ratable abatement of
the Base Rent during the time and to the extent the Premises are unfit for
occupancy, commencing with the fourth business day; and provided further that
Tenant shall have the right to terminate this Lease upon notice served upon
Landlord prior to actual completion of any necessary restoration of the Premises
if such restoration is not substantially completed within 360 days after the
casualty. Such abatement or termination, to the extent provided above, shall be
Tenant's sole remedy. Notwithstanding the foregoing to the contrary, if the
damage is due to the negligence or wilful misconduct of Tenant or any of
Tenant's agents, employees or invitees, there shall be no abatement of rent.
Except for abatement of rent as provided hereinabove, Tenant shall not be
entitled to any compensation or damages for loss of, or interference with,
Tenant's business or use or access of all or any part of the Premises resulting
from any such damage, repair, reconstruction or restoration.
11.2 In the event of any damage or destruction of all or any part of the
Premises, Tenant shall immediately; (a) notify Landlord thereof; and (b) deliver
to Landlord all insurance proceeds received by Tenant with respect to the
Leasehold improvements and Tenant changes in the Premises to the extent such
items are not covered by Landlord's casualty insurance (excluding proceeds for
Tenant's furniture and other personal property), whether or not this Lease is
terminated as permitted in this Section 11, and Tenant hereby assigns to
Landlord all rights to receive such insurance proceeds. If, for any reason
(including Tenant's failure to obtain insurance for the full replacement cost of
any Tenant changes which Tenant is required to insure pursuant to this Lease),
Tenant fails to receive insurance proceeds covering the full replacement cost of
such Tenant changes which are damaged, Tenant shall be deemed to have
self-insured the replacement cost of such tenant changes, and upon any damage or
destruction thereof, Tenant shall immediately pay to Landlord the full
replacement cost of such items, less any insurance proceeds actually received by
Landlord from Landlord's or Tenant's insurance with respect to such items.
11.3 In the event any holder of a mortgage or deed of trust on the
Building should require that the insurance proceeds payable upon damage or
destruction to the Building by fire or other casualty be used to retire the debt
secured by such mortgage or deed of trust, or in the event any lessor under any
underlying or ground lease should require that such proceeds be paid to such
lessor, Landlord shall in no event have any obligation to rebuild, and at
Landlord's election this Lease shall terminate.
11.4 With the exception of insurance required to be carried by Tenant
under Section 28 of this Lease, and except as provided in Section 11.2, any
insurance which may be carried by Landlord or Tenant against loss or damage to
the Building or to the Premises shall be for the sole benefit of the party
carrying such insurance and under its sole control. Landlord shall not be
required to carry insurance of any kind on Tenant's property and, except by
reason of the breach by Landlord of any of its obligations hereunder, shall not
be obligated to repair any damage thereto or to replace the same.
11.5 In addition to its termination rights in Subsection 11.1 above,
Landlord shall have the right to terminate this Lease if any damage to the
Building or Premises occurs during the last 12 months of the Term of this Lease
and Landlord estimates that the repair, reconstruction or restoration of such
damage cannot be completed within the earlier of (a) the scheduled expiration
date of the Lease Term, or (b) 60 days after the date of such casualty.
11.6 Tenant, as a material inducement to Landlord's entering into this
Lease, irrevocably waives and releases its rights under the provisions of
Sections 1932(2) and 1933(4) of the California Civil Code (and any successor
statutes permitting Tenant to terminate this Lease as a result of any damage or
destruction), it being the intention of the parties hereto that the express
terms of this Lease shall control under any circumstances in which those
provisions might otherwise apply.
12. EMINENT DOMAIN.
12.1 In the event that the whole of the Premises, or so much thereof as to
render the balance unusable to Tenant for the purposes leased hereunder, as
reasonably determined by Landlord, shall be lawfully condemned or taken in any
manner for any public or quasi-public use, or conveyed by Landlord in lieu
thereof (a "Taking"), this Lease and the term hereby granted shall forthwith
cease and terminate on the date of the taking possession by of the condemning
authority (the "Date of Taking").
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12.2 In the event of a taking of a portion of the Premises which does not
result in the termination of this Lease pursuant to Section 12.1, above, the
Base Rent shall be abated in proportion to the part of the Premises so taken.
12.3 In the event that there is a Taking of a portion of the Building
other than the Premises, and if, in the opinion of Landlord, the Taking is so
substantial as to render the remainder of the Building uneconomic to maintain
despite reasonable reconstruction or remodeling, or if it would be necessary to
alter the Building or Premises materially, Landlord may terminate this Lease by
notifying Tenant of such termination within 60 days following the Date of
taking, and this Lease shall end on the date specified in the notice of
termination, which shall not be less than 60 days after the giving of such
notice.
12.4 No temporary Taking of the Building or Premises and/or of Tenant's
rights therein or under this Lease shall terminate this Lease or give Tenant any
right to abatement of rent hereunder. Tenant shall be entitled to receive such
portion or portions of any award made for the temporary use with respect to the
period of the taking which is within the term of this Lease, provided that, if
such taking shall remain in force at the expiration or earlier termination of
this Lease, then Tenant shall pay to Landlord a sum equal to the reasonable
costs of performing Tenant's obligations under Section 15 with respect to
Tenant's surrender of the Premises and, upon such payment, shall be excused from
such obligations. For purposes of this Section 12.4, a temporary taking shall be
defined as a taking for a period of 270 days or less.
12.5 Except for the award in the event of a temporary Taking as
contemplated in Section 12.4, above, Tenant hereby releases and shall have no
interest in, or right to participate with respect to the determination of, any
compensation for any Taking, except only that Tenant shall be entitled to the
portion of any award specifically designated by the condemning authority to be
for any personal property of Tenant included in any such Taking or for any
relocation expenses or business interruption loss incurred by Tenant.
13. DEFAULT.
13.1 The following events shall be deemed to be events of default by
Tenant under this Lease:
(a) If Tenant shall fail to pay any installment of rent or any
other sum required to be paid by Tenant under this Lease as due.
(b) If Tenant shall fail to comply with any term, provision or
covenant of this Lease, other than provisions pertaining to the payment of
money.
(c) If Tenant shall make an assignment for the benefit of
creditors.
(d) If Tenant shall file a petition under any section or chapter
of the federal Bankruptcy Code, as amended from time to time, or under any
similar law or statute of the United States or any State thereof pertaining to
bankruptcy, insolvency or debtor relief, or Tenant shall have a petition or
other proceedings filed against Tenant under any such law or chapter thereof and
such petition or proceeding shall not be vacated or set aside within 60 days
after such filing.
(e) If a receiver or trustee shall be appointed for all or
substantially all of the assets of Tenant and such receivership shall not be
terminated and possession of such assets restored to Tenant within 30 days after
such appointment.
(f) If Tenant shall desert or vacate any substantial portion of
the Premises and the same shall remain unoccupied for more than 14 days
thereafter.
(g) If Tenant shall assign this Lease or sublet the Premises in
violation of the terms hereof.
13.2 Any shorter period for cure provided by law notwithstanding, and in
lieu thereof, including without limitation California Code of Civil Procedure
Section 1161, Tenant may cure any monetary default under Subsection 13.1(a),
above, at any time within 5 days after written notice of default is received by
Tenant from Landlord; and (except as specifically provided otherwise in Section
24) Tenant may cure any non-monetary default within 15 days after written notice
of default is received by Tenant from Landlord, provided that if such
non-monetary default is curable but is of such a nature that the cure cannot be
completed within 15 days, Tenant shall be allowed to cure the default if Tenant
promptly commences the cure upon receipt of the notice and diligently prosecutes
the same to completion, which completion shall occur not later than 60 days
from the date of such notice from Landlord.
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14. REMEDIES UPON DEFAULT.
14.1 Upon the occurrence of any event of default by Tenant, Landlord shall
have, in addition to any other remedies available to Landlord at law or in
equity, the option to pursue any one or more of the following remedies (each and
all of which shall be cumulative and non-exclusive) without any notice or demand
whatsoever:
(a) Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may,
without prejudice to any other remedy which it may have for possession or
arrearages in rent, enter upon and take possession of the Premises and expel or
remove Tenant and any other person who may be occupying the Premises or any part
thereof, without being liable for prosecution or any claim or damages therefor;
and Landlord may recover from Tenant the following:
(1) The worth at the time of award of any unpaid rent which has
been earned at the time of such termination; plus
(2) The worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; plus
(3) The worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could have been reasonably
avoided; plus
(4) Any other amount necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom, specifically including but not limited to attorney's fees,
removal and storage (or disposal) of Tenant's personal property, unreimbursed
leasehold improvement costs (e.g., the amounts Landlord has expended for
leasehold improvements which have not been recovered as of the termination of
the Lease when amortized on a straight-line basis over the originally scheduled
lease term), brokerage commissions and advertising expenses incurred, expenses
of remodeling the Premises or any portion thereof for a new tenant, whether for
the same or a different use, and any special concessions made to obtain a new
tenant; and
(5) At Landlord's election, such other amounts in addition to
or in lieu of the foregoing as may be permitted from time to time by applicable
law.
The term "rent" as used in this Subsection 14.1(a) shall be deemed to be and to
mean all sums of every nature required to be paid by Tenant pursuant to the
terms of this Lease, whether to Landlord or to others. Any such sums which are
based on percentages of income, increased costs or other historical data shall
be reasonable estimates or projections computed by Landlord on the basis of the
amounts thereof accruing during the 24-month period immediately prior to
default, except that if it becomes necessary to compute such sums before a
24-month period has expired, then the computation shall be made on the basis of
the amounts accruing during such shorter period. As used in Subsections
14.1(a)(1) and (2), above, the "worth at the time of award" shall be computed by
allowing interest from the date the sums became due at the lesser of (i) the
Bank of America prime rate on the due date plus 6%, or (ii) the maximum rate
permitted by law. As used in Subsection 14.1(a)(3), above, the "worth at the
time of award" shall be computed by discounting such amount at the discount
rate of the Federal Reserve Bank of San Francisco at the time of award plus 1%.
(b) In the event of any such default by Tenant, in addition to any
other remedies available to Landlord under this Lease, at law or in equity,
Landlord shall also have the right, with or without terminating this Lease, to
re-enter the Premises and remove all persons and property from the Premises;
such property may be removed, stored and/or disposed of pursuant to any
procedures permitted by applicable law, including but not limited to those
described in Section 15.3. No re-entry or taking possession of the Premises by
Landlord pursuant to this Subsection 14.1(b), and no acceptance of surrender of
the Premises or other action on Landlord's part, shall be construed as an
election to terminate this Lease unless a written notice of such intention be
given to Tenant or unless the termination thereof be decreed by a court of
competent jurisdiction.
(c) In the event of any such default by Tenant, in addition to any
other remedies available to Landlord under this Lease, at law or in equity,
Landlord shall have the right to continue this Lease in full force and effect,
whether or not Tenant shall have abandoned the Premises. The foregoing remedy
shall also be available to Landlord pursuant to California Civil Code Section
1951.4 and any successor statute in the event Tenant has abandoned the Premises.
In the event Landlord elects to continue this Lease in full force and effect
pursuant to this Subsection 14.1(c), then Landlord shall
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be entitled to enforce all of its rights and remedies under this Lease,
including the right to recover rent as it becomes due. Landlord's election not
to terminate this Lease pursuant to this Subsection 14.1(c) or pursuant to any
other provision of this Lease, at law or in equity, shall not preclude Landlord
from subsequently electing to terminate this Lease or pursuing any of its other
remedies.
(d) Whether or not Landlord elects to terminate this Lease on account
of any default by Tenant, Landlord shall have the right to terminate any and all
subleases, licenses, concessions or other consensual arrangements for possession
entered into by Tenant and affecting the Premises or may, in Landlord's sole
discretion, succeed to Tenant's interest in such subleases, licenses,
concessions or arrangements. If Landlord so elects to succeed to Tenant's
interest, Tenant shall, as of the date of notice by Landlord of such election,
have no further right to or interest in the rent or other consideration
receivable thereunder.
14.2 Following the occurrence of an event of default by Tenant, Landlord
shall have the right to require that any or all subsequent amounts paid by
Tenant to Landlord hereunder, whether in cure of the default in question or
otherwise, be paid in the form of cash, money order, cashier's or certified
check drawn on an institution acceptable to Landlord, or by other means approved
by Landlord, notwithstanding any prior practice of accepting payments in any
different form.
14.3 All rights, options and remedies of Landlord contained in this Section
14 and elsewhere in this Lease shall be construed and held to be cumulative, and
no one of them shall be exclusive of the other, and Landlord shall have the
right to pursue any one or more of such remedies or any other remedy or relief
which may be provided by law or in equity, whether or not stated in this Lease.
Nothing in this Section 14 shall be deemed to limit or otherwise affect Tenant's
indemnification of Landlord pursuant to any provision of this Lease.
14.4 Landlord shall not be deemed in default in the performance of any
obligation required to be performed by Landlord under this Lease unless Landlord
has failed to perform such obligation within 30 days after the receipt of
written notice from Tenant specifying in detail Landlord's failure to perform;
provided however, that if the nature of Landlord's obligation is such that more
than 30 days are required for its performance, then Landlord shall not be deemed
in default if it commences such performance within such 30-day period and
thereafter diligently pursues the same to completion. Upon any such uncured
default by Landlord, Tenant shall be entitled, as Tenant's sole and exclusive
remedy, to recover from Landlord Tenant's actual damages (but not lost profits
or other incidental or consequential damages) shown by Tenant to have been
directly caused thereby; provided, however; (a) Tenant shall have no right to
offset or abate rent in the event of any default by Landlord under this Lease,
except to the extent offset rights are specifically provided to Tenant in this
Lease; (b) Tenant shall in no event be entitled to terminate this Lease by
reason of Landlord's default; and (c) Tenant's rights and remedies hereunder
shall be limited to the extent Tenant has expressly waived in this Lease any of
such rights or remedies, including the limitation on Landlord's liability
contained in Section 33.17 hereof.
14.5 No waiver by Landlord or Tenant of any violation or breach of any of
the terms, provisions and covenants herein contained shall be deemed or
construed to constitute a waiver of any other or later violation or breach of
the same or any other of the terms, provisions, and covenants herein contained.
Forbearance by Landlord in enforcement of one or more of the remedies herein
provided upon an event of default shall not be deemed or construed to constitute
a waiver of such default. The acceptance of any rent hereunder by Landlord
following the occurrence of any default, whether or not known to Landlord, shall
not be deemed a waiver of any such default, except only a default in the payment
of the rent so accepted, subject to the provisions of Section 33.1.
15. SURRENDER OF PREMISES; REMOVAL OF PROPERTY.
15.1 No act or thing done by Landlord or any agent or employee of Landlord
during the term hereof shall be deemed to constitute an acceptance by Landlord
of a surrender of the Premises unless such intent is specifically acknowledged
in a writing signed by Landlord. The delivery of keys to the Premises to
Landlord or any agent or employee of Landlord shall not constitute a surrender
of the Premises or effect a termination of this Lease, whether or not the keys
are thereafter retained by Landlord, and notwithstanding such delivery Tenant
shall be entitled to the return of such keys at any reasonable time upon request
until this Lease shall have been properly terminated. The voluntary or other
surrender of this Lease by Tenant, whether accepted by Landlord or not, or a
mutual termination hereof, shall not work a merger, and at the option of
Landlord shall operate as an assignment to Landlord of all subleases or
subtenancies affecting the Premises.
15.2 Upon the expiration of the term of this Lease, or upon any earlier
termination of this Lease, Tenant shall, subject to the provisions of this
Section 15, quit and surrender possession of the Premises to Landlord in as good
order and condition as when Tenant took possession and as thereafter improved by
Landlord and/or Tenant, reasonable wear and tear and repairs which are
specifically made the responsibility of Landlord hereunder excepted. Upon such
expiration or
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termination, Tenant shall, without expense to Landlord, remove or cause to be
removed from the Premises all debris and rubbish, and such items of furniture,
equipment, free-standing cabinet work, movable partitions and other articles of
personal property owned by Tenant or installed or placed by Tenant at its
expense in the Premises, and such similar articles of any other persons claiming
under Tenant, as Landlord may, in its sole discretion, require to be removed,
and Tenant shall repair at its own expense all damage to the Premises and
Building resulting from such removal.
15.3 Whenever Landlord shall re-enter the Premises as provided in this
Lease, any personal property of Tenant not removed by Tenant upon the expiration
of the term of this Lease, or within 48 hours after a termination by reason of
Tenant's default as provided in this Lease, shall be deemed abandoned by Tenant
and may be disposed of by Landlord (without liability to Tenant) in accordance
with Sections 1980 through 1991 of the California Civil Code and Section 1174 of
the California Code of Civil Procedure, or in accordance with any laws or
judicial decisions which may supplement or supplant those provisions from time
to time, or in accordance with any other legally permissible procedure, whether
by public or private sale or otherwise. Landlord shall be entitled to apply any
proceeds of the sale of such items to any sums due to Landlord by Tenant and to
Landlord's costs of removal, storage and sale of such items. Alternatively,
Landlord shall be entitled to treat Tenant's failure to remove such items from
the Premises as either a permitted or unpermitted holdover pursuant to Section
19 of this Lease.
15.4 All fixtures, alterations, additions, repairs, improvements and/or
appurtenances attached to or built into or on or about the Premises prior to or
during the term hereof, whether by Landlord at its expense or at the expense of
Tenant, or by Tenant at its expense, or by previous occupants of the Premises,
shall be and remain part of the Premises and shall not be removed by Tenant at
the end of the term of this Lease. Such fixtures, alterations, additions,
repairs, improvements and/or appurtenances shall include, without limitation,
floor coverings, drapes, paneling, molding, doors, kitchen and dishwashing
fixtures and equipment, plumbing systems, electrical systems, lighting systems,
silencing equipment, communication systems, all fixtures and outlets for the
systems mentioned above and for all telephone, radio, telegraph and television
purposes, and any special flooring or ceiling installations. Notwithstanding the
foregoing, Landlord may, in its sole discretion, require Tenant, at Tenant's
sole cost and expense, to remove any fixtures, alterations, additions, repairs,
improvements and/or appurtenances attached or built into or on or about the
Premises, and to repair any damage to the Building and Premises occasioned by
the installation, construction, operation and/or removal of such fixtures,
equipment, alterations, additions, repairs, improvements and/or appurtenances.
If Tenant shall fail to complete such removal and repair such damage, Landlord
may do so and may charge the reasonable cost thereof to Tenant.
15.5 Tenant hereby waives all claims for damages or other liability in
connection with Landlord's re-entering and taking possession of the Premises or
removing, retaining, storing or selling the property of Tenant as herein
provided, and Tenant hereby indemnifies and holds Landlord harmless from any
such damages or other liability, and no such re-entry shall be considered or
construed to be a forcible entry.
16. COSTS OF SUIT; ATTORNEYS' FEES; WAIVER OF JURY TRIAL.
16.1 If Tenant or Landlord shall bring any action for any relief,
declaratory or otherwise, against the other arising out of or under this Lease,
including any suit by Landlord for the recovery of rent or possession of the
Premises, the losing party shall pay the successful party its costs of suit,
including, without limitation, a reasonable sum for attorneys' and other
professional fees relating to such suit, and such fees shall be deemed to have
accrued on the commencement of such action and shall be paid whether or not such
action is contested or prosecuted to judgment.
16.2 In the event that Landlord shall, without fault of Landlord's part, be
made party to any litigation instituted by Tenant or by any third party against
Tenant, or by or against any person holding under or using the Premises by
license of Tenant, or for the foreclosure of any lien for labor or material
furnished to or for Tenant or of any such other person, Tenant hereby
indemnifies and holds Landlord harmless from and against all costs and expenses,
including reasonable attorneys' fees, incurred by Landlord in or in connection
with such litigation.
16.3 In order to limit the cost of resolving any disputes between the
parties, and as a material inducement to each party to enter into this Lease,
each party hereby waives the right to a jury trial with respect to any
litigation between the parties arising out of this Lease, Tenant's occupancy of
the Premises, or Landlord's ownership, operation or management of the Building,
irrespective of any rights to a jury trial which either party otherwise then
would have under applicable statutes, constitutions, judicial decisions or other
laws.
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17. ASSIGNMENT AND SUBLETTING.
17.1 Except as hereinafter provided, Tenant shall not sublet all or any
part of the Premises, nor assign this Lease, nor enter any license, "co-location
agreement" or other agreement permitting a third party (other than Tenant's
employees and occasional guests) to use or occupy any portion of the Premises,
without Landlord's express prior written consent, which consent shall not
unreasonably be withheld. (For purposes of the balance of this Section 17.1 and
Sections 17.2 through 17.4, the term "sublease" shall be deemed to include
licenses, co-location agreements, and other agreements for use or occupancy of
the Premises as described in the preceding sentence. The terms "subtenant" and
"sublet" shall be construed accordingly.)
In order to assist Landlord in evaluating any proposed assignment or
sublease, Tenant agrees to provide Landlord with the proposed subtenant or
assignee's current financial statement and financial statements for the
preceding 2 years and such other information concerning the business background
and financial condition of the proposed subtenant or assignee and of Tenant as
Landlord may reasonably request.
Landlord and Tenant hereby agree that Landlord's disapproval of any
proposed sublease or assignment hereunder shall be deemed reasonable if based
upon any reasonable factor, including, without limitation, any or all of the
following factors:
(a) The proposed transfer would result in more than two subleases of
portions of the Premises being in effect at any time during the term;
(b) The rent payable by the proposed transferee would be less than
the fair market rental value for the space as determined pursuant to the last
paragraph of this Section 17.1;
(c) The proposed transferee is an existing tenant or occupant of the
Building or has negotiated with Landlord within the last twelve months for space
in the Building or is another transferee prohibited by the next to last
paragraph of this Section 17.1;
(d) The proposed transferee is a governmental entity;
(e) The transaction calls for new demising walls to be built, and
the portion of the Premises proposed to be sublet or assigned is irregular in
shape and/or has inadequate means of ingress and egress;
(f) The use of the Premises by the proposed transferee (i) is not
permitted by the use provisions of this Lease, or (ii) might, in Landlord's
reasonable opinion, violate any right for an exclusive use granted by Landlord
to another Tenant in the Building;
(g) The transfer would likely result, in Landlord's reasonable
opinion, in a significant increase in the use of the parking areas or common
areas of the Building due to the transferee's employees or visitors, and/or
significant increase in the demand for utilities and services to be provided by
Landlord to the Premises;
(h) The assignee or subtenant does not, in Landlord's reasonable
opinion, have the financial capability to fulfill the obligations imposed by the
transfer, or in the case of an assignment, the assignee does not, in Landlord's
reasonable opinion, have income and net worth at least equal to that of Tenant;
(i) The transferee is not, in the Landlord's reasonable opinion, of
reputable or good character or consistent with Landlord's desired tenant mix;
(j) The transferee is a real estate developer or landlord or is
acting directly or indirectly on behalf of a real estate developer or landlord;
(k) The proposed transferee may, in Landlord's reasonable opinion,
increase the chances of significant hazardous waste contamination within the
Premises or the Building;
(l) In the reasonable judgment of the Landlord, the purpose for
which the transferee intends to use the Premises is not in keeping with the
standards of the Landlord for the Building or is in violation of the terms of
any other lease in the Building; or
(m) Landlord has not leased 95% of the rentable area in the
Building.
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Notwithstanding the foregoing, Tenant may, subject to the rest of the
terms hereof, sublet all of the Premises or assign this Lease to any entity
controlling, controlled by or under common control with Tenant, (including
assignment or subletting to any corporation resulting from a merger or
consolidation with Tenant, or to any person or entity which acquires all the
assets of Tenant's business as a going concern) provided that, with regard to
each such assignment or subletting: (A) Landlord receives the financial
statements prescribed above and such other financial and background information
as Landlord may request regarding the assignee or subtenant at least 20 days
prior to such proposed assignment or sublease; (B) the Landlord determines, in
its reasonable discretion, that the income and net worth of the assignee or
subtenant comply with the standards prescribed in item (h) above; (C) the use of
the Premises is not altered; (D) the Landlord determines, in its sole and
absolute discretion, that the transaction is not being entered into as a
subterfuge to avoid the restrictions on assignment and subletting in the Lease;
and (E) the subtenant or assignee expressly assumes the obligations of Tenant
hereunder as prescribed below in this Section 17.1.
Neither this Lease nor the term hereby demised shall be mortgaged by
Tenant, nor shall Tenant mortgage, assign, pledge or otherwise transfer the
interest of Tenant in and to any sublease or the rentals payable thereunder or
in the Security Deposit.
Any sublease, assignment, mortgage, pledge, encumbrance, or transfer made
in violation of this Section 17.1 shall be void and at Landlord's election shall
terminate this Lease.
Each subtenant, assignee or transferee of Tenant, other than Landlord,
shall assume all obligations of Tenant under this Lease and shall be and remain
liable jointly and severally with Tenant for the payment of the rent, and for
the due performance of all the terms, covenants, conditions and agreements
herein contained on Tenant's part to be performed for the term of this Lease
(provided that in the case of a sublease, the subtenant's obligations shall be
limited to those obligations relating to the subleased space and the common
areas during the sublease term). No sublease or assignment shall be deemed
approved by Landlord unless such subtenant or assignee and Tenant shall deliver
to Landlord a counterpart of such sublease or assignment and an instrument in a
form acceptable to Landlord, which contains a covenant of assumption by the
subtenant or assignee satisfactory in substance and form to Landlord, consistent
with the requirements of this Section 17.1, but the failure or refusal of the
subtenant or assignee to execute such instrument or assumption shall not release
or discharge the subtenant or assignee from its liability as set forth above.
No subtenant or assignee not complying with the foregoing requirements
shall have any interest in the Security Deposit. Any assignee that does
comply with the foregoing requirements shall automatically succeed to Tenant's
position with respect to the Security Deposit, and Landlord shall have the right
to refund all or any portion of the Security Deposit to the assignee at any time
or under any circumstances with no liability to the assignor.
Landlord may require that the assignee or subtenant remit directly to
Landlord on a monthly basis, all monies due to Tenant by said assignee or
subtenant. In such event Landlord shall apply the sums received to the
obligations of Tenant and its successors under this Lease.
In the event of default by any assignee or subtenant or any successor of
Tenant in the performance of any of the terms hereof, Landlord may proceed
directly against Tenant without the necessity of exhausting remedies against
such assignee, subtenant or successor.
Landlord may consent to subsequent assignments of the Lease or sublettings
or amendments or modifications to the Lease with the assignee or other successor
of Tenant, and without obtaining Tenant's consent thereto, and any such actions
shall not relieve Tenant of liability under this Lease.
Consent by Landlord to one assignment or subletting shall not be deemed
consent to any subsequent assignment or subletting.
If Tenant is a corporation which, under California law, is not deemed a
publicly-held corporation, or is an unincorporated association or partnership,
the transfer, assignment or hypothecation of any stock or interest controlling
such corporation, association or partnership shall be deemed an assignment
within the meaning and provisions of this Section 17. For purposes hereof,
"control" shall be deemed to refer to any amount, in the aggregate, exceeding
25% of the voting power of such corporation, association or partnership.
Notwithstanding the foregoing, the immediately preceding sentence shall not
apply to any transfer of stock of Tenant if Tenant is a publicly-held
corporation and such stock is transferred publicly over a recognized security
exchange or over-the-counter market.
Tenant agrees that all advertising by Tenant to market the space in the
Premises to be sublet or assigned shall require Landlord's prior written
approval, which shall not be unreasonably withheld. Tenant further agrees that
it shall not,
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without Landlord's prior written consent, which may be granted or withheld in
Landlord's sole discretion, market any space in the Premises, assign the lease
or sublet any space in the Premises to existing tenants or occupants of the
Building, or to any entity controlling, controlled by, or under common control
with any existing tenant or occupant of the Building, except for any entity
controlling, controlled by or under common control with Tenant.
Tenant agrees that it shall not sublet, nor assign, nor advertise as
available for subletting or assignment, nor list with brokers for subletting or
assignment, all or any portion of the Premises for a consideration which is
equal to less than the fair market rental value, as determined by Landlord in
its reasonable discretion, for comparable space in the Building for a comparable
term commencing concurrently with the assignment or sublease term, with
comparable rent credits and tenant improvement allowances. Within 10 days after
Landlord receives any written request from Tenant for Landlord's estimate of the
fair market rental value for specified space (which request shall identify the
space in question, the proposed term and the proposed rent credits and
improvement allowances), Landlord shall notify Tenant in writing of the fair
market rental value for such space for a comparable term with comparable rent
credits and tenant improvement allowances.
17.2 In the event that Tenant desires to assign this Lease, or to enter
into a sublease, as to all or any portion of the Premises, except where the
subtenant or assignee is an entity controlling, controlled by or under common
control with Tenant, Tenant shall, prior to solicitation of offers therefor,
give Landlord notice of Tenant's desire to assign or sublet and of the portion
of the Premises to be affected by the proposed assignment or sublease. Landlord
shall have the right, exercisable by notice to Tenant within 60 days after
Landlord's receipt of Tenant's notice of desire to assign or sublet, to
terminate this Lease as to the portion of the Premises affected by the proposed
assignment or sublease, such termination to be effective as of the date 60 days
after notice by Landlord to Tenant of such termination.
In the event of a termination of this Lease as to a portion of the Premises
pursuant to this Section 17.2, effective as of such termination, the Premises
shall be deemed to no longer include the portion of the Premises subject to such
termination, Tenant shall surrender possession of that portion of the Premises
in accordance with the provisions of this Lease, and the rent payable hereunder
and Tenant's Percentage Share shall be appropriately adjusted based upon the
rentable area remaining within the Premises.
If Landlord does not elect to terminate pursuant to this Section 17.2, and
if Tenant does not enter into an assignment or sublease as specified in Tenant's
notice of desire to assign or sublet within 6 months after the expiration of
Landlord's 60-day period for election to terminate, then Tenant shall again
comply with the provisions of this Section 17.2 before assigning this Lease, or
entering into a sublease, as to all or any portion of the Premises.
17.3 In the event that Tenant has sought and received Landlord's consent
to assign this Lease, or to enter into a sublease as to all or any portion of
the Premises, the monthly rent payable by Tenant to Landlord, pursuant to
Section 3, shall be increased by the amount to be received by Tenant during each
month pursuant to the terms of the assignment or sublease, in excess of Tenant's
monthly rental payable to Landlord for the space subject to the assignment or
sublease. The amounts referred to in the previous sentence include rent,
additional rent, or any other payment in respect of use or occupancy, or in
reimbursement of costs of leasehold improvements installed by Tenant, and
whether paid in a lump sum or periodic payments. In no event shall the total
sums payable to the Landlord be less than the monthly rental Landlord would have
received but for such assignment or sublease.
The additional rent shall be due and payable to Landlord in accordance with
the schedule specified in the sublease or assignment instrument, and the failure
of any subtenant or assignee to make any payments in accordance with that
schedule shall not affect the obligation of Tenant to pay the additional rent to
Landlord.
The calculation of the amount of rentable space being sublet shall be made
by Landlord in accordance with its usual standards. Landlord may require
acknowledgment by Tenant of Tenant's concurrence on the Landlord's calculation
of the amount of rentable space being sublet as a condition to Landlord's
consent to any sublease.
The provisions of a sublease or assignment instrument consented to by
Landlord cannot be modified, nor the sublease or assignment terminated, other
than in accordance with its terms, without the prior written consent of the
Landlord, which consent shall not be unreasonably withheld. The terms of this
Section 17.3 shall apply to any subleasing or assignment by any subtenant or
assignee.
17.4 Tenant shall pay to Landlord, promptly upon receipt of a billing from
Landlord, the amount of Landlord's reasonable attorney fees incurred in
connection with Landlord's review or approval of any sublease or assignment
transaction requiring Landlord's consent hereunder.
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18. TRANSFER OF LANDLORD'S INTEREST. In the event of any transfer of
Landlord's interest in the Building or Premises, other than a transfer for
security purposes only, the transferor shall be automatically relieved of any
and all obligations and liabilities on the part of Landlord accruing from and
after the date of such transfer, including, without limitation, the obligation
of Landlord to return the Security Deposit as provided in this Lease: provided
that the transferor shall, within a reasonable time, transfer any Security
Deposit then held by Landlord, or any portion thereof remaining after proper
deductions therefrom, to the transferee and shall thereafter notify Tenant of
such transfer, of any claims made against the Security Deposit, and of the
transferee's name and address, by written notice delivered personally (in which
case Tenant shall acknowledge receipt of such notice by signing Landlords's copy
of such notice) or by registered or certified mail.
19. HOLDING OVER. If Tenant holds over after the term hereof, with or
without the express or implied consent of Landlord, such tenancy shall be from
month-to-month only, and shall not constitute a renewal hereof or an extension
for any further term, and in such case, Base Rent shall be payable at a monthly
rate equal to the greater of: (a) two hundred percent (200%) of the Base Rent
applicable to the Premises immediately prior to the date of such expiration or
earlier termination; or (b) one hundred fifty percent (150%) of the prevailing
market rate excluding any rental or other concessions (as reasonably determined
by Landlord) for the Premises in effect on the date of such expiration or
earlier termination. Such month-to-month tenancy shall be subject to every
other term, covenant and agreement contained herein. Nothing contained in this
Section 19 shall be construed as consent by Landlord to any holding over by
Tenant, and Landlord expressly reserves the right to require Tenant to surrender
possession of the Premises to Landlord as provided in this Lease upon the
expiration or other termination of this Lease.
20. NOTICES. In every case when, under the provisions of this Lease, it
shall be necessary or desirable for one party hereto to serve any notice,
request or demand on the other, such notice or demand shall be in writing and
shall be served personally or by deposit in the United States mail, postage and
fees fully prepaid, registered or certified mail, with return receipt requested,
addressed to the applicable address for notice set forth in Section A on page 1.
Landlord or Tenant may, from time to time, by notice in writing served upon the
other as aforesaid, designate a different mailing address or a different
person to whom all such notices or demands are thereafter to be addressed.
Service of any such notice or demand if given personally shall be deemed
complete upon delivery, and if made by mail shall be deemed complete on the day
of actual delivery as shown by the addressee's registry or certification receipt
or at the expiration of 2 business days after the date of mailing, whichever is
earlier.
Notwithstanding the provisions of this Section 20, any notice of default as
described in Section 13.2 and any pleadings or notices given by either party to
the other with respect to any judicial proceeding between the parties shall be
served in the manner prescribed by applicable California law without reference
to this paragraph, and shall be deemed served at such time as is provided by
such applicable law without reference to this paragraph.
21. QUIET ENJOYMENT. Landlord covenants that Tenant, upon paying the
rent and performing the covenants of this Lease on Tenant's part to be
performed, shall and may peaceably and quietly have, hold and enjoy the Premises
for the term of this Lease.
22. TENANT'S FURTHER OBLIGATIONS.
22.1 Except for ordinary wear and as otherwise provided in this Lease,
Tenant shall, at Tenant's expense, keep in good order, condition and repair the
interior of the Premises and shall promptly and adequately repair all damage to
the interior of the Premises and replace or repair all glass, fixtures,
equipment and appurtenances therein damaged or broken, under the supervision and
with the approval of Landlord and, if Tenant does not do so, Landlord may, but
need not, make such repairs and replacements. If Landlord does so, Tenant shall
pay Landlord the cost thereof promptly upon demand, as additional rent
hereunder.
22.2 Tenant shall comply with all laws, ordinances, rules, regulations,
orders and directives of governmental and quasi-governmental bodies and
authorities having jurisdiction over Tenant or the Premises from time to time
and shall obtain and keep in effect all licenses, permits (including but not
limited to conditional use permits) and other authorizations required with
respect to the business or businesses conducted by Tenant within or from the
Premises or with respect to any special equipment or facilities of Tenant
permitted under the other provisions of this Lease. Tenant and its employees,
agents, licensees and invitees shall also comply with all reasonable rules and
regulations which Landlord may adopt from time to time for the protection and
welfare of the Building and its tenants and occupants; provided that Tenant
shall not be responsible for compliance with any rule or regulation adopted by
Landlord unless or until Tenant is furnished with a copy thereof. The present
rules and regulations for the Building are attached hereto as Exhibit "B".
Landlord shall have no liability to Tenant for the failure of any other tenant
in the Building to observe the rules and regulations.
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23. ESTOPPEL CERTIFICATE BY TENANT. At any time and from time to time,
within 15 days after written request by Landlord, Tenant shall execute,
acknowledge and deliver to Landlord a statement in writing certifying that this
Lease is unmodified and in full force and effect (or if there have been
modifications, that this Lease is in full force and effect as modified and
stating the modifications), that Tenant knows of no default hereunder by
Landlord and has no right of offset or deduction against the rent or any other
charge payable to Landlord (or specifying any claimed), the amount of any
security posted by Tenant, the dates to which the rent and other charges have
been paid in advance, any increases or decreases of rent that are anticipated,
the commencement date of the Lease and such other matters as may be reasonably
requested by Landlord. It is intended that any statement delivered pursuant to
this Section 23 may be relied upon by any purchaser of the fee or mortgagee or
beneficiary or assignee of any mortgage or trust deed upon the fee of the
Building or Premises. Tenant's failure to deliver the statement within the
period specified above shall be conclusive and binding upon Tenant that the
Lease is in full force and effect without modification except as may be
represented by Landlord, that there are no uncured defaults in Landlord's
performance and that Tenant has no right of offset, counterclaim or deduction
against rental, and that no more than one month's rental has been paid in
advance.
24. SUBORDINATION AND ATTORNMENT. This Lease is and at all times shall
be subject and subordinate to any ground or underlying leases, mortgages, trust
deeds or like encumbrances, which may now or hereafter affect the Building or
Premises, and to all renewals, modifications, consolidations, replacements and
extensions of any such lease, mortgage, trust deed or like encumbrance. As a
condition precedent to the effectiveness of any such subordination of this Lease
to any future ground or underlying leases or the lien of any future mortgages,
deeds of trust, or like encumbrances, Landlord shall provide to Tenant a
commercially reasonable non-disturbance and attornment agreement in favor of
Tenant executed by such future ground lessor, master lessor, mortgagee or deed
of trust beneficiary, as the case may be, which shall provide that Tenant's
quiet possession of the Premises shall not be disturbed on account of such
subordination to such future lease or lien so long as Tenant is not in default
under any provisions of this Lease. Notwithstanding the foregoing, Landlord
shall have the right to subordinate or cause to be subordinated any or all
ground or underlying leases or the lien of any or all mortgages, deeds of trust
or like encumbrances to the Lease. In the event that any ground or underlying
lease terminates for any reason or any mortgage, deed of trust or like
encumbrance is foreclosed or a conveyance in lieu of foreclosure is made for any
reason, then at the election of Landlord's successor-in-interest, Tenant shall
attorn to and become the tenant of such successor. Tenant hereby waives its
rights under any current or future law which gives or purports to give Tenant
any right to terminate or otherwise adversely affect this Lease and the
obligations of Tenant hereunder in the event of any such foreclosure proceeding
or sale. Tenant covenants and agrees to execute and deliver to Landlord in the
form reasonably required by Landlord, within 10 days after receipt of written
demand by Landlord, any additional documents evidencing the priority or
subordination of this Lease with respect to any ground or underlying lease or
the lien of any mortgage, deed of trust, or like encumbrance. Should Tenant fail
to sign and return any such documents within said 10-day period, Tenant shall be
in default hereunder without the benefit of any additional notice or cure
periods, except as may be required by statute.
25. RIGHTS RESERVED TO LANDLORD.
25.1 All portions of the Building are reserved to Landlord, including
exterior building walls, core corridor walls and doors and any core corridor
entrance, but excluding the Premises and the inside surfaces of all walls,
windows and doors bounding the Premises. Landlord also reserves any space in or
adjacent to the Premises used for shafts, stacks, pipes, conduits, fan rooms,
ducts, electric or other utilities, sinks or other building facilities, and the
use thereof, as well as the right to access thereto through the Premises for the
purposes of operation, maintenance, decoration and repair.
25.2 Landlord shall have the following rights exercisable without notice
and without liability to Tenant for damage or injury to property, person or
business (all claims for damage being hereby released), and without effecting an
eviction or disturbance of Tenant's use or possession or giving rise to any
claim for setoffs or abatement of rent:
(a) To enter the Premises at all reasonable times during the
term of this Lease for the purpose of inspecting the same, supplying janitorial
service, posting notices of non-responsibility, exhibiting the Premises to
prospective tenants, purchasers or others, or making such repairs or
replacements therein as may be required by this Lease or as Landlord may deem
appropriate; provided that Landlord shall use all reasonable efforts not to
disturb Tenant's use and occupancy and shall, when practical, give Tenant prior
notice of such repairs. For each of the foregoing purposes, Tenant shall
provide to Landlord a key with which to unlock at any time all of the doors in,
upon and about the Premises, excluding Tenant's vaults and safes. Landlord may
use any other means which Landlord may deem proper to open such doors in an
emergency in order to obtain entry to the Premises. Any entry to the Premises
obtained by Landlord by any means shall not under any circumstances be construed
or deemed to be a forcible or unlawful entry into, or a detainer of, the
Premises, or an eviction of Tenant from the Premises or any portion thereof, or
grounds for any abatement or reduction of rent. Any damages or losses on
account of any such entry by Landlord shall be Tenant's sole responsibility
except as otherwise
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expressly provided herein. Nothing in this Section 25 shall be construed as
obligating Landlord to perform any repairs, alterations or decorations, except
as otherwise expressly required in this Lease.
(b) To change the name or street address of the Premises or
Building.
(c) To install and maintain signs on the exterior and interior of
the Building, except within the Premises.
(d) To have pass keys to the Premises.
(e) To decorate, remodel, repair, alter or otherwise prepare the
Premises for reoccupancy during the last 6 months of the term hereof if, during
or prior to such time, Tenant has vacated the Premises, or at any time after
Tenant abandons the Premises.
(f) To have access to all mail chutes according to the rules of the
United States Postal Service.
(g) To do or permit to be done any work in or about the exterior of
the Building or any adjacent or nearby building, land, street or alley.
(h) To grant to anyone the exclusive right to conduct any business
or render any service in the Building, provided such exclusive right shall not
operate to exclude Tenant from the use expressly permitted by this Lease.
26. FORCE MAJEURE. Whenever there is provided in this Lease a time
limitation for performance by Landlord or Tenant of any construction, repair,
maintenance or service, the time provided for shall be extended for as long as
and to the extent that delay in compliance with such limitation is due to an act
of God, governmental control or other factors beyond the reasonable control of
Landlord or Tenant, respectively.
27. WAIVER OF CLAIMS; INDEMNITY.
27.1 Tenant, as a material part of the consideration to Landlord, hereby
assumes all risk of, and waives all claims it may have against Landlord, its
agents, employees, affiliates and successors in interest for damage to or loss
of property or personal injury or loss of life resulting from the Building or
Premises or any part thereof becoming out of repair, by reason of any repair or
alteration thereof, or resulting from any accident within the Building or
Premises or on or about any space adjoining the Building or Premises, or
resulting directly or indirectly from any act or omission of any person, or due
to any condition, design or defect of the Building or Premises, or any space
adjoining the Building or Premises, or the mechanical systems of the Building or
Premises, which may exist or occur, whether such damage, loss or injury results
from conditions arising upon the Premises or upon other portions of the
Building, or from other sources or places, and regardless of whether the cause
of such damage, loss or injury or the means of repairing the same is accessible
to Tenant; provided such assumption and waiver shall not apply to claims caused
by the gross negligence or willful misconduct of Landlord or its agents.
27.2 Tenant hereby indemnifies and holds Landlord and Landlord's agents,
employees, affiliates and successors in interest harmless from and against any
and all claims, demands, suits, fines, losses and other liabilities for or
relating to injury or loss of life to persons or damage to or loss of property
arising from Tenant's use of the Building or the Premises or from the conduct of
Tenant's business or from any work done, permitted or suffered by Tenant in or
about the Premises or elsewhere, and further indemnifies and holds Landlord and
Landlord's agents, employees, affiliates and successors in interest harmless
from and against any and all claims arising from any breach or default in the
performance of any obligation on Tenant's part to be performed under the terms
of this Lease, or arising from any negligence or intentional conduct of Tenant
or Tenant's agents, employees, contractors, licensees, invitees, representatives
or successors in interest, and from and against all costs, attorneys' and other
professional fees, expenses and liabilities incurred by Landlord or Landlord's
agents, employees, affiliates and successors in interest in or in connection
with any such claim, demand, suit, fine or proceeding. In the event that any
action or proceeding be brought against Landlord or Landlord's agents,
employees, affiliates or successors in interest by reason of any such claim,
Tenant upon notice from Landlord shall defend such action or proceeding at
Tenant's cost and expense by counsel approved by Landlord, such approval not to
be unreasonably withheld.
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28. INSURANCE.
28.1 Tenant shall procure and shall maintain in effect, at Tenant's sole
cost and expense throughout the term of this Lease, including any extensions and
renewals thereof, public liability and property damage insurance against claims
for bodily injury, death or property damage occuring upon or about the Premises
or Building, in each case naming Landlord as additional insured and, upon
request by Landlord, naming the holder of any mortgage, deed of trust or like
encumbrance or the lessor under any underlying lease covering the Building as
additional insured, with a limit of liability of (a) not less than $1,000,000.00
single limit during the initial three-year period of the Lease term from the
Commencement Date to the third anniversary of the Lease term; and (b) not less
than $2,000,000.00 single limit during the balance of the Lease term from the
day after the third anniversary of the Lease term to the end of the Lease term.
If from time to time, the limits of liability set forth in Subsection 28.1(b)
above are, in the reasonable opinion of Landlord, inadequate, Tenant shall
increase such insurance coverage to an amount as shall be designated by
Landlord's notice to Tenant.
Tenant shall also procure and maintain, at Tenant's sole cost and expense
throughout the term of this Lease, casualty insurance on Tenant's personal
property in the Premises and any leasehold improvements which the Tenant
installed at its own cost in an amount at least equal to the full replacement
cost of such property, providing coverage against all perils insured against by
a "fire and extended coverage" policy, as well as sprinkler damage, vandalism
and malicious mischief.
Tenant shall also obtain the following insurance:
(a) Worker's compensation and employer's liability insurance in
form and amount satisfactory to Landlord.
(b) Loss of income and extra expense insurance in such amounts as
will reimburse Tenant for direct or indirect loss of earnings attributable to
all perils commonly insured against by prudent tenants or attributable to
prevention of access to or use of the Premises or the Building as a result of
such perils.
(c) Liquor liability insurance coverage in limits of not less than
Five Hundred Thousand Dollars ($500,000) if at any time during the term hereof
any alcoholic beverages of any nature are served on the Premises.
(d) Any other form or forms of insurance as Landlord or Landlord's
lender or ground or primary lessors may reasonably require from time to time in
form, in amounts, and for insurance risks against which a prudent tenant of a
comparable size and in a comparable business would protect itself.
Such policies of insurance shall be with insurance companies acceptable to
Landlord, shall not have a deductible amount exceeding $5,000.00 in the
aggregate, and shall specifically provide that the insurance afforded by such
policies for the benefit of Landlord and Landlord's mortgagees and ground
lessors shall be primary, and that any insurance carried by Landlord or
Landlord's, mortgagees and ground lessors shall be excess and non-contributing.
Such policies shall be evidenced by certificates of insurance delivered to
Landlord from time to time showing such insurance to be at all times prepaid and
in full force and effect and providing that such insurance cannot be cancelled
or modified upon less than 30 days' prior written notice to Landlord. If at any
time Tenant has not provided Landlord with a then currently effective
certificate of insurance acceptable to Landlord as to any insurance required to
be maintained by Tenant, Landlord may, without further inquiry as to whether
such insurance is actually in force, obtain such a policy and Tenant shall
reimburse Landlord, upon demand as additional rent hereunder, for the cost
thereof, together with Landlord's administrative fee equal to 25% of the
premium.
28.2 Tenant hereby waives its rights against Landlord and its managing
agent and their respective partners, officers, directors, shareholders,
employees, agents, representatives, contractors, affiliates, successors,
licensees, and invitees with respect to any claims or damages or losses
(including any claims for bodily injury to persons and/or damage to property)
which are caused by or result from (a) risks insured against under any insurance
policy carried by Tenant at the time of such claim, damage, loss or injury, or
(b) risks which would have been covered under any insurance required to be
obtained and maintained by Tenant under this Lease had such insurance been
obtained and maintained as required. The foregoing waivers shall be in addition
to, and not a limitation of, any other waivers or releases contained in this
Lease.
28.3 Tenant shall cause each insurance policy required to be obtained by
it pursuant to this Section 28 to provide that the insurer waives all rights of
recovery by way of subrogation against Landlord and its managing agent and their
respective partners, officers, directors, shareholders, employees, agents,
representatives, contractors, affiliates, successors, licensees, and invitees in
connection with any claims, losses and damages covered by such policy. If Tenant
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fails to maintain insurance required hereunder, Tenant shall be deemed to be
self-insured with a deemed full waiver of subrogation as set forth in the
immediately preceding sentence.
29. FIXTURES, TENANT IMPROVEMENTS AND ALTERATIONS.
29.1 Except as otherwise provided in any rider to this Lease, all
improvements, fixtures and/or equipment which Tenant may install or place in or
about the Premises, and all alterations, repairs or changes to the Premises, and
all signs installed in, on or about the Premises, from time to time shall be at
the sole cost of Tenant. Landlord shall be without any obligation in connection
therewith. Tenant hereby indemnifies and holds Landlord harmless from any
liability, cost, obligation, expense or claim of lien in any manner relating to
the installation, placement, removal or financing of any such alterations,
repairs, changes, improvements, fixtures and/or equipment in, on or about the
Premises.
29.2 Nothwithstanding any provision in this Section 29 to the contrary,
Tenant is absolutely prohibited from making any alterations, additions,
improvements or decorations which: (i) affect any area outside the Premises;
(ii) affect the Building's structure, equipment, services or systems, or the
proper functioning thereof, or Landlord's access thereto; (iii) affect the
outside appearance, character or use of the Building or the common areas; (iv)
weaken or impair the structural strength of the Building; (v) in the opinion of
Landlord, lessen the value of the Building; (vi) will violate or require a
change in any occupancy certificate applicable to the Premises; or (vii) in the
opinion of Landlord, will increase the Building's Operating Costs or Utility
Costs.
29.3 Before proceeding with any alteration, repair or change which is not
otherwise prohibited in Subsection 29.2 above, Tenant must first obtain
Landlord's written approval of(i) the plans and specifications for all such
work; (ii) with respect to any connecting lines that will be outside the
Premises (if such lines are permitted by Landlord in its sole discretion), a
description of the areas of the Building to which Tenant will require access
both for the initial work and for ongoing maintenance of the improvements or
installations; (iii) the names of all contractors and subcontractors who will
perform such work, all of whom shall be selected from Landlord's then-current
list of approved contractors, which Landlord may compile in Landlord's sole
discretion and will provide to Tenant within ten days following Landlord's
receipt of Tenant's written request; (iv) copies of all liability, casualty and
worker's compensation insurance applicable to the construction, maintenance and
ongoing operation of the improvements and installations; and (v) copies of all
governmental permits required for the work. Landlord's consent to such matters
shall not unreasonably be withheld; provided, however, that with regard to any
such matters which may affect the structural members, the heating, ventilation,
air conditioning or other building systems, exterior walls, windows and doors of
the Building, and with regard to the installation of any signs outside the
Premises, Landlord may grant or withhold its consent in its unlimited
discretion. Landlord may impose, as a condition of its consent to any
alterations, repairs or changes of the Premises, such requirements as Landlord
in its sole discretion may deem desirable, including, but not limited to, the
requirement that Tenant utilize for such purposes only contractors, materials,
mechanics and materialmen previously used and currently approved by Landlord for
work in the Building.
29.4 After Landlord has approved the change, repair or alteration and the
other items listed in Section 29.3, Tenants shall enter into an agreement for
the performance of such change, repair or alteration with the contractors and
subcontractors approved by Landlord, as provided in Section 29.3. Before
proceeding with any change, repair or alteration Tenant shall (i) provide
Landlord with 10 days' prior written notice thereof; and (ii) pay to Landlord,
within 10 days after written demand, the costs of any increased insurance
premiums incurred by Landlord as a result of such changes, repairs or
alterations. In additions, before proceeding with any change, repair or
alteration, Tenant's contractors shall obtain, on behalf of Tenant and at
Tenant's sole cost and expense: (A) all necessary governmental permits and
approvals for the commencement and completion of such change, repair or
alteration; and (B) a completion and lien indemnity bond, or other surety,
satisfactory to Landlord for such change, repair or alteration. Landlord's
approval of permits pursuant to Section 29.3 shall not relieve Tenant of the
obligation to obtain any other or supplemental permits required by the preceding
sentence.
29.5 Tenant shall pay to Landlord, as additional rent, the reasonable
costs of Landlord's engineers and other consultants (but not Landlord's on-site
management personnel) for review of all plans, specifications and working
drawings for the change, repair or alteration within 10 business days after
Tenant's receipt of invoices either from Landlord or such consultants. In
addition to such costs, Tenant shall pay to Landlord, within 10 business days
after completion of any change, repair or alteration, the actual, reasonable
costs incurred by Landlord for services rendered by Landlord's management
personnel and engineers to coordinate and/or supervise any of the change, repair
or alteration to the extent such services are provided in excess of or after the
normal on-site hours of such engineers and management personnel.
29.6 All changes, repairs and alterations shall be performed: (i) in
accordance with the approved plans, specifications and working drawings; (ii)
lien-fee and in a fist-class and workmanlike manner; (iii) in compliance with
all laws, rules, and regulations of all governmental agencies and authorities;
(iv) in such a manner so as to not interfere with
22
<PAGE>
the occupancy of any other tenant in the Building, nor impose any additional
expense or delay upon Landlord in the maintenance and operation of the Building;
and (v) at such times, in such manner and subject to rules and regulations as
Landlord may from time to time reasonably designate.
29.7 Throughout the performance of any such change, repair or alteration
Tenant shall obtain, or cause its contractors to obtain, worker's compensation
insurance and general liability insurance covering the work in compliance with
provisions of Section 28 of this Lease, and builder's risk insurance for the
work reasonably acceptable to Landlord.
29.8 In the event Tenant orders any construction, alteration, decorating or
repair work directly from Landlord, or from the contractor selected by Landlord,
the charges for such work, together with Landlord's administration fee equal to
15% of the contract price, shall be deemed additional rent under this Lease,
payable upon billing therefor, either in advance of the start of work, or
periodically during construction, or upon the substantial completion of such
work, at Landlord's option.
30. MECHANIC'S LIENS. Tenant agrees to give Landlord written notice of
the commencement date of any alterations, improvements or repairs to be made in,
to or upon the Premises not later than 15 days prior to the commencement of any
such work, in order to give Landlord time to post notices of nonresponsibility.
Tenant will not permit any mechanic's, materialman's or other lien to be placed
upon the Premises or Building or improvements therein during the term thereof;
and in the event that any mechanic's materialman's or other lien is filed
against the Premises or Building or improvements therein in connection with any
alteration, repair, improvement or change of, or installation of fixtures or
equipment in, the Premises, Tenant shall cause such lien to be released within
10 days after such filing, either by satisfaction of such claim or by posting of
a bond. Notwithstanding the foregoing, Landlord shall have the right and
privilege at Landlord's option of paying the amount of any such lien or claim,
or any portion thereof, without inquiry as to the validity thereof, and any
amounts so paid, including expenses and interest, shall be deemed additional
rent hereunder due from Tenant to Landlord upon demand.
31. ALTERNATE SPACE. If the Premises comprise less than a full floor
in the Building, Landlord shall have the privilege of moving Tenant to other
space in the Building comparable to the Premises, and all terms hereof shall
apply to the new space with equal force. In such event Landlord shall give
Tenant at least 60 days' prior notice in writing and shall move Tenant's effects
to the new space at Landlord's sole cost and expense at such time and in such
manner as to inconvenience Tenant as little as practicable.
32. HAZARDOUS MATERIALS.
32.1 In addition to its other obligations under this Lease, Tenant
covenants to comply with all laws relating to Hazardous Materials, as defined
below, with respect to the Premises and the Building. Except for general office
supplies typically used in an office area in the ordinary course of business
(such as copier toner, liquid paper, glue, ink and cleaning solvents), for use
in the manner for which they were designed and only in accordance with all
Hazardous Materials laws and the highest standards prevailing in the industry
for such use, and then only in such amounts as may be normal for the office
business operations conducted by Tenant on the Premises, neither Tenant nor any
of Tenant's agents, employees, contractors, subtenants, assignees, licensees or
invitees ("Tenant's Parties") shall use, handle store or dispose of any
Hazardous Materials in, on, under or about the Premises, the Building or the
site on which the Building is located. Tenant shall promptly take all actions,
as its sole cost and expense, as are necessary to return the Premises, Building
and site to the condition existing prior to the introduction of any such
Hazardous Materials by Tenant or any Tenant Parties, provided Landlord's
approval of such actions shall first be obtained. Furthermore, Tenant shall
immediately notify Landlord of any inquiry, test, investigation or enforcement
proceeding by or against Tenant or the Premises concerning the presence of any
Hazardous Material.
32.2 Tenant shall be solely responsible for and shall indemnify, defend
(with counsel reasonably approved by Landlord) and hold Landlord harmless from
and against any and all claims, demands, judgments, suits, causes of action,
damages, penalties, fines, liabilities, losses and expenses (including, without
limitation, investigation and clean-up costs, attorneys' fees, consultant fees
and court costs) which arise during or after the term of this Lease as a result
of the breach of any of the obligations and covenants set forth in this Section
33, and/or any contamination of the Premises, Building or site directly or
indirectly arising from the activities of Tenant or any Tenant Parties.
32.3 For purposes of this Lease, the term "Hazardous Materials" shall mean,
collectively, asbestos, any petroleum fuel, and any hazardous or toxic
substance, material or waste which is or becomes regulated or defined as
hazardous or toxic by any local governmental authority, the State of California
or the United States Government, including, but not limited to, any material or
substance defined as hazardous or toxic under the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. (S) 9601, et seq.; the
-- ---
Resource Conservation and Recovery Act,
23
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42 U.S.C. Sections 6901, et seq.; the Toxic Substances Control Act, 15 U.S.C.
------
Sections 2601, et seq.; the Federal Water Pollution Control Act, 33 U.S.C.
------
Sections 1251, et seq.; the California Hazardous Substance Account Act,
------
California Health and Safety Code Sections 25330, et seq.; the California
------
Hazardous Waste Control Act, California Health and Safety Code Sections 25100,
et seq.; the California Safe Drinking Water and Toxic Health Enforcement Act,
- ------
California Health and Safety Code Sections 25249.5, et seq.; California Health
------
and Safety Code Sections 25280, et seq. (Underground Storage of Hazardous
------
Substances); the California Hazardous Waste Treatment Reform Act, California
Health and Safety Code Sections 25179.1, et seq.; California Health and Safety
------
Code Sections 25501, et seq. (Hazardous Materials Release Response Plans and
------
Inventory); Petroleum Underground Storage Tank Cleanup, Health and Safety Code
Sections 25299.10, et seq.; and the Porter-Cologne Water Quality Control Act,
------
California Water Code Sections 13000, et seq., as such laws may be amended from
------
time to time.
32.4 The foregoing covenants and indemnities of Tenant shall survive the
expiration or earlier termination of the Lease.
33. MISCELLANEOUS.
33.1 No receipt of money by Landlord from Tenant after the termination of
this Lease, the service of any notice, the commencement of any suit or final
judgement for possession shall reinstate, continue or extend the term of this
Lease or affect any such notice, demand, suit or judgment. No payment by Tenant
or receipt by Landlord of a lesser amount than the rent payment herein
stipulated shall be deemed to be other than on account of the rent, nor shall
any endorsement or statement on any check or any letter accompanying any check
or payment as rent be deemed an accord and satisfaction, and Landlord may accept
such check or payment without prejudice to Landlord's right to recover the
balance of such rent or pursue any other remedy provided in this Lease. Tenant
agrees that each of the foregoing covenants and agreements shall be applicable
to all obligations of Tenant to Landlord, whether expressly contained in this
Lease or imposed by any statute or at common law.
33.2 If any provision of this Lease or its application to any party or
circumstances shall be determined by any court of competent jurisdiction to be
invalid or unenforceable to any extent, the remainder of this Lease or the
application of such provision to such person or circumstances, other than those
as to which it is so determined invalid or unenforceable to any extent, shall
not be affected thereby, and each provision hereof shall be valid and shall be
enforced to the fullest extent permitted by law; and it is the intention of the
parties to this Lease that in lieu of each clause or provision of this Lease
that is illegal, invalid or unenforceable, there be added as a part of this
Lease a clause or provision as similar in terms to such illegal, invalid or
unenforceable clause or provision as may be possible and be legal, valid and
enforceable.
33.3 The covenants and obligations of Tenant pursuant to this Lease shall
be independent of performance by Landlord of the covenants and obligations of
Landlord pursuant to this Lease, and performance by Tenant of each covenant and
obligation of Tenant pursuant to this Lease shall be a condition precedent to
the duty of Landlord to perform the covenants and obligations of Landlord
pursuant to this Lease.
33.4 The headings of Sections of this Lease are of convenience only and do
not define, limit or construe the contents thereof. References made in this
Lease to numbered Sections, Paragraphs and Subparagraphs shall refer to numbered
Sections, Paragraphs or Subparagraphs of this Lease unless otherwise indicated.
33.5 Where appropriate, words in the singular, including without limitation
the words "Landlord" and Tenant", include the plural, and vice versa. Words in
the neuter gender include the masculine and feminine genders, and vice versa,
and words in the masculine gender include the feminine gender, and vice versa.
33.6 If more than one person or entity executes this Lease as Tenant: (a)
each of them is and shall be jointly and severally liable for the covenants,
conditions, provisions and agreements of this Lease to be kept, observed and
performed by Tenant; and (b) the act or signature of, or notice from or to, any
one or more of them with respect to this Lease shall be binding upon each and
all of the persons and entities executing this Lease as Tenant with the same
force and effect as if each and all of them had so acted or signed, or given or
received such notice.
33.7 Time is of the essence of this Lease. Failure of either party to
perform any act strictly within the applicable period specified herein shall
entitle the other to exercise all remedies herein contemplated. All references
in this Lease to "days" shall mean calendar days unless specifically stated
herein to be "business" days.
33.8 This Lease shall be governed by and interpreted in accordance with
the laws of the State of California.
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33.9 All monetary obligations of either party hereunder to the other
remaining past due 10 days or more after the date specified herein for payment
shall bear interest until paid at the lesser of (i) the Bank of America prime
rate as of the due date plus 6%, or (ii) the maximum rate permitted by law.
33.10 This instrument, along with any riders, exhibits and attachments or
other documents referred to in Section M on page 2 (all of which riders,
exhibits, attachments and other documents are hereby incorporated into this
instrument by this reference), constitutes the entire and exclusive agreement
between Landlord and Tenant relating to the Premises, and this agreement and
said riders, exhibits and attachments and other documents may be altered,
amended or revoked only by an instrument in writing signed by the party to be
charged thereby. All prior or contemporaneous oral agreements, understandings
and/or practices relative to the leasing of the Premises are merged herein or
revoked hereby. References in this instrument to this "Lease" shall mean, refer
to and include this instrument as well as any riders, exhibits, attachments or
other documents referred to in Section M, and references to any covenant,
condition, obligation and/or undertaking "herein", "hereunder" or "pursuant
hereto" (or language of like import) shall mean, refer to and include the
covenants, conditions, obligations and undertakings existing pursuant to this
instrument and such riders, exhibits, attachments or other documents. All terms
defined in this instrument shall be deemed to have the same meanings in all
riders, exhibits, attachments or other documents referred to in Section M unless
the context thereof clearly requires the contrary.
33.11 Tenant hereby consents to amendment of this Lease as and to the
extent required by any lender which makes a loan to Landlord secured in whole or
in part by the Building, provided that no such change shall increase the rent
payable hereunder or impair Tenant's use of the Premises.
33.12 Unless otherwise agreed in writing, if Tenant has dealt with any
real estate broker or other person or firm with respect to leasing or renting
space in the Building, Tenant shall be solely responsible for the payment of any
fee due said broker, person or firm and Tenant hereby indemnifies and holds
Landlord harmless from and against any liability with respect thereto.
Notwithstanding the foregoing, Landlord agrees to pay, and to hold Tenant
harmless from, the commission owing to the brokers identified in Section L on
page 2, as provided in a separate agreement between Landlord and such brokers.
33.13 Tenant agrees to pay to Landlord as additional rent hereunder any
taxes required by law to be paid by Tenant and collected from Tenant by
Landlord.
33.14 Submission of this Lease for examination, even though executed by
Tenant, shall not bind Landlord in any manner, and no lease or other obligation
on the part of Landlord shall arise until this Lease is executed and delivered
by Landlord to Tenant. This Lease shall not be binding and in effect until a
counterpart hereof has been executed and delivered by the parties, each to the
other.
33.15 Tenant shall not cause the recordation of this Lease, a short form
memorandum of this Lease or any reference to this Lease.
33.16 Upon 10 days' prior written request from Landlord (which Landlord
may make at any time during the term but no more than two times in any calendar
year), Tenant shall deliver to Landlord (a) a current financial statement of
Tenant and any guarantor of this Lease, and (b) financial statements of Tenant
and such guarantor for the two years prior to the current financial statement
year. Such statements shall be prepared in accordance with generally acceptable
accounting principles, and certified as true in all material respects by Tenant
(if Tenant is an individual) or by an authorized officer or general partner of
Tenant (if Tenant is a corporation or partnership, respectively).
33.17 Notwithstanding anything contained in this Lease to the contrary,
the obligations of Landlord under this Lease (including any actual or alleged
breach or default of Landlord) do not constitute personal obligations of the
individual partners, directors, officers, shareholders, agents or employees of
Landlord or of Landlord's partners or agents, and Tenant shall not seek recourse
against any such persons or entities or any of their personal assets for
satisfaction of any liability with respect to this Lease. In addition, in
consideration of the benefits accruing hereunder to Tenant and notwithstanding
anything contained in this Lease to the contrary, Tenant hereby covenants and
agrees for itself and all of its successors and assigns that the liability of
Landlord for its obligations under this Lease (including any liability as a
result of any actual or alleged failure, breach or default hereunder by
Landlord) shall be limited solely to, and Tenant's and its successors' and
assigns' sole and exclusive remedy shall be against, Landlord's interest in the
Building and proceeds therefrom, and no other assets of Landlord.
33.18 If Tenant is identified herein as a corporation, then the persons
executing this Lease on behalf of Tenant hereby represent that they are duly
authorized to execute and deliver this Lease on behalf of Tenant pursuant to
Tenant's by-laws or a resolution of its board of directors.
25
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If Tenant is identified herein as a partnership, the undersigned represent
that they are all of the general partners of Tenant, that Tenant has been formed
under the laws of the State of California, and is duly qualified to do business
in the State of California, and that this Lease is being executed on behalf of
Tenant. Each of the partners of Tenant executing this Lease agrees that he or
she and Tenant are irrevocably bound by execution of any amendment to or
modification of this Lease by one or more of the partners of Tenant. Tenant
agrees that each new partner in Tenant shall be obligated under this Lease, in
the same fashion as the existing partners, and that each new partner shall
execute a copy of this Lease and deliver it to Landlord within 60 days after
that partner's admission to the partnership. In the event that such newly
admitted partner is a corporation, the principal or principals for whose benefit
the corporation has been organized shall execute and deliver to Landlord a lease
guaranty in form acceptable to Landlord. Each newly admitted partner in Tenant
shall be jointly and severally liable with the remaining partners for the
performance and satisfaction of all obligations of the Tenant under this Lease
accruing from and after the effective date of the admission of the new partner
to the Partnership. If the provisions of this paragraph are satisfied, the
admission of a new partner shall not be considered an assignment of the lease
for the purposes of Section 17 hereof.
33.19 Subject to the provisions of Section 17 above, and except as
otherwise provided in this Lease, all of the covenants, conditions and
provisions of this Lease shall be binding upon, and shall inure to the benefit
of the parties hereto and their respective heirs, personal representatives and
permitted successors and assigns; provided, however, that no rights shall inure
to the benefit of any transferee of Tenant unless the transfer to such
transferee is made in compliance with the provisions of Section 17, and no
options or other rights which are expressly made personal to the original Tenant
hereunder or in any rider attached hereto shall be assignable to or exercisable
by anyone other than the original Tenant under this Lease.
33.20 The voluntary or other surrender of this Lease by Tenant or a mutual
termination thereof shall not work as a merger and shall, at the option of
Landlord, either (a) terminate all and any existing subleases, or (b) operate as
an assignment to Landlord of Tenant's interest under any or all such subleases.
33.21 Except for Tenant's identity sign on the entry doors of the Premises
and Tenant's elevator lobby identity sign on any full floor of the Building
leased by Tenant (which signs shall be consistent with the Building's signage
program and otherwise subject to Landlord's prior written approval), Tenant
shall have no right to place any sign upon the Premises, the Building or the
site on which the Building is located or which can be seen from outside the
Premises.
33.22 The effectiveness of this Lease and Landlord's obligations hereunder
are subject to and conditional upon Tenant's delivery to Landlord of a lease
guaranty in the form prescribed by Landlord in its sole discretion, fully
executed by the guarantor or guarantors specified in Section N on page 2 of this
Lease.
34. "AS IS" CONDITION. Tenant is taking the Premises in its "as is"
shall condition existing as of the execution of this Lease. Landlord shall have
no obligation for the construction or modification of tenant improvements for
Tenant. In constructing its own tenant improvements to the Premises, Tenant
shall comply with the other applicable provisions of this Lease (including but
not limited to Section 29) and shall utilize only contractors, materials,
mechanics, materialmen, architects and engineers used and currently approved in
writing by Landlord for work in the Building.
26
<PAGE>
35. TENANT'S SUPPLEMENTAL AIR-CONDITIONING. Tenant shall have the right to
install in the Premises its own self-contained 24-hour heating, ventilating and
air-conditioning unit, subject to compliance with the other provisions of this
Lease, including but not limited to obtaining Landlord's prior written consent
to the plans and specifications for the work and electrical requirements of the
unit. Tenant shall in no event be permitted to exhaust such system out of the
west side of the Building. Tenant shall pay all costs of electricity for such
unit and, at Landlord's election, the electrical requirements for such unit
shall be separately metered to Tenant at Tenant's expense.
IN WITNESS WHEREOF, this instrument has been duly executed by the parties
hereto, as of the date first above written.
PRIMECELL, INC.,
a Washington corporation
By: /s/ Alan Chin
------------------------------------------
Its: Secretary
---------------------------------------
By:_________________________________________
Its:______________________________________
ONE WILSHIRE ARCADE IMPERIAL, LTD.,
a California limited partnership
By Paramount Group, Inc., Agent
By:____________________________________
Its:________________________________
By: [SIGNATURE ILLEGIBLE]
-----------------------------------
SENIOR VICE PRESIDENT
-------------------------
PROPERTY MANAGEMENT-OFFICE BUILDINGS
27
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Suite 2840
Approximate location.
Exact location on the
Floor subject to
change at any time
prior to delivery of
the premises.
[FLOOR PLAN APPEARS HERE]
Exhibit A
Primecall, Inc.
Suite 2840
Approximately 1,500
Rentable sq. ft.
28TH FLOOR
ONE WILSHIRE BUILDING
624 SOUTH GRAND AVE., LOS ANGELES, CA 90017
<PAGE>
[LOGO PARAMOUNT GROUP, INC. APPEARS HERE]
EXHIBIT B
RULES AND REGULATIONS
1. Tenant shall not obstruct or interfere with the rights or other
tenants of the Building, or of persons having business in the Building, or in
any way injure or annoy such tenants or persons. Tenant shall not obstruct any
sidewalks, halls, passages, corridors, exits, entrances, courts, lobby areas,
vestibules, garages, parking areas, elevators, escalators, or stairways in and
about the Building (collectively, the "Common Areas"). Such Common Areas are not
for the general public, and Landlord shall in all cases retain the right to
control and prevent access thereto of all persons whose presence in the judgment
of Landlord would be prejudicial to the safety, character, reputation and
interests of the Building and its tenants; provided that nothing herein
contained shall be construed to prevent such access to persons with whom any
tenant normally deals in the ordinary course of its business, unless such
persons are engaged in illegal activities.
2. Tenant shall not commit any act or permit any thing in or about the
Building which shall or might subject Landlord to any liability or
responsibility for injury to any person or property by reason of any business or
operation being carried on in or about the Building or for any other reason.
3. Tenant shall not use the Building for lodging, sleeping, cooking, or
for any immoral or illegal purpose or for any purpose that will damage the
Building, or the reputation thereof, or for any purposes other than those
specified in the Lease.
4. Canvassing, soliciting and peddling in the Building are prohibited,
and Tenant shall cooperate to prevent such activities.
5. Tenant shall not bring or keep within the Building any bicycle or
motorcycle.
6. Tenant shall not conduct mechanical or manufacturing operations, cook
or prepare food, or place or use any inflammable, combustible, explosive or
hazardous fluid, chemical, device, substance, or material in or about the
Building without the prior written consent of Landlord. Tenant shall comply with
all statutes, ordinances, rules, orders, regulations and requirements imposed by
governmental or quasi-governmental authorities or by Landlord from time to time
in connection with security, fire and panic safety and fire prevention and shall
not commit any act, or permit any object to be brought or kept in the Building,
which shall result in a change of the rating of the Building by the Insurance
Services Office or any similar person or entity. Tenant shall not commit any act
or permit any object to be brought or kept in the Building which shall increase
the rate of fire insurance on the Building or on property located therein.
Tenant shall provide Landlord with a name of a designated responsible employee
to represent Tenant on all matters pertaining to fire or security regulations.
Tenant shall cooperate fully in all matters concerning fire and other emergency
procedures.
7. Tenant shall not use the Building for manufacturing or for the storage
of goods, wares or merchandise, except as such storage may be incidental to the
use of the Premises for general office purposes and except in such portions of
the Premises as may be specifically designated by Landlord for such storage.
Tenant shall not occupy the Building or permit any portion of the Building to be
occupied for the manufacture or direct sale of liquor, narcotics, or tobacco in
any form, or as a medical office, barber shop, manicure shop, music or dance
studio or employment agency. Tenant shall not conduct in or about the Building
any auction, public or private, without the prior written approval of Landlord.
8. Tenant shall not install or use in the Building any air conditioning
unit, engine, boiler, generator, machinery, heating unit, stove, water cooler,
ventilator, radiator or any other similar apparatus without the express prior
written consent of Landlord, and then only as Landlord may direct.
9. Tenant shall not use in the Building any machines, other than standard
office machines such as typewriters, calculators, copying machines and similar
machines, without the express prior written consent of Landlord. If Tenant
requires telegraphic, telephonic, burglar alarm or similar services, it shall
first obtain, and comply with, Landlord's
B-1
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instructions in their installation. Tenant shall not install, maintain or
operate upon the Premises any vending machine without the consent of Landlord.
10. Tenant shall move all freight, supplies, furniture, fixtures and other
personal property into, within and out of the Building only at such times and
through such entrances as may be designated by Landlord, and such movement of
such items shall be under the supervision of Landlord. Landlord reserves the
right to inspect all such freight, supplies, furniture, fixtures and other
personal property to be brought into the Building and to exclude from the
Building all such objects which violate any of these rules and regulations or
the provisions of the Lease. Tenant shall not move or install such objects in or
about the Building in such a fashion as to unreasonably obstruct the activities
of other tenants, and all such moving shall be at the sole expense, risk and
responsibility of Tenant. Prior to permitting access into the Building of the
moving company or other persons performing such moving activities, Landlord may
require from such moving company or other persons evidence of insurance
reasonably acceptable to Landlord, from an insurer and with coverage and amounts
reasonably acceptable to Landlord, covering the moving activities and naming
Landlord and its managing agent as additional insureds. Tenant shall not use in
the delivery, receipt or other movement of freight, supplies, furniture,
fixtures and other personal property to, from or within the Building, any hand
trucks other than those equipped with rubber tires and side guards. Any freight
elevator shall be available for use by Tenant in common with other tenants in
the Building, subject to such reasonable scheduling as Landlord in its
discretion shall deem appropriate. No equipment, materials, furniture, packages,
supplies, merchandise or other property will be received in the Building or
carried in the elevators except between such hours and in such elevators as may
be designated by Landlord.
11. Tenant shall not place a load upon any floor of the Premises which
exceeds the load per square foot which such floor was designed to carry and
which is allowed by law. Landlord shall have the right to prescribe the weight,
size and position of all equipment, materials, furniture or other property
brought into the Building. Heavy objects, if such objects are considered
necessary by Tenant, and are permitted by Landlord, shall stand on such
platforms as determined by Landlord to be necessary to properly distribute the
weight. Business machines and mechanical equipment belonging to Tenant, which
cause noise or vibration that may be transmitted to the structure of the
Building or to any space therein to such a degree as to be objectionable to
Landlord or to any tenants in the Building, shall be placed and maintained by
Tenant, at Tenant's expense, on vibration eliminators or other devices
sufficient to eliminate noise or vibration. The persons employed to move such
equipment in or out of the Building must be acceptable to Landlord. Landlord
will not be responsible for loss of, or damage to, any such equipment or other
property from any cause, and all damage done to the Building by maintaining or
moving such equipment or other property shall be repaired at the expense of
Tenant.
12. Tenant shall not deposit any trash, refuse, cigarettes, or other
substances of any kind within or out of the Building, except in the refuse
containers provided therefor. Tenant shall not introduce into the Building any
substance which might add an undue burden to the cleaning or maintenance of the
Premises or the Building, and Tenant shall not place in any trash box or
receptacle any material which cannot be disposed of in the ordinary and
customary manner of trash and garbage disposal. All garbage and refuse disposal
shall be made in accordance with directions reasonably issued from time to time
by Landlord. Tenant shall exercise its best efforts to keep the Common Areas
clean and free from rubbish.
13. Tenant shall use the Common Areas only as a means of ingress and
egrees, and Tenant shall permit no loitering by any persons upon Common Areas or
elsewhere within the Building. The Common Areas and roof of the Building are not
for the use of the general public, and Landlord shall in all cases retain the
right to control or prevent access thereto by all persons whose presence, in the
judgment of Landlord, shall be prejudicial to the safety, character, reputation
or interests of the Building and its tenants. Neither Tenant nor any employee or
invitee of Tenant shall enter the mechanical rooms, air conditioning rooms,
electrical closets, janitorial closets, or similar areas or go upon the roof of
the Building without the express prior written consent of Landlord.
14. Landlord reserves the right to exclude or expel from the Building any
person who, in the judgment of Landlord, is intoxicated or under the influence
of liquor or drugs or who shall in any manner act in violation of the rules and
regulations of the Building.
15. Landlord shall have the right to designate the area or areas, if any,
in which Tenant and Tenant's servants, employees, contractors, jobbers, agents,
licensees, invitees, guests and visitors may park vehicles, and Tenant and its
servants, employees, contractors, jobbers, agents, licensees, invitees, guests,
and visitors shall observe and comply with all driving and parking signs and
markers within and about the Building. All parking ramps and areas and any
pedestrian walkways, plazes or other public areas forming a part of the Building
or the land upon which the Building is situated shall be under the sole and
absolute control of Landlord, who shall have the exclusive right to regulate and
control those areas.
B-2
<PAGE>
16. Tenant shall not use the washrooms, restrooms and plumbing fixtures
of the Building, and appurtenances thereto, for any other purpose than the
purpose for which they were constructed, and Tenant shall not deposit any
sweepings, rubbish, rags or other improper substances therein. Tenant shall not
waste water by interfering or tampering with the faucets or otherwise. If Tenant
or Tenant's servants, employees, contractors, jobbers, agents, licensees,
invitees, guests or visitors cause any damage to such washrooms, restrooms,
plumbing fixtures or appurtenances, such damage shall be repaired at Tenant's
expense, and Landlord shall not be responsible therefor.
17. Tenant shall not mark, paint, drill into, cut, string wires within,
or in any way deface any part of the Building, without the express prior written
consent of Landlord, and as Landlord may direct. Upon removal of any wall
decorations or installations or floor coverings by Tenant, any damage to the
walls or floors shall be repaired by Tenant at Tenant's sole cost and expense.
All cleaning and janitorial services for the Building and the Premises shall be
provided exclusively through Landlord, and except with the written consent of
Landlord, no person or persons other than those approved by Landlord shall be
employed by Tenant or permitted to enter the Building for the purpose of
cleaning the same. Tenant shall not cause any unnecessary labor by carelessness
or indifference to the good order and cleanliness of the Premises. Landlord
shall not in any way be responsible to Tenant for any loss of property on the
Premises, however occurring, or for any damage to any Tenant's property by the
janitor or any other employee or any other person. Without limitation upon any
of the provisions of the Lease, Tenant shall refer all contractors'
representatives, installation technicians, janitorial workers and other
mechanics, artisans and laborers rendering any service in connection with the
repair, maintenance or improvement of the Premises to Landlord for Landlord's
supervision, approval and control before performance of any such service. This
Paragraph 17 shall apply to all work performed in the Building, including
without limitation installation of telephones, telegraph equipment, electrical
devices and attachments and installations of any nature affecting floors, walls,
woodwork, trim, windows, ceilings, equipment or any other portion of the
Building. Plans and specifications for such work prepared at Tenant's sole
expense, shall be submitted to Landlord and shall be subject to Landlord's
express prior written approval in each instance before the commencement of work.
All installations, alterations and additions shall be constructed by Tenant in a
good and workmanlike manner and only good grades of material shall be used in
connection therewith. The means by which telephone, telegraph and similar wires
are to be introduced to the Premises and the location of telephones, call boxes
and other office equipment affixed to the Premises shall be subject to the
express prior written approval of Landlord. Tenant shall not lay linoleum or
similar floor coverings so that the same shall come into direct contact with the
floor of the Premises and, if linoleum or other similiar floor covering is to be
used, such use shall be subject to the prior written approval of Landlord, and
Landlord may require, among other things, that an interlining of builder's
deadening felt shall be first affixed to the floor, by a paste or other material
soluble in water. The use of cement or other similar adhesive material is
expressly prohibited.
18. No signs, awnings, showcases, advertising devices or other
projections or obstructions shall be attached to the outside walls of the
Building or attached or placed upon any Common Areas. No window shades, blinds,
drapes or other window coverings shall be installed in the Building without the
express prior written consent of Landlord. No sign, picture, advertisement,
window display or other public display or notice shall be inscribed, exhibited,
painted or affixed by Tenant upon or within any part of the Premises in such a
fashion as to be seen from the outside of the Premises or the Building without
the express prior written consent of Landlord. In the event of the violation of
any of the foregoing by Tenant, Landlord may remove the articles constituting
the violation without any liability and Tenant shall reimburse Landlord for the
expense incurred in such removal upon demand as additional rent under the Lease.
Interior signs on doors and upon the Building directory shall be subject to the
express prior written approval of Landlord and shall be inscribed, painted, or
affixed by Landlord at the expense of Tenant. Tenant shall not install any radio
or television antennas, loudspeaker, or other device on the roof or exterior
walls of the Building, unless explicitly permitted elsewhere in this Lease, and
Tenant shall not interfere with radio or television broadcasting or reception
from or in the Building or elsewhere.
19. Tenant shall not use the word "Paramount" or the name of the Building
or of the Landlord in its business name, trademarks, signs, advertisements,
descriptive material, letterhead, insignia or any other similar item without
Landlord's express prior written consent, except for the purpose of identifying
Tenant's address.
20. Tenant shall be entitled to have its name entered upon the directory
of the Building. In the event that Tenant wishes to have additional entries made
upon the Building directory for the names of employees of Tenant who occupy
office space within the Premises, such entries may be allowed by Landlord in its
reasonable discretion, and Landlord may require that Tenant pay a reasonable fee
for each such additional entry. However, the directory of the Building is
provided primarily for the display of the name and location of tenants only, and
Landlord reserves the right to exclude any other names therefrom at any time.
All entries upon the Building directory shall be in uniform print of a size,
style and format selected by Landlord.
B-3
<PAGE>
21. The sashes, sash doors, skylights, windows and doors that reflect or
admit light or air into the Common Areas shall not be covered or obstructed by
Tenant, through placement of objects upon window sills or otherwise. Tenant
shall cooperate with Landlord in obtaining maximum effectiveness of the cooling
and heating systems of the Building by keeping corridor doors closed and by
closing drapes and other window coverings when the sun's rays fall upon windows
of the Premises and at the end of the business day. Tenant shall not obstruct,
alter or in any way impair the efficient operation of Landlord's heating,
ventilating, air conditioning, electrical, fire, safety or lighting systems, nor
shall Tenant tamper with or change the setting of any thermostat or temperature
control valves in the Building. Tenant shall not waste electricity, water or air
conditioning and agrees to cooperate fully with Landlord to assure the most
effective operation of the Building's heating and air conditioning and to comply
with any governmental energy-saving rules, laws or regulations of which Tenant
has actual notice.
22. Subject to applicable fire or other safety regulations, all doors
opening onto Common Areas and all doors upon the perimeter of the Premises shall
be kept closed and, during non-business hours, locked, except when in use for
ingress or egress. If Tenant uses the Premises after regular business hours or
on non-business days Tenant shall lock any entrance doors to the Building or to
the Premises used by Tenant immediately after using such doors.
23. The requirements of Tenant will be attended to only upon appropriate
application to the office of the Building by an authorized individual. Tenant
shall not request employees of Landlord to perform any work or do anything
outside of their regular duties unless under special instructions from Landlord
or the project manager for the Building. Tenant shall not request any employee
of Landlord to admit any person (Tenant or otherwise) to any office without
specific instructions from Landlord or the project manager for the Building.
Employees of Landlord shall not receive or carry messages for or to Tenant or
any other person, nor contract with nor render free or paid services to Tenant
or Tenant's servants, employees, contractors, jobbers, agents, invitees,
licensees, guests or visitors. In the event that any of Landlord's employees
perform any such services, such employees shall be deemed to be the agents of
Tenant regardless of whether or how payment is arranged for such services, and
Tenant hereby indemnifies and holds Landlord harmless from any and all
liability in connection with any such services and any associated injury or
damage to property or injury or death to persons resulting therefrom.
24. All keys to the exterior doors of the Premises shall be obtained by
Tenant from Landlord, and Tenant shall pay to Landlord a reasonable deposit
determined by Landlord from time to time for such keys. Landlord will furnish
Tenant, free of charge except for the deposit, with two keys to each door lock
in the Premises. Landlord may make a reasonable charge for any additional keys.
Tenant shall not make or have made duplicate copies of such keys. Tenant shall
not install additional locks or bolts of any kind upon any of the doors or
windows of, or within, the Building, nor shall Tenant make any changes in
existing locks or the mechanisms thereof. Tenant shall, upon the termination of
its tenancy, provide Landlord with the combination locks on safes, safe cabinets
and vaults and deliver to Landlord all keys to the Building, the Premises and
all interior doors, cabinets, and other key-controlled mechanisms therein,
whether or not such keys were furnished to Tenant by Landlord. In the event of
the loss of any key furnished to Tenant by Landlord, Tenant shall pay to
Landlord the cost of replacing the same or of changing the lock or locks opened
by such lost key if Landlord shall deem it necessary to make such a change.
25. Access may be had by Tenant to the Common Areas and to the Premises at
any time between the hours of 8:00 A.M. and 6:00 P.M., Monday through Friday,
legal holidays excepted. At other times access to the Building may be refused
unless the person seeking admission is known to the watchman in charge, if any,
and/or has a pass or is properly identified. Tenant shall be responsible for all
persons for whom Tenant requests passes, and shall be liable to Landlord for all
acts of such persons. In the event Building has, or there is subsequently, a
card access system for using the elevators at other than normal operating hours
for the Building, Landlord may deny access to any area served by the elevators
by anyone not having the necessary elevator access card. Landlord shall in no
case be liable for damages for the admission or exclusion of any person from the
Building. In case of invasion, mob, riot, public excitement, or other commotion,
Landlord reserves the right to prevent access to the Building for the safety of
tenants and protection of property in the Building.
26. Landlord shall not be responsible for, and Tenant hereby indemnifies
and holds Landlord harmless from any liability in connection with, the loss,
theft, misappropriation or other disappearance of furniture, furnishings,
fixtures, machinery, equipment, money, jewelry or other items of personal
property from the Premises or other parts of the Building, regardless of whether
the Premises or Building are locked at the time of such loss.
27. Tenant shall not use or permit to be used in the Premises any foul or
noxious gas or substance, or permit or allow the Premises to be occupied or
used in a manner offensive or objectionable to Landlord or other occupants of
the
B-4
<PAGE>
[LOGO OF PARAMOUNT GROUP, INC. APPEARS HERE]
PARKING SPACE RIDER
-------------------
Provided Tenant is not in default under this Lease and pays the applicable
prevailing monthly parking rate in effect from time to time, and subject to such
rules and regulations as may be adopted from time to time by Landlord or the
operator of the parking facility serving the Building, Tenant and Tenant's
authorized employees designated by Tenant ("Authorized Users") shall have the
right to use in such parking facility up to the full Tenant's Parking Allotment
described in Paragraph K on page 2 of this Lease, on an unreserved monthly basis
until the expiration or termination of this Lease. However, if at any time
during the term of this Lease, Tenant does not choose to pay for the full number
of such parking spaces, Tenant shall not thereafter have the right to recommence
the use of the spaces not paid for if other commitments have been made for those
spaces in the interim.
Landlord reserves the right at any time to relocate any parking spaces and
to substitute an equivalent number of parking spaces in another parking
structure or subterranean parking facility or in a surface parking area within a
reasonable distance of the Premises.
Tenant agrees that it will use its best efforts to cooperate in programs
which may be undertaken by Landlord independently, or in cooperation with local
municipalities or governmental agencies or other property owners in the vicinity
of the Building, to reduce peak levels of commuter traffic. Such programs may
include, but shall not be limited to, car pools, van pools and other ride
sharing programs, public and private transit, and flexible work hours.
Tenant and Tenant's Authorized Users shall comply with the Parking Rules
and Regulations set forth in this Rider. Landlord reserves the right to modify,
add, or delete from time to time such Parking Rules and Regulations as it deems
reasonably necessary for the operation of such parking. Landlord may refuse to
permit any person who violates the Parking Rules and Regulations to park in the
Building parking facility, and any violation of the rules shall subject to the
car to removal, at the vehicle owner's expense. Tenant agrees to use its best
efforts to acquaint Tenant's Authorized Users and visitors with the Parking
Rules and Regulations set forth in this Rider.
PARKING RULES AND REGULATIONS
1. Neither Tenant nor Tenant's Authorized Users shall park vehicles in any
parking areas designated by Landlord, the parking operator or governmental
entities with jurisdiction for other uses, including use by visitors or
other tenants. Tenant and such Authorized Users shall not leave vehicles in
the Building parking areas overnight nor park any vehicles in the Building
parking areas other than automobiles, motorcycles, motor driven or non-
motor driven bicycles or four-wheeled trucks. Landlord may, in its sole
discretion, designate separate areas for bicycles and motorcycles.
2. Tenant shall not permit or allow any vehicles that belong to or are
controlled by Tenant or Tenant's employees or Authorized Users, suppliers,
shippers, customers, or invitees to be loaded, unloaded, or parked in areas
other than those designated by Landlord for such activities. If Tenant
permits or allows any of the prohibited activities described in this
Parking Rider, then Landlord shall have the right, without notice, in
addition to such other rights and remedies that it may have, to remove or
tow away the vehicle involved and charge the cost to Tenant, which cost
shall be immediately payable upon demand by Landlord.
3. Tenant shall submit a written notice in a form reasonably specified by
Landlord or the parking operator, containing the names, home and office
addresses and telephone numbers of those persons who are designated as
Authorized Users by Tenant to use the parking privileges on a monthly basis
and shall use its best efforts to identify each vehicle by make, model and
license number. Such notice, as amended from time to time, is hereafter
referred to as the "Parking Notice." No person whose name and address is
not contained in the Parking Notice shall have any right to park a vehicle
in the area of the Building parking facilities designated for monthly
parking, and no person whether or not his name is included in the Parking
Notice shall have any right to park in such facilities a
PR-1
<PAGE>
vehicle not identified in the Parking Notice without paying the parking
charge then applicable for daily parking and parking in the area designated
for daily parking.
4. Cars must be parked entirely within the stall lines painted on the floor.
5. All directional signs and arrows must be observed.
6. The speed limit within all parking areas shall be 5 miles per hour.
7. Parking is prohibited, unless a floor parking attendant approved by
Landlord directs otherwise:
a. In areas not striped for parking;
b. In aisles;
c. Where "No Parking" or "Handicap" signs are posted (except that
handicapped persons displaying on their vehicles the legalty
prescribed identification may park in such "Handicap" areas);
d. On ramps;
e. In crosshatched areas; or
f. In reserved spaces and in such other areas as may be designated
by Landlord or the parking operator.
8. Parking stickers or any other device or form of identification supplied by
Landlord or the parking operator shall remain the property of Landlord or
the parking operator, as the case may be. Such parking identification
device must be displayed as requested and may not be mutilated in any
manner. The serial number of the parking identification may not be
obliterated. Devices are not transferable, and any device not in the
possession of an Authorized User will be void. There will be a replacement
charge to the Tenant or Authorized User for loss of any magnetic parking
card or other parking identification device.
9. Every Authorized User is requested to park and lock his own car. All
responsibility for damage to or loss of cars is assumed by Authorized
Users, and Landlord shall not be responsible for any such damage or loss by
water, fire, defective brakes, the act or omission by others, theft, or by
any other cause. Tenant shall repair or cause to be repaired at its sole
cost and expense any and all damage to the Building parking facility or any
part thereof caused by Tenant or its Authorized Users or vehicles of Tenant
or such Authorized Users.
10. Loss or theft of parking identification devices from automobiles must be
reported to the garage manager immediately, and a lost or stolen report
must be filed by the Tenant or user of such parking identification device
at that time. Any parking identification devices found on any unauthorized
vehicle will be confiscated and the illegal holder will be subject to
prosecution. Lost or stolen devices previously reported and then found must
be reported found to the office of the garage immediately. Landlord has the
right to exclude any vehicle from the parking facilities that does not have
a parking identification device.
11. Spaces are for the express purpose of one automobile per space unless a
floor parking attendant approved by Landlord directs otherwise. Washing,
waxing, cleaning or servicing of any vehicle in the parking facility by
Tenant or by the Authorized User and/or his agents is prohibited.
PR-2
<PAGE>
[LOGO OF PARAMOUNT GROUP, INC. APPEARS HERE]
RENT ESCALATION RIDER
---------------------
In order to adjust the rent payable under the Lease in accordance with
changes in the cost of living from time to time, Tenant agrees to pay to
Landlord, with the installments of Base Rent, and as additional monthly rent
under the Lease, an amount representing rent escalation. For purposes of
calculating the rent escalation payable hereunder, the Consumer Price Index for
All Urban Consumers, U.S. City Average, All Items (1967=100), unadjusted (herein
the "Index") published by the Bureau of Labor Statistics of the United States
Department of Labor for the month of June, 1996 shall be the base Index figure
(the "Base index"). The Base Index shall be compared to the index figure for
December of each year during the term of the Lease, including the initial
partial calendar year if the Lease term commences other than during December. In
the event that the Index figure for December of any year during the term of the
Lease shall be greater than the Base Index, in addition to the Base Rent Tenant
shall pay rent escalation to Landlord in an amount equal to the same percentage
increase in the Base Rent as the percentage increase in the index for such
December over the Base Index. Such amount shall be payable monthly commencing
with the payment of Base Rent for the month following such December.
In the event that the Index for any December during the term of the Lease
is not yet available upon the date that any installment(s) of Base Rent is due,
Tenant shall continue paying the monthly installments of Base Rent and rent
escalation in the amount applicable for such December until the index for that
month is published, whereupon Tenant shall immediately pay Landlord the rent
escalation which would have been due in the months following such December had
the index for such December been available. In the event that publication of the
Index is discontinued, Landlord and Tenant agree that the index of consumer
prices which is most closely analogous to the index shall be used in place of
the index for calculation of the rent escalation payable hereunder. In the event
that the referents or techniques employed in the calculation of the index shall
be modified and such modification would have resulted in a different figure for
the Base Index, Landlord and Tenant agree that the Base Index shall be
appropriately adjusted and that the Index, as modified, shall be used as
provided hereunder.
The term "Base Rent" as used in this Rider shall be deemed to include the
additional monthly rent for conduit space pursuant to Section 2 of the
Telecommunications Conduit Rider (excluding the initial one-time payment of
$7,200) as well as the Base Rent described in Section E on page 2 and Section 3
on page 3 of the body of this Lease. Thus, the additional rent for the conduit
space shall be adjusted from time to time in the same fashion as the Base Rent.
RER-1
<PAGE>
[LOGO OF PARAMOUNT GROUP, INC. APPEARS HERE]
TELECOMMUNICATIONS CONDUIT RIDER
--------------------------------
1. Lease and Use of Conduit. Landlord hereby leases to Tenant, as part of
------------------------
the Premises for the Lease Term, the conduit space described below (the "Conduit
Space"). Tenant shall use the Conduit Space solely for telecommunications cable
to connect the Premises to the Premises of other telecommunications companies
that lease space on the floors of the Building through which the Conduit Space
passes. Any such connection shall require the mutual written agreement of Tenant
and the other affected telecommunications companies.
The Conduit Space is contained within one 1-inch interduct running from
floor 3 through floor 28.
The interduct from floor 3 through floor 18 runs through conduit closets in
the northwest corner of the corridor on each floor. Access to the conduit closet
on each floor shall, at Landlord's election, be restricted so that no entry to
the closet will be permitted unless Landlord's designated contractor or other
representative is present. The interduct from floor 19 to floor 28 is located in
the north stairwell of the Building. Landlord may require any installation of
cable in the Conduit Space or any connection of Tenant's cable to the Premises
or cable of other tenants in the Building to be performed by Landlord's approved
contractor. All costs of such installations and connections (including but not
limited to Landlord's administrative fee) and the ongoing use and maintenance of
such items shall be at Tenant's sole expense. Tenant shall pay Landlord any
costs incurred by Landlord, together with Landlord's administrative fee, within
ten days after Tenant's receipt of a bill for such items. Tenant's use of the
Conduit Space and such cable and connecting lines shall comply with all
applicable laws, the other provisions of the Lease, and such Building Rules as
are adopted by Landlord from time to time, and shall not interfere in any way
with the operation of the Building or with the use by any other tenant of the
Building of such tenant's premises or the common areas of the Building. All
required cabling and connecting lines shall be installed out of sight.
Prior to any installation of cable in the Conduit Space or connecting lines
to the Premises or the premises of other tenants, Tenant shall obtain Landlord's
written approval as set forth in Section 29.3 of the Lease, and in the case of
connecting lines to the Premises or cable systems of another tenant, obtain the
written consent of such other tenants to the work.
2. Conduit Rent. Tenant agrees to pay Landlord additional rent for the
------------
Conduit Space, which initially shall be a one-time payment of $7,200. Such
$7,200 shall be due and payable upon execution of this Lease. (No portion of
such payment shall be refundable if the Lease is terminated for any reason.)
Thereafter, the additional rent for the Conduit Space shall be $50 per month
during the remaining Lease Term, subject to adjustment as provided below. Such
additional rent shall be due and payable to Landlord on the first day of each
month or portion of a calendar month throughout the Lease Term, together with
Tenant's Base Rent and other monthly charges, with the first such installment of
additional rent due on the Commencement Date. The amount of such monthly conduit
rent shall be adjusted from time to time in accordance with the Rent Escalation
Rider to this Lease to reflect increases in the Consumer Price Index as
described in that Rider.
3. Indemnity and Waiver. Tenant hereby agrees to indemnify and hold
--------------------
harmless Landlord and its partners, its agent Paramount Group, Inc. and their
respective officers, directors, shareholders, agents and employees
(collectively, the "Landlord Group") from and against any and all claims
(including but not limited to claims for bodily injury or property damage),
actions, mechanic's liens, losses, liabilities, and expenses (including
reasonable attorney fees and costs of defense by Landlord's legal counsel)
(collectively, "Claims"), which may arise from the installation, operation, use,
maintenance or removal of the cable and connecting lines pursuant to this Rider
and the Lease. Similarly, Tenant shall pay upon demand by Landlord the costs to
repair any damage to the Building caused by such installation, operation, use,
maintenance or
TCR-1
<PAGE>
removal. Tenant hereby waives and releases the Landlord Group from any Claims
Tenant may have at any time (including but not limited to Claims relating to
interruptions in services) arising out of or relating in any way to the
installation, operation, use, maintenance, or removal of the cable and
connecting lines described in this Rider and the Lease, whether or not caused by
the negligence of any member of the Landlord Group or Landlord's contractors. In
no event shall Landlord or any member of the Landlord Group be liable to Tenant
for lost profits or consequential, incidental, or punitive damages of any kind.
4. Removal of Cable and Connecting lines. Tenant agrees that, upon the
-------------------------------------
expiration or termination of the Lease, Tenant (or, at Landlord's election, the
contractor designated by Landlord) shall promptly remove, at Tenant's sole cost
and expense, all cable, connecting lines, and other installations installed
under this Rider and the Lease (excepting the interduct and conduit themselves,
which shall remain the property of Landlord), and restore those portions of the
Building damaged by such removal to their condition immediately prior to the
installation of such items. If Tenant fails to promptly remove all such items
pursuant to this Section 4, or if Landlord elects to have such work performed by
Landlord's contractor, Landlord may remove such items installed hereunder, and
restore those portions of the Building damaged by such removal to their
condition immediately prior to the installation, in which case Tenant agrees
promptly to pay Landlord's reasonable costs of removal and restoration,
including Landlord's administrative fee.
5. Applicability of Other Provisions. Except as explicitly provided
---------------------------------
otherwise herein, Tenant's obligaitons under the Lease for the protection of the
Building, Landlord, the Landlord Group, and third parties, including but not
limited to Tenant's obligations regarding maintenance, repairs, mechanic's
liens, insurance, attorneys' fees and costs of suit, shall apply in the same
fashion with respect to Tenant's use of the Conduit Space and the cable and
connecting lines described in this Rider as they do with respect to Tenant's use
of the rest of the Premises.
6. Miscellaneous. This Rider supersedes all prior or contemporaneous
-------------
understandings, negotiations, or agreements between the parties, whether written
or oral, with respect to its subject matter.
TCR-2
<PAGE>
[LOGO PARAMOUNT GROUP, INC. APPEAR HERE]
PARAMOUNT
GROUP, INC.
EMERGENCY GENERATOR RIDER
-------------------------
1. The parties acknowledge that Landlord has installed a second Emergency
Generator in the Building which is in service as of the execution of this Lease.
Tenant is granted the right to use up to 20 kilowatts of emergency power from
such Emergency Generator in the event of an interruption of normal electrical
service to the Premises during the Lease Term, provided that: (a) Tenant
notifies Landlord in writing within thirty (30) days following the Commencement
Date of the number of kilowatts (not to exceed 20 kilowatts) of emergency power
which Tenant reserves the right to use; (b) Tenant pays Landlord, at the time of
notification in (a) above, a one-time installation fee in an amount equal to
$475 per kilowatt of emergency power so reserved; and (c) Tenant pays Landlord
as additional rent under the Lease a monthly sum in an amount reasonably
determined by Landlord in good faith based on the amount of emergency power
reserved by Tenant, and Landlord's costs of operation, use, maintenance, fuel,
oil, governmental permits, licenses and fees, insurance, Landlord's profit and
administration and other expenses relating to the Emergency Generator. The
monthly amount of the additional rent described in item (c) initially shall be
$75 per month.
2. Each such payment described in subparagraph 1(c) above shall be due on
the first day of each month with Tenant's other rent payments, with the first
such payment due on the Commencement Date. Such monthly amount may be adjusted
annually, in Landlord's discretion, during the term of the Lease and any
extensions thereto.
3. Tenant's use of such emergency power shall be in accordance with such
rules and regulations as may be established by Landlord from time to time.
4. Landlord shall repair and maintain the Emergency Generator, provided
that Tenant shall reimburse Landlord upon demand, as additional rent hereunder,
for the cost of any repairs or extraordinary maintenance for the Emergency
Generator necessitated by acts of Tenant or Tenant's employees, contractors,
assignees, sublessees, agents, licensees or invitees. In addition, any
installation of equipment or cabling in the Premises or the Building for the
purpose of enabling Tenant to access the Emergency Generator shall be performed
by Landlord in accordance with plans and specifications approved by the parties
in writing in advance, and Tenant shall reimburse Landlord for the costs of such
installation, including, but not limited to, design fees and costs of
demolition.
5. The provision of Emergency Generator service by Landlord to Tenant
shall be subject to Section 9.6 of the Lease.
6. This Emergency Generator Rider supersedes all prior or contemporaneous
understandings, negotiations, or agreements between the parties, whether written
or oral, with respect to its subject matter. This Emergency Generator Rider is
part of and shall be attached to the Lease.
7. All terms of the Lease which have not been expressly altered by this
Emergency Generator Rider shall remain in full force and effect.
EGR-1
<PAGE>
[LOGO OF PARAMOUNT GROUP, INC. APPEARS HERE]
EXTENSION OPTION RIDER
----------------------
Provided that Tenant is not in default under this Lease, Tenant shall have
the option to extend the term of this Lease for an additional five-year period
following the expiration of the initial term. Tenant may exercise such option
only by giving Landlord a written notice at least nine (9) months, but not more
than twelve (12) months, prior to the commencement of the five-year period, and
only if Tenant is not in default at the time Tenant gives such notice. If Tenant
has exercised such option, but is in default on the date the additional
five-year extended term is to commence, then at Landlord's election, the
extended term shall not commence until and unless the Tenant timely cures such
default.
With respect to the additional five-year term, the Lease shall be adjusted
to reflect the following: (a) a new Base Rent for the Premises at a rate equal
to the Base Rent rates being charged by Landlord for telecommunications space in
the Building of comparable size and quality in comparable renewal leases for a
comparable term entered into by Landlord within six months prior to the date
Tenant exercises this option (provided, however, that if no such comparable
renewal leases were entered into within such six month period, then the
valuation of comparable transactions shall be based on the Base Rent rate
Landlord would have been willing to accept at that time in such comparable
renewal leases, as reasonably calculated by Landlord in good faith); (b) a new
rental rate for the Conduit Space based on the then-prevailing rate being
charged by Landlord for similar conduits in the Building; and (c) a new rental
rate for use of the Emergency Generator as provided for in the Emergency
Generator Rider attached to the Lease, based on the then-prevailing rate charged
by Landlord for comparable usage.
Landlord shall advise Tenant of such rental adjustments within one month
after Landlord's receipt of Tenant's notice. Tenant shall have ten days
following Tenant's receipt of notice of the rental adjustment within which to
accept such terms by executing any appropriate documentation submitted by
Landlord to Tenant. If Tenant fails to so accept such terms, Tenant's rights to
extend the term pursuant to this Rider shall be cancelled.
In no event shall the terms offered by Landlord under this Rider bind
Landlord to offer such terms to Tenant or to any other person or entity at any
time except as explicitly set forth in this Rider, nor shall such terms prevent
Landlord from leasing the Premises to any person or entity on different terms if
Tenant does not timely accept the terms determined in accordance with this
Rider.
EOR-1
<PAGE>
[LETTERHEAD & LOGO OF PARAMOUNT GROUP, INC.]
August 26, 1996
Mr. Alan Chin
PRIMECALL, INC.
1520 Eastlake Avenue East
Suite 205
Seattle, Washington 98101
Dear Alan:
Enclosed are three (3) Lease Commencement Certificates confirming commencement
date of August 1, 1996 which require your signature. Please sign and return all
three (3) to my attention. An executed copy will be returned for your files.
If you have any questions, please do not hesitate to call me.
Sincerely,
/s/ Mark Messana
Mark Messana
Project Manager
MM:ie
Enclosures
<PAGE>
LEASE COMMENCEMENT CERTIFICATE
THIS CERTIFICATE, made as of this 26th day of August, 1996, by ONE WILSHIRE
ARCADE IMPERIAL, LTD., a limited corporation (hereinafter called "Landlord") and
Primecall, Inc. (hereinafter called "Tenant").
WITNESSETH:
WHEREAS, by agreement of lease dated June 10, 1996, (hereinafter called the
"Lease Agreement"), Landlord leased to Tenant and Tenant hired from Landlord
certain premises (hereinafter called the "Demised Premises") deemed to contain
1,500 rentable square feet (including common area factor) on the 28th floor(s)
of the building known as ONE WILSHIRE BUILDING, the address of which is 624
South Grand Avenue, Los Angeles, California 90017; and
WHEREAS, the Lease Agreement provides that immediately after the
Commencement Date and the expiration date shall be confirmed by Landlord and
Tenant in writing; and
WHEREAS, the Lease Agreement requires Tenant to certify various other
matters pertaining to the Lease Agreement when requested to do so by Landlord.
NOW, THEREFORE, in consideration of the mutual covenants contained in the
Lease Agreement:
1. Landlord and Tenant confirm that the Commencement Date of the Lease
Agreement is August 1, 1996, and that the expiration date of the Lease Agreement
is July 31, 2006, subject, however, to the provisions of the Lease Agreement;
2. Tenant certifies that all work required to be performed by Landlord in
preparation of the Demised Premises for Tenant's occupancy, if any, has been
satisfactorily completed by Landlord in
<PAGE>
accordance with the provisions of the Lease Agreement and accepted by Tenant;
3. Tenant certifies that the Demised Premises have been delivered to and
accepted by Tenant;
4. Landlord and Tenant certify that the Lease Agreement is in full force
and effect and has not been modified, altered or amended; and
5. Tenant certifies that as of the date hereof it has no offsets or
defenses against the enforcement of any provision of the Lease Agreement.
This Certificate shall be binding upon and inure to the benefit of the
parties hereto, their successors and assigns, and may be relied upon by a
prospective purchaser, lessor, mortgagee, or holder of a deed of trust, of or on
any real property including all or any portion of the Demised Premises.
IN WITNESS WHEREOF, and intending to be legally bound hereby, Landlord and
Tenant have caused this Certificate to be duly executed as of the date first
above written.
Landlord:
ONE WILSHIRE ARCADE IMPERIAL, LTD.
a California Limited Partnership
By: Paramount Group, Inc., Its Agent
Attest:
_____________________________ By:________________________________
Its:_______________________________
Tenant:
Attest: PRIMECALL, INC.
_____________________________ By: /s/ Alan Chin
-------------------------------
V.P./SECRETARY
Its:-------------------------------
<PAGE>
EXHIBIT 10.20
[*] Designates material for which confidential treatment has been requested,
which material has been separately filed with the Securities and Exchange
Commission.
[LOGO OF CABLE & WIRELESS, INC. APPEARS HERE]
CARRIER AGREEMENT
This Carrier Agreement ("Agreement") is entered into by and between Cable &
Wireless, Inc. ("CWI") and its carrier customer signing below ("Carrier"). The
General Terms and Conditions for Carrier Agreements CAR-96A (6/96) attached
hereto are part of this Agreement.
- --------------------------------------------------------------------------------
ORDER INFORMATION
- --------------------------------------------------------------------------------
1 Initial Term: 24 Months
------------ ----
2 Rates: (per minute except for Directory Assistance, T-1 Port Charges and
-----
Reporting Options)
Domestic Inbound, Domestic Outbound and International Outbound:
--------------------------------------------------------------
See attached schedule entitled Prime Call, Inc and dated 8/16/96
--------------------- ------------
Intrastate rates are applicable within: CA
---------------------------------
Directory Assistance: CWI's then-standard per-call rates
--------------------
T-1 Port Charges: Monthly Charge per T-1 Port............. $ [*]
---------------- -------
Non-Recurring Installation Charge per
T-1 Port................................ $
-------
Initial Quantity of T-1 Ports........... 1
-------
Reporting Options: (insert "X" in box for the required option)
-----------------
[_] Second copy of call detail: Monthly Charge $
-------
E-BIS(R) Options:
----------------
[_] On-line [_] Magnetic Tape [_] CD-ROM
[_] Floppy Disk (3.5") [_] Floppy Disk (5.25")
Charges for selected E-BIS(R) option: Set-up............ $
-------
Monthly........... $
-------
3 Payment/Security Deposits (insert "Yes" or "No" where applicable)
-------------------------
Payment Period: 10 days after invoice date
-------------- ------
Payment by Wire Transfer Required yes
--------------------------------- -----
Financial Reports Required....... yes
-------------------------- -----
Security Deposits Required....... no
-------------------------- -----
Initial Security Deposit Amount:...... $ n/a
---------
Continuing Security Deposit Amount:..... n/a times the amount of
---------
usage charges incurred over any n/a period
-------
Deposit Release Period:................. n/a Months
---------
Estimated Payments Required:.............. no
--------------------------- ---------
Estimated Usage Period:............first n/a days of each Month
---------
Estimated Payment Due Date:............. n/a business days after
---------
CWI notifies the Customer of the Estimated Payment Amount
4 Minimum Monthly Payment Obligations:
-----------------------------------
<TABLE>
<CAPTION>
Month after Service Initiation Minimum Amount each Month* Month after Service Initiation Minimum Amount each Month*
------------------------------ -------------------------- ------------------------------ --------------------------
<S> <C> <C> <C>
0-1 $ [*] 2-3 $ [*]
------- -------- -------- -------
4-5 $ [*] 6-24 [*]
------- -------- -------- -------
------- -------- -------- -------
------- -------- -------- -------
</TABLE>
*Minimums apply to international usage only; domestic usage shall not contribute
towards meeting minimum monthly payment obligations
<TABLE>
<CAPTION>
Prime Call Inc Cable & Wireless,Inc
-------------- ---------------------
<S> <C>
Signature: /s/ Alan Chin Signature: /s/ Elaine M. Beiseigel
---------------- -------------------
Printed Name: Alan Chin Printed Name: Elaine M. Beiseigel
---------------- -------------------
Title:V.P Title: Contract Manager
---------------- ------------------
Date: 8/20/96 Date: 9/10/96
---------------- ------------------
</TABLE>
<PAGE>
General Terms and Conditions for Carrier Agreements
[LOGO OF CABLE & WIRELESS, INC.
APPEARS HERE]
1. Service to be Provided by CWI: CWI will provide the following long-distance
-----------------------------
services: Domestic Outbound, Domestic Inbound, International Outbound and
Directory Assistance (hereinafter collectively, "Services").
The Carrier will access CWI's network as soon as is reasonably possible, via
dedicated T-1 lines ("Access Lines") ordered from local exchange carriers or
alternate access carriers (collectively, "Local Carriers") and paid for by
the Carrier. If the Carrier orders an Access Line from a Local Carrier, the
Carrier will pay the Local Carrier directly for the Access Line. If the
Carrier requests CWI to order the Access Line and if permitted by the Local
Carrier, CWI will order the Access Line on behalf of the Carrier and will
have the Local Carrier bill the Carrier directly for the Access Line.
2. Term and Termination: The initial term of this Agreement will end the number
--------------------
of full CWI monthly billing periods ("Month(s)") after service is initiated
as set forth in the "Initial Term" portion of the Order Information section
of this Agreement ("Initial Term"). Either party may terminate this Agreement
at the end of the Initial Term, by providing thirty (30) days' prior written
notice. If no such notice is given, this Agreement will continue after the
Initial Term, until terminated by either party providing the other with
thirty (30) days' prior written notice. The term "Term" as used herein will
mean the Initial Term plus any subsequent period of time during which this
Agreement continues beyond the end of the Initial Term. If CWI shall have
undertaken efforts to provide Services prior to the date of full execution of
this Agreement, the provisions of this Agreement shall apply retroactively
with respect to such efforts and such Services.
At any time prior to the end of the Initial Term, the Carrier may, for its
convenience, terminate this Agreement in its entirety by providing CWI with
thirty (30) days' prior written notice. In such event, in addition to paying
for all charges incurred through the date service is discontinued, including
any applicable shortfall charges, the Carrier will pay (as a contract
discontinuance fee and not as a penalty) an amount equal to the sum of the
minimum monthly payment obligations for each of the remaining Months in the
Initial Term.
If CWI has not received any traffic from Carrier hereunder within sixty (60)
days after full execution of this Agreement, CWI shall have the right to
terminate this Agreement upon written notice to Carrier.
If the Carrier fails to do any of the following when due and then does not
cure such failure within two (2) days after receiving notice thereof from
CWI, CWI may, in addition to any other remedies available to it and without
any further written notice to the Carrier, immediately terminate this
Agreement in its entirety and discontinue providing Services: (i) make a
payment in full; (ii) provide any required security deposit amount; or (iii)
provide any required financial report. In addition to any other remedies
available to it, CWI may immediately terminate this Agreement in its entirety
if Carrier fails to comply with the terms of any license accompanying any
software relating to E-BIS(R) reporting options.
3. Rates and Taxes: The Carrier will pay the monthly, non-recurring and usage
---------------
charges set forth in this Agreement. Each call will be billed in 6-second
increments and will be subject to a 30-second minimum charge except that
domestic outbound calls (both interstate and intrastate) will be subject to a
6-second minimum charge. The Carrier will pay any applicable federal, state,
or local taxes, surcharges, or similar fees for the Services.
CWI may, upon fifteen (15) days written notice to Carrier, increase any of
the rates for any of the countries set forth in this Agreement. If Carrier
subsequently discontinues routing traffic to CWI for a country for which such
increased rate applies and providing traffic to such country would have
contributed to the Carrier's minimum monthly payment obligations set forth in
the Order Information section of the Agreement, then, for so long as Carrier
discontinues routing traffic to such country to CWI, the amount of such
minimum monthly payment obligations will be reduced by a percentage that is
equivalent to the average total charges incurred by the Carrier for calls
placed to that country in each of the three (3) Months immediately preceding
the date the Carrier discontinues routing such traffic to CWI, divided by the
average of the Carrier's total charges for Services in each such month.
Any software which CWI supplies for use in connection with the E-BIS(R)
reporting options shall be provided subject to the software license agreement
that accompanies such software. Carrier agrees to comply with all terms and
conditions set forth in such software license agreement. Title to, all rights
to and all interest in, such software shall at all times remain with CWI or
its third-party suppliers.
4. Payment: CWI will provide monthly invoices covering CWI-designated periods
-------
which will be due and payable within the number of days after the invoice
date as set forth in the "Payment Period" section of the Order Information
section of this Agreement. The "invoice date" for a particular monthly
billing period will be the day immediately following the last day of such
monthly billing period. For example, if the monthly billing period runs from
January 24th to February 23rd, the invoice date for such billing period will
be February 24th, and, if the "Payment Period" set forth in the Order
Information section of the Agreement is "10 days after invoice date", then
payment for such monthly billing period is due no later than the tenth
(10th) day after February 24th.
If the Order Information section of this Agreement indicates that estimated
payments are required, CWI will notify the Carrier on the last day of the
"Estimated Usage Period," or if such day is not a business day, on the next
business day, as to CWI's estimate of the charges incurred by the Carrier
during such period. The Carrier will pay CWI such estimated amount
("Estimated Payment") no later than the "Estimated Payment Due Date". At the
end of a Month, CWI will provide an invoice for the usage charges actually
incurred that Month less that Month's Estimated Payment; provided, however,
that if a minium monthly payment obligation applies for that Month and such
minimum has not been met, then the invoice amount will be that Month's
minimum payment obligation less that Month's Estimated Payment. The Carrier
will pay the invoiced amount within the Payment Period.
A late payment charge will be applied on balances that remain unpaid after
the Payment Period in the amount of the lesser of (a) 1 1/2% per month of the
amount of the late payment starting from the day following the Payment
Period, or (b) maximum amount allowed under applicable law. The Carrier must
pay all invoices when due; any questions which the Carrier may have
concerning an invoice must be brought to CWI's attention within forty-five
(45) days of the invoice date. The Carrier shall reimburse CWI for any
expenses, including, without limitation, reasonable attorney's fees, CWI may
incur in collecting amounts due hereunder.
If so indicated in the Order Information section of this Agreement, all
payments by the Carrier will be made via wire transfer (in immediately
available funds) to Mellon Bank, 3 Mellon Bank Center, Room 153-2718,
Pittsburgh, PA 15259-0001, ABA #0430-00261/Account #1705643.
5. Financial Reports: If the Order Information section of this Agreement
-----------------
indicates that financial reports are required, within thirty (30) days after
the end of each calendar quarter, the Carrier will provide CWI with a written
report updating the Carrier's financial status ("Quarterly Report"), and
within ninety (90) days after the end of each calendar year, the Carrier will
provide CWI with an audited annual report. Each Quarterly Report will
contain, as a minimum, an updated balance sheet and income statement. The
Carrier represents and warrants that no Quarterly Report will contain any
material misstatement or omission.
6. Security Deposits: If the Order Information section of this Agreement
-----------------
indicates that security deposits are required, each required security deposit
will be either in cash (paid by check or via wire transfer) on an irrevocable
stand-by letter of credit in a form and from a financial institution
reasonably acceptable to CWI. The "Initial Security Deposit" amount will be
provided prior to the initiation of service. Thereafter, if requested in
writing by CWI, the Carrier will add additional amounts to the Initial
Security Deposit such that the total amount of security deposit being held by
CWI at all times is at least equal to the "Continuing Security Deposit". The
Carrier will provide any such required additional amounts within five (5)
business days after receiving CWI's written request. CWI will refund or
release, as applicable, any security deposit it is holding (plus, if the
security deposit is in the form of cash, accrued interest at the applicable
rate set by regulation of the state in which CWI invoices the Carrier, or if
no such rate is set by regulation, CWI's then-prevailing interest rate for
security deposit refunds) if the following conditions are met by the Carrier:
(i) for the entire "Deposit Release Period", the Carrier pays CWI in full
when each payment is due; and (ii) CWI determines that the Carrier's
Quarterly Reports covering the Deposit Release Period indicate that the
Carrier's financial condition has had no materially adverse change as
compared to the equivalent period of time immediately prior to the start of
the Deposit Release Period. If CWI does not refund or release the security
deposit during the Term as set forth above, the security deposit will be
refunded or released, as applicable, at the end of the Term. If, at any time
during the term of the Agreement, CWI determines that there has been a
materially adverse change in the Carrier's financial condition as compared
with the equivalent period of time immediately prior to the Effective Date,
CWI may require Carrier to provide a security deposit or an additional
security deposit in an amount to be determined by CWI. The Carrier shall
provide any such required amounts within five (5) business days after
receiving CWI's written request therefor.
7. Minimum Payment Obligations: If the total amount of usage charges incurred by
---------------------------
the Carrier for international service in any Month is less than the amount of
the then-applicable minimum monthly payment obligation set forth in the Order
Information section of this Agreement, then in addition to paying for its
actual usage that Month, the Carrier will pay (as an underutilization fee and
not as a penalty) a shortfall charge equal to the difference between (i) the
actual usage charges incurred for international service that Month, and (ii)
the amount of the then-applicable minimum monthly payment obligation. If this
Agreement remains in effect after the Initial Term, the minimum monthly
payment obligation for each subsequent Month, shall be equal to the amount of
the minimum monthly payment obligation for the last Month of the Initial
Term.
8. Additional Terms: This is a carrier-to-carrier agreement subject to (S)211 of
----------------
the Communications Act of 1934, as amended. The Carrier is responsible for
and shall comply with any and all legal and regulatory requirements with
respect to the Carrier's use and resale of the Services, including those of
the Federal Communications Commission and state public utility commissions.
The Services are governed by this Agreement and all Carrier obligations and
CWI rights as set forth in the "General Rules and Regulations" section of
CWI's interestate tariff, as may be amended by CWI in accordance with
applicable laws and regulations. The Carrier shall defend, indemnify and hold
CWI harmless from and against all claims, demands, actions, causes of action,
judgments, costs and reasonable attorneys' fees and expenses of any kind
arising from or related to any use of the Service or otherwise arising under
this Agreement. In no
<PAGE>
General Terms and Conditions for Carrier Agreements
[LOGO OF CABLE & WIRELESS, INC.
APPEARS HERE]
event shall CWI be liable for any loss of profits, or for any indirect,
incidental, special, exemplary or consequential damages.
This Agreement is effective as of the date of signature of the last party to
sign and it is governed by and subject to the laws and the jurisdiction of the
courts of the Commonwealth of Virginia. The Carrier shall not disclose any of
the terms of this Agreement. This Agreement is the sole and exclusive
understanding between the parties with respect to the Services. CWI and Carrier
expressly agree that this Agreement shall not give rise to any third party being
entitled to any right whatsoever.
[INITIALS
Carrier's Representative's Initials APPEAR HERE] Date 8/20/96
------------ -------
<PAGE>
FINANCIAL SECURITY ADDENDUM
TO CARRIER AGREEMENT
[LOGO OF CABLE & WIRELESS, INC. APPEARS HERE]
Cable & Wireless, Inc. ("CWI") and its carrier customer signing this Financial
Security Terms and Conditions Addendum ("Carrier") agree that their Carrier
Agreement ("Agreement") is modified as set forth below. Any capitalized terms
not defined herein shall have the meaning defined in the General Terms and
Conditions for Carrier Agreements.
===============================================================================
When Carrier's usage in any month exceeds the amount set forth below, CWI may,
upon written notice to Carrier, change any or all of the payment and security
deposit requirements, set forth in the Payment/Security Deposit section of the
------------------------
Order Information section of the Agreement. Such changes will be effective
immediately upon Carrier's receipt of such notice.
$ 50,000 per month
==========
Prime Call, Inc Cable & Wireless, Inc.
-------------------------- ------------------------------
Signature: /s/ Alan Chin Signature: /s/ Elaine M. Beiseigel
--------------------- --------------------------
Printed Name: ALAN CHIN Printed Name: Elaine M. Beiseigel
--------------------- --------------------------
Title: V.P. Title: Contract Manager
--------------------- -------------------------
Date: 8/20/96 Date: 9/10/96
--------------------- -------------------------
<PAGE>
Prime Call, Inc
Country Code Rate
- --------------------------------------------------------------------------
DOMESTIC OUTBOUND (US
MAINLAND ORIGINATED)
- --------------------------------------------------------------------------
OUTBOUND - INTERSTATE
TERMINATED IN US MAINLAND [*]
- --------------------------------------------------------------------------
OUTBOUND - INTRASTATE -
WITHIN (state) [*]
--------------------------------------------------------------------------
OUTBOUND - INTERSTATE
TERMINATED IN ALASKA,
HAWAII, PUERTO RICO & US
VIRGIN ISLANDS [*]
- --------------------------------------------------------------------------
DOMESTIC INBOUND (US
MAINLAND ORIGINATED) [*]
- --------------------------------------------------------------------------
INBOUND - INTERSTATE
TERMINATED IN US MAINLAND [*]
- --------------------------------------------------------------------------
INBOUND - INTRASTATE -
WITHIN [state] [*]
- --------------------------------------------------------------------------
INBOUND - INTERSTATE
TERMINATED IN ALASKA,
HAWAII, PUERTO RICO, & US
VIRGIN ISLANDS [*]
- --------------------------------------------------------------------------
CANADA INBOUND 1 [*]
- --------------------------------------------------------------------------
CANADA (416,905,514,604)
OUTBOUND 1 [*]
- --------------------------------------------------------------------------
CANADA OUTBOUND (Other
NPAs) 1 [*]
- --------------------------------------------------------------------------
AFGHANISTAN 93 [*]
- --------------------------------------------------------------------------
ALBANIA 355 [*]
- --------------------------------------------------------------------------
ALGERIA 213 [*]
- --------------------------------------------------------------------------
AMER SAMOA 684 [*]
- --------------------------------------------------------------------------
ANDORRA 376 [*]
- --------------------------------------------------------------------------
ANGOLA 244
- --------------------------------------------------------------------------
ANGUILLA 809 [*]
- --------------------------------------------------------------------------
ANTIGUA 809 [*]
- --------------------------------------------------------------------------
ARGENTINA 54 [*]
- --------------------------------------------------------------------------
ARMENIA 374 [*]
- --------------------------------------------------------------------------
ARUBA 297 [*]
- --------------------------------------------------------------------------
ASCENSION 247 [*]
- --------------------------------------------------------------------------
ATLOCEANEAST 871 [*]
- --------------------------------------------------------------------------
ATLOCEANWEST 874 [*]
[*] CONFIDENTIAL TREATMENT REQUESTED
- --------------------------------------------------------------------------
AUST EXT TER 672 [*]
- --------------------------------------------------------------------------
AUSTRALIA 61 [*]
- --------------------------------------------------------------------------
AUSTRIA 43 [*]
- --------------------------------------------------------------------------
AZERBAIJAN 994 [*]
- --------------------------------------------------------------------------
BAHAMAS 809 [*]
- --------------------------------------------------------------------------
BAHRAIN 973 [*]
- --------------------------------------------------------------------------
BANGLADESH 880 [*]
- --------------------------------------------------------------------------
[*] CONFIDENTIAL TREATMENT REQUESTED
8/16/96 CWI Confidential
Proposal Expires Sept. 1, 1996 Page 1
<PAGE>
Prime Call, Inc
<TABLE>
<CAPTION>
Country Code Rate
<S> <C> <C>
- --------------------------------------------------------------------------------
BARBADOS 809 [*]
- --------------------------------------------------------------------------------
BELARUS 375 [*]
- --------------------------------------------------------------------------------
BELGIUM 32 [*]
- --------------------------------------------------------------------------------
BELIZE 501 [*]
- --------------------------------------------------------------------------------
BENIN 229 [*]
- --------------------------------------------------------------------------------
BERMUDA 809 [*]
- --------------------------------------------------------------------------------
BHUTAN 975 [*]
- --------------------------------------------------------------------------------
BOLIVIA 591 [*]
- --------------------------------------------------------------------------------
BOSNIA&HERZE 387 [*]
- --------------------------------------------------------------------------------
BOTSWANA 267 [*]
- --------------------------------------------------------------------------------
BR VIRGIN IS 809 [*]
- --------------------------------------------------------------------------------
BRAZIL 55 [*]
- --------------------------------------------------------------------------------
BRUNEI 673 [*]
- --------------------------------------------------------------------------------
BULGARIA 359 [*]
- --------------------------------------------------------------------------------
BURKINA FASO 226 [*]
- --------------------------------------------------------------------------------
BURUNDI 257 [*]
- --------------------------------------------------------------------------------
CAMBODIA 855 [*]
- --------------------------------------------------------------------------------
CAMEROON 237 [*]
- --------------------------------------------------------------------------------
CAPE VERDE 238 [*]
- --------------------------------------------------------------------------------
CAYMAN IS 809 [*]
- --------------------------------------------------------------------------------
CEN AFR REP 236 [*]
- --------------------------------------------------------------------------------
CHAD REP 235 [*]
- --------------------------------------------------------------------------------
CHILE 56 [*]
- --------------------------------------------------------------------------------
CHINA 86 [*]
- --------------------------------------------------------------------------------
COLOMBIA 57 [*]
- --------------------------------------------------------------------------------
CONGO 242 [*]
- --------------------------------------------------------------------------------
COOK ISLANDS 682 [*]
- --------------------------------------------------------------------------------
COSTA RICA 506 [*]
- --------------------------------------------------------------------------------
CROATIA 385 [*]
- --------------------------------------------------------------------------------
CUBA 530 [*]
- --------------------------------------------------------------------------------
CYPRUS 357 [*]
[*] CONFIDENTIAL TREATMENT REQUESTED
- --------------------------------------------------------------------------------
CZECH/SLOVAK 42 [*]
- --------------------------------------------------------------------------------
DENMARK 45 [*]
- --------------------------------------------------------------------------------
DIEGO GARCIA 246 [*]
- --------------------------------------------------------------------------------
DIJIBOUTI 253 [*]
- --------------------------------------------------------------------------------
DOMINICA 809 [*]
- --------------------------------------------------------------------------------
DOMINICAN RP 809 [*]
- --------------------------------------------------------------------------------
ECUADOR 593 [*]
- --------------------------------------------------------------------------------
EGYPT 20 [*]
- --------------------------------------------------------------------------------
</TABLE>
CWI Confidential
Proposal Expires Sept 1, 1996
[*] CONFIDENTIAL TREATMENT REQUESTED
8/16/96 Page 2
<PAGE>
Prime Call, Inc
Country Code Rate
- --------------------------------------------------------------------------
EL SALVADOR 503 [*]
- --------------------------------------------------------------------------
EQUAT GUINEA 240 [*]
- --------------------------------------------------------------------------
ERITREA 291 [*]
- --------------------------------------------------------------------------
ESTONIA 372 [*]
- --------------------------------------------------------------------------
ETHIOPIA 251 [*]
- --------------------------------------------------------------------------
FAEROE IS 298 [*]
- --------------------------------------------------------------------------
FALKLAND IS 500 [*]
- --------------------------------------------------------------------------
FIJI 679 [*]
- --------------------------------------------------------------------------
FINLAND 358 [*]
- --------------------------------------------------------------------------
FRANCE 33 [*]
- --------------------------------------------------------------------------
FRENCH GUIAN 594 [*]
- --------------------------------------------------------------------------
FRENCHPOLYNS 689 [*]
- --------------------------------------------------------------------------
GABON REPUBL 241 [*]
- --------------------------------------------------------------------------
GAMBIA 220 [*]
- --------------------------------------------------------------------------
GEORGIA 995 [*]
- --------------------------------------------------------------------------
GERMANY 49 [*]
- --------------------------------------------------------------------------
GHANA 233 [*]
- --------------------------------------------------------------------------
GIBRALTAR 350 [*]
- --------------------------------------------------------------------------
GREECE 30 [*]
- --------------------------------------------------------------------------
GREENLAND 299 [*]
- --------------------------------------------------------------------------
GRENADA 809 [*]
- --------------------------------------------------------------------------
GUADELOUPE 590 [*]
- --------------------------------------------------------------------------
GUAM 671 [*]
- --------------------------------------------------------------------------
GUANTANAMO 53 [*]
- --------------------------------------------------------------------------
GUATEMALA 502 [*]
- --------------------------------------------------------------------------
GUINEA REP 224 [*]
- --------------------------------------------------------------------------
GUINEABISSAU 245 [*]
- --------------------------------------------------------------------------
GUYANA 592 [*]
- --------------------------------------------------------------------------
HAITI 509 [*]
- --------------------------------------------------------------------------
HONDURAS 504 [*]
- --------------------------------------------------------------------------
HONG KONG 852 [*]
- --------------------------------------------------------------------------
HUNGARY 36 [*]
[*] CONFIDENTIAL TREATMENT REQUESTED
- --------------------------------------------------------------------------
ICELAND 354 [*]
- --------------------------------------------------------------------------
INDIA 91 [*]
- --------------------------------------------------------------------------
INDIAN OCEAN 873 [*]
- --------------------------------------------------------------------------
INDONESIA 62 [*]
- --------------------------------------------------------------------------
IRAN 98 [*]
- --------------------------------------------------------------------------
IRAQ 964 [*]
- --------------------------------------------------------------------------
IRELAND 353
- --------------------------------------------------------------------------
[*] CONFIDENTIAL TREATMENT REQUESTED
8/16/96 CWI Confidential
Proposal Expires Sept. 1, 1996 Page 3
<PAGE>
Prime Call, Inc
Country Code Rate
- --------------------------------------------------------------------------------
ISRAEL 972 [*]
- --------------------------------------------------------------------------------
ITALY 39 [*]
- --------------------------------------------------------------------------------
IVORY COAST 225 [*]
- --------------------------------------------------------------------------------
JAMAICA 809 [*]
- --------------------------------------------------------------------------------
JAPAN 81 [*]
- --------------------------------------------------------------------------------
JORDAN 962 [*]
- --------------------------------------------------------------------------------
KENYA 254 [*]
- --------------------------------------------------------------------------------
KIRIBATI 686 [*]
- --------------------------------------------------------------------------------
KUWAIT 965 [*]
- --------------------------------------------------------------------------------
LAOS 856 [*]
- --------------------------------------------------------------------------------
LATVIA 371 [*]
- --------------------------------------------------------------------------------
LEBANON 961 [*]
- --------------------------------------------------------------------------------
LESOTHO 266 [*]
- --------------------------------------------------------------------------------
LIBERIA 231 [*]
- --------------------------------------------------------------------------------
LIBYA 218 [*]
- --------------------------------------------------------------------------------
LITHUANIA 370 [*]
- --------------------------------------------------------------------------------
LUXEMBOURG 352 [*]
- --------------------------------------------------------------------------------
MACAO 853 [*]
- --------------------------------------------------------------------------------
MACEDONIA 389 [*]
- --------------------------------------------------------------------------------
MADAGASCAR 261 [*]
- --------------------------------------------------------------------------------
MALAWI 265 [*]
- --------------------------------------------------------------------------------
MALAYSIA 60 [*]
- --------------------------------------------------------------------------------
MALDIVES 960 [*]
- --------------------------------------------------------------------------------
MALI REP 223 [*]
- --------------------------------------------------------------------------------
MALTA 356 [*]
- --------------------------------------------------------------------------------
MARSHALL IS 692 [*]
- --------------------------------------------------------------------------------
MARTINIQUE 596 [*]
- --------------------------------------------------------------------------------
MAURITANIA 222 [*]
- --------------------------------------------------------------------------------
MAURITIUS 230 [*]
- --------------------------------------------------------------------------------
MAYOTTECOMOR 269 [*]
- --------------------------------------------------------------------------------
MICRONESIA 691 [*]
- --------------------------------------------------------------------------------
[*] CONFIDENTIAL TREATMENT REQUESTED
MOLDOVA 373 [*]
- --------------------------------------------------------------------------------
MONACO 377 [*]
- --------------------------------------------------------------------------------
MONGOLIA 976 [*]
- --------------------------------------------------------------------------------
MONTSERRAT 809 [*]
- --------------------------------------------------------------------------------
MOROCCO 212 [*]
- --------------------------------------------------------------------------------
MOZAMBIQUE 258 [*]
- --------------------------------------------------------------------------------
MYANMAR 95 [*]
- --------------------------------------------------------------------------------
N MARIANA IS 670 [*]
- --------------------------------------------------------------------------------
[*] CONFIDENTIAL TREATMENT REQUESTED
CWI Confidential
8/16/96 Prosposal Expires Sept 1, 1996 Page 4
<PAGE>
Prime Call, Inc
<TABLE>
<CAPTION>
Country Code Rate
---------------------------------------
<S> <C> <C>
NAMIBIA 264 [*]
---------------------------------------
NAURU 674 [*]
---------------------------------------
NEPAL 977 [*]
---------------------------------------
NETH ANTILLE 599 [*]
---------------------------------------
NETHERLANDS 31 [*]
---------------------------------------
NEVIS 809 [*]
---------------------------------------
NEW CALEDONI 687 [*]
---------------------------------------
NEW ZEALAND 64
---------------------------------------
NICARAGUA 505 [*]
---------------------------------------
NIGER REP 227 [*]
---------------------------------------
NIGERIA 234
---------------------------------------
NIUE ISLAND 683 [*]
---------------------------------------
NORTH KOREA 850 [*]
---------------------------------------
NORWAY 47
---------------------------------------
OMAN 968 [*]
---------------------------------------
PACIFIC OCEAN 872 [*]
---------------------------------------
PAKISTAN 92 [*]
---------------------------------------
PALAU 680 [*]
---------------------------------------
PANAMA 507 [*]
---------------------------------------
PAPUA NEWGUI 675 [*]
---------------------------------------
PARAGUAY 595 [*]
---------------------------------------
PERU 51 [*]
---------------------------------------
PHILIPPINES 63 [*]
---------------------------------------
POLAND 48 [*]
---------------------------------------
PORTUGAL 351 [*]
---------------------------------------
QATAR 974 [*]
---------------------------------------
REUNION ISL 262 [*]
---------------------------------------
ROMANIA 40 [*]
---------------------------------------
RUSSIA & NIS 7 [*]
---------------------------------------
[*] CONFIDENTIAL TREATMENT REQUESTED
RWANDESE REP 250 [*]
---------------------------------------
SAN MARINO 378 [*]
---------------------------------------
SAO TOME&PRI 239 [*]
---------------------------------------
SAUDI ARABIA 966 [*]
---------------------------------------
SENEGAL 221 [*]
---------------------------------------
SEYCHELLES 248 [*]
---------------------------------------
SIERRA LEONE 232 [*]
---------------------------------------
SINGAPORE 65
---------------------------------------
SLOVENIA 386 [*]
---------------------------------------
SOLOMON IS 677 [*]
---------------------------------------
</TABLE>
[*] CONFIDENTIAL TREATMENT REQUESTED
CWI Confidential
8/16/96 Proposal Expires September 1, 1996
<PAGE>
Prime Call, Inc
Country Code Rate
- --------------------------------------------------------------------------
SOMALI DEM R 252 [*]
- --------------------------------------------------------------------------
SOUTH AFRICA 27 [*]
- --------------------------------------------------------------------------
SOUTH KOREA 82
- --------------------------------------------------------------------------
SPAIN 34 [*]
- --------------------------------------------------------------------------
SRI LANKA 94 [*]
- --------------------------------------------------------------------------
ST KITTS 809 [*]
- --------------------------------------------------------------------------
ST LUCIA 809 [*]
- --------------------------------------------------------------------------
ST VINCENT 809 [*]
- --------------------------------------------------------------------------
ST. HELENA 290 [*]
- --------------------------------------------------------------------------
STPIER&MIQ 508 [*]
- --------------------------------------------------------------------------
SUDAN 249 [*]
- --------------------------------------------------------------------------
SURINAME 597 [*]
- --------------------------------------------------------------------------
SWAZILAND 268 [*]
- --------------------------------------------------------------------------
SWEDEN 46
- --------------------------------------------------------------------------
SWITZERLAND 41
- --------------------------------------------------------------------------
SYRIA 963 [*]
- --------------------------------------------------------------------------
TAIWAN 886
- --------------------------------------------------------------------------
TANZANIA 255 [*]
- --------------------------------------------------------------------------
THAILAND 66 [*]
- --------------------------------------------------------------------------
TOGOLESE REP 228 [*]
- --------------------------------------------------------------------------
TONGA 676 [*]
- --------------------------------------------------------------------------
TRINIDAD 809 [*]
- --------------------------------------------------------------------------
TUNISIA 216 [*]
- --------------------------------------------------------------------------
TURKEY 90 [*]
- --------------------------------------------------------------------------
TURKS CAICOS 809 [*]
- --------------------------------------------------------------------------
TUVALU 688 [*]
- --------------------------------------------------------------------------
U A EMIRATES 971 [*]
- --------------------------------------------------------------------------
UGANDA 256 [*]
- --------------------------------------------------------------------------
UK G BRITAIN 44 [*]
- --------------------------------------------------------------------------
UKRAINE 380 [*]
- --------------------------------------------------------------------------
URUGUAY 598 [*]
- --------------------------------------------------------------------------
[*] CONFIDENTIAL TREATMENT REQUESTED
VANUATU 678 [*]
- --------------------------------------------------------------------------
VENEZUELA 58 [*]
- --------------------------------------------------------------------------
VIETNAM 84 [*]
- --------------------------------------------------------------------------
WALLIA&FUTUN 681 [*]
- --------------------------------------------------------------------------
WESTNSAMOA 685 [*]
- --------------------------------------------------------------------------
YEMEN REP 967 [*]
- --------------------------------------------------------------------------
YUGOSLAVIA 381 [*]
- --------------------------------------------------------------------------
ZAIRE REP 243 [*]
- --------------------------------------------------------------------------
[*] CONFIDENTIAL TREATMENT REQUESTED
CWI Confidential
8/16/96 Proposal Expires Sept. 1, 1996 Page 6
<PAGE>
Prime Call, Inc
Country Code Rate
- --------------------------------------------------------------------------
ZAMBIA 260 [*]
- --------------------------------------------------------------------------
ZIMBABWE 263 [*]
- --------------------------------------------------------------------------
MEXICO OUTBOUND ONLY [*]
- --------------------------------------------------------------------------
MEXICO 1 DISCOUNT 52 [*]
- --------------------------------------------------------------------------
MEXICO 1 STANDARD 52 [*]
- --------------------------------------------------------------------------
MEXICO 2 DISCOUNT 52 [*]
- --------------------------------------------------------------------------
MEXICO 2 STANDARD 52 [*]
- --------------------------------------------------------------------------
MEXICO 3 DISCOUNT 52 [*]
- --------------------------------------------------------------------------
MEXICO 3 STANDARD 52 [*]
- --------------------------------------------------------------------------
MEXICO 4 DISCOUNT 52 [*]
- --------------------------------------------------------------------------
MEXICO 4 STANDARD 52 [*]
- --------------------------------------------------------------------------
MEXICO 5 DISCOUNT 52 [*]
- --------------------------------------------------------------------------
MEXICO 5 STANDARD 52 [*]
- --------------------------------------------------------------------------
MEXICO 6 DISCOUNT 52 [*]
- --------------------------------------------------------------------------
MEXICO 6 STANDARD 52 [*]
- --------------------------------------------------------------------------
MEXICO 7 DISCOUNT 52 [*]
- --------------------------------------------------------------------------
MEXICO 7 STANDARD 52 [*]
- --------------------------------------------------------------------------
MEXICO 8 DISCOUNT 52 [*]
- --------------------------------------------------------------------------
MEXICO 8 STANDARD 52 [*]
- --------------------------------------------------------------------------
[*] CONFIDENTIAL TREATMENT REQUESTED
CWI Confidential
8/16/96 Proposal Expires Sept. 1, 1996 Page 7
<PAGE>
Exhibit 10.21
[*] Designates material for which confidential treatment has been requested,
which material has been separately filed with the Securities and Exchange
Commission.
RECIPROCAL TELECOMMUNICATIONS AGREEMENT
AGREEMENT made this 3rd day of December 1996, by and between STAR Vending,
Inc. d/b/a STAR Telecommunications (hereinafter "STAR"), located at 223 East De
La Guerra Street, Santa Barbara, California 93101, a Nevada Corporation, and
PRIMECALL, INC. (hereinafter "CUSTOMER"), a Washington corporation, located at
1520 Eastlake Avenue East, Suite 205, Seattle, Washington 98102.
WITNESSETH
WHEREAS, STAR and CUSTOMER are in the business of providing
telecommunications services; and
WHEREAS, STAR desires to purchase telecommunications services from CUSTOMER
and CUSTOMER desires to purchase telecommunications services from STAR;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, and for good and valuable consideration, the parties agree as
follows:
1. Services
--------
(A) STAR agrees to furnish CUSTOMER and CUSTOMER agrees to purchase from
STAR, the telecommunications services set forth in Exhibit A attached hereto.
(B) CUSTOMER agrees to furnish STAR and STAR agrees to purchase from
CUSTOMER, the telecommunications services as set forth in Exhibit B attached
hereto.
(C) It is understood that all Services provided by the parties hereunder
are provided for resale by the other party to end users, customers or
subscribers.
2. Terms
-----
This Agreement shall commence on or about the 30th day of November 1996
(the "Commencement Date") and continue for a period of six (6) months from such
date. After the expiration of the initial term or any subsequent term, this
Agreement shall thereafter continue, on the same terms and conditions, on a
month-to-month basis unless either party notifies the other party, in writing,
not less than thirty (30) days prior to the termination date of its desire to
terminate this Agreement. This Agreement shall continue and remain in full force
and effect until canceled by either party upon notice as provided herein.
3. Rates
-----
(A) During the term of this Agreement, STAR shall charge for the
telecommunications services, and CUSTOMER shall pay for such services, that
amount as determined by using the rates set out in Exhibit A.
[INITIALS APPEAR HERE] Initials
----------------------
[INITIALS APPEAR HERE] Initials
----------------------
1
<PAGE>
(B) During the term of this Agreement, CUSTOMER shall charge for the
telecommunications services, and STAR shall pay for such services, that amount
as determined by using the rates set out in Exhibit B.
(C) STAR and CUSTOMER shall have the right to modify the rates and
conditions set forth in Exhibits A and B at any time during this Agreement but
shall give the other party at least five (5) days' prior written notice.
4. Charges and Payment Terms
-------------------------
(A) STAR and CUSTOMER hereby acknowledge the charges for the provision
of Services will be billed as provided herein and that payment for such Service
shall be payable in U.S. dollars. For each month during the term of this
Agreement, STAR and CUSTOMER will provide the other party with an invoice for
Service provided during the previous month. The invoice amounts will be due and
payable from both parties within twenty (20) days after the invoice date (the
"Due Date"), which shall be the last date of the previous month's billing cycle.
Late payments will be assessed a late payment penalty of one and one-half
percent (1.5%) per month on the delinquent balance of any undisputed Service
usage not paid by the Due Date. Payments shall be made by wire transfer or such
other methods as may be agreed by the parties. Nothing herein shall be construed
to constitute a waiver of either parties rights to declare a default by the
other party under this Agreement on account of delinquency, to terminate this
Agreement and to exercise any other rights under this Agreement or at law or in
equity.
(B) Should either STAR or CUSTOMER dispute any of the monthly charges
on the monthly invoice, it shall notify the other party of the disputed charges
not later than sixty (60) days from the date of invoice. Said dispute shall set
forth all details concerning the disputed charges in writing. In the event of a
dispute, the entire invoice shall nevertheless by paid in accordance with
payment terms set forth herein. After resolution of the disputed portion of the
invoice, the adjustments, if any shall be immediately credited to the other
party's account.
(C) All calls will be billed in six (6) second increments utilizing
Hardware Answer Supervision where available. All international calls, with the
exception of Mexico, will be billed in six (6) second increments subject to a
thirty (30) second minimum charge. Mexico calls will be billed in one (1) minute
increments.
(D) CUSTOMER and STAR shall at all times comply with the other party's
initial and continuing credit approval procedures and policies. Each party
reserves the right to withhold initiation and full implementation of services
under this Agreement pending initial satisfactory credit review and approval
thereof, which may be conditioned upon terms specified, including, but not
limited to, security for payments due hereunder in the form of a cash deposit,
guarantee, irrevocable letter of credit or other means. Upon request by either
party, at any time, the other party agrees to provide financial statements or
other indications of financial circumstances. As may be determined by either
party, in its sole discretion, at any time, if the financial circumstances or
payment history of the other party is or becomes unacceptable, the party
furnishing Services may require a new or increased deposit, guarantee or
irrevocable letter of credit, at such party's option, to secure the other
party's payments for the term of the Agreement. Failure of a party to provide
requested security shall permit the other party to immediately suspend Services,
without further notice or demand, until such time as requested security is
provided.
2
<PAGE>
5. Warranty
--------
STAR and CUSTOMER will use reasonable efforts under the circumstances
to maintain overall network quality. The quality of Service provided hereunder
shall be consistent with other common carrier industry standards, government
regulations and sound business practices. STAR AND CUSTOMER MAKE NO OTHER
WARRANTIES ABOUT THE SERVICE PROVIDED HEREUNDER, EXPRESS OR IMPLIED, INCLUDING,
BUT NOT LIMITED, TO ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR USE.
6. Continuing Relationship and Termination
---------------------------------------
This Agreement and the relationship of the parties may be terminated
by the non-defaulting party in accordance with applicable provision hereof
and/or the occurrence of any of the following events, which shall constitute a
default:
(A) Material breach of this Agreement, after notice thereof, and
failure of the breaching party to cure such breach: (i) within five (5) days of
receipt of such notice, where breach involves a failure to make payments when
due, and (ii) within twenty (20) days of receipt of such notice for all other
breaches;
(B) The adjudication of bankruptcy of either party under federal,
state or municipal bankruptcy or insolvency act, or the appointment of a
received or any act or action constituting a general assignment by a party of
its properties and interest for the benefit of creditors;
(C) The determination by any governmental entity having jurisdiction
over the Service provided under this Agreement that the relationship of the
parties and/or Services provided hereunder are contrary to then existing laws.
7. Taxes
-----
The parties acknowledge and understand that all charges stated in the
attached Service Schedules are computed exclusive of any applicable use, excise,
gross receipts, sales and privilege taxes, duties, fees and other taxes or
similar liabilities (other than general income or property taxes). Such
Additional Charges shall be paid by the party receiving services in addition to
all other charges provided for herein. Each party is solely liable for and
hereby indemnifies and holds the other party harmless from filing all
applications, forms, reports, returns, statements and other documents and
information with any payment of all taxes and/or assessments to all local,
county, state, federal and other taxing authorities having jurisdiction with
respect to any and all charges to each party's end users or customer for the
services, including, without limitation, any governmental agency or authority in
any foreign country.
8. Suspension of Services
----------------------
In the event payment in full is not received from either party when
due, the other party shall have the right, after giving the defaulting party
five (5) days prior written notice after the Due Date, to suspend all or any
portion of the Service to the defaulting party until such time as such party has
paid in full all charges then due, including any late fees.
3
<PAGE>
9. Liability; General Indemnity
----------------------------
(A) Limited Liability. IN NO EVENT, WILL EITHER PARTY BE LIABLE TO THE
OTHER PARTY FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL LOSSES OR
DAMAGES, INCLUDING WITHOUT LIMITATION, LOSS OF REVENUE, LOSS OF CUSTOMERS OR
CLIENTS, LOSS OF GOODWILL OR LOSS OF PROFITS ARISING IN ANY MANNER FROM THIS
AGREEMENT AND THE PERFORMANCE OR NONPERFORMANCE OF OBLIGATIONS HEREUNDER.
THE LIABILITY OF STAR AND CUSTOMER, WITH RESPECT TO THE INSTALLATION (INCLUDING
DELAYS THEREOF), PROVISION, TERMINATION, MAINTENANCE, REPAIR, INTERRUPTION OR
RESTORATION OF ANY SERVICES OR FACILITIES OFFERED UNDER THIS AGREEMENT, SHALL
NOT EXCEED AN AMOUNT EQUAL TO THE CHARGE APPLICABLE UNDER THIS AGREEMENT TO THE
PERIOD DURING WHICH SERVICES WERE AFFECTED FOR THOSE SERVICES WITH MONTHLY
RECURRING CHARGES. THE LIABILITY OF EITHER PARTY IS LIMITED TO AN AMOUNT EQUAL
TO THE PROPORTIONATE MONTHLY RECURRING CHARGES FOR THE PERIOD DURING WHICH
SERVICE WAS AFFECTED.
(B) General Indemnity. In the event parties other than STAR and
CUSTOMER shall have use of the Services, then STAR and CUSTOMER agree to forever
indemnify and hold each other harmless from and against any and all claims,
demands, suits, actions, losses, damages, assessments or payments which may be
asserted by said parties arising out of or relating to any defect in the
Services.
10. Force Majeure
-------------
If either party's performance of this Agreement, or any obligations
hereunder, is prevented, restricted or interfered with by causes beyond its
reasonable control, including, but not limited to, acts of God, fire, explosion,
vandalism, cable cut, storm or other similar occurrence, any law, order,
regulation, direction, action or request of the United States government or
state or local governments, or of any department, agency, commission, court,
bureau, corporation or other instrumentality of any or more said governments, or
any civil or military authority, or by national emergency, insurrection, riot,
war, strike, lockout or work stoppage or other labor difficulties, supplier
failure, shortage, breach or delay, then such party shall be excused from such
performance on a day-to-day basis to the extent of such restrictions or
interference. Such party shall notify the other and use reasonable efforts under
the circumstances to avoid or remove such causes of nonperformance and shall
proceed to perform with reasonable dispatch whenever such causes are removed or
cease. This provision shall not, however, relieve either party from making
payment when due.
1. Notices
-------
All notices, demands, requests and other communications require or
permitted hereunder shall be in writing and shall be deemed to be delivered when
actually received, or, if earlier and regardless of whether actually received on
the day following the date of mailing via first-class U.S. mail or overnight
courier or facsimile, charges prepaid, to the last known place of business of
either party. Notices will be delivered as follows:
4
<PAGE>
To STAR: Attention: Contracts Manager To CUSTOMER: Attention: Lisa Jenchel
STAR Vending, Inc. Company: PrimeCall, Inc.
223 East De La Guerra Street Address: 1520 Eastlake Ave. East,
Santa Barbara, CA 93101 Suite 205
Telephone: (805) 899-1962 Seattle WA 98102
Facsimile: (805) 899-2792 Telephone: (206) 328-1109 X201
Facsimile: (206) 328-7580
Billing Contact: Lisa Dobson, Director Billing Contact: Eric McKibben
Phone: (805) 899-1962 Address (if different):
Facsimile: (805) 899-2972 -------------
Same as above
------------------------------------
Phone & Facsimile:(206) 328-1109 X204
(206) 328-7580
12. No Waiver
---------
No term or provision of this Agreement shall be deemed waived and no
breach or defaults shall be deemed excused unless such waiver or consent shall
be in writing and signed by the party claimed to have waived or consented. No
consent by any party to, or waiver of, a breach or default by the other, whether
express or implied, shall constitute a consent to, waiver of, or excuse for any
different or subsequent breach or default.
13. Partial Invalidity
------------------
If any term or provision of this Agreement shall be found to be
illegal or unenforceable, then notwithstanding such illegality or
unenforceability, this Agreement shall remain in full force and effect and such
terms or provisions shall be deemed to be deleted.
14. Exclusive Remedies
------------------
Except as otherwise specifically provided for herein, the remedies set
forth in this Agreement comprise the exclusive remedies available to either
party at law or in equity.
15. Use of Service
--------------
STAR and CUSTOMER agree to provide the Service specified hereunder
upon condition that the Services shall not be used for any unlawful purposes.
The provision of Service will not create a partnership or joint venture between
the parties or result in a joint communication service offering to any third
party.
16. Governing Law
-------------
This Agreement shall be, in all respects, governed by and construed
and enforced in accordance with the laws of the State of California, including
all matters of construction, validity and performance. Any action to enforce or
interpret the terms of this Agreement shall be instituted and maintained in the
Superior Court of the County of Santa Barbara, State of California. Both parties
hereby consent to the jurisdiction of such court and wave any objections to such
jurisdiction. In any action or proceeding arising out of this Agreement, the
party prevailing in such action shall be entitled to recover reasonable
attorneys' fees and costs.
17. Proprietary Information
-----------------------
5
<PAGE>
(A) Confidential Information. The parties understand and agree that
------------------------
the terms and conditions of this Agreement, and documents referred herein
(including invoices to STAR for Services provided hereunder), communications
between the parties regarding this Agreement or the Service to be provided
hereunder (including price quote to STAR or CUSTOMER for any Service proposed to
be provided or actually provided hereunder) and all information regarding the
customers of STAR or CUSTOMER, as well as such information relevant to any other
agreements between the parties (collectively "Confidential Information"), are
confidential as between STAR and CUSTOMER.
(B) Limited Disclosure. A party shall not disclose Confidential
------------------
information unless subject to discovery or disclosure pursuant to legal process,
or to any other party other than the directors, officers and employees of a
party or agents of a party, including their respective brokers, lenders,
insurance carriers or prospective purchasers of the party's business, who have
specifically agreed, in writing, to nondisclosure of the terms and conditions
hereof. Any disclosure hereof required by legal process shall only be made after
providing the non-disclosing party with notice thereof in order to permit the
non-disclosing party to seek an appropriate protective order or exemption.
Violation by party or its agents of the foregoing provision shall entitle the
non-disclosing party, at its option, to obtain inductive relief without a
showing of irreparable harm or injury and without bond.
(C) Press Release. The parties further agree that any press release,
-------------
advertisements or publication generated by a party regarding this Agreement, the
Service provided hereunder or in which the party desires to mention the name of
the other party's parent or affiliated company(ies), will be submitted to the
non-publishing party for its written approval prior to publication.
(D) Survival and Confidentiality. The provision of this Paragraph will
----------------------------
be effective as of this Agreement and remain in full force and effect for a
period equal to the longer of: (i) five (5) years following the effective date
of this Agreement; or (ii) five (5) years following the termination of all
Service hereunder.
18. Binding Effect
--------------
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, successors and assigns. Neither party
shall voluntarily, or by operation of law, assign, transfer, license, or
otherwise transfer all or any part of its right, duties or other interest in
this Agreement or the proceeds thereof (collectively "Assignment") without the
other party's written consent, which consent shall not be unreasonable withheld
or delayed. Any attempt to make an Assignment in violation of this provision
shall be null and void. Each party shall provide written notice to the other
party of any material change in ownership of either party. Should either party
fail to comply with the Assignment provisions, as contained in this paragraph,
then the party who failed to meet the terms of Assignment shall, at its sole
discretion, give the other party the option to either accept a party's assignee
or terminate this Agreement. No Assignment shall release either party of its
obligations hereunder.
19. General
-------
(A) Survival of Terms. The terms and provisions contained in this
-----------------
Agreement, that by their sense and context are intended to survive the
performance thereof by the parties hereto, shall so survive the completion of
performance and termination of this Agreement, including, without limitation,
provision for indemnification and the making of any and all payments hereunder.
6
<PAGE>
(B) Interpretation. The words and phrases used herein shall have the
--------------
meaning generally understood in the telecommunications industry. This Agreement
shall be construed in accordance with its fair meaning and not for or against
either party on account of which party drafter this Agreement.
(C) Third Party Beneficiaries/Parties in Interest. This Agreement has
---------------------------------------------
been made and is made solely for the benefit of the Provider and Purchaser, and
their respective successors and permitted assigns. Nothing in this Agreement is
intended to confer any rights/remedies under or by reason of this Agreement on
any third party.
(D) Representation of Authority. Each party represents and warrants to
---------------------------
the other that the execution and delivery of this Agreement and the performance
of such party's obligations hereunder have been duly authorized and that the
Agreement is a valid and legal agreement binding on such parties and enforceable
in accordance with its terms.
(E) Further Assurances. The parties shall at their own cost and
------------------
expense execute and deliver such further documents and instruments and shall
take such other actions as may be reasonably required or appropriate to carry
out the intent and purposes of this Agreement.
(F) Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall constitute an original, but all of which shall
constitute one and the same instrument.
20. Entire Agreement
----------------
This Agreement consists of all of the terms and conditions contained
herein, in executed Service Schedules that are identified herewith and in
documents incorporated herein, specifically by reference. This Agreement
constitutes the complete and exclusive statement of understanding between the
parties and supersedes all proposals and prior agreements (oral or written)
between the parties relating to Service provided hereunder. No subsequent
agreement between the parties, concerning the Service, shall be effective or
binding unless it is made in writing and subscribed to by authorized
representatives of STAR and CUSTOMER.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
STAR VENDING, INC. d/b/a/ CUSTOMER: PRIMECALL, INC.
STAR TELECOMMUNICATIONS
By: [SIGNATURE APPEARS HERE] By: /s/ Alan Chin
---------------------------------- ----------------------------------
Printed Name: [NAME APPEARS HERE] Printed Name: ALAN CHIN
------------------------ ------------------------
Title: PRESIDENT Title: VP
------------------------------- -------------------------------
7
<PAGE>
S T A R TELECOM INTERNATIONAL TERMINATIONS
EXHIBIT A
<TABLE>
<CAPTION>
C O U N T R Y code S T A N D A R D D I S C O U N T E C O N O M Y MIN. OF USE
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
AMERICAN SAMOA 684 [*] [*] [*]
-------------
AUSTRALIA 61 [*] [*] [*]
-------------
AUSTRIA 61 [*] [*] [*]
-------------
BELGIUM 32 [*] [*] [*]
-------------
BRAZIL 55 [*] [*] [*]
-------------
CENTRAL AFRICAN REP. 236 [*] [*] [*]
-------------
CHINA 86 [*] [*] [*]
-------------
COLOMBIA 57 [*] [*] [*]
-------------
DENMARK 45 [*] [*] [*]
-------------
FINLAND 358 [*] [*] [*]
-------------
FRANCE 33 [*] [*] [*]
-------------
FRANCE (MONACO) 377 [*] [*] [*]
-------------
GERMANY 49 [*] [*] [*]
-------------
GREECE 30 [*] [*] [*]
-------------
INDIA 91 [*] [*] [*]
-------------
ISRAEL 972 [*] [*] [*]
-------------
ITALY 39 [*] [*] [*]
-------------
KOREA 82 [*] [*] [*]
-------------
KUWAIT 965 [*] [*] [*]
-------------
MALAYSIA 60 [*] [*] [*]
-------------
NETHERLANDS 31 [*] [*] [*]
-------------
NEW ZEALAND 64 [*] [*] [*]
-------------
NIGERIA 234 [*] [*] [*]
-------------
NORWAY 47 [*] [*] [*]
-------------
PHILIPPINES 63 [*] [*] [*]
-------------
PHILIPPINES (MANILA) [*] [*] [*]
-------------
POLAND 48 [*] [*] [*]
-------------
SINGAPORE 65 [*] [*] [*]
-------------
SOUTH AFRICA 27 [*] [*] [*]
-------------
[*] CONFIDENTIAL TREATMENT REQUESTED
SPAIN 34 [*] [*] [*]
-------------
BALEARIC IS. 34 [*] [*] [*]
-------------
CANARY ISLANDS 34 [*] [*] [*]
-------------
CUETA 34 [*] [*] [*]
-------------
MELILLA 34 [*] [*] [*]
-------------
SWEDEN 46 [*] [*] [*]
-------------
SWITZERLAND 41 [*] [*] [*]
-------------
TURKEY 90 [*] [*] [*]
-------------
ZAIRE 243 [*] [*] [*]
-------------
ZIMBABWE 263 [*] [*] [*]
-------------
AZERBAIJAN 994 [*] [*] [*]
-----------------------------------------------------------------------
</TABLE>
*** Billed in 30 seconds minimum, 06 seconds thereafter
PrimeCall, Inc.
FOB: Los Angeles, CA
[*] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
<TABLE>
<CAPTION>
PEAK OFF-PEAK
---------- ---------- ----------
<S> <C> <C> <C>
MEXICO band 1 [*] [*]
----------
band 2 [*] [*]
----------
band 3 [*] [*]
----------
band 4 [*] [*]
----------
band 5 [*] [*]
----------
band 6 [*] [*]
----------
band 7 [*] [*]
----------
band 8 [*] [*]
---------- ---------- ----------
</TABLE>
* * * Billed in one minute increments
All calls are rated on Pacific Standard Time.
The rates listed herein are subject to NON-DISCLOSURE. Disclosure of these
rates, or any information pertaining to said rates, to any party or parties
outside the employment of Purchaser will result in the withdrawal by Provider of
the disclosed rates.
Rates are subject to change with five (5) days' notice.
Rate decreases are effective as stated in Provider's written notice AND upon
receipt by Provider of Purchaser's signature on said notice. Without a duly
signed amendment notice, no credit will be issued for the differential between
decreased rates and Purchaser's current contract rates.
[*] CONFIDENTIAL TREATMENT REQUESTED
9
<PAGE>
EXHIBIT B
CUSTOMER'S CUSTOM PRICING TO STAR
---------------------------------
<TABLE>
<CAPTION>
Country Price
------------------------------
<S> <C>
BELIZE [*]
EGYPT [*]
GABON REPUBLIC [*]
GEORGIA [*]
GHANA [*]
IRAN [*]
IVORY COAST [*]
MARSHALL ISLANDS [*]
PAKISTAN [*]
PANAMA [*]
ST. HELENA [*]
SURINAME [*]
TOGO [*]
</TABLE>
FOB: Los Angeles, CA
[*] CONFIDENTIAL TREATMENT REQUESTED
10
<PAGE>
Exhibit 10.22
[*] Designates material for which confidential treatment has been requested,
which material has been separately filed with the Securities and Exchange
Commission.
SWITCH PORT LEASE AND SERVICE AGREEMENT
This Switch Port Lease and Service Agreement ("Agreement") is hereby
entered into as of this 7th [handwritten] day of August [handwritten], 1996 and
----------------- --------------------
is between World Touch, Inc., a Washington Corporation (hereinafter "Lessor"),
having its principal offices at 300 120th Ave., NE, Building One, Suite 204,
Bellevue, Washington 98005 and PrimeCall, Inc., a Washington corporation
(hereinafter "Lessee") having its principal offices at 1520 Eastlake Ave., E,
Suite 205, Seattle, Washington 98102 (collectively "Parties").
The Parties agree as follows:
1. Lease of Ports. Subject to the terms and conditions contained herein,
--------------
Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor the
quantity of DS-1 ports (set forth in Exhibit "A") on a Northern Telecom DMS-250
Switch (the "Switch"), located at 625 So. Grand Avenue, 7th Floor #711, (1
Wilshire Bldg.), Los Angeles, California 90017 to receive, process, and output
voice grade telephone message traffic.
2. Term. This Agreement and the services contemplated hereunder shall not
----
become effective until Lessee pays to Lessor $[*] representing first months
rental payment. Unless sooner terminated as provided herein, this Agreement
shall have a initial term of six (6) months (the "Initial Service Term")
commencing on the date set forth above. After the initial Service Term, service
shall automatically continue on a month-to-month basis (each month period is
referred to as an "Extended Term"), unless terminated by either party at the end
of the Initial Service Term or an extended Term, by giving at least 60 days
written notice of intent to terminate prior to the end of such Term. All terms
set forth herein shall apply to any 'Extended Term' of this Agreement.
3. Charges, Payment and Billing.
----------------------------
a. Lessee will pay Lessor monthly for the lease of ports and services
provided pursuant to this Agreement. As of the execution date of this Port
Agreement, the charges which apply are set forth in Exhibit "A" attached hereto.
Charges for ports will be paid in advance each month. In-use port charges
commence when the ports are activated in accordance with Section 6. Ports placed
in In-Use during a partial calendar month shall still be charged at a rate equal
to the full monthly In-Use port rate.
b. Payment. Lessee agrees to remit any payment due to Lessor pursuant
to this Agreement on the first of each month (the "Due Date") . Any payment
[*] CONFIDENTIAL TREATMENT REQUESTED
1
<PAGE>
received more than thirty (30) days after the first of the month shall
constitute a late payment resulting in a late payment charge of 1.5% of the
total invoice amount per month of the maximum legal rate, whichever is less. If
the total amount due on any invoice is not received by Lessor within fifteen
(15) days of the Due Date, Lessor may send Lessee written notice that all
services may be temporarily suspended due to non-payment. Lessor shall have the
right after ten (10) days following such notice to discontinue services pursuant
to this Agreement unless or until the total amount due including late payment
charges is paid in full by Lessee.
c. Disputes. In the event of any billing disputes, Lessee will provide
to Lessor, prior to Due Date, a detailed presentation in writing of any disputed
charges. Notwithstanding such dispute Lessee shall pay any undisputed portion of
the disputed invoice. Any dispute by Lessee must be raised within sixty (60)
days of the Due Date, or such disputed claim is hereby waived. Disputes will be
resolved in accordance with the procedures outlined in paragraph 14(j).
d. Additional Charges. Any applicable federal, state, or local use,
excise, sales, or privilege taxes, duties, or similar liabilities, chargeable to
or against Lessor because of the services provided to Lessee pursuant to this
Agreement shall be charged and payable by Lessee in addition to the other charge
specified in this Section 3. Any extra services provided by Lessor to Lessee
shall be billed to Lessee and paid within ten (10) days of invoice provided that
Lessee has agreed to any such extra services in advance.
4. Lessor's Responsibilities. Lessor shall be responsible only for the
-------------------------
following:
a. Operating the Switch and performing all maintenance and procedures
related thereto in a timely manner;
b. Maintaining a Switch Operator on duty at the Switch location during
normal business hours, Monday through Friday. Lessor will have technicians on
call on a twenty-four (24) hour basis.
c. Providing Lessee with telephone numbers and an escalation list for
use in reporting troubles. Lessor shall monitor the Switch on a twenty-four (24)
hour basis, such monitoring having capability to respond to alarms which alert
the need for immediate maintenance attention.
d. Coordination of the resolution of trouble calls received from the
Lessee by using the Lessor's best effort to respond, identify, and repair each
problem reasonably and promptly (generally within 4 hours) or such longer time
as is reasonable
2
<PAGE>
under the circumstances and to thereafter notify Lessee of the nature of the
problem, following completion of such problem resolution.
e. Scheduling any pre-planned major preventative Switch maintenance
during Lessee's off business hours, coordinate with and notifying Lessee of such
planned outages at least forty-eight (48) hours prior to their occurrence.
Lessor acknowledges that Lessee's business hours may vary significantly from
"normal business hours."
f. Provide Call Detail Records (CDR) in a format and mutually
acceptable media, as required to allow proper billing, tracking, and Lessee
fraud control.
g. Lessor shall also be responsible for the duties detailed in Exhibit
C attached hereto and made a part hereof.
h. Joint coordination of ASR's, however, Lessee will be order
originator, designer and technical point of contact. Lessee will also establish
its own CLLI with each carrier.
5. Lessee's Responsibilities. Lessee shall be responsible for the
-------------------------
following:
a. Payment of all charges and fees due Lessor hereunder in a timely
manner.
b. Any disputed charges must be paid in full as per Section 3c. A
resolution of such disputed charges mutually agreed upon shall be provided in
the form of a credit against existing or future post/use charges.
c. Using the ports and services provided by Lessor under this Agreement
for tandem switching of voice grade telephone message traffic.
d. Complying with all applicable laws.
e. Observing all conditions contained herein.
f. Be responsible for the duties detailed in Exhibit C, attached hereto
and made a part hereof.
6. Port Availability.
-----------------
a. In-Use Ports. Lessor agrees to lease twenty (20) DS-1 (24 ports) on
the Switch to Lessee. In the event Lessee desires additional ports, Lessor shall
make
3
<PAGE>
them available upon the same terms and conditions set forth herein in blocks
of 480 ports upon 90 days notice.
b. Disconnecting Ports. Lessee may disconnect ports by giving Sixty
(60) days written notice to Lessor. Ports may not be disconnected in increments
of less than Four hundred and Eighty (480) ports (20 DS-1). Charges for ports
being disconnected will continue until the actual disconnect date.
7. Routing.
-------
a. Initial Routing. Lessor shall set-up software table (the "Initial
Routing Tables") in the Switch which directs the flow of traffic to Lessee's
ports. Such routing procedure is to be implemented after a mutually acceptable
initial routing procedure has been approved by both parties. Lessee shall
provide Lessor with a written listing of all the output NPA-NXX's and country
codes to be entered into the Initial Routing Tables and shall specify the output
port(s) to which each NPA-NXX or country code, Lessee agrees that traffic bound
for that NPA-NXX or country code will be intercepted by the Switch and treated
with an announcement, or routed to a trunk group designated by Lessee. When
input to the Initial Routing Tables has been completed, Lessor shall provide
Lessee with a paper printout of the Initial Routing Tables. Lessee agrees:
i. to review the Initial Routing Tables to verify their
accuracy;
ii. to notify Lessor in writing with five (5) business days
of receipt of the printout of any error; and
iii. to specify changes needed to the Initial Routing Tables
to Lessor in writing.
Input to all tables will be considered correct and accepted by Lessee
unless Lessor is notified within five (5) business days otherwise.
b. Routing Changes. Lessee may request changes to the Initial Routing
Tables resulting in revised routing tables (the "Revised Routing Tables"), which
may also be changed at the request of the Lessee.
Lessor agrees to make requested changes at an extra charge to be paid in
advance by Lessee in accordance with the procedures and time-lines specified in
Exhibit "B,"
4
<PAGE>
attached hereto and made a part hereof. Lessee agrees to comply with the
routing procedures specified in Exhibit B.
8. Service Outage Recovery. Lessor agrees to work with Lessee to develop a
-----------------------
mutually acceptable plan for alternative routing of Lessee traffic to mitigate
the outage in the event of a disaster or major Switch outage.
9. Defaults and Remedies. It shall be a default under this Port Agreement,
---------------------
entitling lessor or lessee, as the case may be, to terminate this agreement and
to pursue all remedies available under applicable law if:
a. Any party shall be in material breach of the terms and conditions of
this Agreement: or
b. Any party shall file a voluntary petition in bankruptcy, fail to
deny an involuntary petition in bankruptcy with 30 days of filing, or is
adjudicated to be bankrupt, or shall appoint or suffer the appointment of a
receiver or trustee for all or a port of it property, or shall make an
assignment for the benefit of its creditors.
c. In the event either party defaults under the terms of this
agreement, the non-defaulting party shall have the right to immediately
terminate this agreement. In the event the Lessor is in breach of its duties as
set forth in paragraph 5 and of Exhibit "C" attached hereto and incorporated
herein, Lessee shall give Lessor written notice of the breach. If such
deficiency or breach is not cured in five (5) days, Lessee shall have the right
to cancel this Agreement effectively immediately.
10. Required Termination. Either party shall also have the right, whether
--------------------
or not a default shall have occurred, to terminate this Agreement prior to the
expiration of the Initial Service Term or any Extended Term, upon no less than
thirty (30) days prior written notice to the other party if either party is
prohibited from furnishing any service related solely to this Agreement by order
of any court, the Federal Communications Commissions, or any other government
authority having jurisdiction as a result of any change in circumstance
occurring after creation of this Agreement; and in the event of early
termination under the paragraph, neither party shall have any continuing
obligation or liability to the other, except for such obligations or liabilities
for payment which existed at, or in respect of, services rendered through the
termination date.
11. Indemnification.
---------------
a. Each party (the "Indemnifying Party") will indemnify and hold
harmless the other party, ("Indemnified Party") from and against any loss, cost,
claim, liability, damage expense (including reasonable attorney fees) to third
parties, relating to
5
<PAGE>
or arising out of any acts by the Indemnifying Party under this Agreement or its
negligent or willful misconduct and defend any action or suit brought by a third
Party against the Indemnified Party for any loss, claim, liability, damage, or
expense relating to or arising out of actions of the Indemnifying party under
this Agreement or its negligence or willful misconduct.
b. The Indemnified Party will notify the Indemnifying Party promptly in
writing of any written claims, lawsuits, or demands by third parties for which
the Indemnified Party alleges that the Indemnifying party is responsible under
this section and tender such claim, lawsuit, or demand to the Indemnifying Party
for defense and the Indemnifying Party agrees to so defend. The Indemnified
Party also will cooperate in every reasonable manner with the defense or
settlement of such claim, demand, or lawsuit.
c. The Indemnifying Party will not be liable under this section for
settlements by the Indemnified Party of any claim, demand, or lawsuit unless the
Indemnifying Party has approved the settlement in advance or unless the defense
of the claim, demand, or lawsuit has been tendered to the Indemnifying Party in
writing and the Indemnifying Party has failed promptly to undertake the defense.
d. Indemnified party is defined to include directors, officers,
employees, agents, successors or assigns. Indemnifying party is defined to
include successors or assigns.
12. Waiver of Warranties.
--------------------
SUBJECT TO THE TERMS OF PARAGRAPH 11 AND 13 CONTAINED HEREIN, AND EXCEPT
FOR THE GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT OF LESSOR, LESSOR SHALL IN NO
EVENT BE LIABLE TO LESSEE OR ANY OTHER PERSON, FIRM, OR ENTITY IN ANY RESPECT,
INCLUDING WITHOUT LIMITATION, FOR ANY DAMAGES, EITHER DIRECT, INDIRECT
CONSEQUENTIAL, SPECIAL INCIDENTAL, ACTUAL, PUNITIVE OR FOR ANY OTHER DAMAGES OR
FOR ANY LOST PROFITS OF ANY KIND OR NATURE WHATSOEVER, ARISING OUT OF MISTAKES,
ACCIDENTS, ERROR, OMISSIONS, INTERRUPTIONS, TERMINATION OR DEFECTS IN
TRANSMISSION, INCLUDING THOSE WHICH MAY BE CAUSED BY REGULATORY OR JUDICIAL
AUTHORITIES, ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OBLIGATIONS OF
LESSOR PURSUANT TO THIS AGREEMENT. NOTWITHSTANDING ANYTHING CONTAINED HEREIN TO
THE CONTRARY, LESSOR MAKES NO WARRANTY WHETHER EXPRESSED, IMPLIED, OR STATUTORY,
AS TO THE DESCRIPTION, QUALITY,
6
<PAGE>
MERCHANTABILITY, COMPLETENESS OR FITNESS FOR ANY PURPOSES, ALL OF WHICH
WARRANTIES BY LESSOR ARE HEREBY EXCLUDED OR DISCLAIMED. THIS PROVISION MAY NOT
BE WAIVED EXCEPT BY THE PRIOR WRITTEN CONSENT OF GENE ELMORE, PRESIDENT, FIVE
STAR TELECOM, INC.
13. Warranties.
----------
Lessor warrants that all work product, materials and services furnished by
Lessor hereunder to Lessee shall be delivered or performed free of any claim of
any person by way of trade secret, copyright, trademark infringement or any
other proprietary right. Lessor represents and warrants that Lessor has title to
and is the lawful owner of all materials and supplies provided hereunder or, if
not the owner, has the right to use, license and provide same to Lessee.
Lessee warrants that all work product, materials and services furnished by
Lessee hereunder to Lessor shall be delivered or performed free of any claim of
any person by way of trade secret, copyright, trademark infringement or any
other proprietary right. Lessee represents and warrants that Lessee has title to
and is the lawful owner of all materials supplies provided hereunder or, if not
the owner, has the right to use license and provide same to Lessor and that such
materials and supplies are free of any security interests claims, liens or any
other encumbrances whatsoever; that Lessee has the right to assign, transfer and
convey them.
14. Miscellaneous.
-------------
a. Authority. Each party warrants that it has the full legal right,
power, and authority to perform its obligations under this Agreement and that
the person executing this Agreement has the authority to bind such respective
party.
b. Assignment. Lessee shall not assign or transfer this Agreement or
any rights hereunder without first obtaining the written consent of the Lessor,
which consent shall not be unreasonably withheld. Lessor shall notify Lessee of
any assignment of its rights and obligations under this Agreement.
c. Relationship. This Agreement does not and will not create a
partnership, agency, or joint venture between the parties and does not result in
a joint communications service offering.
d. Governing Law; Venue. This Port Agreement and the rights and
obligations of the Parties shall be governed by the laws of the State of
Washington. All
7
<PAGE>
parties consent that venue for the filing of any lawsuits brought hereunder
shall be in the City of Bellevue, County of King, Washington.
e. Severability. If any provision or portion of this Agreement shall
be held invalid under any applicable laws, such invalidity shall not affect any
other provision of this Agreement that can be given effect without the invalid
provision or portion and without materially altering the terms of this agreement
or the intent of the parties, and, to this end, the provisions or portions
hereof are severable.
f. Entire Agreement. This Agreement constitutes the entire agreement
between the parties and supersedes all prior agreements, whether written or oral
with respect to the services being provided under the terms of the Agreement,
and the terms hereof may be changed or waived only by an agreement in writing
signed by both parties hereto.
g. Compliance with Laws. The parties hereto agree to comply with all
federal, state, and local laws with respect to the service and this Agreement.
h. Force Majeure. Neither party shall be liable to the other for its
failure to perform its obligations hereunder if prevented or interfered with by
reason of fire, flood, epidemic, earthquake, or any other act of God, explosion,
power failure, economic impossibility or hardship, utility curtailment, labor or
other dispute, riot or civil disturbance, war, armed conflict, municipal
ordinance, state, or federal law, order of any court of competent jurisdiction,
governmental regulation or acts or omissions of third parties or other causes
beyond the reasonable control of Party.
i. Notices. Notices required under this Port Agreement shall be in
writing and personally delivered, telecopied, or sent by Certified Mail, Return
Receipt Requested, or overnight courier service to the Parties at the address
indicated below:
If To Lessor:
World Touch, Inc.
Attn: Richard H. Hunich
300 120th Ave., NE
Building One, Suite 204
Bellevue, Washington 98005
If to Lessee:
8
<PAGE>
PrimeCall, Inc.
Attn: Allan Chin
1520 Eastlake Ave., E
Suite 205
Seattle, Washington 98102
j. Arbitration. All disputes, including but not limited to billing
disputes, collection, contract interpretation and damages shall be resolved by
mandatory binding arbitration. Such arbitration shall be commenced upon the
filing of a notice requesting arbitration by either party. The cost of the
arbitration shall be initially borne equally by both parties. The prevailing
party shall be awarded its arbitration costs, and all of its actual attorney's
fees incurred in dispute resolution. The arbitration shall be held in the County
of King. The arbitrator's award may be converted into a judgment in accordance
with Washington state law.
k. Joint Procedures. Both parties agree to implement and adhere to the
procedures and duties in Exhibit "C" attached hereto and made a part thereof.
l. Interpretation and Construction. The parties agree that no
presumption shall be applied in favor or against any purported draftor.
m. Attorneys Fees. If any action of law or in equity is necessary to
enforce or interpret the terms of this Agreement, or any part thereof, the
prevailing party shall be entitled to reasonable attorney's fees and costs.
n. Reference. The paragraph headings contained within this Agreement
are for reference and convenience purposes only, and shall under no
circumstances affect the meaning or interpretation of this Agreement.
o. Performance. The failure of either party at any time, or from time
to time to require performance of any of the obligations of the other party
under this Agreement shall in no manner affect the right of either party to
enforce any provision of this Agreement at a subsequent time; and shall not be
construed as a waiver of any subsequent breach of that same provision.
p. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which taken together shall
constitute one and the same Agreement. All signed fax copies of this Agreement
shall be deemed as valid as an original.
9
<PAGE>
q. NO THIRD PARTY BENEFICIARIES. Nothing contained herein shall confer
any right to claim or enforce any right or obligation as third party beneficiary
upon any third party.
15. Circuit Costs. Lessor will accept no responsibility for any long-haul
-------------
transport cost or LEC billing. Lessor provides switch ports to the Lessee as
described above. It is the responsibility of the Lessee for all recurring and
non-recurring charges from local exchange carriers and any other carrier for
switched ports. Lessee will provide Lessor with a letter of agency and any other
required information allowing Lessor to order circuits into the switch office of
the Lessor. All billing for the circuits ordered by the Lessee will be paid
directly by Lessee.
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be
executed as of 8/7/96.
-------
LESSOR: LESSEE:
WORLD TOUCH, INC. PrimeCall, Inc.
By: /s/ R. H. Hunich By: /s/ Alan Chin
----------------------------- -------------------------------
R. H. Hunich Alan Chin
- -------------------------------- -----------------------------------
Name (printed) Name (printed)
Its: President Its: Vice President
---------------------------- -------------------------------
10
<PAGE>
EXHIBIT A
Fee and Term Schedule
Lessor hereby leases to Lessee DS-1 Ports (2 4 ports per DS-1) under the
following terms and conditions to be incorporated in and made a part thereof the
Switch Port Lease and Service Agreement dated June 1, 1996.
1. Lessee shall lease from Lessor 480 ports on a DMS-250C switch located
in Los Angeles, beginning with the execution date of this Agreement.
2. The commencement date of the Initial Service Term shall be the
execution date of this agreement.
3. The price per Voice and Data Digital channel (1/24 of DS-1 or T-1)
shall be [*] per port, payable 30 days in advance. Total price shall be [*] 480
ports x [*] = [*] per month.
4. Rack space and power to accommodate Lessee's equipment and Circuits
shall be provided by Lessor, within reason.
[*] CONFIDENTIAL TREATMENT REQUESTED
11
<PAGE>
EXHIBIT B
Routing Table Change Request Procedure
Both parties to this Port Agreement dated 8/7, 1996,
---
understand that procedures should be established and followed to assure that
required routing changes are executed accurately and in a timely and cost
efficient manner. Lessor agrees to work with Lessee to customize the basic
procedures set forth below in ways which are mutually acceptable for achieving
these goals.
1. Submitting Requests. Change requests must be made in writing and must
-------------------
indicate exactly how the Routing Table data is to appear after the change.
Lessee may submit changes to Lessor via first-class mail, recognized courier or
facsimile transmission. In order to expedite processing, Lessor may request that
changes be sent to the attention of a particular individual or department and/or
that a particular form or format be used. Lessee shall pay for all changes
within 10 days of receipt of an invoice from Lessor.
2. Acknowledging Receipt. Lessor shall acknowledge receipt of change
---------------------
requests by facsimile transmission on the next business day after receipt of
Lessee's written request. If Lessor fails to acknowledge receipt of a change
request within one business day, Lessee should call Lessor to confirm receipt or
resubmit the request. Change requests will not be deemed received unless
acknowledged by Lessor.
3. Timing of Input. Lessor shall review all change requests and contact
---------------
Lessee for clarification of the request, if applicable, within a reasonable
period of time after acknowledging receipt. A reasonable period of time for
reviewing the request generally will not exceed the next business day after the
receipt of the request. The change request will generally be completed within
the next business day following acknowledgment of Lessor's receipt of written
clarifications, if any from Lessee. Should Lessee request that any routing
change be completed by Lessor in less than the time interval specified above,
Lessor will use its best efforts to comply with Lessee's requests at an extra
charge. Lessee will always attempt to limit expedited changes to emergency
situations.
4. Acknowledging Input. Within 1 business day following completion of
-------------------
input, Lessor will send Lessee, via first-class mail, recognized courier or
facsimile transmission, a hard copy of print out of the changed routing tables
showing the contents before and after changes were made. Lessee shall review the
input to verify its accuracy. Completed changes will be considered correct and
accepted by Lessee unless Lessor is
12
<PAGE>
notified otherwise within the next business day after the information was
received or five (5) days after it is sent, whichever is less.
5. Data Base Management. Lessee shall be allowed direct input control via
--------------------
password protected software of the routing, management, and authorization code
data base on the switch under a mutually acceptable procedure for security and
implementation. Any other user of the switch shall coordinate their input
process in conjunction with the Lessor procedures. However, such input control
and access does not allow Lessee to make changes to any data base or routing
other than that associated with Lessee.
13
<PAGE>
EXHIBIT C
Lessee's Responsibilities
Lessee shall be responsible for the following:
1. ANI/Subscriber Maintenance of Class of Service, line/trunk
restrictions, adds, changes and deletions.
2. Trunk configuration, turn-up testing/acceptance, disconnects, moves or
changes will be done as scheduled with Lessor.
3. Trunk, switch and billing link maintenance will be tested, monitored
and trouble reported, pro-actively and re-actively during 8:30 a.m. to 5:30
p.m., Pacific Coast Time and by alarm during non-business hours.
4. Trunk ordering - as an agent when needed, Lessor personnel will respond
as facility point of contact, and test , install on coordinator with carriers
and Lessor's personnel.
5. Joint coordination of ASR's, however, Lessee will be order originator,
designer and technical point of contact. Lessee will also establish its own CLLI
with each carrier.
6. All costs, expenses whatsoever related to the operation of Lessee's
business through the DMS-250 switch.
Lessor's Responsibilities
Lessor shall be responsible for the following:
1. Identify the Switch Trunk Number for installation.
2. Installation wiring, joint testing acceptance of connecting carrier
facilities.
3. Initial installation support will be provided upon demand by Lessor
personnel between the hours of 8:30 a.m. and 5:30 p.m. Pacific Coast Time.
14
<PAGE>
4. If required by Lessee, due to billing link failure, Lessor will send a
billing tape of lost raw detail call records to Lessee. Lessee will be
responsible for shipping cost.
5. Lessor shall maintain the Switch in good working order so that it
operates up to normal carrier standards and up to Northern Telcom DMS standards,
whichever shall be higher standards. Lessor shall also provide least cost
routing on an efficient basis and make changes promptly and accurately. Lessor
shall retain all data and reports in a secure backed up mode at the prevailing
industry standards. Lessor's failure of any of the provisions herein and failure
to remedy such deficiency within five days of notice shall constitute a material
breach of the terms and conditions of the Agreement for purposes of Paragraph 9.
15
<PAGE>
Attachment 1
This Attachment is to amend Exhibit A to increase the number of lease ports from
480 to 960. This increase is to be effective October 1, 1996.
In WITNESS WHEREOF, the parties hereto have cause this Attachment to be executed
as of October 1, 1996. Both parties agree that Attachment 1 is a part of the
original Agreement executed on August 7, 1996.
LESSOR: LESSEE:
WORLD TOUCH, INC. Primecall, Inc.
By: /s/ R. R. Hunich By: /s/ Alan Chin
-------------------------- ---------------------------
R. R. Hunich Alan Chin
- ----------------------------- ------------------------------
Name (printed) Name (printed)
Its: President Its: Vice President
------------------------- --------------------------
16
<PAGE>
Attachment 2
This addendum extends the existing term of the Port Rental Agreement from
February 7, 1997 to January 31, 1998 for 960 Ports on the Los Angeles Switch.
In WITNESS WHEREOF, The parties hereto have cause this Attachment to be executed
as of February 28, 1997. Both parties agree that Attachment 2 is a part of the
original Agreement executed on August 7, 1996.
In addition WTI agrees to lease 20 more T's (480 Ports) at the same prices
starting on March 15, 1997 and terminates on January 31, 1998.
Lessor: Lessee:
World Touch, Inc. Prime Call, Inc.
By: /s/ R. H. Hunich By: /s/ Alan Chin
--------------------------- ------------------------
Name: R. H. Hunich Name: Alan Chin
------------------------- ----------------------
(Printed) (Printed)
Its: President Its: Vice President
-------------------------- ----------------------
17
<PAGE>
EXHIBIT 10.23
[*] Designates material for which confidential treatment has been requested,
which material has been separately filed with the Securities and Exchange
Commission.
TRILOGY TELEMANAGEMENT SERVICE AGREEMENT:
----------------------------------------
WHEREAS: Trilogy Telemanagement, L.L.C. ("Trilogy"), a Delaware limited
liability company, in the business of providing and marketing platform enhanced
telecommunication services, including but not limited to, long distance
telephone services, telephone calling cards, fax services, and debit cards. To
effectuate its services, Trilogy, among other things, designs and develops
computer software, hardware, and services for operation and management of
digital switch services and other products for the deployment of digital switch
application and the management of telecommunications business functions.
WHEREAS: The undersigned "Customer" desires to purchase Trilogy's
services, as specifically defined in Exhibit "1" attached to this Agreement.
WHEREFORE, in consideration for the mutual covenants and promises
contained herein, the parties agree as follows (Trilogy and Customer may also be
referred to as "Party" or "Parties"):
1. SERVICES TO BE PROVIDED TO CUSTOMER: Trilogy agrees to provide the
-----------------------------------
services described in Exhibit "1" attached to this Agreement to the Customer in
consideration for the payment(s) to be provided by the Customer as set forth in
Exhibit "1" to this Agreement.
Trilogy Telemanagement Service Agreement
Page 1
<PAGE>
2. PAYMENT TO BE MADE BY CUSTOMER: Customer agrees, in consideration
------------------------------
for the Services to be provided by Trilogy, to pay the consideration upon the
terms and conditions set forth on Exhibit "1" attached to this Agreement.
Nonpayment of Services shall constitute a material breach of this Agreement.
3. PROPRIETARY INFORMATION: The parties stipulate and agree that
-----------------------
Trilogy possesses certain proprietary information, including but not limited to
patent, trademark, copyright, and trade secret information that may be disclosed
to the Customer to effectuate this Agreement. Proprietary and trade secret
information includes but is not limited to any and all technical information,
financial data, customer lists, user lists, business plans, business
relationships, marketing plans, technical specifications, trade secrets,
discoveries, ideas, concepts, and know-how furnished or disclosed by Trilogy to
the Customer. Customer agrees to diligently keep all proprietary information of
Trilogy's as a trade secret, and not to disclose, sell, sublicense, assign, or
in any other way alienate same without the prior written consent of Trilogy.
Customer agrees that all right, title and interest in and to, and ownership of,
all intellectual property rights in and to such software, to the extent that
such intellectual property rights are not in the public domain, including but
not limited to all rights in patents, trademarks, copyrights and trade secrets
relating thereto, any enhancements and modifications thereto and copies thereof,
and any user documentation related thereto (collectively, the "Trilogy
Software"), shall at all times reside exclusively in Trilogy or such third
parties as Trilogy may in its sole
Trilogy Telemanagement Service Agreement
Page 2
<PAGE>
discretion determine, notwithstanding the fact that any enhancements or
modifications may have been conceived, developed or made by or on behalf of the
Customer. For purposes of this Agreement, (i) the term "enhancements" shall mean
all updates and improvements to the Software in question which, if such Software
were then being licensed or sold, would be generally offered to a purchaser or
licensee as part of such Software and which would not be separately priced
options, and (ii) the term "modifications" shall mean all changes made to the
Software in question in an attempt to repair or correct any defect therein in
order to cause such Software to conform to the specifications related thereto or
any other warranty related thereto as specified in this Agreement. Customer
shall be entitled only to such licensee rights with respect to the Trilogy
Software as are specifically granted in this Agreement and its Exhibits and to
no other rights; said licensee rights shall only be coextensive with the terms
of this Agreement, and shall terminate with the termination of this Agreement.
Upon termination of this Agreement, Customer shall promptly return all
proprietary information of Trilogy's to Trilogy.
4. RELATIONSHIP OF PARTIES: The parties have entered into an
-----------------------
independent contractor relationship. This Agreement is not a partnership, joint
venture, or other noncontractual arrangement.
5. WARRANTEES AND LIMITATIONS OF LIABILITY: (a) Trilogy warrants that
---------------------------------------
all Software, goods, and services (hereinafter "Services") provided in this
Trilogy Telemanagement Service Agreement
Page 3
<PAGE>
Agreement will comply with prevailing telecommunications industry standards
(hereinafter "Technical Standards"). If Trilogy determines that the Services are
not being provided in accordance with the Technical Standards (hereinafter , a
"Defect" or "Defects"), Trilogy shall use reasonable efforts under the
circumstances to conform the Services to the Technical Standards.
(b) THIS EXCLUSIVE WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, AND
CUSTOMER HEREBY WAIVES ALL OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY,
INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR
USE FOR A PARTICULAR PURPOSE. TRILOGY HEREBY SPECIFICALLY DISCLAIMS ANY
LIABILITY TO CUSTOMER FOR INTERRUPTIONS AFFECTING THE SERVICES FURNISHED
HEREUNDER WHICH ARE ATTRIBUTABLE TO CUSTOMER'S SERVICE INTERCONNECTIONS OR TO
CUSTOMER'S EQUIPMENT FAILURES, OR TO CUSTOMER'S BREACH OF THIS AGREEMENT.
(c) IN NO EVENT SHALL TRILOGY OR ANY OF ITS AFFILIATES BE LIABLE TO
CUSTOMER OR ANY OF ITS AFFILIATES OR EMPLOYEES OR TO ANY THIRD PARTY FOR: (i)
ANY LOSS OF PROFIT OR REVENUE, OR FOR ANY INDIRECT CONSEQUENTIAL, INCIDENTAL,
PUNITIVE OR SIMILAR OR ADDITIONAL DAMAGES, WHETHER INCURRED OR
Trilogy Telemanagement Service Agreement
Page 4
<PAGE>
SUFFERED AS A RESULT OF UNAVAILABILITY OF SERVICES PERFORMANCE, NON-PERFORMANCE
TERMINATION, BREACH, OR OTHER ACTION OR INACTION UNDER THIS AGREEMENT, OR FOR
ANY OTHER REASON, EVEN IF CUSTOMER ADVISES TRILOGY OF THE POSSIBILITY OF SUCH
LOSS OR DAMAGE; OR (ii) FOR OUTAGE, OR INCORRECT OR DEFECTIVE TRANSMISSIONS, OR
ANY DIRECT OR INDIRECT CONSEQUENCES THEREOF.
(d) NOT WITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO
EVENT SHALL THE CUMULATIVE LIABILITY OF TRILOGY UNDER THIS AGREEMENT EXCEED THE
TOTAL PAYMENTS PAID BY CUSTOMER TO TRILOGY HEREUNDER.
6. TAXES AND REGULATORY MATTERS: The parties shall be responsible for
----------------------------
paying their individual federal, state, local, and franchise taxes, if any. The
parties agree to cooperate to comply with all federal, state, and local laws,
rules and regulations applicable to this Agreement, and maintain in force all
licenses and permits required for their respective activities and obligations
hereunder. Trilogy hereby represents and warrants that it is authorized to
undertake the activities contemplated under this Agreement in each jurisdiction
in which it will provide services hereunder.
7. TERM AND TERMINATION: This Agreement shall commence with the signing
--------------------
of the Agreement, and continue until March 31, 1999. This Agreement shall be
Trilogy Telemanagement Service Agreement
Page 5
<PAGE>
immediately terminable by either party upon written notice to the other party of
a material breach of this Agreement. In the event that either party has
reasonable suspicion to believe that the other party cannot or will not comply
with the material terms of this Agreement at any time through the end of the
then current term, the suspecting party shall set forth in writing its
suspicions, the basis thereof, and request reasonable assurances under the
circumstances from the other party that the Agreement will be performed. If such
assurances are not received within thirty (30) days of receipt of the written
request for assurances when the request of said assurances is reasonable under
the circumstances, the Agreement shall be terminated.
8. NOTICES: All notices or demands shall be delivered in person against
-------
a written receipt, sent via telecopier or facsimile transmission to the
telecopier or facsimile transmission number listed above, sent by registered or
certified mail of the United States Postal Service, return receipt requested, or
sent by overnight courier service guaranteeing next business day delivery. Each
such notice, demand or request shall be deemed to have been given upon actual
receipt or refusal by the addressee. All notices, demands or requests provided
for or permitted to be given pursuant to this Agreement must be in writing and
shall be sent to the parties at the following addresses:
To Trilogy: Trilogy Telemanagement LLC
210 S. 16th Street, Suite 116
Omaha, N-E 68102
Fax Number: (402) 346-1500
Trilogy Telemanagement Service Agreement
Page 6
<PAGE>
To Customer: Primecall, Inc.
1520 Eastlake Avenue East, Suite 205
Seattle, Washington 98102
9. DISPUTES: Should there exist any error or confusion the Parties
--------
agree to attempt to resolve the matter by bringing it to the attention of the
appropriate party, in writing, within a reasonable time after the dispute arises
and allow a reasonable time from receipt of the notice of dispute to respond to
the matter or otherwise resolve the dispute. The Parties agree to negotiate in
good faith. In the event that a dispute cannot be resolved, the Parties agree
that the dispute will be revolved through arbitration, in the city of Omaha,
Douglas County, Nebraska, in accordance with the Rules of the American
Arbitration Association.
10. AMENDMENTS: All Amendments to this Agreement shall be in writing,
----------
and signed by both parties. Amendments do not need to be supported by additional
consideration outside of this foundational Agreement.
11. SEVERABILITY: If any provision of this Agreement or the application
------------
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Agreement and the application of such provisions
to other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permissible by law.
Trilogy Telemanagement Service Agreement
Page 7
<PAGE>
12. RESTRICTION ON ASSIGNMENT: Customer may not assign this Agreement
-------------------------
without the consent of Trilogy. Trilogy shall not unreasonably withhold its
consent to any assignment of this Agreement by the Customer.
13. AUTHORITY: The individuals below and their respective parties
---------
represent that they are authorized to enter into this Agreement and that the
undersigned signatories are authorized to bind the parties to this Agreement.
14. LEGAL FEES: If any action is necessary in order to enforce the
----------
terms of this Agreement, the prevailing party shall be entitled to recover its
attorney's fees and costs incurred in addition to any other relief to which it
may be entitled.
15. ENTIRE AGREEMENT: This Agreement constitutes the entire Agreement
----------------
between the Parties and supersedes all prior understandings with respect to the
subject matter of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
31st day of March, 1997. The parties agree that the signing and exchange of this
document may be performed via telecopier or facsimile transmission.
TRILOGY TELEMANAGEMENT, L.L.C.
By: /s/ Robert G. Barben
--------------------------------
Name: ROBERT G. BARBEN
Title: Vice President Sales and Marketing
Date: March 31, 1997
Trilogy Telemanagement Service Agreement
Page 8
<PAGE>
PRIMECALL INCORPORATED
Jurisdiction of Formation: State of Washington
----------------------
Taxpayer ID #: 91-173-8735
----------------------------------
By: /s/ Michael S. Sims
---------------------------------------------
Name: Michael S. Sims
-------------------------------------------
Title: Chief Operating Officer
------------------------------------------
Date: 4/2/97
-------------------------------------------
Trilogy Telemanagement Service Agreement
Page 9
<PAGE>
EXHIBIT 1
---------
of
--
TRILOGY TELEMANAGEMENT SERVICE AGREEMENT
----------------------------------------
This Exhibit 1 of Trilogy Telemanagement Service Agreement describes the
Services offered by Trilogy Telemanagement, LLC (hereinafter "Trilogy") and the
responsibilities accepted by both Trilogy and Primecall, Inc. , (hereinafter
"Primecall") to effectuate such services (Trilogy and Primecall may be referred
to as "Party" or "Parties").
A. Whereas, Primecall is involved in the telecommunications
industry and provides long distance telephone services; and
B. Whereas, Trilogy develops software for providers of long
distance telephone services and further provides technical
expertise and support for long distance providers; and
C. Whereas, Primecall wishes to lease with option to buy,
Trilogy's proprietary software, TeleScript, to operate
Primecall's Summa Four SDS 1000 installation and TeleDesq 2.0
Primecall, to manage Primecall's data entry, customer service
and billing requirements through March 31, 1999. Also
Primecall wishes to lease a license to use Trilogy's
proprietary software Web-Call with no option to buy for the
same period of time. Should the license for Web-Call become
available for sale during these twenty four (24) months,
Trilogy will negotiate the sale of this license to Primecall
at that time. Trilogy also gives Primecall the option to
continue to lease Web-Call after the twenty four month period.
Terms of this option will be negotiated and agreed to no later
than sixty days (60) prior to the end of the current lease
agreement. Trilogy and Primecall agrees that lease will remain
at a fair and nominal price for both parties.
1. Description of Services
-----------------------
1.1 TeleScript: TeleScript is a proprietary software of Trilogy.
TeleScript is a fourth generation language designed to command
the Summa Four SDS family of switches to perform complex
callflows and resource management. TeleScript further provides
real time call timing, rating and CDR output. The TeleScript
features and applications contracted for under this service
agreement are listed in Attachment 1 to Exhibit 1.
1.2 TeleDesq 2.0 Primecall: TeleDesq 2.0 Primecall is a
proprietary software of Trilogy. TeleDesq 2.0 Primecall is a
data management software designed specifically for the
telecommunications industry to provide and perform data entry
functionality, customer service support and retail billing
Exhibit 1 of Trilogy Telemanagement Service Agreement
Page 1
<PAGE>
functionality. The TeleDesq 2.0 Primecall capabilities
contracted for under this agreement are listed in Attachment 1
to Exhibit 1.
1.3 Web-Call: Web-Call is a proprietary software of Trilogy.
Web-Call is visual automation software for use of
International Call-Back and Domestic Call-Back via use of the
world wide web network.
1.4 Installation: Trilogy shall use its best efforts to activate
and make operational TeleScript and TeleDesq 2.0 Primecall on
or before April 15th, 1997. TeleScript runtime and TeleDesq
2.0 Primecall shall be activated with Primecall's capabilities
for modifications.
1.5 Support: Trilogy offers ten (10) hours per month Technical
Support without additional charge. Trilogy extends Level II
support without additional charge. Level II Support shall be
defined as support of Trilogy Software and is available 24
hours per day, 7 days a week, 365 days a year. Primecall's
customer training, customer support, data entry and data
manipulation is not included in Level II support All
additional support provided by Trilogy shall be prepaid by
Primecall. It shall be understood that support offered
remotely is billed at Trilogy's prevailing commercial rate.
On-site support shall be offered in accordance with section 4
below plus a 15% surcharge to Trilogy's prevailing commercial
rate.
1.6 Training: Trilogy shall provide "hands-on" training of
Trilogy's TeleDesq 2.0 to Primecall Incorporated personnel in
Trilogy's office. Training on Trilogy TeleScript will be
provided for Primecall technicians at Trilogy's offices if
needed and requested by Primecall.
2. Compensation
------------
2.1 Compensation for Services: Primecall shall compensate Trilogy,
per Summa Four switch, for the lease of a non-exclusive,
non-transferable, with option to purchase at end of twenty
four (24) month lease license of Telescript and Teledesq 2.0
to Primecall as described in section 1 above, and for the
lease of a non-exclusive, non-transferable and non-purchasable
license to use Web-Call in the following manner: (A) To
-
effectuate this agreement and receive Service from April 15th,
1997, through April 14th, 1999, Primecall shall remit payment
of US $[*] in certified funds on or before March 31, 1997.
This payment represents $[*] Installation Fee and $[*]
first months lease with option to buy for Trilogy's TeleScript
and TeleDesq 2.0 Primecall. (B) Effective May 01, 1997
-
Primecall shall remit monthly payments of US$[*], ($[*],
monthly lease with option to buy Trilogy's TeleScript and
TeleDesq 2.0 Primecall and $[*] monthly lease for Trilogy's
Web-Call with no option to buy). (C) Final purchase price at
-
end of twenty four
[*] CONFIDENTIAL TREATMENT REQUESTED
Exhibit 1 of Trilogy Telemanagement Service Agreement
Page 2
<PAGE>
month lease, effective March 31, 1999 US$[*] for purchase
of license of Trilogy's TeleScript and TeleDesq 2.0 Primecall.
2.2 LICENSE AND ASSIGNMENT: Trilogy hereby grants to Customer a
----------------------
nonexclusive, license to use TeleScript, TeleDesq 2.0
Primecall and Web-Call, as defined in Exhibit 1 of the
Agreement for One (1) Summa Four Switch (collectively, the
"Trilogy Software") in Customers business in any manner in
Customer's sole discretion, for the term of this agreement or
until termination hereof. At the end of the term of this
Agreement, or at termination hereof by Trilogy, Customer shall
have the sole and exclusive option to purchase the Trilogy
Software, TeleScript and TeleDesq 2.0 Primecall, upon the
terms set forth in Exhibit 1. Web-Call may not be purchased at
this time.
2.3 Nonpayment of Services: Nonpayment of Services shall
constitute a material breach of this Agreement. Nonpayment of
Services as contemplated by section 2.1 A. B. and C. of this
----- --
Exhibit shall cause the immediate termination of this
Agreement and simultaneously the immediate termination of all
Services.
3. Responsibilities of the Parties
-------------------------------
3.1 Hardware: Primecall shall ensure that all Hardware is in good
and serviceable condition. Hardware may include, but is not
limited to: host computers, Summa Four switches, modems,
cables and wiring. Trilogy shall assume no responsibility or
liability and shall be held harmless for any and all Hardware
malfunctions regardless of cause.
3.2 Data Integrity: Primecall shall ensure the safety, security
and accuracy of its Data. Data may include but is not limited
to: customer records, billing records, rating records, routing
records, traffic records. Primecall shall establish and
perform adequate backup procedures. Primecall shall establish
and perform adequate error checking. Trilogy shall assume no
responsibility or liability and shall be held harmless for any
and all loss or inaccuracy of Data regardless of cause.
3.3 Environment: Primecall shall provide an appropriate operating
environment, that meets with telecommunications industry
standards, to operate its equipment and Trilogy's proprietary
software. Trilogy shall assume no responsibility or liability
and shall be held harmless for any and all failures of the
Environment regardless of cause.
3.4 Upgrades and Fixes: Trilogy shall provide regular and
necessary bug fixes and technical adjustments to the Trilogy
Software licensed under this agreement. Customer is entitled
to all upgrades and will be supplied integration code, service
and support as necessary for Primecall to use the
[*] CONFIDENTIAL TREATMENT REQUESTED
Exhibit 1 of Trilogy Telemanagement Service Agreement
Page 3
<PAGE>
Trilogy Software as contemplated by the Agreement and this
Exhibit 1. Trilogy shall license such fixes, upgrades and
integration code to Primecall with an option to purchase as
set forth in Section 3 of the Agreement.
4. Travel/Per Diem Expenses
------------------------
4.1 Travel and Per Diem Expenses: Any travel necessitated by
Primecall and actual expenses related thereto shall be paid by
Primecall.
TRILOGY TELEMANAGEMENT, L.L.C.
By: /s/ Robert G. Barben
----------------------------------
Name: ROBERT G. BARBEN
Title: Vice President Sales and Marketing
Date: March 31, 1997
PRIMECALL INCORPORATED
Jurisdiction of Formation: State of Washington
---------------------
Taxpayer ID #: 91-173-8735
---------------------------------
By: /s/ Michael S. Sims
--------------------------------------------
Name: Michael S. Sims
------------------------------------------
Title: Chief Operating Officer
-----------------------------------------
Date: 4/2/97
------------------------------------------
Exhibit 1 of Trilogy Telemanagement Service Agreement
Page 4
<PAGE>
Attachment 1 to Exhibit 1 of Trilogy Telemanagement Service Agreement
This attachment defines the first set of features and applications contracted
for under Trilogy Telemanagement's Service Agreement and Exhibit 1.
Trilogy Software Features
- -------------------------
Trilogy TeleDesq 2.0 Primecall
-------------------------------
. Account Management
. 800# Management
. Country/Rating Code Management
. Rate Management
. Agent Management
. Customer Management
. Traffic Detail/Export Management
. Payments Module
. Multiple Billing Entity Support Module
. Order Entry Module
. Management Reports
. Account Code Billing Module
. Dynamic Invoicing Module
. Credit Card Payment Module
. Speed Dial Management
Trilogy TeleScript Features
---------------------------
. TeleScript Development Compiler
. On-line Rating Module
. On-line Credit Card Clearing Module
Trilogy TeleScript Applications
-------------------------------
. Call-Back
. Travel Card/Debit Card
All applications may be tailored to specific requirements (Additional charges
may be required).
<PAGE>
Exhibit 10.24
[*] Designates material for which confidential treatment has been requested,
which material has been separately filed with the Securities and Exchange
Commission.
Scitor International Telecommunications Services, INC.
A SITA Group Company
Agreement for managed Scitor ITS
data network services
- ------------------------------------------------------
- --------------------------------------------------------------------------------
Customer Name: Date:
NetStar International Telecommunications, Inc. April 28, 1995
- --------------------------------------------------------------------------------
Customer Address: Agreement No:
5820 Stoneridge Mall Road, Suite 214 MDNS/US/NC/95-99
Pleasanton, CA 94588
- --------------------------------------------------------------------------------
Customer Contact: Telephone No:
Peter Gust (T) 510-734-5100
(F) 510-734-5100
- --------------------------------------------------------------------------------
In accordance with the terms of this Agreement, Scitor International
Telecommunications Services, Inc. ("Scitor ITS") agrees to make available to the
above Customer ("Customer") certain managed data network services as more fully
described in this Agreement or as may be ordered from time to time by Customer
and accepted by Scitor ITS. All accepted orders shall become a part of this
Agreement.
THE PARTIES HAVE READ THIS AGREEMENT AND AGREE TO BE BOUND BY ALL OF ITS TERMS.
THE PARTIES FURTHER AGREE THAT IT CONSTITUTES THE COMPLETE AGREEMENT BETWEEN
THEM AND SUPERSEDES ALL PROPOSALS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATION
BETWEEN THEM RELATING TO THE SUBJECT HEREOF. NO AGREEMENT OR DOCUMENT HAVING AS
ITS PURPOSE OR EFFECT THE VARIATION, ADDITION OR DELETION OF ANY OF THE TERMS
AND CONDITIONS INDICATED IN THIS AGREEMENT WILL BE BINDING UNLESS SIGNED FOR AND
ON THE BEHALF OF SCITOR, ITS BY AN AUTHORIZED SIGNATORY.
Scitor ITS Customer /s/ German Burtscher
- ------------------------------- ----------------------------------------
Authorized Signatory Authorized Signatory
Name /s/ Bruce D. Jones Name German Burtscher
- ------------------------------- ----------------------------------------
Title Title Vice President
Bruce D. Jones
EXECUTIVE V.P & GENERAL MGR. MAY 15, 1995
- ------------------------------- ----------------------------------------
Date 5/26/95 Date
- --------------------------------------------------------------------------------
<PAGE>
withhold such confirmation of acceptability. Any Equipment connected by
Scitor ITS shall be deemed to comply with this Clause 2.4
2.5 Customer hereby authorizes Scitor ITS to make reasonable use of any user
codes, numbers or passwords allocated to Customer for the purpose of
providing network management and support to Customer.
2.6 Customer shall be responsible for obtaining and maintaining all such
equipment and communications lines, magnetic media, programs, software and
other facilities, including the provision of personnel, as are reasonably
necessary and acceptable to Scitor ITS for communications with the Service
(collectively the "Customer Facilities"). Neither Scitor ITS nor its agents
or sub-contractors shall have any responsibility for or liability with
respect to the use, operation or performance of such Customer Facilities.
3. SUPPORT SERVICES
3.1 Scitor ITS shall provide access by voice and/or data link, if available, to
help desk facilities at locations of Scitor ITS' choice in order for
Customer to obtain technical advice and guidance on the operation and use
of the Service.
3.2 Scitor ITS shall provide [*] management services comprising: (a) the [*]
and [*] of the [*] of [*] and [*] from the relevant [*] as applicable; (b)
the testing and acceptance of [*]; (c) [*] fault restoration upon becoming
aware of a fault: and (d) [*] to [*] providers of [*], [*] or other
telecommunications equipment in local currency on Customer's behalf, where
applicable.
4. EQUIPMENT
4.1 Scitor ITS shall connect the Equipment at the Locations, or such other
locations agreed to by the Parties (if requested by Customer) on dates to
be agreed by the Parties. Scitor ITS shall provide reasonable notification
of the date of connection and shall connect at times to be agreed by the
Parties. Should connection require the removal or disconnection of any
existing equipment of Customer, Customer shall permit, and obtain all
necessary consents for, such removal or disconnection and shall give Scitor
ITS all necessary assistance to enable such work to be carried out.
4.2 On the date of connection of the Equipment, Scitor ITS shall commission the
Equipment, which on successful commissioning shall be deemed to be accepted
by Customer. For the purpose of this Clause 4.2,"successful commissioning
shall mean that Scitor ITS shall have checked powered up, and then carried
out the manufacturer' initialisation tests on the Equipment, save that
should Customer require additional commissioning tests, Scitor ITS shall
carry out such alternative tests provided that such tests are reasonably
necessary to establish the operability of the Equipment and provided,
further, that Customer has given Scitor ITS at least 30 days notice prior
to the date of delivery of the Equipment to the Location.
4.3 The lease term shall commence on the date of acceptance of the Service
pursuant to Clause 11.2 at the Location to which the Equipment relates and
shall thereafter continue in accordance with the term of this Agreement,
subject to Clause 5.1 of Attachment 1 and Clause 1.7 of Attachment 2 .
4.4 The lease and any other charges shall be as specified in Attachment 1.
4.5 Except as set forth in Clause 1.7 of Attachment 2, the Equipment shall at
all times remain the sole and exclusive property of Scitor ITS or its sub-
contractors and Customer shall have no rights or interest in the Equipment
except for quiet possession and the right to use the Equipment under the
terms and conditions of this Agreement.
4.6 Customer shall have the following additional obligations with respect to
the Equipment: (a) not to sell, assign, sub-let, pledge or part with
possession or control of or otherwise deal with the Equipment or any
interest therein: (b) not to change, remove or obscure any labels, plates,
insignia, lettering or other markings which are on the Equipment at the
[*] CONFIDENTIAL TREATMENT REQUESTED
time of connection thereof or which may thereafter be placed on the
Equipment by Scitor ITS or by any person authorized by Scitor ITS; (c) to
keep the Equipment free from distress, execution or any other legal
process; (d) not to move the Equipment from the Location (or other
Location) to which it was delivered and connected without Scitor ITS' prior
written consent; and (e) not to use the Equipment or permit the same to be
used contrary to any law or any regulation for the time being in force.
4.7 Customer shall have full responsibility for the upkeep of the Equipment.
For the purpose of this Clause 4.7, "responsibility for upkeep" shall mean
that Customer shall: (a) ensure that proper environmental conditions as
recommended by the manufacturers are maintained for the Equipment and that
the exterior surfaces are kept clean and in good condition; (b) not make
any modifications to the Equipment: and (c) not use in conjuction with the
Equipment any accessory, attachment or additional equipment other than that
which has been supplied by or approved in writing by Scitor ITS.
4.8 Upon termination or expiry of this Agreement. Customer shall surrender
possession of the Equipment in good order, repair and condition, to Scitor
ITS, fair wear and tear excepted.
4.9 Scitor ITS shall ensure that the Equipment is at the time of commissioning,
and remains during the term of this Agreement, in good working order. If a
Service fault occurs which has been caused by a failure in the Equipment,
Scitor ITS shall restore or repair the Service to the affected Location as
soon as practicably.
<PAGE>
1. DEFINITIONS
1.1 In this Agreement, unless the context otherwise requires, the following
expressions shall have the following meanings:
1.2 "Agreement" shall mean this managed data network services agreement and the
Attachments and Schedules attached hereto and made a part hereof.
1.3 "Dollars" or "S" shall mean United States dollars.
1.4 "DTE" shall mean Data Terminating Equipment.
1.5 "Effective Date" shall mean the date this Agreement is signed by an
authorized signatory of Scitor ITS.
1.6 "Equipment" shall mean the communications equipment, servers, modems,
cables and connectors supplied under lease by Scitor ITS to Customer under
this Agreement.
1.7 "Initial Term" shall mean a period commencing on the Effective Date and
ending 5 (five) years after the date of acceptance of the Service by
Customer (pursuant to Clause 12.2) at the last Location to be connected
under this Agreement.
1.8 "Locations" shall mean the locations specified in Attachment 2.
1.9 "Network" shall mean the communications processors, related equipment, and
circuits used by Scitor ITS for the provision of the Service, excluding
Tail Circuits to the Locations and any communications equipment (including
the Equipment) sited at the Locations.
1.10 "Network Path Availability" shall mean the availability of two way
communication of the virtual communication link (expressed as a percentage)
between the access entry port on which the DTE originator is connected and
the Network access exit port on which the DTE destination is connected,
excluding maintenance windows, host links and Tail Circuits.
1.11 "Network Transit Time" shall mean the elapsed time taken for the one way
transmission of a 128 character length packet (a "Packet") between the
entry point on the Network Node to which Customer's transmitter of the
Packet it connected, and the exit point on the Network Node to which the
receiver of the Packet is connected.
1.12 "Node" shall mean a node of the Network to which a Tail Circuit is to be
connected for the purposes of rendering the Service to Customer such Nodes
being deployed at such times and places as determined by Scitor ITS.
1.13 "Parties" shall mean Scitor ITS and the Customer, "Party" shall mean either
Scitor ITS or the Customer as the context requires.
1.14 "Service" shall mean managed data network services based on X.25 protocol
and all related and ancillary services thereto, or any of same, including
the provision of Equipment and Software all as more fully described in
Attachment 1, or such other managed data network services agreed to by the
Parties from time to time; the Service expressly excludes any PSTN dial-up
lines or modems.
1.15 "Software" shall mean the software programs and each and every component
thereof, as amended from time to time, including all developments, versions
or releases thereof whether existing now or becoming available in the
future, and all related documentation, which may be supplied by Scitor ITS
in connection with the provision of the Service, whether integral to the
Equipment or otherwise.
1.16 "Support Services" shall mean the services as described in Clause 3.
1.17 "Tail Circuit" shall mean a telecommunications circuit or other capacity
leased from the relevant telecommunications authorities (PTTs) and which
permits the connection of a Location to the nearest Scitor Network node.
2. PROVISION OF SERVICE
2.1 Scitor ITS agrees to provide (subject to Clause 2.3), and Customer agrees
to obtain from Scitor ITS, the Service subject to the terms and conditions
of this Agreement and subject to payment of the charges set out in
Attachment 1. Customer understands and agrees that Scitor ITS provides the
Service for the benefit of Customer only and nothing in this Agreement
shall entitle customer to resail the Service to any third party.
2.2 Scitor ITS reserves the right to control, direct and establish procedures
for the use of the Service and Customer agrees to follow the instructions
and procedures of Scitor ITS with respect to the use of the Service. Scitor
ITS also reserves the right to make operational changes in the Service. In
exercising any such rights under this Clause 2.2, Scitor ITS shall not
adversely affect the Service or increase the charges payable by Customer
under this Agreement.
2.3 Customer shall ensure at all times that its use of the Service (including
its connection of any apparatus to any network used to deliver the Service)
is in accordance with all applicable telecommunications, data protection
and other laws, licenses or regulations.
2.4 Any terminal equipment used to gain access to the Service must be approved
by Scitor ITS prior to its connection to the Network. Scitor ITS reserves
the right to disconnect (or require the disconnection of) any terminal
equipment in breach of this provision. Customer shall notify Scitor ITS of
any terminal equipment it wishes to connect to the Network and Scitor ITS
shall promptly confirm its acceptability under this Clause 2.4. Scitor ITS
shall not unreasonably
<PAGE>
possible following such notification. Scitor ITS further agrees that a
Scitor ITS sub-contractor will, if necessary as determined by Scitor ITS,
arrive at the affected Location and commence any remedial activities within
4 working hours of notification, provided the notification is received, and
the call-out can be made during the normal business day of the Scitor ITS
sub-contractor nearest to the affected Location, and provided, also that
the affected Location is within a 50 kilometer radius of said centre
("Normal Service"). Remedial service on Equipment other than Normal Service
shall be carried out by Scitor ITS through its sub-contractors as soon as
is practicably possible, taking into account availability of service
personnel, the time and date of Customer's notification and the country
concerned.
4.10 Scitor ITS shall not be responsible for Service faults, nor shall Scitor
ITS be obliged to comply with its obligations under Clause 4.9, if such
faults occur as a result of: (a) damage to the Equipment during transport
activity or connection carried out by Customer or any third party other
than as authorised by Scitor ITS; (b) interventions other than normal
interventions carried out by non Scitor ITS personnel; (c) modifications to
the Equipment which have not been approved by the Equipment manufacturer or
carried out by personnel unapproved by Scitor ITS; (d) improper treatment
to the Equipment, failure to meet the Equipment manufacturer's
specifications, or environmental conditions by non-Scitor personnel; or (e)
accident or negligence on the part of Customer or any force majeure event.
Any site visits or repairs made necessary by the events specified in this
Clause 4.10 shall be subject to prior agreement by Scitor ITS and may cause
Customer to incur increased charges for the Service at the affected
Location, such charges to be commensurate with the cost to Scitor ITS of
restoring or repairing the Service. Nothing in this Clause 4.10 shall
affect Customer's obligations in respect of Equipment under the other
provisions of this Clause 4.
4.11 In this Clause 4. and notwithstanding definition 1.8. 'Locations' means
Locations as such term is defined in 1.8 and other locations where the
Equipment may be situated and connected, as agreed by the Parties from time
to time.
5. SOFTWARE
Customer is hereby granted non-exclusive and non-transferrable licenses to
use Software strictly in performing this Agreement. The Software and any
intellectual property rights of whatever nature in the Software are and
shall remain vested in Scitor ITS or an associated company of Scitor ITS
and nothing contained in this Agreement shall convey any ownership interest
in the Software to Customer. Customer acknowledges that the provision of
Software is made by Scitor ITS strictly for use in conjunction with the
Service and Customer agrees not to produce, copy, alter, modify, or add to
the Software or any part thereof, nor to attempt or to allow a third party
to attempt to reverse engineer, translate or convert the Software from
machine readable to human readable form, except as permitted by applicable
law.
6. INTELLECTUAL PROPERTY RIGHTS AND CONFIDENTIALITY
6.1 It is understood and agreed by Customer that all intellectual property
rights in the Service including, all specifications, manuals and other
documents provided by Scitor ITS to Customer as part of or in relation to
the Service are either licensed to or the property of Scitor ITS and
nothing contained in this Agreement shall be deemed to convey any title or
ownership interest to Customer. Customer shall use its best efforts not to
disclose such proprietary information to third parties without Scitor ITS'
prior approval.
6.2 Customer and Scitor ITS acknowledge that they will receive confidential
information and trade secrets ("Confidential Information") from each other
in connection with the Agreement. Confidential Information shall be deemed
to include all information each Party receives from the other Party, except
anything designated as not confidential. Customer and Scitor ITS agree to
maintain the secrecy of Confidential Information and agree neither to use
it (except for the purposes of performing the Agreement) nor to disclose it
to anyone outside Customer or Scitor ITS or to anyone within Customer or
Scitor ITS who does not have a need to know it in order to perform under
the Agreement, except with the consent of the other Party or in accordance
with the order of a court of competent jurisdiction. Confidential
Information shall not include any information which is publicly available
at the time of disclosure or subsequently becomes publicly available
through no breach of this provision by Customer or Scitor ITS or is
rightfully acquired from a third party who is not in breach of an agreement
to keep such information confidential.
7. CHARGES AND PAYMENT
7.1 All charges shall be as specified in Attachment 1 shall be invoiced by
Scitor ITS to Customer, monthly in arrears unless otherwise provided in
Attachment 1, and shall be payable without deductions or set-off within 30
days of receipt of invoice by Customer.
7.2 All charges stated are exclusive of any value added tax, sales tax, excise
tax, gross receipts tax and any similar tax which may be applicable thereto
and Customer agrees to pay all such applicable taxes.
7.3 Scitor ITS reserves the right to make a reasonable charge for any work done
by Scitor ITS which is attributable to Customer's failure to perform its
obligations or not specified by Scitor ITS as part of any Service provided.
7.4 Charges for components and materials and for magnetic media, stationery and
other supplies and for travel and subsistence (when not specifically
included in the Service) are separately payable by Customer.
<PAGE>
7.5 Failure by Customer to pay any charge according to the terms of this
Agreement shall entitle Scitor ITS without prejudice to its other rights
and remedies under the Agreement to (a) suspend the provision of the
Service following 30 days written notice, provided that Customers has not
remedied its default within that time and /or (b) charge interest on a
daily basis from the original due date at the rate of 2 percentage points
above the Chase Manhattan Bank's prime rate in force from time to time.
8. EXCLUSIONS AND LIMITATIONS OF LIABILITY
8.1 Scitor ITS is not liable for any delay in performing its obligations or for
any failure to perform its obligations under the Agreement if the delay or
failure results from circumstances beyond Scitor ITS' reasonable control.
Scitor ITS will notify the customer in a reasonable timeframe of any delay
in performing its obligations or of any failure to perform its obligations
under this Agreement.
8.2 EXCEPT AS EXPRESSLY CONTAINED IN THIS AGREEMENT, SCITOR ITS GIVES NO
WARRANTIES AND HEREBY DISCLAIMS ANY WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE WITH RESPECT TO THE SERVICE OR ANY EQUIPMENT OR SOFTWARE PROVIDED
UNDER OR IN RELATION TO THIS AGREEMENT.
8.3 NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, SCITOR ITS
SHALL NOT BE LIABLE FOR ANY INDIRECT, CONSEQUENTIAL, SPECIAL, INCIDENTAL OR
PUNITIVE DAMAGES HOWSOEVER ARISING INCLUDING, BUT NOT LIMITED TO, SUCH
DAMAGES ARISING FROM THE USE OF THE SERVICE BY CUSTOMER OR BY ITS OFFICERS,
EMPLOYEES, OR AGENTS OR BY ANY THIRD PARTY, WHETHER OR NOT AUTHORIZED BY
CUSTOMER, EVEN IF SCITOR ITS WAS MADE AWARE OF THE POSSIBILITY OF SUCH
DAMAGES IN ADVANCE.
8.4 In the event that data furnished by Customers, whether transmitted via the
Network or otherwise, is lost, destroyed or damaged due to the negligence
of Scitor ITS, its agents or employees, Customer's sole remedy shall be the
repair or replacement by Scitor ITS of such lost, destroyed or damaged
data, provided however that such repair or restoration can reasonably be
performed by Scitor ITS and provided, further, that Customer furnishes
Scitor ITS with all source data, in machine readable form, necessary for
such repair or restoration.
5 SUBJECT TO THE EXCLUSIONS AND LIMITATIONS OF LIABILITY SET OUT IN CLAUSES
8.1, 8.2, 8.3 AND 8.4 ABOVE. SCITOR ITS' LIABILITY TO CUSTOMER UNDER THIS
AGREEMENT, WHETHER IN CONTRACT, TORT OR OTHERWISE, AND INCLUDING LIABILITY
FOR NEGLIGENCE, IS LIMITED IN RESPECT OF EACH EVENT OR SERIES OF CONNECTED
EVENTS TO $100,000.
8.6 Scitor ITS' sole obligations and liabilities are as stated herein and all
other representations, conditions, warranties and terms express or implied
whether by statute law or otherwise are hereby excluded to the full extent
permitted by law.
9. NETWORK PATH AVAILABILITY
9.1 Subject to Clause 9.2, Scitor ITS shall warrant Network Path Availability
(NPA) for each Location as set out in Attachment 4 (as updated from time to
time to incorporate additional Locations).
9.2 If Scitor ITS breaches any NPA warranty for 2 consecutive months or for any
4 months in any 12 month period, such breach to be clearly substantiated by
Customer, then Customer's sole remedy for such breach under this Agreement
shall be an entitlement to cancel the Service at the Location directly
affected by such breach, without financial liability, on giving Scitor ITS
30 days written notice. Nothing contained in this Clause 9.2 shall affect
Customer's liability to pay for Service rendered prior to the effective
date of such cancellation. A breach of the NPA warranty at any Location
shall not constitute a material breach of this Agreement.
10. NETWORK TRANSIT TIME
10.1 Subject to Clause 10.2. Scitor ITS shall warrant the Network Transit Times
(NTT) set out in Attachment 4 (as updated from time to time to incorporate
additional Locations).
10.2 If Scitor ITS breaches any NTT warranty for 3 consecutive months, such
breach to be clearly substantiated by Customer, then Customer's sole remedy
under this Agreement for such breach shall be an entitlement to cancel the
Service at the Location directly affected by such breach without financial
liability on giving Scitor ITS 30 days written notice. Nothing contained in
this Clause 10.2 shall affect Customer's liability to pay for Service
rendered prior to the effective date of such cancellation. A breach of the
NTT warranty at any Location shall not constitute a material breach of this
Agreement.
11. DURATION AND TERMINATION
11.1 This Agreement shall come into force on the Effective Date and shall then,
subject to Clause 11.2 below remain in force for the duration of the
initial Term. It will be renewed automatically for additional terms of 12
months unless either Party gives to the other notice of its intention to
terminate at least 60 prior days to the expiration of the initial Term or
any renewal term.
<PAGE>
11.2 Either Party may terminate this Agreement by notice in writing to the other
forthwith in any of the following events: (a) if the other Party is guilty
of any material breach, non-observance or non-performance of its
obligations hereunder or any of them and does not remedy the same (if it is
capable of remedy) within 30 days of notice of such failure or breach being
given by the non-defaulting Party; (b) if an order is made or an effective
resolution is passed for the dissolution or winding up the other Party
except for the purposes of an amalgamation, merger or reconstruction; (c)
if an encumbrancer takes possession or a receiver is appointed over the
whole or any part of the undertaking or assets of the other, or the other
fails to provide adequate assurance of its ability to render due
performance upon demand; or (d) if the other becomes insolvent or makes any
special arrangements or any special assignment for the benefit of its
creditors or is the subject of a voluntary or involuntary filing under the
bankruptcy laws of any jurisdiction.
11.3 Termination of this Agreement for any cause shall not affect any rights or
obligations of the Parties in relation to anything done prior to such
termination and the provisions of this Agreement shall continue to bind the
Parties insofar and so long as may be necessary to give effect to such
rights and obligations.
12. COMMISSIONING/ACCEPTANCE
12.1 Scitor ITS shall connect the Service at the Locations according to
procedures set out in Attachment 3.
12.2 Customer shall be deemed to have accepted the Service at each of the
Locations on completion of the commissioning tests specified in Attachment
3.
13. NOTICES
All notices under this Agreement shall be in writing addressed to the
Parties at their respective addresses stated in the cover page of this
Agreement, or as may be otherwise notified under this Clause 13. If sent
by first class mail, notices shall be deemed to have been given 2 days
after the date of mailing. Notices may also be sent by fax provided that
the sending Party obtains confirmation of the receipt of such notices from
the recipient. If so sent, such fax notices shall be deemed to have been
given on the first business day (in the country of receipt) after the date
of transmission.
14. ASSIGNMENT
Customer may not assign, sub-contract or otherwise, dispose of this
Agreement or any part hereof or any benefit hereunder without the prior
written consent of Scitor ITS.
15. GENERAL
15.1 No Waivers:- No failure or delay of either Party in exercising any right,
power, or privilege under this Agreement (and no course of dealing between
the Parties) shall operate as a waiver of any such right, power or
privilege. No waiver of any default on any one occasion shall constitute a
waiver of any subsequent default. No single or partial exercise of any
such right, power or privilege shall preclude the further or full exercise
thereof.
15.2 No Third Party Beneficiaries, Agency or Partnership:- The provisions of
this Agreement are solely for the benefit of the Parties. No other party,
including invitees, members of the general public and other third parties
are intended to have nor shall have any rights whatsoever under this
Agreement, whether for injury, loss or damage to persons or property, or
for economic loss, damage or injury otherwise. This Agreement is not
intended to create a joint venture or partnership between the Parties and
neither Party is authorized to act as the agent of the other.
15.3 Invalidity:- If any term, provision or clause of this Agreement or any
portion of such term, provision, or clause is held invalid or
unenforceable, the remainder of this Agreement will not be affected thereby
and each remaining term, provision or clause or portion thereof will be
valid and enforceable to the full extent permitted by law.
15.4 Entire Agreement:- This Agreement; including the Attachment, together with
any supplement hereto duly signed on behalf of Scitor ITS by an authorized
signatory, represents the entire agreements between the Parties and
supersedes all other agreements, oral or written, and all other
communications between the Parties relating to the subject matter hereof.
15.5 Supplements:- Each Party agrees to execute such additional documents as
may be reasonably necessary or appropriate to accomplish the purposes of
this Agreement.
15.6 Interpretation:- In this Agreement (a) the headings used are included for
convenience only and are not to be used in construing or interpreting this
Agreement (b) any reference to the plural includes the singular and any
reference to the singular includes the plural; and (c) any reference to a
clause, an attachment or to a schedule is to a clause, attachment or
schedule of this Agreement.
16. APPLICABLE LAW AND ARBITRATION
16.1 This Agreement and all matters regarding the interpretation and / or
enforcement hereof, shall be governed exclusively by the law of the State
of Delaware except insofar as the federal law of the United States of
America may control any aspect of this Agreement in which case federal law
shall govern such aspect.
<PAGE>
16.2 All disputes, controversies or claims arising out of, or relating to this
agreement shall be settled exclusively by arbitration before a single
arbitrator in District of Colombia in accordance with the Commercial
Arbitration Rules of the American Arbitration Association. Each Party
irrevocably consents to personal jurisdiction and to ex parte action
should any Party refuse to participate in such proceedings. The
arbitrator's award shall be final and binding on all Parties and judgement
on the award may be entered and the award enforced in any court having
jurisdiction thereof.
<PAGE>
ATTACHMENT 1. CHARGES
Scitor ITS shall provide Customer with the Service in the Locations and in
accordance with the charges all as specified herein or in the schedule to
this Attachment 1 ("Schedule 1").
1. PORT CHARGES
The port charges applicable to the Locations shall be as specified in
Schedule 1. Except as set forth in Clause 8 of this Attachment 1, all port
charges are fixed for the Initial Term. Scitor ITS shall commence its port
charges 30 days after the date of acceptance of the Service at a Location
and the first invoice shall be for the first 2 months charges.
Notwithstanding the above, no port charges shall be charged for the San
Francisco and Mexico City Locations for the first 90 days following
acceptance of the Service at such Locations.
2. CONNECTION/PROJECT MANAGEMENT/DISCONNECTION CHARGES
The charges applicable for connections shall be as specified in Schedule 1
and for disconnections shall be [*] per disconnected Location. All such
charges are one time charges payable in the case of connections on the date
of acceptance of the Service at a Location; in the case of disconnections,
such charges are payable on the date disconnection of the Location from the
Network. Connection charges for additional ports in the same Location shall
be [*].
3. [*] CHARGES
[*] charges shall be as notified to Customer by Scitor ITS. [*] charges are
monthly charges fixed for the Initial Term and then adjusted in line with
actual charges from [*] at that time. Any revised [*] charges shall be
fixed for the duration of any renewal term.
4. [*] MANAGEMENT CHARGES
For the management of each [*], Scitor ITS shall charge monthly [*] or [*]
of the monthly [*] charge, whichever is the greater.
5. EQUIPMENT LEASE CHARGES
5.1 Equipment lease charges applicable to this Agreement shall be as specified
in Schedule 1 or as otherwise notified by Scitor ITS (subject to precise
specification). Equipment lease charges shall be fixed for the first 3
years of the lease term. Thereafter the following shall apply: (a) Customer
may terminate the lease by paying Scitor ITS a lease buyout fee equal to
[*] of the original price paid by Scitor ITS or its subcontractors for the
Equipment: or (b) the lease term will continue for a further 2 years at a
reduced lease charge equal to [*] of the charge prevailing during the first
3 year period. At the end of 5 years from the commencement of the lease
term all lease charges shall cease and Scitor ITS will transfer ownership
of the relevant Equipment to Customer. Equipment lease charges shall
commence on the date of acceptance of the Service at a Location.
5.2 In addition to the charges set out in Clause 5.1 above (and Schedule 1),
Scitor ITS shall charge Customer a fee for Equipment connected in a
Location controlled by Scitor ITS or an affiliated company of Scitor ITS.
Such charge shall be as notified by Scitor ITS and Scitor ITS shall have no
obligation to connect Equipment at any such Location unless and until
Customer has agreed said charges.
6. SOFTWARE LICENSE FEES
Any Software license fees shall be as notified by Scitor ITS from time to
time unless the Software is integral to the Equipment, in which case no
separate charges shall apply.
[*] CONFIDENTIAL TREATMENT REQUESTED
7. UPGRADES
With reference to Clause 1 of Attachment 3 of the Agreement, subject to
this Clause 7, Scitor ITS agrees that Customer will be entitled to upgrade
the Service at any Location without penalty. Scitor ITS will, however,
charge Customer for any difference in charges resulting therefrom and in
addition its reasonable connection, disconnection and project management
charges relating to such upgrades. Any changes to the Service which reduce
service capacity or function, result in lower charges and are not
compensated by equivalent increases in service capacity or function and
charges, are excluded from this provision and the Parties shall agree such
changes and the financial effects resulting therefrom on a case by case
basis.
8. DISCOUNTS
8.1 Additional port connections either at the same Location, or in additional
Locations within a country, will be charged at the then prevailing Scitor
ITS list prices less a [*] discount.
8.2 Customer shall also receive the following discounts against port charges
for each Location to be provided with X.25 Service in the 4th and 5th year
following acceptance of the Service at the Location:
4th year [*]
5th year [*]
Final Attachment 1 Page 1
[*] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
ATTACHMENT 2 - LOCATIONS
1.1 The Locations covered by this Agreement are as listed in the schedule to
this Attachment 2 ("Schedule 2"). Locations shall be added in phases and
Customer shall be entitled to modify which Locations are to be connected in
a phase. Notwithstanding the foregoing or anything else contained in this
Agreement. Scitor ITS shall be [*] for all Locations listed in Schedule 2.
1.2 Customer may connect additional Locations not identified on Schedule 2 on
receiving written consent from Scitor ITS. Customer understands and agree
that Scitor ITS obligation to provide Service to any Location not
identified on Schedule 2 is subject to Scitor ITS ability to operate in any
country.
1.3 Customer agrees that subject only to the following exceptions, all Location
shall remain connected to the Network for the term of this Agreement from
the date of acceptance of the Service. The exceptions are as follows:
(a) Customer terminates this Agreement pursuant to Clause 11.2 or cancels
the Services at a Location pursuant to Clause 9.2 or 10.2;
(b) Customer may substitute any Location with a new Location provided
Scitor ITS is able to provide Service at the new Location. Scitor ITS
shall be entitled to charge Customer for connection and project
management for the new Location at prices agreed by the Parties;
(c) Customer may disconnect a Location due to force majeure. This right
may only be invoked by Customer after 30 continuous days of force
majeure;
(d) Customer may cancel the Service for convenience at the San Francisco
and Mexico City Locations within the first 90 days after the date of
acceptance of the Service and, at any other Location, within the
first 60 days after the date of acceptance of the Service.
1.4 Any cancellation of Service at a Location other than under Clauses 9.2,
10.2 or 11.2 of this Agreement shall be conditional on the Following:
1.5 Customer must give Scitor ITS at least 30 days prior written notice.
1.6 Customer shall remain responsible for any Tail Circuit charges relevant to
the cancellation Location, but Scitor ITS shall, on a best efforts basis,
mitigate such costs by terminating any rental contracts with PTTs as soon
as practically possible, following notification by Customer.
1.7 Customer shall remain responsible for the duration of the term of this
Agreement for payment of the monthly lease charges for the Equipment.
Customer may discharge this responsibility at any time by paying Scitor ITS
a lump sum equal to the depreciated value of the Equipment based on the
original price paid by Scitor ITS or its subcontractors for the Equipment
plus 15% of such original price as a fee for administration and
disconnection. On payment of the resulting sum, Scitor ITS will transfer
title in the relevant Equipment to Customer. Customer understands that
Scitor ITS depreciates the Equipment over 3 years. Scitor ITS will transfer
the Equipment to a substitute Location on payment of a reconnection charge
agreed by the Parties and in addition Scitor ITS' travel and out of pocket
expenses.
[*] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
ATTACHMENT 3- COMMISSIONING
1. CONNECTIONS
1.1 Scitor ITS shall use all reasonable efforts to connect the Service at the
Locations as soon as possible after the date the Tail Circuits are made
available by PTTs for Customer's use and in accordance with Customer's
requirements. Scitor ITS shall have no responsibility, nor liability for
delays caused by Customer or any third party. In the event of any such
delays Scitor ITS shall use all reasonable efforts to provide the Service
as set out in this Agreement at the earliest opportunity.
1.2 Should the Customer request to delay any connection date as agreed by the
Parties after Scitor ITS has ordered any Tail Circuit or Equipment, such
request shall be agreed by Scitor ITS but any delays in connection shall
not affect Customer's obligations to reimburse scitor ITS for all Tail
Circuit and Equipment charges incurred from the date of any contract
between Scitor ITS and any PTT or other supplier. Customer also understands
that should Scitor ITS or its agents or sub-contractors carry out a visit
to a Location in order to connect the Service, and be then unable to do so
as a result of any act or omission by the Customer, Scitor ITS reserves the
right to charge Customer for such visit at its then current rates for such
time and its reasonable travel expenses.
2. COMMISSIONING/ACCEPTANCE
2.1 Commissioning shall mean that Scitor ITS or its subcontractors shall carry
out the following Commissioning Tests at each Location as appropriate from
Scitor ITS sites remote to the Locations:
TAIL CIRCUIT
------------
To run three 15 minute Bit Error Rate Tests to ensure that no moe than one
error in 10/5/ data bits occur on the Tail Circuit.
X .25 FUNCTIONALITY TESTING
---------------------------
(a) An X.25 DTE attached via Tail Circuit to a Node is able to establish
link level communications with the Node local to the Location.
(b) An X.25 DTE attached via Tail Circuit to a Note is able to place an
X.25 call to pre-designated address, transfer data and then clear the
virtual connection than has been established.
ALTERNATIVE TESTING
-------------------
Where local PTT operating conditions are such that the above commissioning
tests are not appropriate, Scitor ITS shall be entitled to carry out
alternative commissioning tests as agreed by Customer. In this event Scitor
shall provide to the Customer a description of these alternative
commissioning tests.
FINAL ATTACHMENT 3. PAGE 1 NETSTAR
<PAGE>
ATTACHMENT 4 - NETWORK PATH AVAILABILITY / NETWORK TRANSIT TIME WARRANTIES
The following Service warranties shall apply:
<TABLE>
<CAPTION>
NTT NPA
From To (milliseconds) (%)
- ---- -- ------------ ---
<S> <C> <C> <C>
San Francisco Mexico City 375 98.81
</TABLE>
Service warranties for additional Locations shall be as specified in
supplements.
FINAL ATTACHMENT 4, PAGE 1 NETSTAR
<PAGE>
EXHIBIT 10.25
[*] DESIGNATES MATERIAL FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED,
WHICH MATERIAL HAS BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
GLOBALTEL RESOURCES, INC.
EXCLUSIVE SERVICES AND MARKETING AGREEMENT
THIS GlobalTel Resources, Inc. Exclusive Services And Marketing Agreement (the
"Agreement") is made as of April 15, 1997 (the "Effective Date"), by and among
GlobalTel Resources, Inc., a Washington corporation ("GTR"), and International
Business Network for World Commerce & Industry, Ltd., a company doing business
in New York and Bermuda ("IBNet").
RECITALS
WHEREAS, GTR plans to market and sell a package of telecommunications services
as it exists from time to time to international chambers of commerce, chamber
members and consortia of the same; and
WHEREAS, IBNet desires to market telecommunications services established by GTR
to international chambers of commerce, chamber members and consortia of the
same; and
NOW, THEREFORE, in consideration of the mutual promises and covenants contained
herein, the parties agree as follows:
AGREEMENT
1. Definitions. The following terms, whenever initially capitalized, shall
-----------
have the following meanings for purposes of this Agreement:
1.1 "Chambers of Commerce" shall mean all international and local chambers
of commerce, and all consortia and groups of same.
1.2 "Customer" shall mean an individual or legal entity that enters into
an agreement with GTR for the Telecommunications Services offered hereunder.
1.3 "Offering" shall mean the various offering(s) by GTR of any
combination of Telecommunications Services.
1.4 "Fee" shall mean the fee payable to IBNet from GTR for each Customer
that enters into an agreement with GTR for Telecommunications Services, as
further described in paragraph 4 and Exhibit A.
1.5 "Telecommunications Services" shall mean the international services
offered by GTR to Customers, including but not limited to the following or any
combination of the following: voice services; facsimile services; virtual
private networks;
1
<PAGE>
Internet service; intranets service; local dial-up for global travelers;
wireless communications (satellite, cellular, paging); cable; messaging services
(voice, fax, electronic mail, voice mail), multimedia services (audio, video,
video conferencing); domestic and international long-distance; and system
integration services.
2. Exclusive Marketing of Telecommunications Services.
---------------------------------------------------
2.1 As of the Effective Date, and subject to the other terms and
conditions set forth herein, IBNet hereby agrees to market and promote the
Telecommunications Services to Chambers of Commerce. IBNet shall not market or
promote the telecommunications services of any party other than GTR for the term
of this Agreement.
2.2 IBNet agrees to allow GTR to use the Chambers of Commerce trademarks
as the exist today, or as they may be developed to represent the Chambers of
Commerce and IBNet in the future, in the marketing of GTR's Offerings to the
Chambers of Commerce as well as non-chamber members on an exclusive basis,
subject to the provisions of Section 7 to this Agreement.
2.3 IBNet agrees to do the following, at a minimum, to market and promote
the Telecommunications Services to Chambers of Commerce: (a) list the Offerings
in its database available to the Chambers of Commerce and their members; (b)
promote the Offerings in IBNet's literature that it provides to the Chambers of
Commerce; and (c) promote GTR and its Offerings at trade shows, in speaking
engagements and to the press.
2.4 IBNet shall market and promote the particular Offerings of GTR, which
GTR shall communicate to IBNet from time to time in its sole discretion. IBNet
shall not alter, change or modify the Offerings of GTR without GTR's prior
approval.
3. GTR's Responsibilities.
-----------------------
3.1 GTR shall develop its own telecommunications services and enter into
agreements with third parties offering \telecommunications services which shall
constitute the Offerings.
3.2 GTR grants to IBNet during the term of this Agreement the exclusive
right to market and promote the Offerings to Chambers of Commerce.
3.3 GTR shall enter into agreements directly with its Customers for the
Telecommunications Services. GTR or its agent shall be solely responsible for
billing its Customers, product packaging, training and Customer service.
2
<PAGE>
3.4 GTR shall be entitled to offer and provide the Telecommunications
Services to Chambers of Commerce on such terms and conditions (including without
limitation as to the Offering, the specific services provided and pricing and
billing procedures) as GTR may determine in its sole discretion.
3.5 GTR will offer Telecommunications Services to the Chambers of Commerce
exclusively in partnership with IBNet as authorized under this agreement. Any
customer lead generated and actively being pursued by IBNet along with the
Chambers of Commerce, IBNet will have the first right to pursue and receive
compensation on said customer as outline in this agreement. Customer
opportunities that are generated outside of IBNet and the Chambers of Commerce
are not covered under this agreement, and IBNet and the Chambers of Commerce
will not receive compensation from said customers.
4. Fees and Payments.
------------------
4.1 As long as IBNet complies with its obligations under this agreement,
GTR shall pay IBNet Fees as set forth in Exhibit A, which shall be amended from
time to time, for Chambers of Commerce that become Customers of GTR for
Telecommunications Services.
4.2 Payments of Fees shall be made in accordance with the schedule and in
the manner set forth in Exhibit A.
5. Joint Marketing.
----------------
5.1 The parties will carry out mutually agreed joint marketing activities
from time to time, including without limitation the following activities:
advertising, press releases, conferences and special events.
5.2 GTR and IBNet will supply from time to time copy for use in marketing
collateral for the Offerings, for distribution pursuant to Section 2.2 and in
other marketing and promotional activities. GTR and IBNet shall be entitled to
review and approve in writing all marketing collateral that will be used in the
marketing of the Offerings to the Chambers of Commerce prior to distribution.
GTR and IBNet shall not unreasonably withhold or delay their approval of such
marketing collateral.
6. Equity Options and Internet Services.
-------------------------------------
6.1 In consideration for the exclusive marketing of GTR's
Telecommunications Services, GTR grants to IBNet an option to purchase from ten
thousand (10,000) shares of GTR common stock at $1.10 (U.S.) per share.
Additional options shall be granted to IBNet based on the schedule and
conditions set forth in Exhibit B.
3
<PAGE>
6.2 GTR and IBNet shall negotiate in good faith the terms and pricing of
a GTR-provided Internet for IBNet to link the Chambers of Commerce
electronically (the "Internet Services"). GTR shall provide IBNet with
information regarding the terms and pricing of extending such Intranet Services
to IBNet's member companies.
7. Trademarks.
-----------
7.1. IBNet acknowledges that "GlobalTel Resources, Inc." and the
trademarks, service marks and logos of GTR and third parties associated with the
Telecommunications Services (collectively, the "GTR Trademarks") are owned by
GTR and/or its affiliated parties. GTR acknowledges that "IBNet," and the
trademarks, service marks and logos of the Chambers of Commerce (the "Chambers
of Commerce Trademarks") are owned by IBNet or the Chambers of Commerce, and
that IBNet is authorized to allow third parties' uses of such trademarks as they
exist today or may be created in the future. (Collectively or individually, the
parties' trademarks are hereinafter referred to as "Trademarks.") Each party
hereby authorizes the other to use such party's Trademarks on a nonexclusive
basis during the term of this Agreement to promote the Offerings and to carry
out its respective or joint marketing obligations in accordance with Sections
2, 5 and all other terms of this Agreement. Each party agrees not to challenge
or contest the ownership of the Trademarks; validity of the Trademarks; or
validity of the licenses granted under this Agreement. Each party agrees that it
will do nothing inconsistent with such ownership and that all use of the
Trademarks shall inure to the benefit of and be on behalf of owner of the
Trademarks. Each party agrees it will not set up any adverse claim against the
party owning the Trademarks based upon its use of the Trademarks. Each party
shall employ best efforts to use the Trademarks in a manner that does not
derogate from the owner's rights in the Trademarks and will take no action that
will interfere with or diminish its rights in the Trademarks, either during the
term of this Agreement or afterwards. Each party agrees not to adopt, use or
register any corporate name, trade name, trademark, service mark or
certification mark, or other designation similar to, or containing in whole or
in part, the Trademarks not owned by it.
7.2. Each party shall use the Trademarks in a form and manner consistent
with proper trademark usage and any guidelines on such usage which the owner of
the Trademarks may prescribe from time to time.
7.3. All rights not expressly granted herein relating to the Trademarks
are reserved by the party owning the Trademarks. Each party acknowledges that
nothing in this Agreement shall give it any right, title or interest in the
Trademarks not owned by it. No party may use the Trademarks in any manner
whatsoever other than as expressly described in this Agreement. All rights a
party has acquired or may acquire in the Trademarks, including all associated
goodwill, shall be the property of the owner of the Trademarks solely and are
hereby assigned to such owner. Except as otherwise expressly
4
<PAGE>
provided herein, neither party shall assign, transfer or sublicense its rights
under this Section 7 in any manner without the prior written consent of the
other party. Any attempted assignment or transfer in violation of the provisions
hereof, by operation of law or otherwise, shall be void.
7.4. Each party acknowledges that a breach by it of this Agreement may
cause the other party irreparable damage which cannot be remedied in monetary
damages in an action at law, and may also constitute infringement of the
Trademarks. In event of any breach that could cause irreparable harm to the
owner of the Trademarks, or cause some impairment or dilution of its reputation
or Trademarks, such owner shall be entitled to an immediate injunction, in
addition to any other legal or equitable remedies.
8. Confidentiality.
---------------
8.1. For purposes of this Agreement, "Confidential Information" shall mean
nonpublic information that the disclosing party designates as being confidential
or that, under the circumstances surrounding disclosure, ought to be treated as
confidential. "Confidential Information" includes, without limitation,
information relating to released or unreleased disclosing party products, the
marketing or promotion of any disclosing party product, disclosing party's
business policies or practices, information received from others that disclosing
party is obligated to treat as confidential, and the terms and conditions of
this Agreement. Confidential Information disclosed to the receiving party by any
disclosing party subsidiary and/or agents is covered by this Agreement.
8.2. Confidential Information shall not include any information that: (i)
is or subsequently becomes publicly available without the receiving party's
breach of any obligation owed the disclosing party; (ii) became known to the
receiving party prior to the disclosing party's disclosure of such information
to the receiving party; (iii) became known to the receiving party from a source
other than the disclosing party other than by the breach of an obligation of
confidentiality owed to the disclosing party; or (iv) is independently developed
by the receiving party.
8.3 The receiving party shall not disclose any Confidential Information to
third parties for three (3) years following the date of its disclosure by the
disclosing party to the receiving party, except on a need-to-know basis to the
receiving party's employees and consultants (including without limitation third
party legal and financial advisors). However, the receiving party may disclose
Confidential Information in accordance with judicial or other governmental
order, provided the receiving party shall give the disclosing party reasonable
notice prior to such disclosure and shall comply with any applicable protective
order or equivalent.
5
<PAGE>
8.4. The receiving party shall return all originals, copies, reproductions
and summaries of Confidential Information and/or materials containing
Confidential Information at the disclosing party's request, or at the disclosing
party's option, certify destruction of the same.
9. Term and Termination.
--------------------
9.1. This Agreement shall become effective as of the Effective Date and
shall continue in effect for a period of ten (10) years. This Agreement shall be
automatically renewed for additional one (1) year term(s) upon the expiration of
the initial or any succeeding term unless either party notifies the other in
writing not later than sixty (60) days before expiration of the then-current
term that such party elects not to renew this Agreement, in which event it will
expire at the end of such then-current term.
9.2. Notwithstanding the provisions of Section 9.1, this Agreement may be
terminated prior to its natural expiration under any of the following
provisions:
(a) Either party may terminate this Agreement if the other party
materially fails to perform or comply with this Agreement or any provision
hereof and does not remedy such failure within sixty (60) days of receiving
notice thereof from the other party. If this Agreement is so terminated, the
effective date of such termination will be the last day of the calendar month
following the month in which such sixty (60)-day cure period expires.
(b) In addition, in the event either party: becomes insolvent or
makes any assignment for the benefit of creditors or similar transfer evidencing
insolvency; or suffers or permits the commencement of any form of insolvency or
receivership proceeding; or has any petition under any bankruptcy law filed
against it, which petition is not dismissed within sixty (60) days of such
filing; or has a trustee or receiver appointed for its business or assets or any
part thereof, then the other party may terminate this Agreement immediately,
without prior written notice.
9.3. Upon the expiration or termination of this Agreement for any reason,
each party shall deliver and surrender up to the other party each and every
Trademark of the other party, any Confidential Information of the other party,
and the possession of any physical objects bearing or containing any of the
same, and the delivering party shall not thereafter use any of the same, and
delivering party hereby acknowledges and agrees that ownership of all such
items, as and between the parties, is and shall at all times remain vested in
the owner of the Trademark and/or Confidential Information.
10. Representations and Covenants.
------------------------------
10.1. IBNet represents, warrants and covenants to GTR that:
6
<PAGE>
(a) IBNet shall market and promote the Telecommunications
Services in a professional manner and in conformance with the terms of this
Agreement.
(b) IBNet has the power and authority on behalf of the
Chambers of Commerce and other consortium members to enter into this Agreement
and to fully perform its obligations hereunder.
(c) IBNet will notify GTR promptly and in reasonable detail,
in accordance with all procedures communicated from time to time to IBNet by
GTR, of any complaints or other notices received by IBNet with respect to
content or services within the Offerings and any potential liability of GTR
therefor, and will provide reasonable cooperation to GTR in investigating any
such complaints and notices.
(d) IBNet will not represent itself as the legal
representative of GTR for any purpose whatsoever, and shall not create or assume
for GTR any obligation of any kind.
(e) IBNet will not make any representations or warranties
concerning the Offerings except as may be specifically authorized in writing by
GTR.
10.2. GTR represents and warrants to IBNet that:
(a) GTR shall conduct business with IBNet and the Chambers of
Commerce in a professional manner and in conformance with the terms of this
Agreement.
(b) GTR has the power and authority to enter into Agreement
and to fully perform its obligations hereunder.
(c) GTR will notify IBNet promptly and in reasonable detail,
in accordance with all procedures communicated from time to time to GTR by
IBNet, of any complaints or other notices received by GTR with respect to the
Offerings or business relationship with IBNet and the Chambers of Commerce, and
will provide reasonable cooperation to IBNet in investigating any such
complaints and notices.
(d) GTR will not represent itself as the legal representative
of GTR for any purpose whatsoever, and shall not create or assume for IBNet any
obligation of any kind.
THIS SECTION CONTAINS THE ONLY WARRANTIES MADE BY THE PARTIES. TO THE MAXIMUM
EXTENT PERMITTED BY LAW, EACH PARTY DISCLAIMS ALL OTHER WARRANTIES OF ANY KIND,
EITHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, IMPLIED WARRANTIES OF
7
<PAGE>
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE
MATTERS COVERED HEREIN.
11. Indemnification. Limitation of Liability.
-----------------------------------------
11.1. Each party (the "indemnifying party") agrees to indemnify, defend,
and hold harmless the other party, its officers, directors, employees, and
agents, from any and all third party causes of action, claims, demands, damages,
liabilities, costs, and expenses (including without limitation reasonable
attorneys' fees and costs) (hereinafter referred to as "Claims") arising out of
or in connection with any claim which, if true, would be a breach of the
indemnifying party's warranties, representations, or obligations under this
Agreement. If any action shall be brought against a party under this Agreement
in respect to which indemnity may be sought hereunder, the party claiming such
indemnity shall promptly notify the other party in writing, specifying the
nature of the Claim and the total monetary amount sought or other such relief as
is sought therein. The indemnified party shall cooperate with the indemnifying
party in all reasonable respects in connection with the defense of any Claim.
Except as otherwise provided herein, the indemnifying party may upon written
notice to the indemnified party undertake to conduct all proceedings or
negotiations in connection with a Claim, and assume the defense thereof, and, if
it so undertakes, it shall also undertake all other required steps or
proceedings to settle or defend any such Claim at its own expense. Each party
shall have the right to employ separate counsel and participate in the defense
of any Claim hereunder. The indemnifying party shall reimburse the indemnified
party hereunder upon demand for any payment made by such indemnified party that
is based upon the judgment of any court of competent jurisdiction or pursuant to
a bona fide compromise or settlement of any Claim; provided, however, that the
indemnifying party shall not be responsible for any settlement made by the
indemnified party without the indemnifying party's written approval, which shall
not be unreasonably withheld.
11.2. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY
INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL, OR PUNITIVE DAMAGES (INCLUDING
WITHOUT LIMITATION DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION,
LOSS OF BUSINESS INFORMATION, OR OTHER PECUNIARY LOSS) ARISING OUT OF THIS
AGREEMENT.
12. Miscellaneous.
--------------
12.1. Neither party shall represent itself as the agent or legal
representative of the other for any purpose whatsoever, and neither party shall
have the right to create or assume for the other any obligation of any kind.
This Agreement shall not create or be deemed to create an agency, partnership,
franchise, employment relationship or joint
8
<PAGE>
venture between the parties. Each party's employees who perform services related
to this Agreement shall remain under the exclusive-direction and control of
their respective employer and shall receive such salaries, compensation and
benefits as their respective employer may from time to time determine. Each
party shall have full and sole responsibility for its employees who perform any
service related to this Agreement with regard to compliance with all applicable
laws, rules and regulations governing such party relating to employment, labor,
wages, benefits, taxes and other matters affecting its employees.
12.2. Any notice required or permitted to be given under this Agreement
shall be made in writing and shall be deemed to have been given or made if it is
in writing and is: (i) delivered in person, (ii) sent by same day or overnight
courier, (iii) mailed by certified or registered mail, return receipt requested,
postage prepaid, addressed to the party at its address set forth below or at
such other address as such party may subsequently furnish to the other party by
notice hereunder, or (iv) delivered by facsimile, the transmittal of which shall
be confirmed by a telephone call to the other party and by dispatch of a
confirming copy of the transmittal by registered or certified mail, postage
prepaid. Notices will be deemed effective on the date of delivery in the case of
personal delivery, or three (3) business days after mailing, or on the date of
dispatch in the case of notification by facsimile (assuming confirmation of
transmission). The parties' addresses for purposes of notice shall be as
follows:
GTR: GlobalTel Resources, Inc.
1520 Eastlake Avenue East, Ste. 210
Seattle, Washington 98102
Attn: Mr. Ronald Erickson
(206) 720-7250 (voice)
(206) 720-7251 (fax)
IBNet: International Business Network
115 Lantern Park Lane South
Southbury, CT 06488-2331 USA
Attn: Mr. John A. Monteleone
(203) 264-0359 (voice)
(203) 264-7293 (fax)
12.3. The failure of any party to enforce its rights, remedies or any
condition of this Agreement, shall not be deemed a waiver thereof, nor shall it
affect such party's right to subsequently enforce the same.
12.4. This Agreement shall be construed, enforced, performed and in all
respects governed by and in accordance with the laws in the State of Washington
as they apply to
9
<PAGE>
contracts entered into and performed entirely within such State. Each of the
parties hereby irrevocably consents to jurisdiction and venue in the state and
federal courts sitting in King County, Washington. In any action or suit to
enforce any right or remedy under this Agreement, the prevailing party shall be
entitled to recover its reasonable attorneys' fees and costs.
12.5. The invalidity or unenforceability of any provision of this
Agreement shall not affect the other provisions of this Agreement and this
Agreement shall be construed in all respects as if such invalid or unenforceable
provision were replaced with a valid and enforceable provision as similar as
possible to the one replaced.
12.6. Either party may voluntarily or by operation of law assign,
sublicense, transfer, encumber or otherwise dispose of all or any part of its
interest in this Agreement, in the event of a reorganization, consolidation or
merger involving another entity which results in a change of control of the
assigning party, with the prior written consent of the other party, which
consent shall not be unreasonably withheld. For purposes of this Agreement, a
"change in control" shall mean the acquisition of more than fifty percent (50%)
of any class of either party's voting stock by another entity, or the sale of
more than fifty percent (50%) of such party's assets. Subject to the provisions
of this Section, this Agreement shall be binding upon and inure to the benefit
of each party and their respective successors and assigns.
12.7. Except as otherwise specifically stated herein, this Agreement is
not intended to benefit, nor shall it be deemed to give rise to, any rights in
any third party.
12.8. This Agreement, including all exhibits and agreements referenced and
made effective herein, represents the entire understanding of the parties with
respect to the subject matter hereof. Except as provided for elsewhere in this
Agreement, no conditions, usage of trade, course of dealing or performance,
understanding or agreement purporting to modify, vary, explain or supplement the
terms or conditions of this Agreement shall be binding unless hereafter made in
writing and signed by both parties. No modification shall be effected by the
acknowledgment or acceptance of a purchase order, by invoice or otherwise,
containing terms or conditions at variance with or in addition to those set
forth herein.
10
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
GTR IBNet
By /s/ Ronald P. Erickson By /s/ John A. Moteleone
---------------------- ----------------------
Name Ronald P. Erickson Name John A. Moteleone
--------------------------- --------------------------
Title Chairmain & CEO Title Exec. VP & COO
--------------------------- --------------------------
11
<PAGE>
Exhibit A
---------
Fees and Payments
-----------------
GTR agrees to pay IBNet fees for the referral of business to GTR by IBNet with a
customer agreement that has been initiated by IBNet or the Chambers of Commerce.
The fees will be paid for the term of the agreement. Fees may vary by product
and will be paid on gross margin dollars which shall be calculated by taking the
gross revenue and subtracting the cost of goods sold (the network cost excluding
G & A).
Fees apply beginning with the contract signing by a customer.
<TABLE>
<CAPTION>
Fee Fee Fee
Product Year 1 Year 2 Year 3 + option
- ------- -------------------------- --------------------- ---------------------
<S> <C> <C> <C>
International Voice [*] of Gross Margin [*] of GM [*] of GM
International Fax [*] of Gross Margin [*] of GM [*] of GM
Calling Card Services To Be Determined (TBD)
Intranet Services TBD
Internet Access TBD
Domestic Voice TBD
Virtual Private Networks TBD
Wireless Communications TBD
Messaging Services TBD
Multimedia Services TBD
System Integrations Services TBD
Cable Services TBD
Other Telecommunications Services TBD
</TABLE>
[*] CONFIDENTIAL TREATMENT REQUESTED
A-1
<PAGE>
Exhibit B
---------
Options
-------
GTR will grant options to IBNet based on reaching certain milestones based on
performance as measured by monthly revenue of the services sold to Chambers of
Commerce. The options will be granted at the then current price at the time of
grant. The option schedule is as follows:
Existing options based on section 6 of the contract: 10,000 options
Monthly Revenue Milestones Options Granted
- -------------------------- ---------------
$1,000,000 per month 25,000 options
$2,000,000 per month 25,000 options
$3,000,000 per month 25,000 options
$4,000,000 per month 25,000 options
$5,000,000 per month 25,000 options
$7,500,000 per month 25,000 options
$10,000,000 per month 25,000 options
Any option for revenue per month in excess of $10,000,000 per month will be
negotiated at that time.
B-1
<PAGE>
Novell/GlobalTel Confidential Execution Original
================================================================================
[*] Designates material for which confidential treatment has been requested,
which material has been separately filed with the Securities and Exchange
Commission.
EXHIBIT 10.26
Master Task Agreement
between
Novell, Inc. and GlobalTel
This Master Task Agreement ("MTA"), having an effective date of August 21, 1997,
is agreed to by GFP Group, Inc., a corporation with principal offices at 1520
Eastlake Road #205, Seattle, Washington 98102 ("GlobalTel"), and Novell,
Inc.("Novell"), a Delaware corporation with principal offices at 1555 North
Technology Way, Orem, Utah 84057.
1. OVERVIEW. Each Statement of Work will be deemed to incorporate by reference
--------
this Section 1 unless the Statement of Work explicitly states otherwise.
a. [*]
b. Description Of This MTA. This MTA contains terms and conditions for
-----------------------
all business transactions between Novell and GlobalTel that are
within its scope. Novell and GlobalTel intend that all individual
business transactions that are within the scope of this MTA be
implemented through individual Statements of Work under this MTA.
This MTA, by itself, does not implement any business transaction and
does not create an obligation on either party to enter into any
Statement of Work or to develop, license, purchase or sell any
product or service, or to refrain from doing so.
c. [*]
d. [*]
================================================================================
PAGE 1 Master Task Agreement
[*] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Novell/GlobalTel Confidential Execution Original
================================================================================
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
[*] With a Copy to GlobalTel Designated
Attorney
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Name German Burtscher
- ------------------------------------------------------------------------------------------------------
Title Senior Vice President, Business
Development
- ------------------------------------------------------------------------------------------------------
Address 1520 Eastlake Road #205,
Seattle, WA 98102
- ------------------------------------------------------------------------------------------------------
Phone (208) 720-7250
- ------------------------------------------------------------------------------------------------------
Fax (208) 720-7251
- ------------------------------------------------------------------------------------------------------
E-mail [email protected]
Address
- ------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------
[*] With a Copy to Novell Designated
Attorney
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Name Ron Palmeri
- ------------------------------------------------------------------------------------------------------
Title General Manager,
Business Internet Services Division
- ------------------------------------------------------------------------------------------------------
Address 2180 Fortune Drive, San Jose, CA 95131
- ------------------------------------------------------------------------------------------------------
Phone (408) 577-7512
- ------------------------------------------------------------------------------------------------------
Fax (408) 577-5775
- ------------------------------------------------------------------------------------------------------
E-mail [email protected]
Address
- ------------------------------------------------------------------------------------------------------
</TABLE>
e. Definitions. This MTA, and each of the Statements of Work,
-----------
incorporates by reference the definitions stated in Appendix 1.
f. Term & Termination. The term of, and termination of, this MTA
------------------
and related Statements of Work are provided in Section 8, unless
the Statement of Work explicitly states otherwise with respect
to its term and termination.
2. ADMINISTRATION OF A STATEMENT OF WORK. Each Statement of Work will be
-------------------------------------
deemed to incorporate by reference this Section 2 unless the Statement
of Work explicitly states otherwise.
a. [*]
================================================================================
PAGE 2 Master Task Agreement
[*] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Novell/GlobalTel Confidential Execution Original
================================================================================
b. Identification Of An Individual Statement of Work. Each individual
-------------------------------------------------
Statement of Work will be identified by a numerical or alphanumerical
sequence, as determined by the parties, its title and effective date
such as, for example, "Statement of Work No. 1 for ABC Development
Effective on 6/23/95".
c. Required Contents Of Each Statement of Work. Each Statement of Work
-------------------------------------------
will contain (or incorporate as attachments or by reference):
(1) A reference to this MTA by agreement number. This reference
will act to automatically incorporate the terms of this MTA, as
described in Section 2.e below, into the Statement of Work
unless the Statement of Work explicitly states otherwise.
(2) A title identifying the Statement of Work and an effective date
on which the Statement of Work becomes effective between the
parties.
(3) A brief description describing the scope of the Statement of
Work.
(4) [*]
(5) Description of Novell's responsibilities, including work or
services to be performed, and schedules for any development or
delivery.
(6) Description of GlobalTel's responsibilities, including work or
services to be performed, and schedules for any development or
delivery.
(7) Description or specification of any item to be developed or
delivered.
(8) Description of payments to be made, if any, by any one party to
the other as consideration under the Statement of Work,
including the amount, method of calculation, schedule of
payments, and address to which such payments are to be made.
d. Optional Contents Of Each Statement of Work. In addition, a Statement
-------------------------------------------
of Work may contain (or incorporate as attachments or by reference):
(1) Ownership terms between the parties. The Statement of Work will
be presumed not to change the ownership terms stated in Section
7.b below or any pre-existing ownership rights if no ownership
terms are stated in the Statement of Work. Such changes may
only be made by explicit statement in the Statement of Work.
(2) Grant of a copyright license by one party to the other by
identifying the specific Licensed Work to be licensed and
either (i) by incorporating one
================================================================================
PAGE 3 Master Task Agreement
[*] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Novell/GlobalTel Confidential Execution Original
================================================================================
or more specific licenses described in Section 4 below, or (iii) by
stating other license terms. No copyright license will be presumed if
the Statement of Work does not contain an explicit grant.
(3) Grant of a trademark license by one party to the other. The trademark
license will specify detailed license terms and must be approved by
the Legal Departments of both Novell and GlobalTel. No trademark
license will be presumed if the Statement of Work does not contain an
explicit grant.
(4) Warranty provisions, such as scope, nature, term, or limitations.
(5) [*]
(6) [*]
(7) Additional specifications, such as acceptance criteria, documentation
specifications and standards, quality standards, performance
specifications, or usability and architecture requirements.
(8) Resource requirements, such as training or assignment of key
personnel.
(9) Special term or termination provisions.
(10) Other appropriate terms.
e. Incorporation Form This MTA Into A Statement of Work.
----------------------------------------------------
(1) The parties agree that a Statement of Work under, and referring to,
this MTA incorporates by reference the following sections of this MTA
unless the Statement of Work explicitly states otherwise:
Section 1: Overview
Section 2: Administration Of A Statement of Work
Section 3: Ownership Under A Statement of Work
Section 6: Compensation Due Under A Statement of Work
Section 7: Inventions And Patents Under A Statement of Work
Section 8: Term And Termination Of A Statement of Work
Section 9: General Terms
================================================================================
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[*] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Novell/GlobalTel Confidential Execution Original
================================================================================
(2) The parties agree that a Statement of Work under, and referring
to, this MTA may incorporate by reference any portions of the
following sections of this MTA, as explicitly stated in the
Statement of Work:
Section 4: Copyright License In A Statement of Work
Section 5: Trademark License In A Statement of Work
f. [*]
3. OWNERSHIP UNDER A STATEMENT OF WORK. Each Statement of Work will be deemed
-----------------------------------
to incorporate by reference this Section 3 unless the Statement of Work
explicitly states otherwise. A Statement of Work will be presumed not to
change the ownership terms stated in Section 7.b below or any pre-existing
ownership rights if no ownership terms are stated in the Statement of Work.
The parties agree that such changes may only be made by explicit statement
in a Statement of Work.
4. COPYRIGHT LICENSE IN A STATEMENT OF WORK. A Statement of Work may contain
----------------------------------------
a grant by one party ("Licensor") to the other party ("Licensee") of a
copyright licensee to a Licensed Work identified in the Statement of Work.
The Statement of Work may specifically incorporate one or more of the
copyright licenses described in this Section 4 or it may recite other
license terms. If the Statement of Work incorporates a copyright license
described in this Section 4, the Statement of Work may include additional
terms that ad or modify the terms of the incorporated copyright license.
a. Full Source License. Under a Full Source License, the Licensor will
-------------------
provide the Licensee with each Licensed Work identified in the
Statement of Work as licensed under a Full Source License with Code
supplied in at least Source Code form. The Licensor grants to the
Licensee a non-exclusive, worldwide, payment-bearing (if the
Statement of Work states that payment is required) license under the
Licensor's copyrights covering the Licensed Work identified in the
Statement of Work. This Full Source License grants the Licensee all
of the following rights.
(1) To reproduce or have reproduced and internally distribute
copies of such Licensed Work and to internally use such copies.
(2) To create or have created Derivative Works by modifying the
Source Code of the Licensed Work and to reproduce and
distribute internally the Derivative Works in Source Code form
or in Object Code form.
================================================================================
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[*] CONFIDENTIAL TREATMENT REQUESTED
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================================================================================
(3) To create or have created Derivative Works by modifying
the Documentation of the Licensed Work and to reproduce
and distribute internally such Derivative Works.
(4) To distribute externally to end-users, either directly
or through distributors, copies in Object Code form only
of the Licensed Work or Derivative Work and copies in
any form of the Documentation or any Derivative Work of
the Documentation. Except as explicitly stated in the
Statement of Work, such distribution shall be in
accordance with the Licensee's standards software
distribution license agreement. The parties expect that
such distribution right would by payment-bearing.
(5) To exercise all rights to the Licensed Work with regard
to pictorial, graphic or audio/visual works, including
icons, screens, music and characters, that are created
as a result of execution of any Code or any Derivative
Work thereof in accordance with the granted license.
(6) To use all Development Environment Materials that
accompany the Licensed Work to produce Executable Code
and/or Object Code for use within the scope of this
license.
This Full Source License does not grant the Licensee the
right to sub-license any right to reproduce or
distribute any Licensed Work or Derivative Work except
as explicitly stated in the Statement of Work. Further,
this Full Source License does not grant the Licensee
the right to distribute or sub-license any Licensed Work
of Derivative Work in Source Code form except as
explicitly stated in the Statement of Work.
b. Limited Source License. Under a Limited Source License, the
----------------------
Licensor will provide the Licensee with each Licensed Work
identified in the Statement of Work as licensed under a Limited
Source License with Code supplied in at least Source Code form.
The Licensor grants to the Licensee a non-exclusive, worldwide,
payment-bearing (if the Statement of Work states that payment is
required) license under the Licensor's copyrights covering the
Licensed Work identified in the Statement of Work. This Limited
Source License grants the Licensee all of the following rights:
(1) To reproduce or have reproduced and internally
distribute copies of such Licensed Work in Object Code
form only, and to internally use such copies.
(2) To create or have created Derivative Works by modifying
the Documentation of the Licensed Work and to reproduce
and distribute internally such Derivative Works of
Documentation.
================================================================================
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<PAGE>
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================================================================================
(3) To distribute externally to end-users, either directly
or through distributors, copies in Object Code form only
of the Licensed Work or Derivative Work and copies in
any form of the Documentation or any Derivative Work of
the Documentation. Except as explicitly stated in the
Statement of Work, such distribution shall be in
accordance with the Licensee's standard software
distribution license agreement. The parties expect that
such distribution right would be payment-bearing.
(4) To exercise all rights to the Licensed Work with regard
to pictorial, graphic or audio/visual works, including
icons, screens, music and characters, that are created
as a result of execution of any Code or any Derivative
Work thereof in accordance with the granted license.
(5) To use all Development Environment Materials that
accompany the Licensed Work to produce Executable Code
and/or Object Code for use within the scope of this
license.
This Limited Source License, without explicit provision
to the contrary in a Statement of Work, does not permit
the Licensee to modify the Source Code of the Licensed
Work or otherwise create a Derivative Work of the Source
Code of the Licensed Work, nor does this Limited Source
License permit the Licensee to distribute internally or
externally the Licensed Work in Source Code form.
c. OEM License. Under an OEM License, the Licensor will provide
-----------
each Licensed Work identified in the Statement of Work as
licensed under an OEM License, with Code being supplied in
Object Code form only. The Licensor grants to the Licensee a
non-exclusive, worldwide, payment-bearing (if the Statement of
Work states that payment is required) license under the
Licensor's copyrights covering the Licensed Work identified in
the Statement of Work. This OEM License grants the Licensee all
of the following rights:
(1) To reproduce or have reproduced and internally
distribute copies of such Licensed Work in Object Code
form only, and to internally use such copies.
(2) To exercise all rights to the Licensed Work with regard
to pictorial, graphic or audio/visual works, including
icons, screens, music and characters, that are created
as a result of execution of any Code in accordance with
the granted license.
(3) To distribute externally to end-users, either directly
or through distributors, copies in Object Code form only
of the Licensed Work and copies in any form of the
Documentation. Except as explicitly stated in the
Statement of Work, such distribution shall be in
accordance with the
================================================================================
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<PAGE>
Novell/Global Confidential Execution Original
================================================================================
Licensee's standard software distribution license agreement. The
parties expect that such distribution right would be payment-
bearing.
This OEM License does not obligate the Licensor to provide any
Source Code to the Licensee. The Licensee shall not modify any
Materials received or developed under the Statement of Work or
otherwise create any Derivative Work of any such Materials.
d. Distribution License. Under a Distribution License, the Licensor will
--------------------
provide each Licensed Work identified in the Statement of Work as licensed
under a Distribution License, with Code being supplied in Object Code form
only. The Licensor grants to the Licensee a non-exclusive, worldwide,
payment-bearing (if the Statement of Work states that payment is required)
license under the Licensor's copyrights covering the Licensed work
identified in the Statement of Work. This Distribution License grants the
Licensee all of the following rights:
(1) To internally use as an end-user copies of the Licensed Work in
Object Code form only and to make backup or archive copies of Code
only.
(2) To exercise all rights to the Licensed Work with regard to
pictorial, graphic or audio/visual works, including icons, screens,
music and characters, that are created as a result of execution of
any Code or any Derivative Work thereof in accordance with the
granted license.
(3) To distribute externally to end-users, either directly or through
distributions, the Licensor-provided copies of the Licensed Work and
any additional related material, such as standard software license
agreement, provided by the Licensor for distribution with the
Licensed Work.
This Distribution License does not permit the Licensee to reproduce
or copy the Materials received or developed under the Statement of
Work or sublicense such rights.
e. Internal Use License -- Source Code. Under an Internal Use License --
-----------------------------------
Source Code, the Licensor will provide the Licensee with each Licensed Work
identified in the Statement of Work as licensed under an Internal Use License --
Source Code, with Code supplied in Source Code form. The Licensor grants to the
License a non-exclusive, worldwide, payment-bearing (if the Statement of Work
states that payment is required) license under the Licensor's copyrights
covering the Licensed Work identified in the Statement of Work. This Internal
Use License -- Source Code grants the Licensee all of the following rights:
================================================================================
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================================================================================
(1) To reproduce or have reproduced and internally distributed Object
Code forms of the Licensed Work, and to internally use such Object
Code forms.
(2) To reproduce, distribute and use (all internally only) Source Code
forms of a Licensed Work, but only as required to support Licensee's
use of Object Code forms of the Licensed Work, including modifying
such Source Code solely to correct Errors.
(3) To create or have created Derivative Works by modifying the
Documentation of the Licensed Work and to reproduce and distribute
internally such Derivative Works of Documentation.
(4) To exercise all rights to the Licensed Work with regard to pictorial,
graphic or audio/visual works, including icons, screens, music and
characters, that are created as a result of execution of any Code or
any Derivative Work thereof in accordance with the granted license.
(5) To use all Development Environment Materials that accompany the
Licensed Work to produce Executable Code and/or Object Code for use
within the scope of this license.
f. Internal Use License -- Object Code. Under an Internal Use License --Object
--------------------
Code, the Licensor will provide the Licensee with each Licensed Work
identified in the Statement of Work as licensed under an Internal Use
License -- Object Code, with Code supplied in Object Code form only. The
Licensor grants to the Licensee a non-exclusive, worldwide, payment-bearing
(if the Statement of Works states that payment is required) licensed under
the Licensor's copyrights covering the Licensed Work identified in the
Statement of Work. This Internal Use License -- Object Code grants the
Licensee all of the following rights:
(1) To reproduce or have reproduced and internally distribute Object Code
forms of a Licensed Work and to internally use such Object Code forms
for any lawful purpose.
(2) To exercise all rights to the Licensed Work with regard to pictorial,
graphic or audio/visual works, including icons, screens, music and
characters, that are created as a result of execution of any Code in
accordance with the granted license.
(3) To create or have created Derivative Works by modifying the
Documentation for a License Work and to reproduce or have reproduced
and distribute internally such Derivative Works in any from.
================================================================================
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<PAGE>
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================================================================================
5. TRADEMARK LICENSE IN A STATEMENT OF WORK. A Statement of Work may contain a
----------------------------------------
grant by one party to the other of a trademark license to one or more
Licensed Marks identified in the Statement of Work. The Statement of Work
will specify detailed trademark license terms and must be approved by the
Legal Departments of both Novell and GlobalTel. No trademark license will
be presumed if the Statement of Work does not contain an explicit grant.
6. COMPENSATION DUE UNDER A STATEMENT OF WORK. Each Statement of Work will be
------------------------------------------
deemed to incorporate by reference this Section 6 unless the Statement of
Work explicitly states otherwise.
a. Payments [*]. A Statement of Work may specify that one party is to pay
------------
the other certain compensation for the other party's performance under
the Statement of Work or for rights or licenses granted under the
Statement of Work. The payments specified in the Statement of Work are
in consideration of the other party's performance and grant of rights
or licenses under the Statement of Work. [*]. All payments will be made
to the address specified in the Statement of Work.
b. [*]
(1) [*]
(2) [*]
(3) [*]
(4) [*]
c. [*]
================================================================================
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[*] CONFIDENTIAL TREATMENT REQUESTED
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================================================================================
d. Audit. During the term of this Agreement, the period of any Statement
-----
of Work and for a period of three years after the termination or
expiration of this Agreement or any Statement of Work (whichever is the
later), the parties shall maintain complete and accurate records, in
accordance with generally acceptable accounting practices, evidencing
(i) amounts due and amounts paid under a Statement of Work, and (ii)
[*]. The parties shall have the right, at their own expense and upon no
less than fifteen business days prior written notice, to audit the
other party's records. Such audit may be conducted by a party's own
audit team or by its authorized representative(s), shall not interfere
unreasonably with the other party's business activities, and shall be
conducted no more often than once per calendar year, unless a previous
audit disclosed a material discrepancy. If such audit shows that a
party has underpaid amounts owing, that party shall immediately pay all
amounts owning. If such audit shows that a party has underpaid amounts
owing by more than five percent (5%), the defaulting party shall also
pay the reasonable expenses of the audit. Each party shall use the
information obtained from any such audit solely to determine the other
party's compliance or non-compliance with this Agreement and any
Statement of Work and to remedy any non-compliance. Each party shall
otherwise maintain the confidentiality of all such information.
e. Tax Consequences. Unless otherwise explicitly stated in this MTA or in
----------------
a Statement of Work, the party making a payment to the other party will
be responsible for all sales or equivalent taxes arising out of the
payment and will either include such taxes with the payment or will
provide the other party with a resale certificate or other
documentation to successfully claim exemption from the tax. Each party
will be responsible for payment of all income or equivalent taxes based
upon that party's net income.
f. Late Payment. For any payment made late than the appropriate payment
------------
date, the party making the payment will pay the other party a late fee
of one and one-half percent of the amount paid late for each calendar
month beyond the payment date.
7. INVENTIONS AND PATENTS UNDER A STATEMENT OF WORK. Each Statement of Work
------------------------------------------------
will be deemed to incorporate by reference this Section 7 unless the
Statement of Work explicitly states otherwise.
a. Patent License. If a Statement of Work states that a copyright license
--------------
to certain Materials is granted by one party to the other, then such
Statement of Work will automatically include a grant by the Copyright
Licensor to the Copyright Licensee of a worldwide, non-exclusive, paid-
up and royalty-free license under the Copyright Licensor's patents,
inventor's certificates, and utility models (and similar forms of legal
protection of any country) and applications therefor, to make, have
made, use and sell those certain Materials. Such license will be
limited in scope
================================================================================
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================================================================================
to the minimum extent that is consistent with the grant of the
copyright license. Such patent license is also extended, at the
minimum scope necessary to be consistent with the grant of the
copyright license, to the Copyright Licensee's agents, distributors
and customers.
b. Ownership Of Inventions. If an invention, whether or not patentable,
-----------------------
is conceived or reduced to practice by one or more employees of one of
the parties, then that party will own such invention and all patents
and patent applications on the invention. If an invention, whether or
not patentable, is conceived or reduced to practice jointly by one or
more employees of each of the parties, then each party will own such
invention and all patents and patent applications on the invention
jointly with the other party without any duty to account for profits
to the other party, and each party may freely license third parties.
8. TERM AND TERMINATION. Each Statement of Work will be deemed to incorporate
--------------------
by reference this Section 8 unless the Statement of Work explicitly states
otherwise.
a. MTA. This MTA will be effective upon the date specified at the
---
beginning of this MTA, and will remain in force for a period of [*],
unless otherwise terminated as provided in Section 8.c. After this
initial term of [*], this MTA will automatically renew for additional
terms of [*] each, unless 90 days or more prior to the end of either
the initial term or any subsequent term either party provides the
other party with written notice terminating this MTA.
b. Statements of Work.
------------------
(1) Term Of A Statement of Work. The Statement of Work will enter
---------------------------
into effect upon its effective date and will continue in effect
for the term specified in the Statement of Work unless earlier
extended, terminated by mutual written agreement of the parties,
or terminated for cause in accordance with Section 8.c below.
In the event that a Statement of Work fails to contain a term,
the Statement of Work will be deemed to have a term of [*] and
will be subject to the termination provisions provided in
Section 8.c.
(2) Relationship to MTA. As long as a Statement of Work is in
-------------------
effect this MTA will remain in effect.
c. Termination for Cause. Either party may terminate this MTA or a
---------------------
Statement of Work for the substantial breach by the other party of a
material term. The terminating party will first give the other party
written notice of the alleged breach and a reasonable period of at
least 90 days in which to cure the alleged breach. If a cure is not
achieved during the cure period, then the parties will enter into the
dispute resolution procedures specified in Section 9.f below.
Termination of the Statement of Work will occur upon the expiration of
the cure period and the
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================================================================================
subsequent unsuccessful completion of the dispute resolution
procedures specified in Section 9.f below.
d. Insolvency, Assignment, or Bankruptcy. Either party may terminate
-------------------------------------
this MTA or a Statement of Work upon written notice to the other party
if the other party (i) is not paying its debts as such debts generally
become due, (ii) becomes insolvent, (iii) files or has filed against
it a petition (or other document) under any Bankruptcy Law or similar
law, which is unresolved within sixty (60) days of the filing of such
petition (or document), (iv) proposes any dissolution, liquidation,
composition, financial reorganization or recapitalization with
creditors, (v) makes a general assignment or trust mortgage for the
benefit of creditors, or (vi) if a receiver, trustee, custodian or
similar agent is appointed or takes possession of any of its property
or business.
e. Survival Of Terms. In the event of a termination of a Statement of
-----------------
Work, all obligations of confidentiality (including those specified in
Section 9.c below) will continue in effect in accordance with their
terms. In addition, the terms of Section 9.k (Intellectual Property
Indemnity), Section 9.n (Limitation Of Liabilities), and Section 9.q
(Representations And Warranties) will continue in effect in accordance
with their terms.
9. GENERAL TERMS. Each Statement of Work will be deemed to incorporate by
-------------
reference this Section 9 unless the Statement of Work explicitly states
otherwise.
a. Assignment. Except as otherwise provided herein, neither party may
----------
transfer or assign any right or obligation set forth in this MTA or in
a Statement of Work without the prior written consent of the other
party. Any such attempted transfer or assignment will be void.
Notwithstanding the above, either party may assign any right or
obligation in this MTA or in a Statement of Work in connection with a
corporate merger by that party or a sale of substantially all of its
assets.
b. Changes To This MTA Or To A Statement of Work. This MTA or a
---------------------------------------------
Statement of Work may only be modified in a writing that is executed
by authorized representatives of both parties. A change to this MTA
will not affect any Statement of Work that is already in effect when
the MTA is changed unless the parties agree in writing that the change
to this MTA will affect that Statement of Work. The parties will
indicate the level of revision to this MTA by assigning each revised
MTA a new MTA agreement number.
c. Confidentiality And Information Exchange. It is the intention of
----------------------------------------
GlobalTel and Novell to transfer and/or exchange information,
including confidential information, as may be necessary under the
Statements of Work. Such information may be disclosed in oral,
visual, or written form (including magnetic media). Novell and
GlobalTel agree that all Source Code received under a Statement of
Work (or
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================================================================================
developed from Source Code received under a Statement of Work) will be
considered to be confidential information for the purposes of this Section
9.c.
(1) The party receiving confidential information under a Statement of Work
("Recipient") will make use of the confidential information only for
the purposes of that Statement of Work. However, this Section 9.c.(1)
will not be construed to limit either party's right to independently
develop or acquire products without use of the other party's
confidential information. Further, either party will be free to use
the residuals resulting from access to or work with the other party's
confidential information, provided that such party otherwise complies
with these nondisclosure provisions. The term "residuals" means
information in non-tangible form which may be retained by persons who
have had access to the confidential information.
(2) The Recipient will protect the disclosed confidential information by
using the same degree of care, but no less than a reasonable degree of
care, to prevent the unauthorized use, dissemination, or publication
of the confidential information as the Recipient uses to protect its
own confidential information of like nature.
(3) The Recipient's duty to hold confidential information in confidence
expires (i) [*] after its return or destruction in the case of
confidential information embodied in received or developed (whichever
is later) source and related descriptions, specifications and system
documentation, or (ii) in the case of any other confidential
information, [*] after the MTA terminates. The expiration of the duty
of confidentiality will not modify other restrictions on the Recipient
including, for example, any restrictions on distribution of Source
Code arising out of granted copyright license.
(4) [*]
(5) This MTA and the Statement of Work impose no obligation upon Recipient
with respect to information that: (a) was in Recipient's possession
before receipt from the disclosing party ("Discloser"); (b) is or
becomes a matter of public knowledge through no fault of Recipient;
(c) is rightfully received by the Recipient from a third party without
a duty of confidentiality; (d) is disclosed by the Discloser to a
third party without a duty of confidentiality on the third party; (e)
is independently developed by the Recipient without thereby violating
the Discloser's patent or copyright; (f) is disclosed under operation
of law after all reasonable means have been afforded to the
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================================================================================
Discloser to protect the information; or (g) is disclosed by the
Recipient with Discloser's prior written approval.
d. Construction. The headings in this MTA and in the Statements of Work
------------
are provided for reference only and will not be used as a guide to
interpretation. When used in this MTA or in a Statement of Work, the
singular includes the plural and the plural includes the singular, and
gender related pronouns include the feminine, masculine and neuter.
e. Copyright Notices. Each party will ensure that all copyright notices
-----------------
of the other party that are marked on or included in any portion of
Materials under a Statement of Work will be marked on or included at
least once in each copy or Derivative Work of the Materials.
f. [*]
g. Entire Agreement. A Statement of Work, including the incorporated
----------------
portions of this MTA, sets forth the entire agreement and
understanding between the parties as to its specific subject matter
and merges all prior discussions between them with regard to such
specific subject matter. Neither of the parties will be bound by any
conditions, definitions, warranties, understandings, agreements, or
representations, whether written or oral, with respect to such
specific subject matter other than as expressly provided in the
Statement of Work or as duly set forth on or subsequent to its
effective date, in a written document that is signed by a duly
authorized representative of each Party. However, the parties
acknowledge that they do not intend, at the present time, to merge any
independent written agreements existing between them and executed
prior to the execution of this MTA, and such independent agreements
will not be considered merged into this MTA or into any Statement of
Work except as specifically set forth in a Statement of Work executed
under this MTA.
h. Export of Technical Data. Regardless of any disclosure made by one
------------------------
party to the other of an ultimate destination of the Licensed Work,
neither party will transfer, export or re-export or cause to be
exported or re-exported, directly or indirectly, any Licensed Work or
technical information or direct product thereof or Confidential
Information received from the other party to anyone outside the United
States without first complying strictly and fully with all export
controls that may be imposed on the Licensed Work, technical
information or direct product
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================================================================================
thereof or confidential information by the United States Government or any
country or organization of nations within whose jurisdiction the party
operates or does business. In particular, each party assures the other
that, absent any required prior authorization from the Office of Export
Licensing U.S. Department of Commerce, 14th and Constitution Avenue,
Washington D.C. 20230, that party will not export or reexport (as defined
in Section 779 of the Export Administration Regulations, as amended
("Regulations")) the Licensed Work or any technical data or other
confidential information, or direct product of any of the foregoing, to
Iraq, Iran, Syria, or any Group S or Z country specified in Supplement No.
1 to Section 770 or the Regulations which, as of the date of this contract,
include the countries of Libya (Group S), and North Korea, Cuba (Group Z),
or such other countries as come under restriction by action of the United
States Government, or to nationals from or residing in the foregoing
contries, without first obtaining permission from the appropriate United
States Government authorities. The countries subject to restriction by
action of the United States Government are subject to change, and it is
each party's responsibility to comply with the United States Government
requirements as they may be amended from time to time.
i. Force Maleure. Neither party will be liable in damages or have the right to
-------------
cancel or terminate this MTA or any Statement of Work for any delay or
default in performance if such delay or default is caused by unforeseen
conditions or conditions beyond the control of the delaying or defaulting
party, including but not limited to acts of God, government restrictions,
continuing domestic or international problems such as wars or
insurrections, strikes, fires, floods, work stoppages and embargoes. Either
party will have the right to terminate a Statement of Work upon 60 days
prior written notice if the delay or default of the other party due to any
of the above-mentioned causes continues for a period of six (6) months.
Each party will give the other party prompt written notice of any such
condition likely to cause any delay or default.
j. Freedom of Action. This MTA and the Statements of Work will not prevent
-----------------
either party from (i) entering into any agreement similar to this MTA or
any Statement of Work with any corporation in any industry or any non-
profit body such as a university or a government, or (ii) developing,
manufacturing and/or selling any product or service that can compete with
the other party's products or services in the marketplace.
k. Intellectual Property Indemnity.
-------------------------------
(1) If, under a Statement of Work, one party ("Licensor") transfers
Materials, whether its own or those of a third party, to the other
party ("Licensee"), the Licensor, except as otherwise provided below,
will defend or settle any claim made or any suit or proceeding
brought against the Licensee so far as its is based on an allegation
that any Materials furnished under the Statement of Work infringes a
patent or copyright of the country in which
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<PAGE>
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================================================================================
the Licensee takes delivery of the product (or the country in
which an end-user takes delivery of the product), if the
Licensor is notified promptly in writing and is given
information, assistance and the sole authority to defend or
settle same at the Licensor's expense. The Licensor will pay
all damages and costs finally awarded therein against the
Licensee. In addition, GlobalTel agrees that it will indemnify
Novell, and hold it harmless, from any action based on an
allegation that any Materials, provided by an entity other than
Novell, that are provided by GlobalTel in connection with
GlobalTel's offering, infringe a patent or copyright of the
country in which an end user takes delivery of the Materials.
Moreover, GlobalTel agrees that it will pay Novell's reasonable
attorney's fees incurred in connection with any such action.
(2) In case the Materials in such suit are held to infringe and use
of the Materials are enjoined or the case is settled, as
referred to above, the Licensor will have the option, at its
expense, to procure for the Licensee the right to continue
using the Materials, to replace or modify such Materials so
that they become non-infringing materials which have the same
or additional functionality and comparable or better
performance characteristics, or to terminate the license with
respect to the Materials that are infringing.
(3) The Licensor will have no liability for any infringement of
patents, copyrights, trademarks or other intellectual property
rights that result from (a) the Licensor's compliance with the
Licensee's designs, specifications, or instructions, (b)
modifications of the Materials that were not requested or
authorized by the Licensor, (c) use of the Materials other than
as specified in relevant Licensor publications, (d) use of the
Materials with goods not supplied by the Licensor, or (e) the
furnishing of any intangible information, service or technical
support to the Licensee.
(4) This Section 9.k will represent the entire and exclusive
obligation of one party to the other regarding any claim of
intellectual property infringement arising under a Statement of
Work, except as explicitly stated otherwise in the Statement of
Work.
(5) This Section 9.k is subject to the provisions of Section 9.n
below.
i. Independent Contractors. Each party is and will remain an independent
-----------------------
contractor with respect to all performance under this MTA and the
Statements of Work. No employee of either party will be considered an
employee or agent of the other party for any purpose. Each party
assumes sole responsibility for the supervision, daily direction and
control, payment of salary (including withholding of income taxes and
social security), worker's compensation, disability benefits and the
like of its employees. Nothing in this agreement will be construed to
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================================================================================
prevent either party from delegating performance under this MTA or
any resultant Statement of Work to independent contractors who have
entered into agreements consistent with the provisions contained in
this MTA. However, the contracting party will remain primarily
responsible for the performance of its subcontractors and hereby
waives any defense alleging that it has no liability as a result of a
claim of breach by any such permitted subcontractors.
m. Laws. Subject to the provisions of any Statement of Work, the
----
validity, construction, and performance of this MTA and the
Statements of Work will be governed by the laws of the United States.
Each party will, at its own expense, comply with any governmental
law, statute, ordinance, administrative order, rule or regulation
relating to its duties, obligations or performance under this MTA and
the Statements of Work. Any action arising out of or relating to this
MTA or any Statements of Work will be instituted and prosecuted
exclusively in the courts of competent jurisdiction of the State of
Utah in the event of a proceeding instituted by GlobalTel, and of the
State of Washington in the event of a proceeding instituted by
Novell.
n. Limitation of Liabilities. THE REMEDIES PROVIDED IN THIS MTA AND THE
-------------------------
STATEMENTS OF WORK ARE THE SOLE AND EXCLUSIVE REMEDIES OF THE
PARTIES, NEITHER PARTY WILL IN ANY EVENT BE LIABLE TO THE OTHER, OR
TO ANY LICENSEE, SUBLICENSEE, OR GlobalTel OF THE OTHER UNDER THIS
MTA OR ANY STATEMENT OF WORK FOR LOSS OF PROFITS, LOSS OF BUSINESS,
LOSS OF USE OR OF DATA, OR FOR INTERRUPTION OF BUSINESS. NEITHER
PARTY WILL IN ANY EVENT BE LIABLE FOR INDIRECT, SPECIAL, RELIANCE,
INCIDENTAL, COVER, OR CONSEQUENTIAL LOSS OR DAMAGE OF ANY KIND
ARISING UNDER OR OUTSIDE OF THIS MTA OR ANY STATEMENT OF WORK,
WHETHER IN A CONTRACT, TORT OR OTHER ACTION FOR OR ARISING OUT OF
ALLEGED BREACH OF WARRANTY, ALLEGED BREACH OF CONTRACT, DELAY,
NEGLIGENCE, STRICT LIABILITY OR OTHERWISE. [*].
o. Notices. All notices to a party under this MTA will be delivered to
-------
that party's [*] at the address stated in Section 1.c above. All
notices to a party under a Statement of Work will be delivered [*] at
the address specified in the Statement of Work. All notices required
or permitted to be given under this MTA or a Statement of Work will
be in writing. A notice will be validly given upon the earlier of
confirmed receipt by [*] (for a notice under this MTA) or [*] (for a
notice under a Statement of Work) or 14 days after deposit postage
prepaid, with the U.S. Postal Service as first class mail. Notices
may be
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delivered by telefax or by courier and will be validly given upon confirmed
receipt [*], as stated above.
p. Order of Precedence. In the event of any conflict between this MTA and a
-------------------
Statement of Work, the terms of the Statement of Work will control. In the
event of any conflict between this MTA or a Statement of Work and any
Purchase Order or Acknowledgment, this MTA or the Statement of Work will
take precedence over any written or typed instructions in a written or
electronic Purchase Order or Acknowledgment. The pre-printed provisions of
any written or electronic Purchase Order or Acknowledgment will be void and
of no effect.
q. Representations and Warranties.
------------------------------
(1) Each party represents and warrants that, to the best of its
knowledge, it has full and sufficient right to perform under this MTA
and the Statements of Work, including the right to grant any licenses
or rights stated in this MTA or in the Statements of Work.
(2) EXCEPT AS EXPRESSLY SET FORTH IN THIS MTA OR IN A STATEMENT OF WORK,
NEITHER PARTY MAKES ANY WARRANTIES OR REPRESENTATIONS OF ANY KIND,
EXPRESS OR IMPLIED, WITH RESPECT TO DELIVERABLES, LICENSED WORKS,
MATERIALS, INVENTIONS, INFORMATION OR ANY OTHER WORK OR OTHERWISE
UNDER THIS MTA OR THE STATEMENT OF WORK, AND EACH PARTY HEREBY
EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES, INCLUDING BUT NOT LIMITED TO
THE IMPLIED WARRANTIES OF MERCHANTABILITY, NON-INFRINGEMENT AND
FITNESS FOR A PARTICULAR PURPOSE.
r. Severability. Each Statement of Work is intended to constituted an
------------
independent and distinct agreement of the parties, notwithstanding the fact
that a Statement of Work may incorporate provisions of this MTA. If any
provison of this MTA or a Statement of Work is held by a court of competent
jurisdiction to be invalid, illegal or unenforceable, the remaining
provisions will remain in full force and effect and will be interpreted, to
the extent possible, to achieve the purpose of this MTA and any affected
Statements of Work as originally expressed.
s. Subsidiaries. All rights and licenses granted to a party under this MTA and
------------
the Statements of Work will apply to that party's Subsidiaries so long as
such Subsidiaries agree to comply fully with the obligations imposed on
that party by this MTA and the Statements of Work. Each party will remain
fully liable for the actions and omissions of its Subsidiaries relative to
rights granted under this Section 9.s, 10.k. The parties agree, however,
that they may not seek to enforce any obligation of the other party (or its
Subsidiaries) through a legal action
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brought against a Subsidiary except to the extent that such action
seeks injunctive relief against that particular Subsidiary.
t. Volume Obligations. Except as explicitly stated in a Statement of
------------------
Work, neither party will have an obligation under any Statement of
Work (i) to offer any product or service to any third party by way of
sale, license or otherwise, or (ii) to use any minimum level of
effort in the promotion, marketing, licensing or sales of any
products or services, including products or services of the other
party, or (iii) to purchase or license any minimum amount of products
or services from the other party.
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10. SIGNATURES.
----------
ACCEPTED AND AGREED:
NOVELL, INC. GFP GROUP, INC.
Name Dave Trotter Name [SIGNATURE APPEARS HERE]
------------------------------ ------------------------------
Dave Trotter
Title VP OEM Sales Title Chairman
------------------------------ ------------------------------
Date 21-October-1997 Date 19-September-1997
------------------------------ ------------------------------
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APPENDIX 1: DEFINITIONS
Each Statement of Work will be deemed to incorporate by reference the
definitions stated in this Appendix unless the Statement of Work explicitly
states otherwise. Unless the context clearly requires otherwise, the
capitalized terms used in this MTA or in a Statement of Work will have the same
meaning as ascribed to the terms below.
a. Code - will mean computer programming code. Unless specifically stated
----
otherwise, Code will include Executable Code, Object Code, Source Code and
any Maintenance Modifications to Code or Enhancements to Code in existence
from time to time.
(1) Executable Code - will mean Code that loads and executes without
---------- ----
further processing by a software complier or linker.
(2) Object Code - will mean the Code that results when Source Code is
------ ----
processed by a software compiler, but is not Executable Code.
(3) Source Code - will mean the human-readable form of the Code and
------ ----
related system documentation, Including all comments and any
procedural language.
(4) GlobalTel Code, Novell Code, or Third-Party Code - will mean Code in
--------- ---- ------ ---- ----------- ----
which GlobalTel, Novell, or a third party, respectively is the
copyright owner.
b. Deliverable - will mean any Materials procured or prepared by one party
-----------
under a Statement of Work for delivery to the other party. Whether or not
actually delivered to the other party. Deliverables will in all cases
include all Code, Documentation media and other objects identified as
Deliverables in the Statement of Work.
c. Derivative Work - will mean a work that is based on one or more preexisting
---------- ----
works (such as a revision, enhancement, modification, translation,
abridgement, condensation, expansion, or any other form in which such
preexisting work may be recast transformed, or adapted) and that, if
prepared without authorization of the copyright owner of such preexisting
work, would constitute copyright infringement under United States law.
d. Development Environment - will mean any non-commercially available device,
----------- -----------
Code, Documentation, media or development tool (including compliers,
workbenches, tools, and higher-level or proprietary languages) that are
used or
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required by a party for the development, maintenance or
implementation of any Deliverable.
e. Documentation - will mean user manuals and other written materials
-------------
that relate to particular Code including materials useful for design
(for example, logic manuals, flow charts, and principles of
operation), and including machine-readable text or graphic files
subject to display or print-out. Documentation will include any
Maintenance Modifications or Enhancements, in existence from time to
time, to prior Documentation and will also include new versions of
prior Documentation.
f. Enhancements - will mean changes, additions or new releases, other
------------
than Maintenance Modifications to Code and to related Documentation
that are provided to existing end-users without charge and that
improve functions, add new functions, or improve performance by
changes to system design or coding.
g. Error - will mean any of the following conditions:
-----
(1) Code Error - will mean a program function that is described in
---- -----
a Statement of Work but is omitted from the Code, or a program
function or user interface that does not operate or that gives
incorrect results when measured against its design
specifications.
(2) Documentation Error - will mean a failure of the Documentation
------------- -----
to accurately describe a program function contained in a
Statement of Work; or, a failure of the Documentation to meet
the requirements of the Statement of Work; or, a failure of the
Documentation to enable reasonably competent users to correctly
operate the associated Code.
h. Licensed Work - will mean any Materials that are licensed by one
-------- ----
party to the other party under a Statement of Work.
i. Maintenance Modification - will mean any modification or revision to
----------- ------------
Code or to Documentation, other than an Enhancement, that corrects an
Error or provides an other incidental correction.
j. Materials - will mean Code, Documentation and other written materials
---------
or tangible media (including machine-readable media with Code or
Documentation recorded thereon), or any combination of the foregoing.
GlobalTel Materials, Novell Materials, or Third-Party Materials will
--------- --------- ------ --------- ----------- ---------
mean Materials in which GlobalTel, Novell, or a third party,
respectively, is the copyright owner.
k. Subsidiaries - will mean a company the majority of whose stock
------------
entitled to vote for election of directors is now or later owned by
that party either directly or indirectly, but such company will be
deemed to be a subsidiary only so long as
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such control exists. Notwithstanding the foregoing, the term
subsidiary will in no event include Novell Japan, Ltd.
================================================================================
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================================================================================
EXHIBIT 10.27
[*] Designates material for which confidential treatment has been requested,
which material has been separately filed with the Securities and Exchange
Commission.
Novell Business Internet Services Affiliate
Service Platform Statement of Work
to
Agreement No. 97-GlobalTel-001
Effective October 5, 1997 ("Effective Date")
1. Description. Novell is a supplier of software systems and services
-----------
for information processing and data networking. Novell wishes to further
expand its NetWare product family to include enterprise-wide networking
solutions, and to create new internetworking products and services.
GlobalTel is a supplier of telecommunications products and services for
voice and data communications applications, and desires to create an open,
intelligent, wide area data network to transport all forms of data and to
host a variety of client-server software applications and information
services. Novell and GlobalTel believe that their skills and objectives are
complementary. On the terms of this Service Platform Statement of Work,
("Service Platform SOW") Novell will provide GlobalTel licenses to
technology that GlobalTel will use to create a base platform from which to
provide services [*] (GlobalTel may license technology to provide
individual services in a separate Statement of Work). [*]. The contents of
this Section 1 are merely intended to provide an overview and will not be
binding on either party. The actual terms and conditions of this Service
Platform SOW are stated below.
2. Project Managers.
----------------
- --------------------------------------------------------------------------------
[*] [*]
- --------------------------------------------------------------------------------
Name German Burtscher David Roach
- --------------------------------------------------------------------------------
Title Senior Vice President, Carrier Development Manager,
Business Development Business Internet Services
Division
- --------------------------------------------------------------------------------
Address 1520 Eastlake Road #205 1177 Avenue of the Americas
Seattle, WA 98102 New York, NY 10036
- --------------------------------------------------------------------------------
Phone (206) 720-7250 (212) 403-7851
- --------------------------------------------------------------------------------
Fax (206) 720-7251 (212) 403-7801
- --------------------------------------------------------------------------------
E-mail [email protected] [email protected]
Address
- --------------------------------------------------------------------------------
3 Definitions. The following terms are in addition to those contained
-----------
in Agreement No. 97-GlobalTel-001 ("MTA"). Capitalized terms in this
Service Platform SOW have the
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SOW have the meanings stated below or defined elsewhere in this Service
Platform SOW. A reference to a Section is to a section of this Service
Platform SOW. A reference to an Exhibit is to an exhibit of this Service
Platform SOW.
3.1 [*]
3.2 [*]
3.3 [*]
3.4 [*]
3.5 [*]
3.6 [*]
3.7 [*]
3.8 [*]
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3.9 [*]
3.10 "BIS Services" means BIS Core Services and BIS Application Services.
3.11 [*]
3.12 "BIS User" means a subscriber to one or more BIS Services.
3.13 [*]
3.14 "Code Error" means a program function that is described in the
specifications for the program but is omitted from the Code, or a program
function or user interface that does not operate or that gives incorrect
results when measured against its specifications.
3.15 "Common Carrier" means an entity that offers to the public services
that consist of, and/or have as a component, the transportation of data
over intrastate, interstate, international, and/or foreign
telecommunications facilities or services.
3.16 "Correction" means a fix or fixes to correct known Errors in Code,
and corresponding changes to related Documentation.
3.17 "Deliverable" means any information in tangible form (including
Licensed Software) that one party is obligated to provide to the other
party under this Service Platform SOW or under another written document
signed by both parties pursuant to this Service Platform SOW.
3.18 "Derivative Work" means a version (including but not limited to a
revision, enhancement, modification, translation, abridgement,
condensation, or expansion) of the Licensed Software, whether or not in the
language, code or notation in which the work was originally expressed, that
is not a reproduction of the Licensed Software; and that if prepared
without authorization of the copyright owner of such preexisting work,
would constitute copyright infringement under United States law.
3.19 "Documentation" means all user manuals and other written materials
that relate to particular Code, whether in hard copy, electronic, or other
form. The term includes all such written materials that relate to
Corrections, Upgrades, and Enhancements provided under this Service
Platform SOW.
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3.20 "Documentation Error" means a failure of Documentation to accurately
describe a program function contained in the specifications for that
program; or a failure of Documentation to meet the agreed requirements for
that Documentation; or a failure of Documentation to enable reasonably
competent users to correctly operate the associated Executable Code.
3.21 "Enhancements" means a new function or feature in Table 2 of Exhibit
A and corresponding changes to related Documentation.
3.22 "Error" means a Code Error or a Documentation Error, or both.
3.23 "Formal Notice" means notice provided according to Section 10.2.2.
3.24 [*]
3.25 "Information" means information of any type, including all
inventions, creations, ideas, know-how, specifications, designs, software,
simulations, test results, reports, drawings, manufacturing processes,
improvements, and other developments, whether or not fixed in a tangible,
reproducible medium, and whether or not protected or capable of protection
by patents, copyrights, mask work rights, trade secret rights, or other
intellectual property rights.
3.26 "IP Rights" of a party means that party's existing and future
copyrights, patents, trade secrets, trademarks, and other proprietary
rights.
3.27 "Licensed Software" means the software identified in Table 1 and
Table 2 of Exhibit A that Novell licenses to GlobalTel under this Service
Platform SOW for GlobalTel's [*].
3.28 "NAEC" means a Novell Authorized Education Center.
3.29 [*]
3.30 [*]
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3.31 "GlobalTel Information" means all information owned or licensed by
GlobalTel at any time.
3.32 "TSA" means Technical Support Alliance.
3.33 "Upgrade" means an improvement in the performance of an existing
function or feature in the Licensed Software (for example, by decreasing
program size, improving execution speed, or decreasing main memory
requirements), and corresponding changes to related Documentation.
4 Establishment and Governance of the Relationship.
------------------------------------------------
4.1 Term and Termination. The initial term of this Service Platform SOW
--------------------
("Initial Term") begins on the Effective Date and ends on the third
anniversary of the Effective Date. Every third anniversary of the Effective
Date, this Service Platform SOW will automatically renew for successive [*]
terms unless terminated by either party 60 or more days before the then
current term ends. [*]. After the expiration of the Initial Term, either
party may terminate this Service Platform SOW, without cause, on 60 days'
prior written notice.
4.2 [*]
4.3 [*]
4.4 [*]
4.4.1 [*]
4.4.2 [*]
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4.5 Publicity. The existence and terms of this Service Platform SOW are
---------
Confidential Information, except as this Section 4.5. expressly provides.
4.5.1 GlobalTel and Novell will cooperate to make a joint
announcement about the execution of this Service Platform SOW at a
mutually convenient date within 90 days after the Effective Date. Each
party must approve in writing the final content and form of that
announcement.
4.5.2 [*]
5 Design, Development, and Deployment of the [*].
----------------------------------------------
5.1 [*]
5.2 Design, Implementation, Day-to-Day Operations, and Marketing.
------------------------------------------------------------
[*]. GlobalTel will inform Novell of GlobalTel's [*] and will do so in a
manner sufficiently timely to enable Novell to fulfill its obligations
under this Service Platform SOW. [*]. The parties agree that this Service
Platform SOW is non-exclusive, and it is contemplated that GlobalTel will
use other vendors in addition to Novell in developing and deploying
products and services to meet its customers' needs.
5.3 [*]
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5.4 [*]
5.5 [*]
5.6 [*]
6 Marketing.
---------
6.1 Trademarks. Except as expressly provided in this Service Platform SOW
----------
or under applicable law, neither party may use any trademark or service
mark of the other party for any purpose without the other party's prior
written consent, which the other party may grant or withhold in its
discretion.
6.2 [*]
6.3 [*]
6.4 [*]
6.4.1 [*]
6.4.2 [*]
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6.5 [*]
6.6 [*]
6.6.1 [*]
6.6.2 [*]
6.6.3 [*]
6.7 [*]
6.7.1 [*]
6.7.2 [*]
7. Licensed Software.
-----------------
7.1 Licensed Terms for Licensed Software.
------------------------------------
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Notwithstanding any license terms that may be included with the Licensed
Software Materials delivered to GlobalTel, the license terms governing each
copy of Licensed Software are, subject to the terms and conditions of this
Service Platform SOW and the MTA, as follows:
7.1.1 [*]
7.1.2 [*]
7.1.3 [*]
7.1.4 [*]
7.1.5 The licenses in this Section 7.1. are worldwide,
non-exclusive, and non-transferable. The license grants for the
Licensed Software are in force only during the term of this Service
Platform SOW. Notwithstanding the foregoing, in the event that Novell
terminates this Service Platform SOW without cause pursuant to
Section 4.1, the license grants for the Licensed Software will remain
in force until the earlier of 1) one year from the date of
termination, 2) the date on which GlobalTel completes the process of
replacing the Licensed Software with substitute software having
similar functionality, or 3) the date on which GlobalTel completes
the process of transferring its BIS Users to another provider of
similar services.
7.1.6 [*]
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7.1.7 Without Novell's prior written consent, GlobalTel will not
decompile, reverse compile, reverse assemble, modify, or perform any
similar type of operation on Licensed Software, except and only to the
extent expressly permitted by applicable law. GlobalTel agrees that
any such resulting works are derivative works and as such are the sole
and exclusive property of Novell.
7.1.8 Novell reserves all rights in the Licensed Software not
expressly granted to GlobalTel in this Service Platform SOW.
8. [*]
8.1 [*]
8.1.1 [*]
8.1.2 [*]
Table 8.1.2
----------------------------------------------------
[*] [*]
----------------------------------------------------
[*] [*]
----------------------------------------------------
[*] [*]
----------------------------------------------------
[*] [*]
----------------------------------------------------
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-------------------------------------------------
[*] [*]
-------------------------------------------------
[*] [*]
-------------------------------------------------
[*] [*]
-------------------------------------------------
8.2 [*]
8.3 [*]
9. Intellectual Property.
---------------------
9.1 Ownership. The parties do not intend to transfer the ownership of any
---------
of their respective information exchanged under this Service Platform SOW,
or of any of their respective IP Rights covering that Information; each
party provides all information to the other party on a license or
confidential disclosure basis only, as specified elsewhere in this Service
Platform SOW.
9.2 Derivative Work. In relation to any Derivative Work which is,
---------------
9.2.1 [*]
9.2.2 [*]
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9.2.3 [*]
9.3 Corrections, Upgrades and Enhancements. Novell will own Corrections,
--------------------------------------
Upgrades, and Enhancements to Licensed Software (including Corrections,
Upgrades, and Enhancements developed by GlobalTel).
9.4 Customer Information. Subject to any legal restrictions concerning
--------------------
privacy of customer data, GlobalTel will provide billing information that
GlobalTel compiles during the term about BIS Users who identify themselves
as Novell customers or Novell VARs in GlobalTel's BIS User database. All
such BIS User information will be GlobalTel Confidential Information.
9.5 Proprietary Notices. Neither party will remove any copyright notices
-------------------
or proprietary legends contained in Information provided by the other
party, including Licensed Software.
9.6 No Implied Rights or Licenses. All rights and licenses with respect
-----------------------------
to intellectual property which the parties intend to grant under this
Service Platform SOW are expressly stated in Sections 7 and 9.
10 Interpretation and Enforcement.
------------------------------
10.1 Principles of Interpretation.
----------------------------
10.1.1 Construction of Certain Terms.
-----------------------------
10.1.1.1 In all cases under this Service Platform SOW in
which GlobalTel consults with Novell or otherwise obtains
Novell's input or assistance, GlobalTel will in good faith
consider Novell's advice.
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10.1.1.2 Statements of a party's intent in this Service
Platform SOW reflect that party's good faith intent as of the
Effective Date, but do not represent binding obligations of
that party.
10.1.1.3 The term "include" and its derivatives are
illustrative and not limiting or exclusive.
10.1.2 Severability. If any provision of this Service Platform
------------
SOW will be found by a court of competent jurisdiction to be invalid
or unenforceable, such finding will not affect the validity and/or
enforceability of the Service Platform SOW as a whole or of any other
part of the Service Platform SOW. In such case this Service Platform
SOW will be construed and enforced as if it did not contain the
invalid and/or unenforceable provision. However, if either party
considers that provision to be an essential element of this Service
Platform SOW, the parties agree to promptly negotiate a replacement
achieving the same intent to the extent possible.
10.2 Termination.
-----------
10.2.1 Either party may terminate this Service Platform SOW if the
other party is in default. A party to this Service Platform SOW is in
default if, subject to Section 10.2.2, it commits a material breach;
or it ceases normal operations or becomes insolvent. As used in this
Section 10.2.1, "insolvent" means that the party is unable to pay its
debts as they become due, files or has filed against it a petition
under an bankruptcy law (which, if involuntary, is unresolved after
60 calendar days), proposes any dissolution, liquidation,
composition, financial reorganization, or recapitalization with
creditors, makes an assignment or trust mortgage for the benefit of
creditors, or that a receiver trustee, custodian, or similar agent is
appointed or takes possession with respect to any major property or
business of that party.
10.2.2 If a material breach of this Service Platform SOW will be
claimed to have occurred by either party, that party will give the
violating party Formal Notice stating the nature of the violation
with reasonable particularity. Termination will not become effective
unless the violating party will have failed to cure or correct the
violation within 90 days of the receipt of such notice.
10.2.3 Upon expiration or termination of this Service Platform SOW
for any reason, each party will, at the request of the other party,
return and make no further use of property, Materials, and other
items (and all copies thereof) belonging to the other party and
relating to this Service Platform SOW.
10.3 Survival of Obligations. The obligations of the parties under this
-----------------------
Service Platform SOW that by their nature continue beyond the expiration of
this Service Platform SOW,
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and those provisions that are expressly stated to survive termination, will
survive the termination or cancellation of this Service Platform SOW.
11 General Terms and Conditions.
----------------------------
11.1 Injunctive Relief. Each party acknowledges and agrees that the
-----------------
obligations and promises under this Service Platform SOW are of a unique,
intellectual character that gives them particular value. Each party further
acknowledges and agrees that a breach of any of the promises or agreements
contained in this Service Platform SOW may result in irreparable and
continuing damage to the other for which there may be no adequate remedy at
law and, in the event of such breach, the non-breaching party will be
entitled to injunctive relief and/or a decree for specific performance, and
such other and further relief as may be proper (including monetary damages
if appropriate).
11.2 Employee Liability.
------------------
11.2.1 All persons furnished by a party ("Employer") to perform
services or otherwise discharge Employer's obligations under this
Service Platform SOW will be considered solely Employer's employees
or agents, and Employer will be responsible for payment of all
unemployment, social security, and other payroll taxes, including
contributions when required by law. Employer agrees to indemnify and
save harmless the other party, and that other party's Subsidiaries
and customers and their officers, directors, employees, successors,
and assigns (all hereinafter referred to in this clause as
"Indemnitee" from and against any losses, damages, claims, demands,
suits, liabilities, and expenses (including reasonable attorneys'
fees) that arise out of or result from: (1) injuries or death to
persons or damage to property, including theft, in any way arising
out of or occasioned by, caused or alleged to have been caused by or
on account of the performance of the work or services performed by
Employer or persons furnished by Employer, (2) assertions under
Workers' Compensation or similar acts made by persons furnished by
Employer or by an subcontractor, or by reason of any injuries to such
persons for which Indemnitee would be responsible under Workers'
Compensation or similar acts if the persons were employed by
Indemnitee, (3) any failure on the part of Employer to satisfy all
claims for labor, equipment, materials, and other obligations
relating directly or indirectly to the performance of the work in
connection with this Service Platform SOW; or (4) any failure by
Employer to perform Employer's obligations under this clause.
Employer agrees, at its expense, to defend Indemnitee, at
Indemnitee's request, against any such claim, demand, or suit.
Indemnitee agrees to notify Employer within a reasonable time of any
written claims or demands against Indemnitee for which Employer is
liable under this Section 11.2.1.
11.2.2 Employer will not implead or bring any action against the
other party or its employees based on any claim by a person for
personal injury or death that
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occurs in the course of scope of employment of such person by
Employer and that arises out of work performed in connection with
this Service Platform SOW.
11.3 Disclaimers of Warranties. EXCEPT AS OTHERWISE STATED IN THIS
-------------------------
SECTION 11, NEITHER PARTY MAKES ANY REPRESENTATIONS OR WARRANTIES, EXPRESS
OR IMPLIED, TO THE OTHER CONCERNING OR RELATED TO THE LICENSED SOFTWARE OR
OTHER INFORMATION DEVELOPED OR PROVIDED PURSUANT TO THIS Service Platform
SOW. BY WAY OF EXAMPLE BUT NOT OF LIMITATION, NEITHER PARTY MAKES ANY
REPRESENTATIONS OR WARRANTIES OF MERCHANTABILITY OF FITNESS FOR ANY
PARTICULAR PURPOSE, OR THAT THE USE OF THE LICENSED SOFTWARE OR OTHER
INFORMATION WILL NOT INFRINGE ANY PATENT. NEITHER PARTY WARRANTS THAT THE
OPERATION OF LICENSED SOFTWARE WILL BE UNINTERRUPTED OR ERROR FREE.
11.4 Licensed Software. THE LICENSED SOFTWARE IS NOT DESIGNED,
-----------------
MANUFACTURED OR INTENDED FOR USE OR RESALE FOR ON-LINE CONTROL EQUIPMENT IN
HAZARDOUS ENVIRONMENTS REQUIRING FAIL-SAFE PERFORMANCE, SUCH AS IN THE
OPERATION OF NUCLEAR FACILITIES, AIRCRAFT NAVIGATION OR AIRCRAFT
COMMUNICATION SYSTEMS, AIR TRAFFIC CONTROL, DIRECT LIFE SUPPORT MACHINES,
OR WEAPONS SYSTEMS, IN WHICH FAILURE OF THE LICENSED SOFTWARE COULD LEAD
DIRECTLY TO DEATH, PERSONAL INJURY, OR SEVERE PHYSICAL OR ENVIRONMENT
DAMAGE. THE LICENSED SOFTWARE IS ONLY COMPATIBLE WITH CERTAIN COMPUTERS AND
OPERATING SYSTEMS. THE LICENSED SOFTWARE IS NOT WARRANTED FOR
COMPATIBILITY.
11.5 Limitation of Liabilities. Novell's liability under this Service
-------------------------
Platform SOW is subject to the limitation on liabilities as provided in 9.n
of the MTA.
11.6 Third Party Beneficiaries. This Service Platform SOW is not intended
-------------------------
to benefit any person or entity not a party signatory to it.
11.7 No Implied Rights to GlobalTel. Other than an express grant of
------------------------------
rights and licenses under this Service Platform SOW, GlobalTel has no
rights or licenses, including implied rights or licenses, under this
Service Platform SOW.
11.8 Amendments and Waivers. No amendment to this Statement of Work No. 1
----------------------
will be binding unless agreed to in a writing executed by both Novell and
GlobalTel, and no approval, consent, or waiver will be enforceable unless
signed by the granting party. The pre-printed terms of any order,
acknowledgment, or other form do not amend this Service Platform SOW. No
document will be deemed to amend this Service Platform SOW by implication.
A waiver of a breach of any term of this Service Platform SOW will not be
construed as a waver of any succeeding breach of that term or as a waiver
of the term itself. A party's
================================================================================
15 September 18, 1997
<PAGE>
Novell/GlobalTel Confidential Execution Original
================================================================================
performance after the other's breach will not be construed as a waiver of
that breach. No course of dealing, or informal communication of any kind,
will be deemed to amend this Service Platform SOW.
11.9 Entire Service Platform SOW. This is the entire agreement between
---------------------------
the parties with respect to the subject matter hereof. This Service
Platform SOW supersedes all prior agreements, proposals, representations,
statements, and understandings, whether written or oral, concerning the
subject matter.
12 Signatures. This Statement of Work may be executed in counterparts and
----------
will become effective when signed by authorized representatives of both
parties.
Novell, Inc. GFP Group, Inc.
Name: /s/ Dave Trotter Name: [SIGNATURE APPEARS HERE]
------------------------------- -------------------------------
Dave Trotter
Title: VP OEM Sales Title: Chairman
------------------------------ ------------------------------
Date: 21-October-1997 Date: 19-September-1997
------------------------------- -------------------------------
================================================================================
16 September 18, 1997
<PAGE>
Novell/GlobalTel Confidential Execution Original
================================================================================
Exhibit A
Deliverables
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Item Item Description
No.
- --------------------------------------------------------------------------------
<S> <C> <C>
1 [*] [*]
- --------------------------------------------------------------------------------
2 [*] [*]
- --------------------------------------------------------------------------------
3 [*] [*]
- --------------------------------------------------------------------------------
4 [*] [*]
- --------------------------------------------------------------------------------
5 [*] [*]
- --------------------------------------------------------------------------------
6 [*] [*]
- --------------------------------------------------------------------------------
7 [*] [*]
- --------------------------------------------------------------------------------
8 [*] [*]
- --------------------------------------------------------------------------------
9 [*] [*]
- --------------------------------------------------------------------------------
</TABLE>
================================================================================
17 September 18, 1997
[*] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Novell/GlobalTel Confidential Execution Original
================================================================================
- --------------------------------------------------------------------------------
10 [*] [*]
- --------------------------------------------------------------------------------
11 [*] [*]
- --------------------------------------------------------------------------------
12 [*] [*]
- --------------------------------------------------------------------------------
13 [*] [*]
- --------------------------------------------------------------------------------
================================================================================
18 September 18, 1997
[*] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
EXHIBIT 10.28
SHARE EXCHANGE AGREEMENT
THIS AGREEMENT is made and entered into this day of December, by
----
and between the undersigned Sellers (hereinafter collectively referred to as
"Sellers"), the undersigned persons, and GLOBALTEL RESOURCES, INC. (hereinafter
referred to as "Purchaser"), who agree to the following, including the Recitals.
RECITALS
A. Sellers directly or indirectly own 1,080,000 shares of the voting common
stock of GFP GROUP, INC., a Washington corporation (the "Stock"), which are
all the issued and outstanding shares of the capital stock of GFP GROUP,
INC. (the "Company"). The Company is the sole shareholder of Ratsten
International Telecommunications, Inc. ("Ratsten").
B. Purchaser desires to purchase, and the Sellers desire to sell, all of the
Stock, subject to the terms and conditions of this Agreement.
AGREEMENT
1. SALE AND PURCHASE OF STOCK.
--------------------------
Sellers agree to sell, and Purchaser agrees to buy, the Stock.
2. STOCK EXCHANGE.
--------------
Purchaser shall purchase the Stock by exchanging one (1) share of
Purchaser's voting common stock for each share of Sellers' Stock.
3. CLOSING.
-------
"Closing" shall occur at a time convenient to the parties, provided
that all conditions to Closing set forth in this Agreement will have been
satisfied, and further provided that Closing will occur not later than December
29, 1995, unless the parties agree in writing to an extension of that date.
Closing will take place at the offices of Vandeberg Johnson & Gandara, 3200
Columbia Seafirst Center, Seattle, Washington, or at such other time and place
as is mutually agreeable to Purchaser and Sellers. Closing shall be effective
as of 12:01 a.m., December 29, 1995 (the "Effective Date"). At Closing,
Purchaser shall be entitled to take possession of all assets of the Company.
Sellers covenant to take all action reasonably necessary to put Purchaser in
such position at the time of Closing, including without limiting the same:
(a) Endorsing and delivering to Purchaser certificates or assignments
separate from certificates, in form acceptable to Purchaser, representing the
Stock. of the Company;
1
<PAGE>
(b) Delivery of the corporate minute books and stock record books of
the Company and Ratsten, financial records, and such other books, papers arid
records of the Company and Ratsten as relate to its assets and operations;
(c) A general release of all claims which the Sellers and Ronald P.
Erickson, German Burtscher, and Frank Krentzman may have through the Closing
Date against the Company and Ratsten, except those obligations set forth in
those agreements described on Exhibit A attached hereto and incorporated herein
by this reference.
At Closing, Purchaser shall deliver to the Sellers stock certificates
representing the proper shares of Purchaser's common stock that are due under
the terms of paragraph 2 hereof.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLERS.
----------------------------------------------------
Sellers hereby represent and warrant to Purchaser and covenant and
agree as follows:
(a) Organization of Company; Documents. The Company, is a corporation
----------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Washington. The Company has full power and lawful authority to own, or
to hold under lease, all of its assets. True copies of the Articles of
Incorporation, Bylaws, minutes of all directors' and shareholders' meetings, and
consent resolutions of the directors and shareholders of the Company, as
amended, have been provided to Purchaser.
(b) Organization of Ratsten; Documents. Ratsten is a corporation duly
----------------------------------
organized, validly existing and in good standing under the laws of the State of
California. Ratsten has full power and lawful authority to own, or to hold
under lease, all of its assets. True copies of the Articles of Incorporation,
Bylaws, minutes of all directors' and shareholders' meetings, and consent
resolutions of the directors and shareholders of Ratsten, as amended, have been
provided to Purchaser.
(c) Authorization of Agreement. This Agreement constitutes a valid
--------------------------
obligation, legally binding upon Sellers in accordance with its terms. The
execution and delivery of this Agreement and the consummation of the transaction
do not and will not result in any breach of, or default under, or require the
consent of any third party under, any agreement, license or instrument,
undertaking, or obligation of Sellers, the Company, or Ratsten, or under any
judgment, order, or decree to which they are subject. Neither the execution of
this Agreement nor the consummation of the transactions provided for hereunder
requires the consent or approval of governmental authority having jurisdiction
over the business of the Company or Ratsten, or of any party to party to any
agreement with the Company or Ratsten, or with any Seller, as a condition to the
continuance of the Company's or Ratsten's conduct of its business after the
Closing or with that party.
(d) Stock Ownership. The Company's entire authorized and issued or to
---------------
be issued capital stock consists of 1,250,007 shares of common stock. There
are not now, and will not be at the Closing date, any outstanding subscriptions,
options, rights, warrants,
2
<PAGE>
convertible shares, debts or other agreements or commitments obligating the
Company to issue any other shares of its capital stock, except as may be set
forth on EXHIBIT A, and including 62,500 shares to be issued to Purchaser.
Except as may be set forth on EXHIBIT A, now and at Closing, the lawful,
beneficial and record owners of each share of the Stock are and will be:
<TABLE>
<CAPTION>
<S> <C>
Laura Street Family L.P......................... 270,000 shares
North Willow Family L.P......................... 270,000 shares
Sirius International Telecommunications......... 500,000 shares
a California General Partnership
[or German Burtscher and Frank Krentzman, individually as former general
partners]
Peter Gust...................................... 25,000 shares
Donald Kovaks................................... 15,000 shares
</TABLE>
Sellers own the Stock free and clear of all restrictions, liens, Security
interests, hypothecations, pledges and encumbrances of every kind and nature
whatsoever. Sellers have and will have full legal power and authority to
transfer and to deliver to Purchaser the Stock such that Purchaser will be the
absolute owner of the Stock, free and clear. There are no restrictions in the
Articles of Incorporation, Bylaws or other corporate documents against the free
transferability of the Stock, except for (1) shareholder agreements, agreements
to sign shareholder agreements for the Company's shares, or (2) shareholder
preemptive rights given to Ratsten's shareholders in Section 6.7 of Ratsten's
Bylaws. The Company does not own any capital stock of any other corporation or
any interest in any partnership or joint venture other than Ratsten.
The Company owns the stock of Ratsten free and clear of all restrictions,
liens, security interests, hypothecations, pledges and encumbrances of every
kind and nature whatsoever. GFP Group, Inc. has and will have full legal power
and authority to transfer and to deliver the Company's shares in Ratsten so that
the transferee will be the absolute owner of the Ratsten shares, free and clear.
There are no restrictions in the Articles of Incorporation, Bylaws, or other
corporate documents against the free transferability of the. stock. Ratsten
does not own any capital stock of any other corporation or interest in any
partnership or joint venture.
(e) Financial Information. Sellers certify that they have provided
---------------------
Purchaser with such unaudited balance sheets, income statements, corporate
records and documents material to the operation of the Company's business and
the business of Ratsten (hereinafter collectively referred to as the "Financial
Information") as necessary to accurately show the Company's and Ratsten's
financial condition. All of the Financial Information is true and accurate, has
been taken from the Company's books of account, was prepared in accordance with
generally accepted accounting principles applied on a consistent basis, and to
the best of Seller's knowledge does not omit any information which would make
the Financial Information materially misleading.
(f) Liabilities. All Company and Ratsten liabilities arise under the
-----------
agreements shown on EXHIBIT A. Neither the Company nor Ratsten has yet filed
tax returns.
3
<PAGE>
(g) Title to Assets. The Company and Ratsten have good and marketable
---------------
title to all of the assets disclosed in the Financial Information, free and
clear of all mortgages, liens, pledges, security interests, charges and
leasehold interests, except for general liens for property taxes and
encumbrances disclosed in the Financial Information.
(h) Compliance with Law. The Company and Ratsten and the business which
-------------------
they operate now comply and will, as of the Closing date, comply in all material
respects with all applicable federal and state law, and all rules, regulations
and orders of local governing authorities. Neither Sellers, the Company, nor
Ratsten have received any notice with which they have not complied from any
governmental authority or agency or from any insurance or inspection body
stating that the Company, Ratsten, or their business, or any of their
properties, facilities or the assets, fail or may fail to comply with any
applicable law, ordinance, regulation, building or zoning law, or requirements
of any public authority or body, including but not limited to environmental laws
and regulations.
The conduct of the Company's and Ratsten's business is not dependent on any
governmental or private license, permit, or other authorization that has not
been obtained and furnished to Purchaser, and the consummation of the
transaction contemplated by this Agreement will not terminate or adversely
affect any such license, permit, or authorization.
The Company (GFP Group, Inc.) and its Ratsten subsidiary will be relying on
Purchaser's existing FCC 214 license to operate the MFS and GM-AX switches as
contemplated by the parties.
(i) Litigation and Claims. There is no pending or threatened suit, action
---------------------
or litigation, administrative, arbitration or other proceeding or governmental
investigation or inquiry to which the Company, Ratsten, or their assets, the
business of the Company, or Ratsten, or Sellers are a party or subject. Neither
the Company nor Ratsten nor the Sellers are in default with respect to any
decree, order, judgment, or injunction of any court or governmental or quasi-
governmental board, agency, or instrumentality. The. Company and Ratsten have
complied with and at Closing will be in compliance in all material respects with
all laws, regulations, and orders applicable to its business and property. No
stockholder, officer, or employee of the Company has any claim of any nature
against the Company, or Ratsten, except as described on EXHIBIT A.
(j) Employees. The Company and Craig R. Palmer, Ronald P. Erickson, German
---------
Burtscher and Frank Krentzman are not now and at Closing will not be in default
of their obligations under the employment agreements, and those agreements shall
be freely assignable to and enforceable by Purchaser for its own account at
Closing, or enforceable by the Company if no such assignment is made. Those
agreements will not be amended, modified, or terminated in any respect prior to
the Closing Date except with the prior written consent of Purchaser. After
Closing, the Purchaser shall fulfill all of the Company's obligations under the
employment agreements as required by Section 6.(d) below.
4
<PAGE>
There are no other employees of the Company or Ratsten. The Company and
Ratsten have no other obligation, contractual or otherwise, to their employees,
except for compensation required by the agreements shown on EXHIBIT A. Neither
Sellers, the Company, nor Ratsten have taken any actions with respect to any
employee which would give rise to any claims of discrimination on the basis of
age, sex, race, disability or any other status protected by federal or local
law, any violation of the Fair Labor Standards Act, or any other state or
federal law related to the rights of employees.
(k) Assets in Good Operating Condition. To Sellers' knowledge all of the
----------------------------------
operating assets of the Company, and Ratsten are in good operating condition and
repair. Through the Effective Date, the Company shall maintain adequate
insurance with respect to all risks normally insured against by it in the past
or by companies similarly situated.
(l) Scitor ITS License Agreement. A true copy of the agreement dated April
----------------------------
28, 1995 between Scitor International Telecommunications Services, Inc.
("Scitor") and Ratsten International Telecommunications, Inc. d/b/a/ Netstar
International Telecommunications, Inc., a wholly owned subsidiary of the Company
(the "Scitor Agreement") is attached as EXHIBIT B. Sellers expressly warrant and
represent to Purchaser that under the Scitor Agreement, the Company and Ratsten
have, and after Closing will continue to have, the right to purchase, lease,
install, operate, and maintain IT Group MFS-400 and GMAX switches to provide fax
and various data services to third parties, as defined in the Scitor Agreement,
and that the prohibition against resale of the "Service" in paragraph 2.1
thereof only prohibits the Company and Ratsten from reselling its wholesale
rights to use the Service in specific "Locations" (as defined in the Scitor
Agreement) to third parties.
To the best of Sellers' knowledge, the Scitor Agreement is now and at
Closing will be in full force and effect and enforceable by Ratsten in
accordance with its terms. To the best of Sellers' knowledge, Scitor is not now
in default of its obligations to Ratsten under the Scitor Agreement.
Ratsten is required between December 14, 1995 and December 31, 1995, to pay
Scitor ITS an additional estimated $32,000 in relation to the GMAX nodes leased
in Mexico City, Hong Kong, and Los Angeles, and for related installation,
maintenance, and leased line port charges. Purchaser agrees to advance to or
through the Company funds prior to Closing to make these payments to maintain
the Scitor contract.
The Company and Ratsten are not now and at Closing will not be in default
of any of its obligations under the Scitor Agreement other than to make the
$32,000 in payments required between December 14, 1995 and December 31, 1995.
There is not now and at Closing will not be any basis in fact or at law for
amendment, modification, or termination of the Scitor Agreement by any party,
other than voluntary amendments or termination resulting from expiration of the
term stated in the Scitor Agreement. The execution of this Agreement and the
consummation of the transactions contemplated by this Agreement will not
terminate, invalidate, amend, or otherwise affect the Scitor Agreement in any
respect, and the Scitor Agreement will remain in full force and effect following
Closing. Purchaser acknowledges that the Company is negotiating amendments and
supplements
5
<PAGE>
to the Scitor Agreement which may, among other changes (1) substitute the
Company for Ratsten International Telecommunications, Inc. d/b/a Netstar
International Telecommunications, Inc. as the Customer, (2) provide that
financing for MFS-400 switches will be provided by third parties, and that
Scitor may no longer be providing financing for additional GM-AX switches as
such financing will also be provided by third parties, (3) add an additional 41
cities for initial MFS/GMAX switch roll-out; and (4) change the base agreement
term from five years to ten years prior to "tail" add-on of five years.
(m) Conduct Pending Closing. The Company's and Ratsten's business will be
-----------------------
conducted in the ordinary course from the date of this Agreement to Closing.
(n) Environmental Liability. Neither the Company, Ratsten, nor Sellers have
-----------------------
caused or permitted the Company Ratsten to generate, manufacture, store, handle,
dispose, transfer, produce, or process "hazardous substances" or other dangerous
or toxic substances, except in compliance with all federal, state or local
regulations. To the best of Sellers' knowledge, there is no presence of, nor
has there been any release of, any "hazardous substances" in the Company's or
Ratsten's premises or off-site of the premises which might affect said premises.
Sellers have no knowledge or reason to know of any prior ownership or use of the
Company's or Ratsten's premises which would indicate that "hazardous substances"
may have been generated, manufactured, transported, stored, handled, released or
disposed of upon the Company's or Ratsten's premises or off-site of the
Company's or Ratsten's premises which might affect said premises, except in full
compliance with all federal, state and local law. For purposes hereof,
"hazardous substances" shall have the meaning specified in RCW 70.105D and the
Model Toxics Control Act.
(o) Investigation and Access. During the period from the date hereof to
------------------------
Closing, Sellers shall cause Purchaser and its agents to have free access to the
Company's and Ratsten's premises, offices, records, files, books of account,
copies of tax returns and retirement plan returns of the Company and Ratsten.
Sellers shall cause the Company's. and Ratsten's personnel to aid and assist
Purchaser in reviewing the operations and records of the Company and Ratsten.
(p) Contracts. Except for the Scitor Agreement and the agreements described
---------
in EXHIBIT A, the Company and Ratsten are not parties to any other agreements,
contracts, undertakings, or leases of real or personal property. Those
agreements described in EXHIBIT A are now and at Closing will be in full force
and effect, and none of the parties to those agreements are now in default of
their obligations under that agreement. None of the parties hereto has waived
any rights under those agreements, and none of the parties hereto shall be in
default thereof at Closing.
(q) Restrictions on Purchaser's Stock. Sellers acknowledge and agree that
---------------------------------
the shares of Purchaser's common stock to be conveyed to them under this
Agreement ("Shares") have not been registered under the federal Securities Act
of 1933, as amended, or under the Washington State Securities Act or under any
other applicable securities acts (the "Acts"), and that Sellers must therefore
hold the Shares indefinitely unless they are
6
<PAGE>
subsequently registered under the Acts or an exemption from such registration is
available. Sellers agree that Purchaser is under no obligation to register the
Shares or to take any other action which would make an exemption from
registration available; and Purchaser is under no obligation to cause or permit
the Shares to be transferred in the absence of such registration or an opinion
satisfactory to Purchaser's counsel that an exemption is available. Sellers
acknowledge and agree that the Shares will also be subject to a shareholders'
agreement or bylaw restrictions which will impose further restrictions upon the
transferability of the Shares. The certificates representing the Shares will
have a legend similar to the following placed on them:
This stock has not been registered under the Securities Act of 1933, as
amended, or any state securities law. It may not be sold or otherwise
transferred unless registered under applicable federal or state securities
laws or the Company issuing the stock is furnished with an opinion of
counsel acceptable to it that an exemption from registration is available.
This stock is also subject to certain restrictions set forth in a
shareholders' agreement or the bylaws of GlobalTel Resources, Inc., and may
not be sold or transferred except in compliance therewith.
After Closing, transfer of shares in Purchaser shall be restricted by a
provision in Purchaser's Bylaws or Articles of Incorporation consistent with the
provisions set forth on EXHIBIT C. The Bylaws or Articles shall provide that the
restriction may not be changed except by vote of the holders of at least two-
thirds of the issued and outstanding shares of the Purchaser.
(r) Broker. The Purchaser is entitled at closing to 62,500 shares of the
------
Company as a finder's fee for the Company's acquisition of Ratsten. The Sellers
have not employed any other broker, finder, or agent, nor otherwise become in
any way obligated for any broker's, finder's or agent's, or similar fee with
respect to the transaction contemplated by this Agreement.
(s) Absence of Certain Events, Circumstances, Etc. Since September 1,
----------------------------------------------
1995, the Company and Ratsten have not (1) incurred any obligation or liability,
whether absolute or contingent, except obligations and liabilities incurred in
the ordinary course of the Company's or Ratsten's business; (2) discharged or
satisfied any lien or encumbrances or paid any obligation or liability whether
absolute or contingent, other than current liabilities having become due and
payable since that date in the ordinary course of the Company's or Ratsten's
business and obligations and liabilities under contracts referred to in the
exhibits annexed hereto; (3) made or agreed to make any wage, salary, or
employee benefit increases for full-time employees (4) sold or transferred any
of its tangible or intangible assets or canceled any debts or claims, except, in
each case, in the ordinary course of business; (5) sold, assigned, or
transferred any trademark or trade name; (6) suffered any losses that would have
a materially adverse effect on the business or financial condition of the
Company or waived any rights of substantial value; (i) suffered any loss,
damage, or destruction to any of its properties due to fire or other casualty
whether or not insured, which loss, damage, or destruction materially and
adversely affects its business, properties or operations; (8) issued or sold or
agreed to issue
7
<PAGE>
or sell any shares of its capital stock or any other securities or reclassified
or agreed to reclassify its capital stock except as shown on EXHIBIT A; (9)
mortgaged, pledged, or subjected to lien, charge or other encumbrance any of its
tangible or intangible assets, except the lien of current real and personal
property taxes not yet due and payable or purchase money or similar liens
incurred in the ordinary course of business; (10) made or agreed to make capital
expenditures, except as shown on the financial statements plus additional
corporate expenditures not to exceed $5,000; (11) declared or paid a dividend or
transferred property or loaned any money or agreed to loan money to any of its
directors or officers; (12) amended its Articles of Incorporation or Bylaws;
(13) conducted its business otherwise than in its ordinary and usual manner; or
(14) become aware of any event, transaction, or circumstance which does or could
materially adversely affect is condition (financial or otherwise), assets,
liabilities, earnings, business, or operations.
(+) Disclosure. This Agreement does not contain any untrue statement of
----------
any material fact or omits to state any material fact required to be stated in
order to make the statements contained in this Agreement not misleading. To the
best knowledge of Sellers, there is no fact which materially adversely affects,
or in the future may (so far as Sellers can now reasonably foresee) materially
adversely affect, the business or prospects or condition (financial or
otherwise) of the Company or Ratsten or any of their properties or assets, which
fact has not been disclosed in writing to Purchaser prior to the effective date
of this Agreement.
Alan H. Chin and Curt Lew have fully participated in many of the meetings
with Scitor ITS and are fully aware of the Scitor ITS relationship with the
Company and its Ratsten subsidiary.
All representations and warranties of Sellers contained in this Agreement
shall be true as of the date of Closing. All of the above representations,
warranties, and covenants survive the Closing of this transaction for the
benefit of Purchaser.
5. INDEMNIFICATION BY SELLERS.
--------------------------
Sellers, their successors and assigns, jointly and severally, shall
indemnify, defend and hold Purchaser harmless from any and all losses, claims,
damages or liabilities suffered by Purchaser as a result of:
(a) The failure of any representation or warranty of Sellers contained in
this Agreement to be true and accurate when made on and as of Closing;
(b) The failure of Sellers to comply with any obligations, agreements or
covenants contained in this Agreement;
(c) The conduct of the business of the Company and Ratsten prior to the
Effective Date; and
(d) Any accounts payable, liabilities, debts, taxes, leases or other
obligations arising with respect to any period prior to the Effective Date or
with respect to the
8
<PAGE>
Equipment which are not disclosed in the Financial Information or otherwise
disclosed in this Agreement.
Sellers, their successors and assigns, shall reimburse Purchaser for any
legal or other expense reasonably incurred by Purchaser in connection with any
loss, claim, damage or liability indemnified hereby. This indemnification shall
benefit and inure to the successors and assigns of Purchaser, including the
Company, and shall survive the Closing. In the event Purchaser, its successors
or assigns, believes it is entitled to indemnification hereunder, it shall give
Sellers written notice of the basis for the claim for indemnification. If
Sellers have not discharged or satisfied the claim raised by Purchaser within
thirty (30) days from Purchaser's mailing of such notice, then Purchaser may
proceed to collect the amount of the claim through any manner it chooses.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER.
------------------------------------------------------
Purchaser hereby represents and warrants to Sellers, and covenants and
agrees as follows:
(a) Organization of Purchaser. Purchaser is a corporation duly organized,
-------------------------
validly existing and in good standing under the laws of the State of Washington.
Purchaser has full power and lawful authority to purchase the Stock.
(b) Authorization of Agreement. This Agreement constitutes a valid 1
--------------------------
obligation, legally binding upon Purchaser in accordance with its terms, and the
execution and delivery of this Agreement and the consummation of this
transaction (1) are permissible under the Purchaser's Articles of Incorporation
and Bylaws; (2) have been or will have been validly authorized by the directors
and shareholders of Purchaser by Closing; (3) does not and will not result in
any breach of or default under any agreement, license or other obligation of
Purchaser; and (4) will not violate any law, rule or regulation of any agency or
governmental body.
(c) Purchaser's Stock. Purchaser certifies that it owns sufficient numbers
-----------------
of common shares of its stock to exchange with Sellers for their shares of the
Company's Stock on a one-for-one basis. Purchaser owns this stock free and
clear of all restrictions, liens, security interests, hypothecations, pledges
and encumbrances of every kind and nature whatsoever. Purchaser has and will
have full legal power and authority to transfer and deliver to Sellers the stock
such that Sellers will be the absolute owner of the stock, free and clear.
There are no restrictions in the Articles of Incorporation, Bylaws or other
corporate documents against the free transferability of Purchaser's stock.
(d) Assumption of Rights and Performance of Liabilities. After Closing,
---------------------------------------------------
Purchaser shall have the rights and shall perform, or cause the Company to
perform, the obligations of Purchaser set forth in the documents described in
EXHIBIT A attached hereto, including but not limited to, the following:
(1) The obligations of the Company under each of the employment or
management agreements with the following individuals as listed on the EXHIBIT A:
9
<PAGE>
German Burtscher, Frank Krentzman, Ronald P. Erickson, and Craig R. Palmer.
Where these employment agreements call for the employees to be officers of the
Company, the Purchaser agrees that they shall have the same office in the
Purchaser with the same salary and benefits paid by the Purchaser. To the
extent that the employment agreements require the issuance of shares to the
employees, Purchaser agrees to issue shares to the employee in lieu of shares in
the Company on a one-for-one basis.
(2) The Purchaser agrees to perform all obligations of the Company to
Krentzman and Burtscher as set forth in the Acquisition and Management Agreement
for GFP Group, Inc., Frank Krentzman and German Burtscher signed on October 10,
1995, a copy of which is attached hereto as EXHIBIT D ("Acquisition and
Management Agreement"). Where the agreement calls for Krentzman and Burtscher
to be officers of the Company, the Purchaser agrees that each shall have the
same office in the Purchaser with the same salary and benefits paid by the
Purchaser. To the extent that the agreement requires the issuance of shares to
the employees, Purchaser agrees to issue shares to Krentzman and Burtscher in
lieu of shares in the Company on a one-for-one basis. The Purchaser agrees that
Krentzman and Burtscher shall be vice presidents of Purchaser of equal rank, and
with the same pay packages, benefits, and stock ownership as Alan Chin and Curt
Lew at Closing, except as noted in Section 6.(d)(9).
(3) As required by the Acquisition and Management Agreement described
in Section 6.(d)(2) above, Purchaser shall at Closing have a seven-member Board
of Directors. Krentzman and Burtscher shall have the right to serve as director
in alternate years and to nominate one additional director. For 1995, Frank
Krentzman shall be the director. During 1996, German Burtscher shall be the
director. The alternate director to be nominated by Krentzman and Burtscher for
the first year shall be Donald Sledge. Purchaser reserved the right to require
a different alternate director to be nominated by Krentzman and Burtscher in the
event that Purchaser deems it in the best interest of Purchaser's business.
(4) Purchaser shall issue 1,250,007 shares to the group of
individuals. comprised of the former shareholders in GFP Group, Purchaser, and
those individuals who provided bridge financing to the Company as shown on
EXHIBIT A. Purchaser agrees that, as of Closing, there shall be only one class
of stock in Purchaser which shall be voting common. Purchaser shall issue
shares in Purchaser to the holders of the bridge loans as shown on Exhibit A
even if no corresponding shares in the Company have been issued to the bridge
loan holders. The issuance of the shares in Purchaser shall be in full
satisfaction of the obligation of the Company to issue shares in the Company to
the bridge loan holders. Purchaser may issue the shares to the bridge loan
holders after closing.
(5) Purchaser shall loan Krentzman $35,500 and Burtscher $14,500 to
repay personal loans, upon presentation of documents evidencing such loans and
the outstanding balance of each, as required by the Acquisition and Management
Agreement.
(6) Purchaser shall pay up to $30,000 to repay persons who advanced
funds to Krentzman and Burtscher for Ratsten operations as shown on EXHIBIT D to
the Acquisition and Management Agreement.
10
<PAGE>
(7) Purchaser shall make cash payments to GFP Group or any lender to
GFP Group sufficient to repay working capital provided to and by GFP as part of
its acquisition and operation of Ratsten. Purchaser shall also pay all of GFP's
and Ratsten's costs and expenses in negotiating and obtaining GFP's acquisition
of the Ratsten contract and the acquisition of the GFP Group, Inc.'s shares by
Purchaser.
(8) Purchaser agrees that as of Closing, all existing shareholder
agreements, voting trusts, stock options, or similar agreements among Purchaser
and its current shareholders shall be terminated and of no further force and
effect. Instead, Purchaser's Bylaws shall be amended as of closing as set forth
on Exhibit C to restrict transfer of shares in Purchaser. The restriction may
not be changed without the affirmative vote of the holders of at least two-
thirds of the issued and outstanding shares in Purchaser.
(9) Purchaser agrees at Closing to escrow 184,000 shares of the shares
reserved for the Purchaser's ISOP until confirmation of the ownership by Alan
Chin's family and by Curt Lew's family of all or a portion of the 184,000 shares
of Purchaser held in Chin's or Lew's name alone. Upon confirmation of the
number of shares actually held by Alan Chin and Curt Lew individually,
sufficient numbers of the shares held in escrow pursuant to this section shall
be made available to Frank Krentzman and German Burtscher so that each may
purchase through Purchaser's ISOP a number of additional shares of Purchaser so
that Krentzman, Burtscher, Chin and Lew have an equal number of shares in
Purchaser.
(e) Financial Information. Purchaser certifies that Purchaser has provided
---------------------
Sellers with such balance sheets, income statements, corporate records and
documents material to the operation of the Purchaser's business (hereinafter
collectively referred to as the "Financial Information") as necessary to
accurately show the Purchaser's financial condition. All of the Financial
Information is true and accurate, has been taken from the Purchaser's books of
account, was prepared in accordance with generally accepted accounting
principles applied on a consistent basis, and to the best of Purchaser's
knowledge does not omit any information which would make the Financial
Information. materially misleading.
(f) Liabilities. The Financial Information, when delivered to Sellers
-----------
accurately discloses, reserves against, or accrues all liabilities of the
Purchaser, including but not limited to accounts payable, taxes, debts,
obligations, leases, employment related obligations, fringe benefits, employment
taxes and contributions to industrial or unemployment insurance funds, or any
other indebtedness or leasehold interest of any nature associated with the
assets, the Purchaser, or the business of the Purchaser. The amounts set forth
as liabilities for taxes on the Purchaser's financial statements will be
sufficient for the payment of all federal, state, county, local or foreign taxes
of the Purchaser which are or may become payable by the Purchaser. Any other
liabilities of the Purchaser not set forth in the Financial Information are set
forth on EXHIBIT E attached hereto. The Purchaser has filed all federal, state,
county, local and foreign income, excise, corporate license or franchise,
property, sales or retail occupation taxes and other tax returns required to be
filed by it, and such returns are true and correct.
11
<PAGE>
(g) Title to Assets. The Purchaser has good and marketable title to all of
---------------
the assets disclosed in the Financial Information, free and clear of all
mortgages, liens, pledges, security interests, charges and leasehold interests,
except for general liens for property taxes and encumbrances disclosed in the
Financial Information.
(h) Compliance With Law. The Purchaser and the business which the
-------------------
Purchaser operates now comply and will, as of the Closing date, comply in all
material respects with all applicable federal and state law, and all rules,
regulations and orders of local governing authorities. Neither Purchaser nor
the Purchaser have received any notice with which they have not complied from
any governmental authority or agency or from any insurance or inspection body
stating that the Purchaser or its business, or any of its properties, facilities
or the assets, fail or may fail to comply with any applicable law, ordinance,
regulation, building or zoning law, or requirements of any public authority or
body, including but not limited to environmental laws and regulations. The
conduct of the Purchaser's business is not dependent on any governmental or
private license, permit, or other authorization that has not been obtained and
furnished to Purchaser, and the consummation of the transaction contemplated by
this Agreement will not terminate or adversely affect any such license, permit,
or authorization.
(i) Litigation and Claims. There is no pending or threatened suit, action
---------------------
or litigation, administrative, arbitration or other proceeding or governmental
investigation or inquiry to which the Purchaser or its assets, the business of
the Purchaser or Purchaser are a party or subject. Neither the Purchaser nor
the Purchaser are in default with respect to any decree, order, judgment, or
injunction of any court or governmental or quasi-governmental board, agency, or
instrumentality. The Purchaser has complied with and at Closing will be in
compliance in all material respects with all laws, regulations, and orders
applicable to its business and property. No stockholder, officer, or employee
of the Purchaser has any claim of any nature against the Purchaser.
(j) Employees. The Purchaser has disclosed and provided Sellers with
---------
copies of the written employment contracts entered into by Purchaser with Alan
Chin and Curt Lew, which as of the date of this Agreement are the only written
employment contracts Purchaser has entered into with any of its employees.
Purchaser and the other parties to the employment agreements are not now and at
Closing will not be in default of their obligations under the employment
agreements. Those agreements shall be amended as necessary for Purchaser to
comply with its obligations under this agreement, including as necessary to give
Krentzman, Burtscher, Erickson, and Palmer the required positions, shares and
compensation with and from Purchaser. Except as required by the previous
sentence, those agreements will not be amended, modified, or terminated in any
respect prior to the Closing Date except with the prior written consent of
Purchaser.
All other employees of the Purchaser are at-will employees. The Purchaser
has no other obligation, contractual or otherwise, to its employees, except for
compensation due in the ordinary course of business. Neither Purchaser nor its
officers, directors, or shareholders have taken any actions with respect to any
employee which would give rise to any claims of discrimination on the basis of
age, sex, race, disability or any other status protected by federal or local
law, any violation of the Fair Labor Standards Act, or any
12
<PAGE>
other state or federal law related to the rights of employees. Purchaser has
represented to Sellers that all employees are at-will employees and, therefore,
as part of the indemnification contained herein, Purchaser shall be liable to
Sellers and the Company for any claims by any employee that he or she may not be
terminated by Purchaser because of any actions by the Purchaser prior to
Closing.
(k) Assets in Good Operating Condition. To Purchaser's knowledge all of
----------------------------------
the operating assets of the Purchaser are in good operating condition and
repair. Through the Effective Date, the Purchaser shall maintain adequate
insurance with respect to all risks normally insured against by it in the past
or by companies similarly situated.
(l) Scitor ITS License Agreement. A true copy of the agreement dated April
----------------------------
28, 1995 between Scitor International Telecommunications Services, Inc.
("Scitor") and Ratsten International Telecommunications, Inc. d/b/a/ Netstar
International Telecommunications, Inc., a wholly owned subsidiary of the Company
(the "Scitor Agreement") is attached as EXHIBIT B. Purchaser shall fulfill all
of Ratsten's and the Company's obligations under the Scitor Agreement.
(m) Conduct Pending Closing. The Purchaser's business will be conducted in
-----------------------
the ordinary course from the date of this Agreement to Closing.
(n) Environmental Liability. Purchaser has not generated, manufactured,
-----------------------
stored, handled, disposed, transferred, produced, or processed "hazardous
substances" or other dangerous or toxic substances, except in compliance with
all federal, state or local regulations. To the best of Purchaser's knowledge,
there is no presence of, nor has there been any release of, any "hazardous
substances" in the Purchaser's premises or off-site of the premises which might
affect said premises. Purchaser have no knowledge or reason to know of any
prior ownership or use of the Purchaser's premises which would indicate that
"hazardous substances" may have been generated, manufactured, transported,
stored, handled, released or disposed of upon the Purchaser's premises or off-
site of the Purchaser's premises which might affect said premises, except in
full compliance with all. federal, state and local law. For purposes hereof,
"hazardous substances" shall have the meaning specified in RCW 70.105D and the
Model Toxics Control Act.
(o) Investigation and Access. During the period from the date hereof to
------------------------
Closing, Purchaser shall cause Sellers and its agents to have free access to the
Purchaser is premises, off-ices, records, files, books of account, copies of tax
returns and retirement plan returns of the Purchaser. Purchaser shall cause the
Purchaser's personnel to aid and assist Sellers in reviewing the operations and
records of the Purchaser.
(p) Contracts. Except for the agreements described in EXHIBIT E, the
---------
Purchaser is not a party to any other agreements, contracts, undertakings, or
leases of real or personal property. Those agreements described in EXHIBIT E
are now and at Closing will be in full force and effect, and none of the parties
to those agreements are now in default of their obligations under that
agreement. None of the parties hereto has waived any rights under those
agreements, and none of the parties hereto shall be in default thereof at
Closing.
13
<PAGE>
(q) No Broker. The Purchaser has not employed any broker, finder, or
---------
agent, nor otherwise become in any way obligated for any broker's, finder's or
agent's, or similar fee with respect to the transaction contemplated by this
Agreement.
(r) Absence of Certain Events, Circumstances, Etc. Except as disclosed to
---------------------------------------------
Sellers in writing prior to Closing, since January 1, 1995, the Purchaser has
not (1) incurred any obligation or liability, whether absolute or contingent,
except obligations and liabilities incurred in the ordinary course of the
Purchaser's business; (2) discharged or satisfied any lien or encumbrances or
paid any obligation or liability whether absolute or contingent, other than
current liabilities having become due and payable since that date in the
ordinary course of the Purchaser's business and obligations and liabilities
under contracts referred to in the exhibits annexed hereto; (3) made or agreed
to make any wage, salary, or employee benefit increases for full-time employees
(4) sold or transferred any of its tangible or intangible assets or canceled any
debts or claims, except, in each case, in the ordinary course of business; (5)
sold, assigned, or transferred any trademark or trade name; (6) suffered any
losses that would have a materially adverse effect on the business or financial
condition of the Purchaser or waived any rights of substantial value; (7)
suffered any loss, damage, or destruction to any of its properties due to fire
or other casualty whether or not insured, which loss, damage, or destruction
materially and adversely affects its business, properties or operations; (8)
issued or sold or agreed to issue or sell any shares of its capital stock or any
other securities or reclassified or agreed to reclassify its capital stock; (9)
mortgaged, pledged, or subjected to lien, charge or other encumbrance any of its
tangible or intangible assets, except the lien of current real and personal
property taxes not yet due and payable or purchase money or similar liens
incurred in the ordinary course of business; (10) made or agreed to make capital
expenditures in excess of $25,000; (11) declared or paid a dividend or
transferred property or loaned any money or agreed to loan money to any of its
directors or officers; (12) amended its Articles of Incorporation or Bylaws;
(13) conducted its business otherwise than in its ordinary and usual manner; or
(14) become aware of any event, transaction, or circumstance which does or could
materially adversely affect its condition (financial or otherwise), assets,
liabilities, earnings, business, or operations.
(s) Disclosure. This Agreement does not contain any untrue statement of
----------
any material fact or omits to state any material fact required to be stated in
order to make the statements contained in this Agreement not misleading. To the
best knowledge of Purchaser, there is no fact which materially adversely
affects, or in the future may (so far as Purchaser can now reasonably foresee)
materially adversely affect, the business or prospects or condition (financial
or otherwise) of the Purchaser or any of its properties or assets, which fact
has not been disclosed in writing to Purchaser prior to the effective date of
this Agreement.
All representations and warranties of Purchaser contained in this Agreement
shall be true as of the date of Closing. All of the above representations,
warranties, and covenants survive the Closing of this transaction for the
benefit of Purchaser.
(t) Compliance with Funder Requests. Purchaser acknowledges that the
-------------------------------
Company, through Palmer and Erickson, is arranging financing for Ratsten's
obligations
14
<PAGE>
under the Scita/Scitor Agreement, as may be amended and supplemented, in the
approximate amount of $50 million to $100 million U.S. Dollars through Quoin
Financial Corporation or other lenders/investors (collectively the "Lender").
Purchaser agrees to take all steps required by the Lender to obtain the funding,
including, but not limited to: (1) changing the size or the composition of
Purchaser's or the Company's board of directors to include directors desired by
the Lender; (2) making such personnel changes as Lender desires in the Company
or Purchaser subject to rights under existing employment agreements (3)
permitting the Lender to acquire an equity interest in the Company or Purchaser;
and (4) to execute all documents which the Purchaser's board after the share
exchange deems necessary for the Lender and/or investor financing.
(u) Addition of John Cox. Purchaser and Purchaser's Directors shall, upon
--------------------
recommendation of Ronald Erickson and Craig R. Palmer, make John Cox Vice
President of Network Services for Purchaser at a salary of $150,000 per year,
plus benefits of similar rank officers, contingent upon receipt of financing
from Quoin Financial Corporation or other institutional lender.
7. INDEMNIFICATION BY PURCHASER.
----------------------------
Purchaser, its successors and assigns, shall indemnify, defend and hold
Sellers harmless from any and all losses, claims, damages or liabilities
suffered or incurred by Sellers as a result of:
(a) The failure of any representation or warranty of Purchaser contained in
this Agreement to be true and accurate when made on and as of the date of
Closing;
(b) The failure of Purchaser to comply with any obligations, agreements or
covenants contained in this Agreement;
(c) The conduct of the Company's business; and
(d) Any accounts payable, liabilities, debts, taxes, leases or other
obligations of the Company except for those exceeding $ 1,000 arising with
respect to any period prior to Closing and which were not disclosed by Sellers
or the Company prior to Closing.
Purchaser, its successor or assigns, shall reimburse Sellers for any legal
or other expense reasonably incurred by them in connection with any loss, claim,
damage or liability indemnified hereby. This indemnification obligation will
survive the Closing.
8. CONDITIONS TO PURCHASER'S OBLIGATIONS.
-------------------------------------
The obligations of Purchaser under this Agreement are subject to
satisfaction of each of the following conditions, unless waived in writing by
Purchaser, at or prior to Closing:
(a) Representations True; Compliance with Covenants. The representations
-----------------------------------------------
and warranties of Sellers contained in this Agreement shall be true in all
15
<PAGE>
material respects on and as of Closing with the same force and effect as though
made on and as of said date. Sellers shall have performed and complied in all
material respects with all covenants contained herein required to be performed
or complied with by Sellers at or prior to Closing.
(b) No Litigation. There shall not be pending or threatened any claim,
-------------
suit, action, proceeding, investigation or inquiry by any person, governmental
body or authority or other entity seeking to restrain or prohibit this
transaction, to obtain damages in connection with this Agreement, or any claim
of any nature filed or commenced against the Company.
(c) No Material Adverse Change. There shall have been no material adverse
--------------------------
change in the Company or Ratsten, the business of the Company or the assets
since the date of the last financial statement presented to Purchaser.
(d) Additional Documents. Sellers shall have delivered or caused to be
--------------------
delivered to Purchaser all instruments and copies of instruments required to
complete the Closing.
(e) Approval of Directors and Shareholders. The Directors and Shareholders
--------------------------------------
of Purchaser have ratified, confirmed, and approved the execution of this
Agreement and the execution of the other documents and consummation of the
transactions which are provided for herein or which are required to consummate
the transactions contemplated herein.
9. CONDITIONS TO SELLERS' OBLIGATIONS.
----------------------------------
The obligations of Sellers under this Agreement are subject to satisfaction
of each of the following conditions, unless waived in writing by Sellers, at or
prior to Closing:
(a) Representations True; Compliance with Covenants. The representations
-----------------------------------------------
and warranties of Purchaser contained in this Agreement shall be true in' all
material respects on and as of Closing with the same force and effect as though
made on and as of said date. Purchaser shall have performed and complied in all
material respects with all covenants contained herein required to be performed
or complied with by Purchaser at or prior to Closing.
(b) No Litigation. There shall not be pending or threatened any claim,
-------------
suit, action, proceeding, investigation or inquiry by any person, governmental
body or authority or other entity seeking to restrain or prohibit this
transaction, or to obtain damages in connection with this Agreement, nor any
claim of any nature filed or commenced against the Purchaser.
(c) No Material Adverse Change. There shall have been no material adverse
--------------------------
change in the Purchaser, the business of the Purchaser or the assets of
Purchaser since the date of the last Purchaser's financial statement presented
to Sellers.
16
<PAGE>
(d) Additional Documents. Purchaser shall have delivered or caused to be
--------------------
delivered to Sellers all instruments and copies of instruments required to
complete the Closing.
(e) Approval of Directors and Shareholders. The Directors and Shareholders
--------------------------------------
of Purchaser have ratified, confirmed, and approved the execution of this
Agreement and the execution of the other documents and consummation of the
transactions which are provided for herein or which are required to consummate
the transactions contemplated herein.
10. TERMINATION AND REMEDIES.
------------------------
(a) Termination. This Agreement may be terminated at any time prior to
-----------
Closing by mutual consent of all the parties hereto or unilaterally by Sellers
and Purchaser if (1) any party has defaulted in a material respect in the
performance of any covenant hereunder, (2) any representation or warranty made
by any other party is untrue in any material respect, or (3) a condition
precedent to the terminating party's obligation to close has not been satisfied
by the Closing Date. Termination shall be effective on the date mutually agreed
by the parties, or on the date of termination notice if terminated unilaterally.
(b) Remedies. If a Seller refuses to close as provided herein, Purchaser,
--------
in addition to any other remedies it may have, may enforce this Agreement by
specific performance.
11. MISCELLANEOUS
-------------
(a) Notice. All notices and other communications required to be given by
------
the parties shall be in writing and sent to the respective parties at the
following addresses:
SELLERS: Frank Kreatzman
------------------------
2917 Pearl Street
------------------------
Santa Monica, CA 90405
------------------------
WITH COPY TO: John W. Hathaway, Esq.
Edwards, Sieh, Hathaway, Smith & Goodfriend, P.S.
701 - 5th Avenue, Suite 6501
Seattle, WA 98104
PURCHASER: GlobalTel Resources, Inc.
1520 Eastlake Ave. E., Suite 205
Seattle, WA 98102
WITH COPY TO: Daniel Gandara, Esq.
701 - 5th Avenue, Suite 3200
Seattle, WA 98104-7026
17
<PAGE>
(b) Washington Law. This Agreement shall be construed in accordance with
--------------
the laws of the State of Washington.
(c) Expenses. In any action brought to enforce this Agreement, or to seek
--------
damages for breach thereof, the prevailing party shall be entitled to recover a
reasonable attorney's fee (including a reasonable attorney's fee on any appeal
thereof) and reasonable costs of litigation in addition to any other award or
decree granted or given by the court.
(c) Entire Agreement. This Agreement, together with the exhibits attached
----------------
hereto, supersedes all prior agreements of the parties, constitutes the entire
agreement and understanding between the parties and may only be modified or
amended by a subsequent written agreement executed by both parties.
(e) Assignment. No Seller, or Purchaser, may assign his or its rights or
----------
delegate his or its obligations hereunder without the prior written consent of
the other party hereto, such consent not to be unreasonably withheld. This
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns.
(f) No Waiver. No failure on the part of either party to exercise and no
---------
delay in exercising any rights hereunder shall operate as a waiver thereof; nor
shall any waiver or acceptance of a partial, single or delayed performance of
any term or condition of this Agreement operate as a continuing waiver or a
waiver of any subsequent breach thereof.
(g) Severability. If any provision of this Agreement is held to be illegal,
------------
invalid or unenforceable, such provision shall be fully severable and this
Agreement shall be continued and enforced if such illegal, invalid or
unenforceable provision were never a part hereof; and in lieu of such provision,
there shall be added automatically as part of this Agreement a provision as
similar in terms to such illegal, invalid or unenforceable provision as may be
possible to make such provision legal, valid and enforceable.
(h) Arbitration of Disputes. Any disputes arising under this Agreement that
-----------------------
remains unresolved three months after it arose shall be determined by
arbitration in Seattle, Washington before a single arbitrator of the Judicial
Arbitration and Mediation Service, unless otherwise agreed by the parties to the
dispute. If the parties cannot agree on the arbitrator, then either party may
apply to have the arbitrator appointed by the King County Superior Court
Presiding Judge. The then existing Washington and King County Civil Rules shall
apply to such arbitration. Any party may invoke arbitration by mailing a
written demand to the other parties, stating the matter in controversy. The
decision of the arbitrator shall be binding on the parties and may be entered as
a judgment in any court of competent Jurisdiction. The substantially prevailing
party in any such dispute shall be entitled to an award of that party's actual
attorney fees and costs relating to the dispute. The actual amount charged the
party shall be presumed reasonable, which presumption may be rebutted by a
specific showing of duplication, waste, or charges for collateral or unnecessary
matters. Arbitration pursuant to this section is a condition precedent to any
legal or equitable action.
18
<PAGE>
(i) Authority and Spousal Consent. Each signatory on behalf of a
-----------------------------
corporation or partnership warrants that he or she has authority to bind that
entity to this Agreement. Each married signatory shall obtain the written
consent of the signatory's spouse to this Agreement.
DATED as of the date set forth above.
SELLERS:
LAURA STREET FAMILY L.P. NORTH WILLOW FAMILY L.P.
By: LSLP, Inc., General Partner By: /s/ NORTH WILLOW CORPORATION
------------------------------
General Partner
By: /s/ CRAIG R. PALMER by By: /s/ RONALD P. ERICKSON
RONALD P. ERICKSON ATTORNEY ------------------------------
IN FACT RONALD P. ERICKSON
-------------------------- Its PRESIDENT
---------
CRAIG R. PALMER
/s/ FRANK K. KRENTZMAN
- ------------------------------- -----------------------------------
Frank Krentzman Spouse
/s/ GERMAN BURTSCHER /s/
- ------------------------------- -----------------------------------
German Burtscher Spouse
/s/ PETER GUST /s/
- ------------------------------- -----------------------------------
Peter Gust Spouse
/s/ DONALD KOVAKS /s/ CARAL M. KOVAKS
- ------------------------------- -----------------------------------
Donald Kovaks Spouse
19
<PAGE>
THE FOLLOWING PERSONS, AS TO
THEIR INDIVIDUAL UNDERTAKINGS
SET FORTH IN THIS AGREEMENT:
/s/ RONALD P. ERICKSON
- ----------------------------------- -----------------------------------
Ronald P. Erickson, a Single Person Spouse
/s/ GERMAN BURTSCHER /s/
- ----------------------------------- -----------------------------------
German Burtscher Spouse
/s/ FRANK KRENTZMAN
- ----------------------------------- -----------------------------------
Frank Krentzman Spouse
/s/ CRAIG R. PALMER by RONALD P.
ERICKSON HIS ATTORNEY IN FACT
- -----------------------------------
Craig R. Palmer
PURCHASER:
GLOBALTEL RESOURCES, INC., A
Washington Corporation
By: /s/ CURTIS LEW
-------------------------
Its: VICE PRESIDENT
-------------------------
20
<PAGE>
EXHIBIT A
CONTINUING OBLIGATIONS OF GFP GROUP, INC.
1. The obligations between the Company's wholly owned subsidiary,
Ratsten, and Scitor ITS under the Scitor Agreement. These obligations include,
but are not limited to, installing switches in 1996 with a list price of
$46,000,000 and during the period from 1997 through 2000, an additional
$300,000,000 to $400,000,000 in switches must be installed. In addition, between
December 14, 1995 and December 31, 1995, an estimated $32,000 must also be paid
as set forth in Section 4(k) of the parties' agreement. A copy of the current
roll-out list is attached.
2. Acquisition and Management Agreement for GFP Group, Inc., Frank
Krentzman and German Burtscher signed on October 10, 1995.
3. Employment Agreement between GFP Group, Inc. and Ronald P. Erickson of
September 23, 1995, as amended December 15, 1995, copy attached.
4. Employment Agreement between GFP Group, Inc. and Craig R. Palmer of
September 23, 1995, as amended December 15, 1995, copy attached.
5. Employment Agreement between German Burtscher and GFP Group, Inc.
dated October 20, 1995, copy attached .
6. Employment Agreement between Frank Krentzman and GFP Group, Inc. dated
October 20, 1995, copy attached.
7. Obligations under the bridge loans from the following individuals to
Ratsten International Telecommunications, Inc. or GFP Group, Inc, including the
issuance of the shares shown to be converted at Closing to shares in Purchaser
on a one-to-one basis:
<TABLE>
<CAPTION>
NO. OF STOCK
AMOUNT OPTION OPTION
NOTE HOLDER LOANED DUE DATE SHARES COMPANY
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael Brownfield $50,000 01/17/96 20,284 GFP
William Gordon III $20,000 02/10/96 8,114 GFP
Michael Brownfield
David Kenyon $70,000 01/31/95 28,398 GFP
Wing Li $50,000 12/31/95 20,284 GFP
Robert Randolph $25,000 01/10/96 10,142 GFP
$14,000 3/__/96 5,680
Daniel Robinson $16,000 01/31/96 6,491 GFP
Robert Staudacher $20,000 01/31/96 8,114 GFP
- --------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE>
8. Any outstanding amounts to Mitchell Hymowitz under a consulting
contract under which he is being paid on a per hour basis.
9. Any outstanding amounts to John Cox under a consulting contract under
which he is being paid on a per hour basis.
10. Any amounts due Robert Staudacher for professional accounting
services.
11. Logo design contract with Ken Widmeyer in the approximate amount of
$4,000 to $5,000, of which $900 has been paid.
12. Unpaid salaries, expenses, and balances for Krentzman, Burtscher,
Palmer, and Erickson for periods after December 16, 1995 on their employment
agreements, plus $5,000 each to Krentzman and Burtscher for deferred signing
bonus under the Acquisition and Management Agreement.
13. Legal fees to Morse Taylor, counsel for Burtscher. Of the $7,000
amount due, approximately $3,000 has been paid.
14. Continuing legal services for John W. Hathaway, and other attorneys at
Edwards, Sieh, Hathaway, Smith, & Goodfriend, P.S. Nine thousand dollars has
been paid and additional fees in connection with this transaction are being
accrued.
15. Approximately $5,000 for Ratsten obligations as shown on the Ratsten
October 31, 1995 financial statements.
16. Sublease from Purchaser of space at 1520 Eastlake, Seattle,
Washington.
A-2
<PAGE>
EMPLOYMENT AGREEMENT BETWEEN GFP GROUP, INC. AND RONALD P. ERICKSON OF SEP. 23,
1995
This Employment Agreement between GFP Group, Inc. ("GFP") and Ronald P. Erickson
("Employee") is dated and entered into as of the 23rd day of Sep., 1995, and
amended on Dec. 15, 1995.
1. EMPLOYMENT. Subject to the terms and conditions of this Employment
Agreement, GFP and Employee agree to contract for all of Erickson's time and
efforts as an employee of GFP, performing such duties, tasks and
responsibilities and exercise such powers as may be requested of Employee by the
Company's Board of Directors.
2. SCOPE AND DUTIES. Employee will serve as a Chairman, President and Chief
Executive Officer in the operation of GFP with respect to development, quality
control, sale and operations of various products (fax, E-mail, voice messaging,
Internet, EFTS, video, VPN, etc.), customers and vendors entailed in developing
the business of GFP, as directed by the Board of Directors.
3. TERMS. Subject to this Agreement, the term of this Employment Agreement
shall begin Sep. 23, 1995 and continue on a rolling three year term, renewing
daily. The parties acknowledge the Corporation's intention to be acquired by
GlobalTel Resources, Inc. ("GlobalTel" or "GTR") in a manner that will require
that GlobalTel assume the Corporation's obligations pursuant to this Agreement,
in which case GlobalTel will automatically assume GFP Group's rights and
obligations and the term of this Agreement shall continue without requiring any
action by either party, or GlobalTel. The Employee shall automatically become
Chairman, President and CEO of GlobalTel as a condition of any acquisition of
GFP by GlobalTel.
4. COMPENSATION. For all services rendered by the Employee under this
Agreement, the Corporation shall compensate the Employee as determined by the
Board of Directors.
a. Monthly Salary. The Employee shall initially be compensated at a
--------------------
salary level of $5,000/month following the attainment of working capital in
excess of $200,000 (retroactive to inception) to increase to $10,000/month upon
any acquisition of GFP by GlobalTel. Thereafter, the employee shall receive
$30,000/month upon GFP's and/or GlobalTel's achievement of significant funding
to adequately capitalize the business. Annual performance reviews shall
establish merit raises in salary in relation to performance as measured against
annual objectives and other responsibilities assigned the Employee.
Notwithstanding the impact of such annual performance evaluation merit-raises,
the Employee's compensation shall be not less than $40,000/month at the
beginning of the second year of employment and not less than $50,000/month at
the beginning of the third year of employment, establishing new base salary
levels to which any merit raises shall be added, provided that continued
employment has been satisfactory as determined by the Board.
b. Bonus. The Employee shall participate in a key management incentive
-----------
performance-based bonus plan approved by the Company's Board of Directors,
providing an opportunity to achieve up to 100% of base salary in bonus, based
upon the Company's review of Employee's contribution to its business, operations
and financial success on an annual basis (paid each January, following calendar
year-end, starting with calendar 1996).
c. Employee Benefits. The Employee shall participate in the normal
-----------------------
employee benefits provided the Senior Management Group, including health and
dental group plans (employee contributory plan through preferred providers),
group life insurance, group disability insurance, key man life insurance in an
amount of not less than $3,000,000 (with $1,000,000 paid to the Employee's
estate/beneficiaries), 401-k and such other benefits as may be provided by GFP
and/or GTR in its normal course of business.
1
<PAGE>
d. Expense Account. The Employee shall participate in a bi-weekly
---------------------
accounting of reimbursable expenses, and shall in addition be provided with two
corporate credit cards for business use (travel, entertainment and incidental
business expenses only) by Dec. 31, 1995.
e. Stock Program. The Employee shall be provided with his current equity
-------------------
holdings in the new GFP Group, Inc., which upon sale of the Company to a third
party ("New Co.", presumably GTR) shall equal not less than 270,000 shares of
the New Co. (up to 10,000,000 shares authorized, up to 5,000,000 shares issued).
f. ISOP Participation. The Employee shall be provided with participation
------------------------
in the Company's ISOP program (to be developed at GFP, and assumed by GTR upon
any sale or acquisition by GTR) to be developed prior to Jan. 31, 1995. The
level of participation in the ISOP shall be consistent with the senior level of
the position, to be determined annually by the Compensation Committee of the
Company. Notwithstanding such level to be determined by the Compensation
Committee, the Employee shall receive the right to acquire not less than 150,000
shares of GTR, to be deemed fully vested as of the merger in terms of ability to
exercise such ISOP shares. The cost per share shall be $1.10/share for exercise
of such initial ISOP options, whether in GFP or GTR.
g. Stock Option Grants for Performance in Certain Affiliates. In addition
--------------------------------------------------------------
to the ISOP provisions specified in "f" above, the Employee shall have a right
to additional ISOP equity ownership as determined by the Board in relation to
performance in establishing the Company's ownership in various joint ventures,
strategic alliances or affiliates contributing to the Company's successful roll-
out, where the Employee had a direct or indirect role in introducing,
negotiating or structuring such joint venture, strategic alliance or affiliate
operation parties, even should any such successful partnering arrangements
culminate substantially after the merger of the combined entities (sic.-
GFP/GTR). At the time of this agreement's execution, a significant potential
such joint venture, strategic alliance or affiliate operation known by the
Employee relates to certain relationships introduced on behalf of GFP in Japan.
h. Corporate Car. The Employee shall have the right to have the Company
-------------------
make car lease/purchase payments for business use up to $850/month, such right
starting 1/1/96.
i. Corporate Cellular Phone. The Employee shall have the right to a
------------------------------
corporate cellular phone (or combination car/mobile phone) paid at the Company's
expense, including equipment purchase, start-up and monthly fees and air time
costs.
j. Corporate Office at Home. The Employee shall have the right to be
------------------------------
reimbursed for the expense of maintaining a corporate office at home for after-
hours work on behalf of the company, including payment for the home office
telephone, fax, computer/printer (including purchase of an appropriate portable
computer) and on-line services, as well as monthly rent of $1,000/month.
k. Vacations. The Employee shall be entitled each calendar year to a
---------------
vacation consisting of four weeks, which may be increased by the Board of
Directors, during which time the Employee's salary and benefits shall be paid in
full. The Employee may carry over no more than two-weeks to the next calendar
year (for a total of six weeks). The Employee shall take the vacation as such
time or times as shall be appropriate for the Corporation. The Corporation
shall pay the Employee for any vacation days lost.
5. BOARD OF DIRECTORS REPRESENTATION. For the term of employment, the
Employee shall have the right to serve as Chairman of the Company's Board of
Directors (to eventually be at least seven Directors), and shall have the right
to suggest to the Board other outside Directors for the Company to consider as
candidates for its Board. This right to Board representation shall survive any
initial sale of the Company to GTR, with the right extending to New Co.'s Board.
2
<PAGE>
6. OWNERSHIP OF WORKS CREATED BY EMPLOYEE. The Employee acknowledges that the
Corporation shall have exclusive ownership of all inventions, technology and
know-how that the Employee creates or modifies during the term of this Agreement
and any subsequent agreement. The Corporation shall have the exclusive
copyright rights in such works and related materials and shall be considered the
author and owner of any such copyrightable work created by the Employee during
the term of this Agreement, as authorship is defined in the Copyright Act, 17
U.S.C. (S) 102. All such work shall be considered "work made for hire" under 17
U.S.C. 201(b). To the extent that any such work does not qualify as a "work
made for Hire" under applicable law, the Employee hereby irrevocably and
exclusively assigns to the Corporation, its successors and assigns all right,
title and interest in and to such work, including the right to copyright,
patent, trade secret, and other proprietary rights protection. To the extent
that any of the Employee's rights in such a work are not, or may not be, subject
to assignment or transfer, or the Employee may have a right of avoidance as to
any such assignment or transfer, the Employee hereby irrevocably and
unconditionally waives enforcement of all such rights, including moral rights.
The Employee acknowledges that the transfer, assignment and waiver of the
foregoing rights and interests are complete and effective as of the date of this
Agreement in consideration of the Corporation's employment of the Employee and
execution of this Agreement and without regard to the time or circumstances
under which the Agreement may be terminated. The Employee agrees to execute any
assignments or other documents and take such other actions as may be necessary
or desirable to assure or verify that ownership of the rights addressed in this
section resides exclusively with the Corporation.
7. TERMINATION. This Agreement may be terminated by either party upon 30 days
written notice, if for cause, and upon 180 days advance written notice, if
without cause. The term "cause" means any material breach of the Employee's
duty of loyalty to the Corporation; material failure to perform his Corporate
duties for a period of 30 days on a consistent basis after written notice of
such failure, regardless of the cause; any failure to carry out a lawful order
of the Board, or for any fact of documented material corporate misconduct,
fraud, or criminal malfeasance.
Termination of this Agreement for cause shall automatically terminate for
cause all other agreements between the Corporation or its subsidiary and the
Employee. In the event of "for-cause" termination, the employee would forfeit
any right to additional stock grants or ISOP awards not yet vested or exercised,
or the payment of salary or benefits beyond the effective contract three year
date, together with any continuing Board representation.
The Company shall retain the right to terminate the Employee without cause,
so long as the Company honors the balance of the compensation (cash, benefits,
stock or other compensation elements specified in the Employee's contract) under
the full term of this Agreement as provided for under this agreement. The scope
and enforceability of this section shall be determined in accordance with
Washington law.
In the event that the Corporation establishes the Employee's breach or
threatened breach of this section's provisions, the Corporation shall be
entitled to any injunction restraining the Employee from disclosing any
Proprietary Trade Secrets or Customer Confidences and/or restraining the
Employee from rendering any services to any person, firm, corporation,
association or other entity to whom any Proprietary Trade Secret or Customer
Confidence, in whole or in part, either has been disclosed or is threatened to
be disclosed.
Nothing contained in this section shall be construed as prohibiting the
Corporation from pursuing any other remedies available to the Corporation for
breach or threatened breach of this provision, including the recovery of damages
from the Employee, as well as reasonable attorneys fees and costs.
3
<PAGE>
8. CHANGE OF CONTROL EVENT. Should the Company (or its successor GTR) undergo
a change of control event, including acquisition of a 50% or larger controlling
interest, sale of the Company (excluding an initial acquisition of GFP by GTR)
or its principal assets, the Employee shall, as an obligation of the acquirer,
have the right to receive an additional three years cash compensation and
continuation of benefits beyond the stated contract period (including a bonus
which represents the sum of the prior two years bonus, or an equivalent amount
if less than two years of employment in service has been gained).
9. DISPUTES/ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or a breach hereof, shall be settled by binding arbitration
under the Judicial Arbitration Management Services ("JAMS") conducted in
accordance with the then existing Washington Civil Court rules and judgment upon
the award rendered by the arbitrator may be entered in any court having
jurisdiction thereof. The losing or substantially non-prevailing party shall
pay the JAMS arbitration and private counsel attorney fees and reasonable costs
to the winning or substantially prevailing party in the event of such
arbitration.
10. ASSIGNMENT. This Agreement shall not be transferred or assigned whether
voluntarily or by operation of law without the written consent of the other
party, with the exception of an acquisition of the Company or its principal
assets by GTR under any sale/purchase agreement, wherein the assignment of the
contractual obligations to GTR becomes automatic.
11. WAIVER. No waiver of any of the provisions hereof shall be valid unless in
writing, signed by the party against whom such claim or waiver is sought be
enforced, nor shall failure to enforce any right hereunder constitute a
continuing waiver of the same or a waiver of any other right hereunder.
12. NON-COMPETITION. Employee agrees not to compete with the Company (or its
successor, following its acquisition by GTR) for a period of two years from the
date of termination in the same or similar business, including the attempt to
develop other telecom business from SCITOR/SITA, should the employee be
terminated for cause.
Such non-competition covenant shall include a restriction on the Employee
as of the termination date preventing the Employee from: soliciting business
from any customer of the Company of a similar type; or soliciting business from
any customer of management-level employees of the Company to leave the
Corporation's employment or hire any management employee of the Company. Should
the employee be terminated not for cause or leave employment voluntarily, this
non-competition covenant shall survive for twelve months from the date of
termination, with the ability of the Employee to conduct any business with
customers of the Company based upon a written request approved in writing by the
Board of Directors detailing how the business arrangement does not conflict with
the Company's business. The Company shall be entitled to an injunction
restraining the Employee from any action which represents a breach or threatened
breach of this provision. Nothing in this section shall be construed as
prohibiting the Corporation from pursuing any other available remedies for the
breach or threatened breach, including the recovery of damages from the
Employee, as well as reasonable attorneys fees and costs.
13. AMENDMENT. No modification of any of the provisions hereof shall be
binding upon either Employee or Company, unless in writing, signed by the party
against whom such modification is sought to be enforced. Amendments upon merger
with GTR shall not be binding unless agreed to in writing by the Employee.
14. APPLICABLE LAW. This agreement shall be governed by the laws of the State
of Washington.
4
<PAGE>
15. NOTICE. Any notice required or desired to be given under this Agreement
shall be sufficient if in writing and sent by certified mail, return receipt
requested, to the Employee's residence or to the principal office of the
Corporation, as the case may be.
16. COMPLETE AGREEMENT. The parties understand and agree that this Agreement
fully sets forth their entire agreement concerning terms and conditions of the
employment agreement between them.
IN WITNESS WHEREOF, the parties have agreed to the content of this
Agreement, and have executed and entered into this Agreement on the date set
forth above.
EMPLOYEE: /s/ Ronald P. Erickson
----------------------
Ronald P. Erickson
GFP GROUP, INC. By /s/
---------------------
Its /s/ EVP
---------------------
Witnessed: /s/ Michael Brownfield
----------------------
Michael Brownfield
<PAGE>
EMPLOYMENT AGREEMENT BETWEEN GFP GROUP, INC. AND CRAIG R. PALMER OF SEP. 23,
1995
This Employment Agreement between GFP Group, Inc. ("GFP") and Craig R. Palmer
("Employee") is dated and entered into as of the 23rd day of Sep., 1995 and
amended on Dec. 15, 1995.
1. EMPLOYMENT. Subject to the terms and conditions of this Employment Agreement,
GFP and Employee agree to contract for all of Palmer's time and efforts as an
employee of GFP, performing such duties, tasks and responsibilities and exercise
such powers as may be requested of Employee by the Company's Chairman/CEO,
except that Employee shall have up to six months to conclude his normal business
activities in process at the time of this Agreement (National Xpress and
Heartsmart).
2. SCOPE AND DUTIES. Employee will serve as a "Executive Vice President," with
special emphasis upon Strategic Planning/Relationships, Corporate Finance and
Acquisitions in the operation of GFP with respect to development, quality
control, sale and operations of various products (fax, E-mail, voice messaging,
Internet, EFTS, video, VPN, etc.), customers and vendors entailed in developing
the business of GFP, as directed by the CEO.
3. TERM. Subject to this Agreement, the term of this Employment Agreement shall
begin Sep. 23, 1995 and continue on a rolling three year terms, renewing daily.
The parties acknowledge the Corporation's intention to be acquired by GlobalTel
Resources, Inc. ("GlobalTel" or "GTR") in a manner that will require that
GlobalTel assume the Corporation's obligations pursuant to this Agreement, in
which case GlobalTel will automatically assume GFP Group's rights and
obligations and the term of this Agreement shall continue without requiring any
action by either party, or GlobalTel. The Employee shall automatically become
EVP of GlobalTel with the same scope of duties as a condition of any acquisition
of GFP by GlobalTel.
4. COMPENSATION. For all services rendered by the Employee under this Agreement,
the Corporation shall compensate the Employee as determined by the Board of
Directors.
a. Monthly Salary. The Employee shall initially be compensated at a
--------------
salary level of $5,000/month following the attainment of working capital in
excess of $200,000 (retroactive to inception), to increase to $7,500/month upon
any acquisition of GFP by GlobalTel. Thereafter, the employee shall receive
$25,000/month upon GFP's and/or GlobalTel's achievement of significant funding
to adequately capitalize the business. Annual performance reviews shall
establish merit raises in salary in relation to performance as measured against
annual objectives and other responsibilities assigned the Employee.
Notwithstanding the impact of such annual performance evaluation merit-raises,
the Employee's compensation shall be not less than $35,000/month at the
beginning of the second year of employment and not less than $45,000/month at
the beginning of the third year of employment, establishing new base salary
levels to which any merit raises shall be added, provided that continued
employment has been satisfactory as determined by the CEO.
b. Bonus. The Employee shall participate in a key management
-----
incentive performance-based bonus plan approved by the Company's Board of
Directors, providing an opportunity to achieve up to 100% of base salary in
bonus, based upon the Company's review of Employee's contribution to its
business, operations and financial success on an annual basis (paid each
January, following calendar year-end, starting with calendar 1996). Assuming
successful institutional funding of the Company (either GFP and/or GTR, once it
has acquired GFP).
1
<PAGE>
c. Employee Benefits. The Employee shall participate in the normal
-----------------
employee benefits provided by the Senior Management Group, including health and
dental group plans (employee contributory plan through preferred providers),
group life insurance, group disability insurance, key man life insurance in an
amount of not less than $2,000,000 (with $750,000 paid to the Employee's
estate/beneficiaries), 401-K and such other benefits as may be provided by GFP
and/or GTR in its normal course of business.
d. Expense Account. The Employee shall participate in a bi-weekly
---------------
accounting of reimbursable expenses, and shall in addition be provided with two
corporate credit cards for business use (travel, entertainment and incidental
business expenses only) by Dec. 31, 1995.
e. Stock Program. The Employee shall be provided with his current
-------------
equity holdings in the new GFP Group, Inc., which upon sale of the Company to a
third party ("New Co.," presumable GTR) shall equal not less than 270,000 shares
of the New Co. (up to 10,000,000 shares authorized, up to 5,000,000 shares
issued).
f. ISOP participation. The Employee shall be provided with
------------------
participation in the Company's ISOP program (to be developed at GFP, and assumed
by GTR upon any sale or acquisition by GTR) to be developed prior to Jan. 31,
1995. The level of participation in the ISOP shall be consistent with the
senior level of the position, to be determined annually by the Compensation
Committee of the Company. Notwithstanding such level to be determined by the
Compensation Committee, the Employee shall receive the right to acquire not less
than 150,000 shares of GTR, to be deemed fully vested as of the merger in terms
of ability to exercise such ISOP shares. The cost per share shall be
$1.10/share for exercise of initial ISOP options, whether in GFP or GTR.
g. Stock Option Grants for Performance in Certain Affiliates. In
---------------------------------------------------------
addition to the ISOP provisions specified in 'f' above, the Employee shall have
a right to additional ISOP equity ownership as determined by the Board in
relation to performance in establishing the Company's ownership in various joint
ventures, strategic alliances or affiliates contributing to the Company's
successful roll-out, where the Employee had a direct or indirect role in
introducing or bringing to the table or structuring such joint venture, even
should any such successful partnering arrangements culminate substantially after
the merger of the combined entities (sic.-GFP/GTR). At the time of this
agreement's execution, a significant potential such joint venture, strategic
alliance or affiliate operation known by the Employee relates to certain
relationships promulgated on behalf of GFP in Japan.
h. Corporate car. The Employee shall have the right to have the
-------------
Company make car lease/purchase payments for business use up to $850/month, such
right starting 1/1/96.
i. Corporate cellular phone. The Employee shall have the right to a
------------------------
corporate cellular phone (or combination car/mobile phone) paid at the Company's
expense, including equipment purchase, start-up and monthly fees and air time
costs.
j. Corporate Office at home. The Employee shall have the right to be
------------------------
reimbursed for the expense of maintaining a corporate office at home for after-
hours work on behalf of the company, including payment for the home office
telephone, fax, computer/printer (including purchase of an appropriate portable
computer) and on-line service, as well as monthly rent of $1,000/month.
k. Vacations. The Employee shall be entitled each calendar year to a
---------
vacation consisting of four weeks, which may be increased by the Board of
Directors, during which time the Employee's salary and benefits shall be paid in
full. The Employee may carry over no more than two weeks to the next calendar
year (for a total of six weeks). The Employee shall take the vacation at such
time or times as shall be appropriate for the Corporation. The Corporation
shall pay the Employee for any vacation days lost.
2
<PAGE>
5. BOARD OF DIRECTORS REPRESENTATION. For the term of employment, the Employee
shall have the right to serve as a Director on the Company's Board of Directors
(to eventually be at least seven Directors). This right to Board representation
shall survive any initial sale of the Company to GTR, with the right extending
to GTR's Board.
6. OWNERSHIP OF WORKS CREATED BY EMPLOYEE. The Employee acknowledges that the
Corporation shall have exclusive ownership of all inventions, technology and
know-how that the Employee creates or modifies during the term of this Agreement
and any subsequent agreement. The Corporation shall have the exclusive copyright
rights in such works and related materials and shall be considered the author
and owner of any such copyrightable work created by the Employee during the term
of this Agreement, as authorship is defined in the Copyright Act, 17 U.S.C. (S)
102. All such work shall be considered "work made for hire" under 17 U.S.C. (S)
201(b). To the extent that any such work does not qualify as a "work made for
Hire" under applicable law, the Employee hereby irrevocably and unconditionally
waives enforcement of all such rights, including moral rights. The Employee
acknowledges that the transfer, assignment and waiver of the foregoing rights
and interests are complete and effective as of the date of this Agreement in
consideration of the Corporation's employment of the Employee and execution of
this Agreement and without regard to the time or circumstances under which the
Agreement may be terminated. The Employee agrees to execute any assignments or
other documents and take such other actions as may be necessary or desirable to
assure or verify that ownership of the rights addressed in this section resides
exclusively with the Corporation.
7. TERMINATION. This Agreement may be terminated by either party upon 30 days
written notice, if for cause, and upon 180 days advance written notice, if
without cause. The term "cause" means any material breach of the Employee's duty
of loyalty to the Corporation; material failure to perform his corporate duties
for a period of 30 days on a consistent basis after written notice of such
failure, regardless of the cause; any failure to carry out a lawful order of the
CEO, or for any fact of documented material corporate misconduct, fraud, or
criminal malfeasance. Termination of this Agreement for cause shall
automatically terminate for cause all other agreements between the Corporation
or its subsidiary and the Employee. In the event of "for-cause" termination, the
employee would forfeit any right to additional stock grants or ISOP stock awards
not yet vested or exercised, or the payment of salary or benefits beyond the
effective contract three year date, together with any continuing Board
representation.
The Company shall retain the right to terminate the Employee without
cause, so long as the Company honors the balance of the compensation (cash,
benefits, stock or other compensation elements specified in the Employee's
contract) under the full term of this Agreement as provided for under this
agreement. The scope and enforceability of this section shall be determined in
accordance with Washington law.
In the event that the Corporation establishes the Employee's breach or
threatened breach of this section's provisions, the Corporation shall be
entitled to an injunction restraining the Employee for disclosing any
Proprietary Trade Secrets or Customer Confidences and/or restraining the
Employee from rendering any services to any person, firm, corporation,
association or other entity to whom any Proprietary Trade Secret or Customer
Confidence, in whole or in part, either has been disclosed or is threatened to
be disclosed.
3
<PAGE>
Nothing contained in this section shall be construed as prohibiting
the Corporation from pursuing any other remedies available to the Corporation
for breach or threatened breach of this provision, including the recovery of
damages from the Employee, as well as reasonable attorneys fees and costs.
8. CHANGE OF CONTROL EVENT. Should the Company (or its successor GTR) undergo a
change of control event, including acquisition of a 50% or larger controlling
interest, sale of the Company (excluding an initial acquisition by GTR) or its
principal assets, the Employee shall, as an obligation of the acquirer, have the
right to receive an additional three years cash compensation and benefits beyond
the stated contract period (including a bonus which represents the sum of the
prior two years bonus, or an equivalent amount if less than two years of
employment in service has been gained).
9. DISPUTES/ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement, or a breach hereof, shall be settled by binding arbitration
under the Judicial Arbitration Management Service ("JAMS") conducted in
accordance with the then existing Washington Civil Court rules and judgment upon
the award rendered by the arbitrator may be entered in any court having
jurisdiction thereof. The losing or substantially non-prevailing party shall pay
the JAMS arbitration and private counsel attorney fees and reasonable costs to
the winning or substantially prevailing party in the event of such arbitration.
10. ASSIGNMENT. This Agreement shall not be transferred or assigned whether
voluntarily or by operation of law without the written consent of the other
party, with the exception of an acquisition of the Company or its principal
assets by GTR under any sale/purchase agreement, wherein the assignment of the
contractual obligations to GTR becomes automatic.
11. WAIVER. No waiver of any of the provisions hereof shall be valid unless in
writing, signed by the party against whom such claim or waiver is sought to be
enforced, nor shall failure to enforce any right hereunder constitute a
continuing waiver of the same or a waiver of any other right hereunder.
12. NON-COMPETITION. Employee agrees not to compete with the Company (or its
successor, following its acquisition by GTR) for a period of two years from the
date of termination in the same or similar business, including the attempt to
develop other telecom business from SCITOR/SITA, should the employee be
terminated for cause. Such non-competition covenant shall include a restriction
on the Employee as of the termination date preventing the Employee from:
soliciting business from any customer of the Company of a similar type; or
soliciting, recruiting or attempting to induce any management-level employees of
the Company to leave the Corporation's employment or hire any management
employee of the Company.
Should the employee be terminated not for cause or leave employment
voluntarily, this non-competition covenant shall survive for twelve months from
the date of termination, with the ability of the Employee to conduct any
business with customers of the Company based upon a written request approved in
writing by the Board of Directors detailing how the business arrangement does
not conflict with the Company's business.
The Company shall be entitled to an injunction restraining the
Employee from any action which represents a breach or a threatened breach of
this provision. Nothing in this section shall be construed as prohibiting the
Corporation from pursuing any other available remedies for the breach or
threatened breach, including the recovery of damages from the Employee, as well
as reasonable attorneys fees and costs.
4
<PAGE>
13. AMENDMENT. No modification of any of the provisions hereof shall be binding
upon either Employee or Company, unless in writing, signed by the party against
whom such modification is sought to be enforced. Amendments upon merger with GTR
shall not be binding unless agreed to in writing by the Employee.
14. APPLICABLE LAW. This agreement shall be governed by the laws of the State of
Washington.
15. NOTICE. Any notice required or desired to be given under this Agreement
shall be sufficient if in writing and sent by certified mail, return receipt
requested, to the Employee's residence or to the principal office of the
Corporation, as the case may be.
16. COMPLETE AGREEMENT. The parties understand and agree that this Agreement
fully sets forth their entire agreement concerning terms and conditions of the
employment agreement between them.
IN WITNESS WHEREOF, the parties have agreed to the content of this
Agreement, and have executed and entered into this Agreement on the date set
forth above.
EMPLOYEE: /s/ Craig R. Palmer
-----------------------
Craig R. Palmer
GFP GROUP, INC. by /s/ Ronald P. Erickson
-----------------------
Ronald P. Erickson
Its /s/ CEO
-----------------------
Witnessed: /s/ Michael Brownfield
-----------------------
Michael Brownfield
<PAGE>
EMPLOYMENT AGREEMENT
Effective as of the 10th day of October, 1995, GERMAN BURTSCHER
(the "Employee") and GFP GROUP, INC., a Washington corporation (the
"Corporation"), in consideration of the mutual covenants and conditions
contained in this Agreement, agree as follows:
1. Employment. The Corporation hereby employs the Employee and the
----------
Employee hereby accepts employment upon the terms and conditions set forth in
this Agreement.
2. Term. The term of this Agreement shall begin on the effective
----
date set forth above and shall continue on a rolling three year term, renewing
daily. The parties acknowledge the Corporation's intention to be acquired by
GlobalTel Resources, Inc. ("GlobalTel") in a manner that will require that
GlobalTel assume the Corporation's obligations pursuant to this Agreement, in
which case GlobalTel will automatically assume GFP Group's rights and
obligations and the term of this Agreement shall continue without requiring any
action by either party, or GlobalTel.
3. Compensation. For all services rendered by the Employee. under
------------
this Agreement, the Corporation shall compensate the Employee as determined by
the Board of Directors. The Employee shall receive a one-time payment of
$10,000, half on execution of this Agreement and half on completion of
GlobalTel's Acquisition of GFP Group. Starting compensation of $5,000 per
month. Compensation still be increased to $10,000 per month on the earlier of
March 1, 1996 or receipt of significant institutional funding for operations.
Compensation shall be increased to a minimum of $12,500 per month at the
beginning of the second year of employment and to $15,000 per month at the
beginning of the third year of employment. The Corporation and the Employee
contemplate significant increases in salary and benefits if target goals for
corporate financing and expansion are met. Employee shall receive increases in
compensation equal to any increases in the compensation of the Corporation's
other comparable officers, currently Curtis Lew and Alan Chin. Compensation may
also be increased in the discretion of the Board of Directors and additional
bonuses may be paid to the Employee at the discretion of the Board of Directors.
4. Duties. The Corporation employs the Employee as Vice President to
------
perform work in connection with marketing, sales, network operations or such
other projects or products that are being undertaken by the Corporation, as
directed by the President of the Corporation. The Employee shall also continue
duties as an officer of the Corporation's GFP Group subsidiary, including
administration of the SITA/SCITOR Agreement. The employee shall report directly
to the Chief Executive Officer of the Corporation. Any duties of the Employee
as a director or an officer of the Corporation shall be without further
compensation.
5. Extent of Service. The Employee shall devote his or her time,
-----------------
attention and energies to the Corporation's business on a full time basis,
unless a different basis is
1
<PAGE>
provided in an addendum to this Agreement, and shall not become involved in any
other business activity that would in any way detract from, limit, or impair the
Employee's performance of his work for the Corporation or may adversely impact
the Corporation's business interests, whether or not such outside business
activity is pursued for gain, profit, or other pecuniary advantage. The Employee
must request written consent of the Corporation's Board of Directors to engage
in any such outside business activity which writing shall specify the outside
business activity in detail, and shall be attached to this Agreement. As to any
request for consent, the Board of Directors shall not unreasonably withhold
consent, taking into account the nature of the outside business activity, its
relationship to the Corporation's business, the relative time that the Employee
would be required to devote to the Corporation's business and to the outside
business activity, and whether the effect on the Employee's work performance
would have an adverse impact on the Corporation's business. The Corporation has
no obligation to consent to an outside business activity that, in its sole
opinion, could adversely impact conduct of the Corporation's business. The
Corporation may condition consent upon a reasonable compensation adjustment
reflecting the impact on the Corporation. The Corporation acknowledges that the
Employee operated a consulting business prior to becoming an employee and agrees
that the Employee may continue to service existing customers described in
Exhibit A for a transition period of six months. The Employee represents that
time devoted to such consulting work shall not prevent him from working full
time for the Corporation and that such work shall not be in competition with any
service or product of the Corporation. The Employee may invest the Employee's
assets without restriction so long as the investment does not require the
Employee to devote his or her services to operation of the companies in which
the investments are made and so long as the subject of the investment is not
inconsistent with the Corporation's business interests.
6. Ownership Of Works Created By Employee. The Employee acknowledges
--------------------------------------
that the Corporation shall have exclusive ownership of all inventions,
technology, and know-how that the Employee creates or modifies during the term
of this Agreement and any precious agreement. The Corporation shall have the
exclusive copyright rights in such works and related materials and shall be
considered the author and owner of any such copyrightable work created by the
Employee during the term of this Agreement, as authorship is defined in the
Copyright Act, 17 U.S.C. (S) 102. All such work shall be considered "work made
for hire" under 17 U.S.C. (S) 201(b). To the extent that any such work does not
qualify as a "work made for hire" under applicable law, the Employee hereby
irrevocably and exclusively assigns to the Corporation, its successors and
assigns all right, title and interest in and to such work, including the right
to copyright, patent, trade secret, and other proprietary rights protection. To
the e extent that any of the Employee's rights in such work are not, or may not
be, subject to assignment or transfer, or the Employee may have a right of
avoidance as to any such assignment or transfer, the Employee hereby irrevocably
and unconditionally waives enforcement of all such rights, including moral
rights. The Employee acknowledges that the transfer, assignment, and waiver of
the foregoing rights and interests are complete and effective as of the date of
this Agreement in consideration of the Corporation's employment of the Employee
and execution of this Agreement and without regard to the time or circumstances
under which the Agreement may be terminated. The Employee agrees to execute any
assignments or other documents and take such other actions as may be necessary
or desirable to assure
2
<PAGE>
or verify that ownership of the rights addressed in this section resides
exclusively with the Corporation.
7. Ownership Of Unrelated Works. The Corporation's ownership of
-----------------------------
works created by the Employee during the term of this Agreement shall not apply
to Unrelated Works, which is defined as a work that is not created through the
use of any of the Corporation's equipment, supplies, facilities, or trade secret
information, which was developed entirely on the Employee's own time and which
does not relate directly to the Corporation's business or the Corporation's
actual or demonstrably anticipated research or development at the time the
software is created and does not result from any work performed by the Employee
for the Corporation. The Employee's development of Unrelated Works shall not
limit the Corporation's business or prohibit the Corporation from developing
similar or related works. Should all or part of the Employee's Unrelated Work
be incorporated into the Corporation's inventions or other works, the
Corporation shall have a royalty-free license to copy, use, and sell such. works
without restriction, unless the Employee and the Corporation have executed a
written agreement providing otherwise in advance of such incorporation, or the
Employee establishes that the Corporation wrongfully obtained the Unrelated
Works through no fault of the Employee.
8. Fringe Benefits. The relationship between the Corporation and the
----------------
Employee is that of an employer and employee. The parties acknowledge that the
nature of the Employee's work requires substantial technological expertise and
the consistent exercise of substantial discretion and judgment. The Employee is
a professional, salaried, full-time employee who shall be entitled to
participate in the Senior Management Benefit Package "Senior Management Benefit
Package" means the retirement, ISOP, bonus expense allowance, profit sharing,
vacation, and similar plans adopted by the Corporate for the President and Vice-
Presidents having the same full-time status and length of service as the
Employee. The Corporation anticipates having the package in place within six
months after execution of this Agreement.
9. Income From Services; Accounting And Disclosure Of Income And.
--------------------------------------------------------------
Unrelated Software. Income generated by the Employee from the creation,
- ------------------
maintenance, or modification, use, license, sale, or any other transfer of
Unrelated Works, and from outside business activities permitted by this
Agreement shall belong to the Employee. While employed by the Corporation and
for three years thereafter, the Employee agrees upon request of the Corporation
to render a true account of all transactions concerning Unrelated Works and/or
outside business activities should the Corporation receive information
reasonably suggesting that the such Works or outside business activity violates
the terms of this Agreement. The Corporation shall require that those employees
and agents of the Corporation having access to this Information shall keep
confidential all information disclosed pursuant to this section and the
Corporation shall limit access to such information to the members of the Board
of Directors and the management-level employee conducting the accounts.
10. Working Facilities. The Corporation will furnish the Employee
------------------
with working space, hardware, technical and secretarial assistance, and other
facilities and services suitable to the Employee's position and adequate for the
performance of the
3
<PAGE>
Employee's duties. Any automobile allowance or payment of relocation expenses
shall be as provided in the Senior Management Benefit Package. The Employee
shall work at the Corporation's Seattle, Washington office. The Corporation
shall pay reasonable travel and lodging expenses that the Employee incurs
commuting from San Antonio, Texas to Seattle, Washington, until the Employee is
able to relocate to Seattle, Washington, not to exceed 180 days from the
effective date of this Agreement.
11. Expenses. The Corporation shall pay for or reimburse the
--------
Employee for travel, lodging, and all reasonable and necessary expenses for the
promotion of the business of the Corporation, including expenses for
entertainment, dues, and other expenses that the Employee reasonably and
necessarily incurs in the performance of the duties for the Corporation covered
by this Agreement.
12. Vacations. The Employee shall be entitled each calendar year to
---------
a vacation consisting of two two-week periods, which may be increased by the
Corporation's business and subject to any policies adopted prospectively by the
Board of Directors, during which time the Employee's salary shall be paid in
full. The Employee may carry over no more than one two-week period to the next
calendar year (for a total of six weeks). The Employee shall take the vacation
at such time or times as shall be approved by the Corporation. Vacation time
may not be accrued from year to year without the advance written consent of the
Corporation, but the Corporation shall pay the Employee for any vacation days
lost.
13. Leave Of Absence. Leaves of absence with full payment of salary
----------------
may be granted to the Employee for attendance at professional conventions,
seminars, and other professional or business activities approved by the
Corporation. All expenses reasonably and necessarily incurred by the employee
in these activities shall be paid for or reimbursed by the Corporation. The
Corporation may from time to time approve leaves of absence with full or partial
payment, of salary and other expenses for other reasons in its sole discretion.
14. Termination. This Agreement may be terminated by either party
-----------
upon 3O days written notice, if for cause, and upon 60 days advance written
notice, if without cause. The term "cause" means any material breach of the
employee's duty of loyalty to the Corporation; material failure to perform his
corporate duties for a period of 30 days on a consistent basis after written
notice of such failure, regardless of the cause; any act of criminal fraud,
whether or not involving the Corporation; or any material breach of the terms of
this Agreement, the Acquisition and Management Agreement, Shareholder Agreement,
or any other written agreement between the Employee and the Corporation or its
subsidiary, GFP Group, Inc. Termination of this Agreement for cause shall
automatically terminate for cause all other agreements between the Corporation
or its subsidiary and the Employee. In the case of termination for cause,
unless the Employee contests the grounds stated in the notice and demands
arbitration, all rights of the Employee under such agreements and all rights
under this Agreement, including salary, benefits, and Board representation shall
automatically be extinguished as of the terminate date stated in the notice and
the Employee's stock, including vested options, shall be redeemed by the
Corporation at 75 per cent of the value calculated pursuant to
4
<PAGE>
the method stated in the shareholder agreement, so long as the Corporation's
stock is not then publicly traded, in which case there shall be no redemption.
If the Employee demands arbitration of the termination grounds, the parties will
immediately proceed to arbitration and all compensation, benefits, and stock
voting rights of the Employee shall be suspended pending the decision of the
arbitrator, which shall take place within six months from the commencement of
arbitration unless delay is caused by the Employee. If the Corporation
terminates this Agreement without cause, the Corporation shall be obligated to
continue to provide the Employee with the full salary and compensation benefits
required by this Agreement until the expiration of the rolling three-year term.
Unless the Corporation's stock is then publicly traded, the Corporation shall
redeem the Employee's stock, including vested options, at market value
determined by the method stated in the Shareholder Agreement. All stock
acquisition rights shall cease as of the termination date stated in the written
notice of termination, whether the stock is publicly traded or not. Unless
otherwise agreed, the redemption amount shall be paid as follows: in 12 equal
monthly installments if the amount is less than $500,000; in 24 equal monthly
installments if the redemption amount is between $500,000 and $1,000,000; and in
equal quarterly installments over a five-year period if the redemption amount is
$1,000,000 or more. Each installment shall include interest on the declining
balance at 6% per annum, compounded monthly.
15. Conflict of Interest. Except as provided in Section 5 above, the
--------------------
Employee warrants and represents that: (1) the Employee has no conflict of
interest in performing the duties for which the Corporation is hiring the
Employee; (2) that the Employee is not under any legal disability regarding
these duties and is not prohibited by any employment agreement or covenant not
to compete from performing these duties; (3) that the work the Employee is
performing and will perform for the Corporation does not to the knowledge of the
Employee, breach any contract,. or infringe upon any existing patent or
copyright or contain any proprietary information or trade secrets of any former
employer or other person or entity.
16. Proprietary Information. The Employee acknowledges that the list
-----------------------
of the Corporation's contracts, suppliers, customers, material information on
the business of those customers, and the Corporation's telecommunication
technology, work in progress, know-how, techniques, and current and anticipated
research and development activities, as well as the related printed and tangible
materials, as these may exist from time to time, constitute Proprietary Trade
Secrets of the Corporation that are valuable, special and unique assets of the
Corporation's business and which the Corporation takes reasonable steps to
safeguard from disclosure to persons that do not owe a duty of confidentiality
to the Corporation. The Employee also acknowledges that conducting the
Employee's duties for Corporation's business may require that the Employee come
into contact with information belonging to the Corporation's customers which
information is disclosed to the Employee pursuant to the Corporation's agreement
to keep the information confidential ("Customer Confidences"). The employee
will not, during or after the term of employment, disclose any Proprietary Trade
Secrets or Customer Confidences, directly or indirectly, in whole or in part, to
any person, firm, corporation, association, or other entity for any reason or
purpose whatsoever. Nor shall the Employee include any know-how, or techniques
that constitute Proprietary Trade Secrets of the Corporation or Customer
5
<PAGE>
Confidences in any invention or work unless it is owned by the Corporation.
Information shall cease being Proprietary Trade Secrets or Customer Confidences
if the Corporation or the Customer has permitted the information to enter the
public domain without any involvement of the Employee. The scope and
enforceability of this section shall be determined in accordance with Washington
law. In the event that the Corporation establishes the Employee's breach or
threatened breach of this section's provisions, the Corporation shall be
entitled to an injunction restraining the Employee from disclosing any
Proprietary Trade Secrets or Customer Confidences and/or restraining the
Employee from rendering any services to any person, firm, corporation,
association or other entity to whom any Proprietary Trade Secret or Customer
Confidence, in whole or in part, either has been disclosed or is threatened to
be disclosed. Nothing contained in this section shall be construed as
prohibiting the Corporation from pursuing any other remedies available to the
Corporation for breach or threatened breach of this provision, including the
recovery of damages from the Employee, as well as reasonable attorneys fees and
costs.
17. Restrictive Covenant. During the term of this Agreement and for
--------------------
a period of 12 months after termination or expiration of this Agreement, the
Employee will not (a) directly or indirectly, own, manage, operate, control, be
employed by, participate in, or be connected in any manner with any business
that derives income from providing the same or similar services or products as
those of the Corporation, or is in competition with any business that the
Corporation is conducting or demonstrably anticipated conducting as of the
Employee's termination date; (b) solicit business or perform work for any
customer of the Corporation, which work is similar to the type of work performed
by the Corporation for its customers, regardless of whether the Employee would
be performing the work on his or her own behalf or on behalf of some other
business; (c) solicit, recruit, or attempt to induce any employee to leave the
Corporation's employment or hire any employee whose employment with the
Corporation was terminated less than six months before the date of hire. If, at
any time during the term of this Agreement, the Employee's outside business
activity or Unrelated Work business conflicts with or competes with the
Corporation's then existing business, the Employee agrees either to merge the
competing or conflicting part of the outside business into the Corporation for
its fair market value on mutually agreed terms, permit the Corporation to
acquire the competing or conflicting portion of the employee's business for its
fair market value on mutually agreed terms, or terminate employment with the
Corporation. After termination of this Agreement for any reason, the Employee-
may request written consent from the Corporation's Board of Directors to permit
the Employee to become associated with a competitor prior to expiration of the
12-month period stated above. The Board of Directors shall not unreasonably
withhold consent and shall base any denial of consent upon its determination
that the former Employee's requested business activity would significantly
impair the Corporation's operations, market position, proposals in progress, or
relationship with existing customer(s). In the event that the Corporation
establishes the Employee's actual or threatened breach of this section's
provisions, the Corporation shall be entitled to an injunction restraining the
Employee from the action or threatened action. Nothing in this section shall be
construed as prohibiting the Corporation from pursuing any other available
remedies for the breach or threatened breach, including the recovery of damages
from the Employee, as well as reasonable attorneys fees and costs.
6
<PAGE>
18. Arbitration. Any controversy or claim arising out of, or
-----------
relating to, the meaning or enforceability of any provision of this Agreement,
the terms of employment, the work performed by the Employee, or ownership of any
product or right created during or after the terms of this Agreement, shall be
settled by binding arbitration before a single arbitrator of the Judicial
Arbitration and Mediation Service in the city of Seattle, Washington, or as
agreed-upon by the parties or selected by the King County Presiding Judge. The
arbitration shall be conducted in accordance with the then existing Washington
Civil Court Rules and judgment upon the award shall be rendered within six
months of commencement of arbitration, if practicable, and shall be final and
enforceable in any court of competent jurisdiction.
19. Attorneys Fees. In the event of any dispute arising out of this
--------------
Agreement or the employment relationship, the substantially prevailing party in
such dispute shall be entitled, in addition to any other relief, to an award of
attorneys fees and actual costs, including expert fees and arbitration fees.
The award shall include fees and costs incurred before any proceeding or
arbitration is commenced. If a proceeding is commenced and neither party wholly
prevails, the party receiving substantially greater relief shall be considered
the prevailing party as to all fees and costs relating to the dispute. The
actual attorneys fees and costs incurred by the substantially prevailing- party
shall be presumptively reasonable, which presumption is rebuttable.
20. Notices. Any notice required or desired to be given under this
-------
Agreement shall be sufficient if in writing and sent by certified mail, return
receipt requested, to the Employee's residence or to the principal office of the
Corporation, as the case may be.
21. Waiver of Breach. The waiver by either the Corporation or the
----------------
Employee of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach by either the Corporation or the
Employee.
22. Assignment. Sale or Merger. The Employee acknowledges that the
--------------------------
services to be rendered by him or her are unique and personal. Accordingly, the
Employee may not assign any of his or her rights or delegate any of his or her
duties or obligations under this Agreement. The rights and obligations of the
Corporation under this Agreement shall inure to the benefit of, and shall be
binding upon, the successors and assigns of the Corporation. The parties
contemplate and intend that this Agreement shall be assumed without material
change by GlobalTel as part of its acquisition of GFP Group and that it will be
fully enforceable by GlobalTel and the Employee without the need of any
additional agreement. In the event of a sale or merger of the Corporation to
any other entity, the successor to the Corporation shall assume the
Corporation's obligations pursuant to this Agreement. In the event that a sale,
merger or corporate restructure results in a 50 percent or greater change of
ownership or control of the Corporation's affairs, except as a result of the
GlobalTel acquisition, the Employee may terminate this Agreement and require
that the Corporation redeem the Employees stock pursuant to the formula and
method of valuation stated in the Shareholder Agreement, and pay the other
amounts as provided in paragraph 14 above.
7
<PAGE>
23. Entire Agreement. This Agreement and any addenda attached to
----------------
this Agreement and signed by the parties contain the entire agreement of the
parties. There are no other agreements, oral or written. This Agreement may be
changed only by a written agreement signed by the party against whom enforcement
is sought. In the event of a conflicts the terms of more recently executed
documents supersede those of earlier documents.
24. Severability. The provisions of Section 5 "Extent of Service,"
------------
Section 6 "Ownership of Works Created by Employee," Section 9 "Income from
Services; Accounting and Disclosure of Income and Unrelated Software," Section
15 "Conflict of Interest," Section 16 "Proprietary Information," Section 17
"Restrictive Covenant," and any addendum that concerns the subject matter of any
of those provisions, state obligations of the parties that are independent of
each other, severable, and separately enforceable. To the extent that any
portion of a provision is deemed unenforceable, the balance of that provision
shall be fully enforced. The unenforceability of any provision shall have no
effect on the enforceability of any other provision of this Agreement.
25. Applicable Law. This Agreement shall be construed in accordance
--------------
with the laws of the State of Washington.
Dated: 10/10/95 /s/ German Burtscher
---------- --------------------------------------------
EMPLOYEE
CORPORATION
Dated: 10 October 1995 By /s/ Ronald P. Erickson
--------------- ------------------------------------------
Its Chairman
------------------------------------------
8
<PAGE>
EMPLOYMENT AGREEMENT
Effective as of the ___ day of _______________, 19__, FRANK KRENTZMAN
(the "Employee") and GFP GROUP, INC., a Washington corporation (the
"Corporation"), in consideration of the mutual covenants and conditions
contained in this Agreement, agree as follows:
1. Employment. The Corporation hereby employs the Employee and the
----------
Employee hereby accepts employment upon the terms and conditions set forth in
this Agreement.
2. Term. The term of this Agreement shall begin on the effective
----
date set forth above and shall continue on a rolling three year term, renewing
daily. The parties acknowledge the Corporation's intention to be acquired by
GlobalTel Resources, Inc. ("GlobalTel") in a manner that will require that
GlobalTel assume the Corporation's obligations pursuant to this Agreement, in
which case GlobalTel will automatically assume GFP Group's rights and
obligations and the term of this Agreement shall continue without requiring any
action by either party, or GlobalTel.
3. Compensation. For all services rendered by the Employee under this
------------
Agreement, the Corporation shall compensate the Employee as determined by the
Board of Directors. The Employee shall receive a one-time payment of $10,000,
half on execution of this Agreement and half on completion of GlobalTel's
Acquisition of GFP Group. Starting compensation of $5,000 per month.
Compensation shall be increased to $10,000 per month on the earlier of -March 1,
1996 or receipt of significant institutional funding for operations.
Compensation shall be increased to a minimum of $12,500 per month at the
beginning of the second year of employment and to $15,000 per month at the
beginning of the third year of employment. The Corporation and the Employee
contemplate significant increases in salary and benefits if target goals for
corporate financing and expansion are met. Employee shall receive increases in
compensation equal to any increases in the compensation of the Corporation's
other comparable officers, currently Curtis Lew and Alan Chin. Compensation may
also be increased in the discretion of the Board of Directors and additional
bonuses may be paid to the Employee at the discretion of the Board of Directors.
4. Duties. The Corporation employs the Employee as Vice President to
------
perform work in connection with marketing, sales, network operations or such
other projects or products that are being undertaken by the Corporation, as
directed by the President of the Corporation. The Employee shall also continue
duties as an officer of the Corporation's GFP Group subsidiary, including
administration of the SITA/SCITOR Agreement. The employee shall report directly
to the Chief Executive Officer of the
1
<PAGE>
Corporation. Any duties of the Employee as a director or an officer of the
Corporation shall be without further compensation.
5. Extent Of Service. The Employee shall devote his or her time,
-----------------
attention and energies to the Corporation's business on a full time basis,
unless a different basis is provided in an addendum to this Agreement, and shall
not become involved in any other business activity that would in any way detract
from, limit, or impair the Employee's performance of his work for the
Corporation or may adversely impact the Corporation's business interests,
whether or not such outside business activity is pursued for gain, profit, or
other pecuniary advantage. The Employee must request written consent of the
Corporation's Board of Directors to engage in any such outside business activity
which writing shall specify the outside business activity in detail, and shall
be attached to this Agreement. As to any request for consent, the Board of
Directors shall not unreasonably withhold consent, taking into account the
nature of the outside business activity, its relationship to the Corporation's
business, the relative time that the Employee would be required to devote to the
Corporation's business and to the outside business activity, and whether the
effect on the Employee's work performance would have an adverse impact on the
Corporation's business. The Corporation has no obligation to consent to an
outside business activity that, in its sole opinion, could adversely impact
conduct of the Corporation's business. The Corporation may condition consent
upon a reasonable compensation adjustment reflecting the impact on the
Corporation. The Corporation acknowledges that the Employee operated a
consulting business prior to becoming an employee and agrees that the Employee
may continue to service existing customers described in Exhibit A for a
transition period of six months. The Employee represents that time devoted to
such consulting work shall not prevent him from working full time for the
Corporation and that such work shall not be in competition with any service or
product of the Corporation. The Employee may invest the Employee's assets
without restriction so long as the investment does not require the Employee to
devote his or her services to operation of the companies in which the
investments are made and so long as the subject of the investment is not
inconsistent with the Corporation's business interests.
6. Ownership of Works Created By Employee. The Employee acknowledges
--------------------------------------
that the Corporation shall have exclusive ownership of all inventions,
technology, and know-how that the Employee creates or modifies during the term
of this Agreement and any previous agreement. The Corporation shall have the
exclusive copyright rights in such, works and related materials and shall be
considered the author and owner of any such copyrightable work created by the
Employee during the term of this Agreement, as authorship is defined in the
Copyright Act, 17 U.S.C. (S) 102. All such work shall be considered "work made
for hire" under 17 U.S.C. (S) 201(b). To the extent that any such work does not
qualify as a "work made for hire" under applicable law, the Employee hereby
irrevocably and exclusively assigns to the Corporation, its successors and
assigns all right, title, and interest in and to such work, including the right
to copyright, patent, trade secret, and other proprietary rights protection. To
the extent that any of the
2
<PAGE>
Employee's rights in such a work are not, or may not be, subject to assignment
or transfer, or the Employee may have a right of avoidance as to any such
assignment or transfer, the Employee hereby irrevocably and unconditionally
waives enforcement of all such rights, including moral rights. The Employee
acknowledges that the transfer, assignment, and waiver of the foregoing rights
and interests are complete and effective as of the date of this Agreement in
consideration of the Corporation's employment of the Employee and execution of
this Agreement and without regard to the time or circumstances under which the
Agreement may be terminated. The Employee agrees to execute any assignments or
other documents and take such other actions as may be necessary or desirable to
assure or verify that ownership of the rights addressed in this section resides
exclusively with the Corporation.
7. Ownership Of Unrelated Works. The Corporation's ownership of
----------------------------
works created by the Employee during the term of this Agreement shall not apply
to Unrelated Works, which is defined as a work that is not created through the
use of any of the Corporation's equipment, supplies, facilities, or trade secret
information, which was developed entirely on the Employee's own time and which
does not relate directly to the Corporation's business or the Corporation's
actual or demonstrably anticipated research or development at the time the
software is created and does not result from any work performed by the Employee
for the Corporation. The Employee's development of Unrelated Works shall not
limit the Corporation's business or prohibit the Corporation from developing
similar or related works. Should all or part of the Employee's Unrelated Work
be incorporated into the Corporation's inventions or other works, the
Corporation shall have a royalty-free license to copy, use, and sell such works
without restriction, unless the Employee and the Corporation have executed a
written agreement providing otherwise in advance of such incorporation, or the
Employee establishes that the Corporation wrongfully obtained the Unrelated
Works through no fault of the Employee.
8. Fringe Benefits. The relationship between the Corporation and the
---------------
Employee is that of an employer and employee. The parties acknowledge that the
nature of the Employee's work requires substantial technological expertise and
the consistent exercise of substantial discretion and judgment. The Employee is
a professional, salaried, full-time employee who shall be entitled to
participate in the Senior Management Benefit Package. "Senior Management
Benefit Package" means the retirement, ISOP, bonus, expense allowance, profit
sharing, vacation, and similar plans adopted by the Corporation for the
President and Vice-Presidents having the same full-time status and length of
service as the Employee. The Corporation anticipates having the package in
place within six months after execution of this Agreement.
9. Income From Services; Accounting And Disclosure Of Income And
-------------------------------------------------------------
Unrelated Software. Income generated by the Employee from the creation,
- ------------------
maintenance, or modification, use, license, sale, or any other transfer of
Unrelated Works, and from outside business activities permitted by this
Agreement shall belong to the Employee.
3
<PAGE>
While employed by the Corporation and for three years thereafter, the Employee
agrees upon request of the Corporation to render a true account of all
information and transactions concerning Unrelated Works and/or outside business
activities should the Corporation receive information reasonably suggesting that
the such Works or outside business activity violates the terms of this
Agreement. The Corporation shall require that those employees and agents of the
Corporation having access to this information shall keep confidential all
information disclosed pursuant to this section and the Corporation shall limit
access to such information to the members of the Board of Directors and the
management-level employee conducting the accounting.
10. Working Facilities. The Corporation will furnish the Employee
------------------
with working space, hardware, technical and secretarial assistance, and other
facilities and services suitable to Employee's position and adequate for the
performance of the Employee's duties. Any automobile allowance or payment of
relocation expenses shall be as provided in the Senior Management Benefit
Package. The Corporation shall provide the Employee with an office in Los
Angeles, California, near the SCITOR switch facility. The Employee shall have a
full time administrative assistant in the Los Angeles office.
11. Expenses. The Corporation shall pay for or reimburse the
--------
Employee for travel, lodging, and all reasonable and necessary expenses for the
promotion of the business of the Corporation, including expenses for
entertainment, dues, and other expenses that the Employee reasonably and
necessarily incurs in the performance of the duties for the Corporation covered
by this Agreement.
12. Vacations. The Employee shall be entitled each calendar year to
---------
a vacation consisting of two two-week periods, which may be increased by the
Corporation's business and subject to any policies adopted prospectively by the
Board of Directors, during which time the Employee's salary shall be paid in
full. The Employee may carry over no more than one two-week period to the next
calendar year (for a total of six weeks). The Employee shall take the vacation
at such time or times as shall be approved by the Corporation. Vacation time
may not be accrued from year to year without the advance written consent of the
Corporation, but the Corporation shall pay the Employee for any vacation days
lost.
13. Leave Of Absence. Leaves of absence with full payment of salary
----------------
may be granted to the Employee for attendance at professional conventions,
seminars, and other professional or business activities approved by the
Corporation. All expenses reasonably and necessarily incurred by the employee
in these activities shall be paid for or reimbursed by the Corporation. The
Corporation may from time to time approve leaves of absence with full or partial
payment of salary and other expenses for other reasons in its sole discretion.
4
<PAGE>
14. Termination. This Agreement may be terminated by either party
-----------
upon 30 days written notice, if for cause, and upon 60 days advance written
notice, if without' cause. The term "cause" means any material breach of the
employee's duty of loyalty to the Corporation; material failure to perform his
corporate duties for a period of 30 days on a consistent basis after written
notice of such failure, regardless of the cause; any act of criminal fraud,
whether or not involving the Corporation; or any material breach of the terms of
this Agreement, the Acquisition and Management Agreement, Shareholder Agreement,
or any other written agreement between the Employee and the Corporation or its
subsidiary, GFP Group, Inc. Termination of this Agreement for cause shall
automatically terminate for cause all other agreements between the Corporation
or its subsidiary and the Employee. In the case of termination for cause,
unless the Employee contests the grounds stated in the notice and demands
arbitration, all rights of the Employee under such agreements and all rights
under this Agreement, including salary, benefits, and Board representation shall
automatically be extinguished as of the termination date stated in the notice
and the Employee's stock, including vested options, shall be redeemed by the
Corporation at 75 per cent of the value calculated pursuant to the method stated
in the shareholder agreement, so long as the Corporation's stock is not then
publicly traded, in which case there shall be no redemption. If the Employee
demands arbitration of the termination grounds, the parties will immediately
proceed to arbitration and all compensation, benefits, and stock voting rights
of the Employee shall be suspended pending the decision of the arbitrator, which
shall take place within six months from the commencement of arbitration unless
delay is caused by the Employee. If the Corporation terminates this Agreement
without cause, the Corporation shall be obligated to continue to provide the
Employee with the full salary and compensation benefits required by this
Agreement until the expiration of the rolling three-year term. Unless the
Corporation's stock is then publicly traded, the Corporation shall redeem the
Employee's stock, including vested options, at market value determined by the
method stated in the Shareholder Agreement. All stock acquisition rights shall
cease as of the termination date stated in the written notice of termination,
whether the stock is publicly traded or not. Unless otherwise agreed, the
redemption amount shall be paid as follows: in 12 equal monthly installments if
the amount is less than $500,000; in 24 equal monthly installments if the
redemption amount is between $500,000 and $1,000,000 and in equal quarterly
installments over a five-year period if the redemption amount is $1,000,000 or
more. Each installment shall include interest on the declining balance at 6%
per annum, compounded monthly.
15. Conflict Of Interest. Except as provided in Section 5, above,
--------------------
the Employee warrants and represents that: (1) the Employee has no conflict of
interest in performing the duties for which the Corporation is hiring the
Employee; (2) that the Employee is not under any legal disability regarding
these duties and is not prohibited by any employment agreement or covenant not
to compete from performing these duties; (3) that the work the Employee is
performing and will perform for the Corporation does not to the knowledge of the
Employee, breach any contract or infringe upon any existing patent or copyright
or
5
<PAGE>
contain any proprietary information or trade secrets of any former employer or
other person or entity.
16. Proprietary Information. The Employee acknowledges that the list
-----------------------
of Corporation's contracts, suppliers, customers, material information on the
business of those customers, and the Corporation's telecommunication technology,
work in progress,' know-how, techniques, and current and anticipated research
and development activities, as well as the related printed and tangible
materials, as these may exist from time to time, constitute Proprietary Trade
Secrets of the Corporation that are valuable, special and unique assets of the
Corporation's business and which the Corporation takes reasonable steps to
safeguard from disclosure to persons that do not owe a duty of confidentiality
to the Corporation. The Employee also acknowledges that conducting the
Employee's duties for Corporation's business may require that the Employee come
into contact with information belonging to the Corporation's customers which
information is disclosed to the Employee pursuant to the Corporation's agreement
to keep the information confidential ("Customer Confidences"). The employee
will not, during or after the term of employment, disclose any Proprietary Trade
Secrets or Customer Confidences, directly or indirectly, in whole or in part, to
any person, firm, corporation, association, or other entity for any reason or
purpose whatsoever. Nor shall the Employee include any know-how, or techniques
that constitute Proprietary Trade Secrets of the Corporation or Customer
Confidences, in any invention or work unless it is owned by the Corporation.
Information shall cease being Proprietary Trade Secrets or Customer Confidences
if the Corporation or the Customer has permitted the information to enter the
public domain without any involvement of the Employee. The scope and
enforceability of this section shall be determined in accordance with Washington
law. In the event that the Corporation establishes the Employee's breach or
threatened breach of this section's provisions, the Corporation shall be
entitled to an injunction restraining the Employee from disclosing any
Proprietary Trade Secrets or Customer Confidences and/or restraining the
Employee from rendering any services to any person, firm, corporation,
association or other entity to whom any Proprietary Trade Secret or Customer
Confidence, in whole or in part, either has been disclosed or is threatened to
be disclosed. Nothing contained in this section shall be construed as
prohibiting the Corporation from pursuing any other remedies available to the
Corporation for breach or threatened breach of this provision, including the
recovery of damages from the Employee, as well as reasonable attorneys fees and
costs.
17. Restrictive Covenant. During the term of this Agreement and for
--------------------
a period of 12 months after termination or expiration of this Agreement, the
Employee will not (a) directly or indirectly, own, manage, operate, control, be
employed by, participate in, or be connected in any manner with any business
that derives income from providing the same or similar services or products as
those of the Corporation, or is in competition with any business that the
Corporation is conducting or demonstrably anticipates conducting as of the
Employee's termination date; (b) solicit business or perform work for any
6
<PAGE>
customer of the Corporation, which work is similar to the type of work performed
by the Corporation for it-s customers, regardless of whether the Employee would
be performing the work on his or her own behalf or on behalf of some other
business; (c) solicit, recruit, or attempt to induce any employee to leave the
Corporation's employment or hire any employee whose employment with the
Corporation was terminated less than six months before the date of hire. If, at
any time during the term of this Agreement, the Employee's outside business
activity or Unrelated Work business conflicts with or competes with the
Corporation's then existing business, the Employee agrees either to merge the
competing or conflicting part of the outside business into the Corporation for
its fair market value on mutually agreed terms, permit the Corporation to
acquire the competing or conflicting portion of the employee's business for its
fair market value on mutually agreed terms, or terminate employment with the
Corporation. After termination of this Agreement for any reason, the Employee
may request written consent from the Corporation's Board of Directors to permit
the Employee to become associated with a competitor prior to expiration of the
12-month period stated above. The Board of Directors shall not unreasonably
withhold consent and shall base any denial of consent upon its determination
that the former Employee's requested business activity would significantly
impair the Corporation's operations, market position, proposals in progress, or
relationship with existing customer(s). In the event that the Corporation
establishes the Employee's actual or threatened breach of this section's
provisions, the Corporation shall be entitled to an injunction restraining the
Employee from the action or threatened action. Nothing in this section shall be
construed as prohibiting the Corporation from pursuing any other available
remedies for the breach or threatened breach, including the recovery of damages
from the Employee, as well as reasonable attorneys fees and costs.
18. Arbitration. Any controversy or claim arising out of, or
-----------
relating to, the meaning or enforceability of any provision of this Agreement,
the terms of employment, the work performed by the Employee, or ownership of any
product or right created during or after the terms of this Agreement, shall be
settled by binding arbitration before a single arbitrator of the Judicial
Arbitration and Mediation Service in the city of Seattle, Washington, or as
agreed-upon by the parties or selected by the King County Presiding Judge. The
arbitration shall be conducted in accordance with the then existing Washington
Civil Court Rules and judgment upon the award shall be rendered within six
months of commencement of arbitration, if practicable, and shall be final and
enforceable in any court of competent jurisdiction.
19. Attorneys Fees. In the event of any dispute arising out of this
--------------
Agreement or the employment relationship, the substantially prevailing party in
such dispute shall be entitled, in addition to any other relief, to an award of
attorneys fees and actual costs, including expert fees and arbitration fees.
The award shall include fees and costs incurred before any proceeding or
arbitration is commenced. If a proceeding is commenced and neither party wholly
prevails, the party receiving substantially greater relief shall be considered
the prevailing party as to all fees and costs relating to the
7
<PAGE>
dispute. The actual attorneys fees and costs incurred by the substantially
prevailing party shall be presumptively reasonable, which presumption is
rebuttable.
20. Notices. Any notice required or desired to be given under this
-------
Agreement shall be sufficient if in writing and sent by certified mail, return
receipt requested, to the Employee's residence or to the principal office of the
Corporation, as the case may be.
21. Waiver Of Breach. The waiver by either the Corporation or the
----------------
Employee of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach by either the Corporation or the
Employee.
22. Assignment, Sale or Merger. The Employee acknowledges that the
--------------------------
services to be rendered by him or her are unique and personal. Accordingly, the
Employee may not assign any of his or her rights or delegate any of his or her
duties or obligations under this Agreement. The rights and obligations of the
Corporation under this Agreement shall inure to the benefit of, and shall be
binding upon, the successors and assigns of the Corporation. The parties
contemplate and intend that this Agreement shall be assumed without material
change by GlobalTel as part of its acquisition of GFP Group and that it will be
fully enforceable by GlobalTel and the Employee without the need of any
additional agreement. In the event of a sale or merger of the Corporation to
any other entity, the successor to the Corporation shall assume the
Corporation's obligations pursuant to this Agreement. In the event that a sale,
merger or corporate restructure results in a 50 percent or greater change of
ownership or control of the Corporation's affairs, except as a result of the
GlobalTel acquisition, the Employee may terminate this Agreement and require
that the Corporation redeem the Employees stock pursuant to the formula and
method of valuation stated in the Shareholder Agreement, and pay the other
amounts as provided in paragraph 14, above.
23. Entire Agreement. This Agreement and any addenda attached to
----------------
this Agreement and signed by the parties contain the entire agreement of the
parties. There are no other agreements, oral or written. This Agreement may be
changed only by a written agreement signed by the party against whom enforcement
is sought. In the event of a conflict, the terms of more recently executed
documents supersede those of earlier documents.
24. Severability. The provisions of Section 5 "Extent of Service,"
------------
Section 6 "Ownership of Works Created by Employee," Section 9 "Income from
Services; Accounting and Disclosure of Income and Unrelated Software," Section
15 "Conflict of Interest," Section 16 "Proprietary Information," Section 17
"Restrictive Covenant,' and any addendum that concerns the subject matter of any
of those provisions, state obligations of the parties that are independent of
each other, severable, and separately enforceable. To the extent that any
portion of a provision is deemed unenforceable, the
8
<PAGE>
balance of that provision shall be fully enforced. The unenforceability of any
provision shall have no effect on the enforceability of any other provision of
this Agreement.
25. Applicable Law. This Agreement shall be construed in accordance
--------------
with the laws of the State of Washington.
Dated: ------------------------
EMPLOYEE
CORPORATION
By----------------------
Its---------------------
9
<PAGE>
EXHIBIT B
Scitor International Telecommunications Services, INC.
A SITA Group Company
Agreement for managed Scitor ITS
data network services
- ------------------------------------------------------
- --------------------------------------------------------------------------------
Customer Name: Date:
NetStar International Telecommunications, Inc. April 28, 1995
- --------------------------------------------------------------------------------
Customer Address: Agreement No:
5820 Stoneridge Mall Road, Suite 214 MDNS/US/NC/95-99
Pleasanton, CA 94588
- --------------------------------------------------------------------------------
Customer Contact: Telephone No:
Peter Gust (T) 510-734-5100
(F) 510-734-5100
- --------------------------------------------------------------------------------
In accordance with the terms of this Agreement, Scitor International
Telecommunications Services, Inc. ("Scitor ITS") agrees to make available to the
above Customer ("Customer") certain managed data network services as more fully
described in this Agreement or as may be ordered from time to time by Customer
and accepted by Scitor ITS. All accepted orders shall become a part of this
Agreement.
THE PARTIES HAVE READ THIS AGREEMENT AND AGREE TO BE BOUND BY ALL OF ITS TERMS.
THE PARTIES FURTHER AGREE THAT IT CONSTITUTES THE COMPLETE AGREEMENT BETWEEN
THEM AND SUPERSEDES ALL PROPOSALS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATION
BETWEEN THEM RELATING TO THE SUBJECT HEREOF. NO AGREEMENT OR DOCUMENT HAVING AS
ITS PURPOSE OR EFFECT THE VARIATION, ADDITION OR DELETION OF ANY OF THE TERMS
AND CONDITIONS INDICATED IN THIS AGREEMENT WILL BE BINDING UNLESS SIGNED FOR AND
ON THE BEHALF OF SCITOR, ITS BY AN AUTHORIZED SIGNATORY.
Scitor ITS Customer /s/ German Burtscher
- ------------------------------- ----------------------------------------
Authorized Signatory Authorized Signatory
Name /s/ Bruce D. Jones Name German Burtscher
- ------------------------------- ----------------------------------------
Title Title Vice President
Bruce D. Jones
EXECUTIVE V.P & GENERAL MGR. MAY 15, 1995
- ------------------------------- ----------------------------------------
Date 5/26/95 Date
- --------------------------------------------------------------------------------
<PAGE>
withhold such confirmation of acceptability. Any Equipment connected by
Scitor ITS shall be deemed to comply with this Clause 2.4
2.5 Customer hereby authorizes Scitor ITS to make reasonable use of any user
codes, numbers or passwords allocated to Customer for the purpose of
providing network management and support to Customer.
2.6 Customer shall be responsible for obtaining and maintaining all such
equipment and communications lines, magnetic media, programs, software and
other facilities, including the provision of personnel, as are reasonably
necessary and acceptable to Scitor ITS for communications with the Service
(collectively the "Customer Facilities"). Neither Scitor ITS nor its agents
or sub-contractors shall have any responsibility for or liability with
respect to the use, operation or performance of such Customer Facilities.
3. SUPPORT SERVICES
3.1 Scitor ITS shall provide access by voice and/or data link, if available, to
help desk facilities at locations of Scitor ITS' choice in order for
Customer to obtain technical advice and guidance on the operation and use
of the Service.
3.2 Scitor ITS shall provide Tail Circuit management services comprising: (a)
the ordering and managing of the connection of Tail Circuits and modems
from the relevant PTTs as applicable; (b) the testing and acceptance of
Tail Circuits; (c) Tail Circuit fault restoration upon becoming aware of a
fault: and (d) payment to third party providers of Tail Circuits, modems or
other telecommunications equipment in local currency on Customer's behalf,
where applicable.
4. EQUIPMENT
4.1 Scitor ITS shall connect the Equipment at the Locations, or such other
locations agreed to by the Parties (if requested by Customer) on dates to
be agreed by the Parties. Scitor ITS shall provide reasonable notification
of the date of connection and shall connect at times to be agreed by the
Parties. Should connection require the removal or disconnection of any
existing equipment of Customer, Customer shall permit, and obtain all
necessary consents for, such removal or disconnection and shall give Scitor
ITS all necessary assistance to enable such work to be carried out.
4.2 On the date of connection of the Equipment, Scitor ITS shall commission the
Equipment, which on successful commissioning shall be deemed to be accepted
by Customer. For the purpose of this Clause 4.2,"successful commissioning
shall mean that Scitor ITS shall have checked powered up, and then carried
out the manufacturer' initialisation tests on the Equipment, save that
should Customer require additional commissioning tests, Scitor ITS shall
carry out such alternative tests provided that such tests are reasonably
necessary to establish the operability of the Equipment and provided,
further, that Customer has given Scitor ITS at least 30 days notice prior
to the date of delivery of the Equipment to the Location.
4.3 The lease term shall commence on the date of acceptance of the Service
pursuant to Clause 11.2 at the Location to which the Equipment relates and
shall thereafter continue in accordance with the term of this Agreement,
subject to Clause 5.1 of Attachment 1 and Clause 1.7 of Attachment 2 .
4.4 The lease and any other charges shall be as specified in Attachment 1.
4.5 Except as set forth in Clause 1.7 of Attachment 2, the Equipment shall at
all times remain the sole and exclusive property of Scitor ITS or its sub-
contractors and Customer shall have no rights or interest in the Equipment
except for quiet possession and the right to use the Equipment under the
terms and conditions of this Agreement.
4.6 Customer shall have the following additional obligations with respect to
the Equipment: (a) not to sell, assign, sub-let, pledge or part with
possession or control of or otherwise deal with the Equipment or any
interest therein: (b) not to change, remove or obscure any labels, plates,
insignia, lettering or other markings which are on the Equipment at the
time of connection thereof or which may thereafter be placed on the
Equipment by Scitor ITS or by any person authorized by Scitor ITS; (c) to
keep the Equipment free from distress, execution or any other legal
process; (d) not to move the Equipment from the Location (or other
Location) to which it was delivered and connected without Scitor ITS' prior
written consent; and (e) not to use the Equipment or permit the same to be
used contrary to any law or any regulation for the time being in force.
4.7 Customer shall have full responsibility for the upkeep of the Equipment.
For the purpose of this Clause 4.7, "responsibility for upkeep" shall mean
that Customer shall: (a) ensure that proper environmental conditions as
recommended by the manufacturers are maintained for the Equipment and that
the exterior surfaces are kept clean and in good condition; (b) not make
any modifications to the Equipment: and (c) not use in conjuction with the
Equipment any accessory, attachment or additional equipment other than that
which has been supplied by or approved in writing by Scitor ITS.
4.8 Upon termination or expiry of this Agreement. Customer shall surrender
possession of the Equipment in good order, repair and condition, to Scitor
ITS, fair wear and tear excepted.
4.9 Scitor ITS shall ensure that the Equipment is at the time of commissioning,
and remains during the term of this Agreement, in good working order. If a
Service fault occurs which has been caused by a failure in the Equipment,
Scitor ITS shall restore or repair the Service to the affected Location as
soon as practicably.
<PAGE>
1. DEFINITIONS
1.1 In this Agreement, unless the context otherwise requires, the following
expressions shall have the following meanings:
1.2 "Agreement" shall mean this managed data network services agreement and the
Attachments and Schedules attached hereto and made a part hereof.
1.3 "Dollars" or "S" shall mean United States dollars.
1.4 "DTE" shall mean Data Terminating Equipment.
1.5 "Effective Date" shall mean the date this Agreement is signed by an
authorized signatory of Scitor ITS.
1.6 "Equipment" shall mean the communications equipment, servers, modems,
cables and connectors supplied under lease by Scitor ITS to Customer under
this Agreement.
1.7 "Initial Term" shall mean a period commencing on the Effective Date and
ending 5 (five) years after the date of acceptance of the Service by
Customer (pursuant to Clause 12.2) at the last Location to be connected
under this Agreement.
1.8 "Locations" shall mean the locations specified in Attachment 2.
1.9 "Network" shall mean the communications processors, related equipment, and
circuits used by Scitor ITS for the provision of the Service, excluding
Tail Circuits to the Locations and any communications equipment (including
the Equipment) sited at the Locations.
1.10 "Network Path Availability" shall mean the availability of two way
communication of the virtual communication link (expressed as a percentage)
between the access entry port on which the DTE originator is connected and
the Network access exit port on which the DTE destination is connected,
excluding maintenance windows, host links and Tail Circuits.
1.11 "Network Transit Time" shall mean the elapsed time taken for the one way
transmission of a 128 character length packet (a "Packet") between the
entry point on the Network Node to which Customer's transmitter of the
Packet it connected, and the exit point on the Network Node to which the
receiver of the Packet is connected.
1.12 "Node" shall mean a node of the Network to which a Tail Circuit is to be
connected for the purposes of rendering the Service to Customer such Nodes
being deployed at such times and places as determined by Scitor ITS.
1.13 "Parties" shall mean Scitor ITS and the Customer, "Party" shall mean either
Scitor ITS or the Customer as the context requires.
1.14 "Service" shall mean managed data network services based on X.25 protocol
and all related and ancillary services thereto, or any of same, including
the provision of Equipment and Software all as more fully described in
Attachment 1, or such other managed data network services agreed to by the
Parties from time to time; the Service expressly excludes any PSTN dial-up
lines or modems.
1.15 "Software" shall mean the software programs and each and every component
thereof, as amended from time to time, including all developments, versions
or releases thereof whether existing now or becoming available in the
future, and all related documentation, which may be supplied by Scitor ITS
in connection with the provision of the Service, whether integral to the
Equipment or otherwise.
1.16 "Support Services" shall mean the services as described in Clause 3.
1.17 "Tail Circuit" shall mean a telecommunications circuit or other capacity
leased from the relevant telecommunications authorities (PTTs) and which
permits the connection of a Location to the nearest Scitor Network node.
2. PROVISION OF SERVICE
2.1 Scitor ITS agrees to provide (subject to Clause 2.3), and Customer agrees
to obtain from Scitor ITS, the Service subject to the terms and conditions
of this Agreement and subject to payment of the charges set out in
Attachment 1. Customer understands and agrees that Scitor ITS provides the
Service for the benefit of Customer only and nothing in this Agreement
shall entitle customer to resail the Service to any third party.
2.2 Scitor ITS reserves the right to control, direct and establish procedures
for the use of the Service and Customer agrees to follow the instructions
and procedures of Scitor ITS with respect to the use of the Service. Scitor
ITS also reserves the right to make operational changes in the Service. In
exercising any such rights under this Clause 2.2, Scitor ITS shall not
adversely affect the Service or increase the charges payable by Customer
under this Agreement.
2.3 Customer shall ensure at all times that its use of the Service (including
its connection of any apparatus to any network used to deliver the Service)
is in accordance with all applicable telecommunications, data protection
and other laws, licenses or regulations.
2.4 Any terminal equipment used to gain access to the Service must be approved
by Scitor ITS prior to its connection to the Network. Scitor ITS reserves
the right to disconnect (or require the disconnection of) any terminal
equipment in breach of this provision. Customer shall notify Scitor ITS of
any terminal equipment it wishes to connect to the Network and Scitor ITS
shall promptly confirm its acceptability under this Clause 2.4. Scitor ITS
shall not unreasonably
<PAGE>
possible following such notification. Scitor ITS further agrees that a
Scitor ITS sub-contractor will, if necessary as determined by Scitor ITS,
arrive at the affected Location and commence any remedial activities within
4 working hours of notification, provided the notification is received, and
the call-out can be made during the normal business day of the Scitor ITS
sub-contractor nearest to the affected Location, and provided, also that
the affected Location is within a 50 kilometer radius of said centre
("Normal Service"). Remedial service on Equipment other than Normal Service
shall be carried out by Scitor ITS through its sub-contractors as soon as
is practicably possible, taking into account availability of service
personnel, the time and date of Customer's notification and the country
concerned.
4.10 Scitor ITS shall not be responsible for Service faults, nor shall Scitor
ITS be obliged to comply with its obligations under Clause 4.9, if such
faults occur as a result of: (a) damage to the Equipment during transport
activity or connection carried out by Customer or any third party other
than as authorised by Scitor ITS; (b) interventions other than normal
interventions carried out by non Scitor ITS personnel; (c) modifications to
the Equipment which have not been approved by the Equipment manufacturer or
carried out by personnel unapproved by Scitor ITS; (d) improper treatment
to the Equipment, failure to meet the Equipment manufacturer's
specifications, or environmental conditions by non-Scitor personnel; or (e)
accident or negligence on the part of Customer or any force majeure event.
Any site visits or repairs made necessary by the events specified in this
Clause 4.10 shall be subject to prior agreement by Scitor ITS and may cause
Customer to incur increased charges for the Service at the affected
Location, such charges to be commensurate with the cost to Scitor ITS of
restoring or repairing the Service. Nothing in this Clause 4.10 shall
affect Customer's obligations in respect of Equipment under the other
provisions of this Clause 4.
4.11 In this Clause 4. and notwithstanding definition 1.8. 'Locations' means
Locations as such term is defined in 1.8 and other locations where the
Equipment may be situated and connected, as agreed by the Parties from time
to time.
5. SOFTWARE
Customer is hereby granted non-exclusive and non-transferrable licenses to
use Software strictly in performing this Agreement. The Software and any
intellectual property rights of whatever nature in the Software are and
shall remain vested in Scitor ITS or an associated company of Scitor ITS
and nothing contained in this Agreement shall convey any ownership interest
in the Software to Customer. Customer acknowledges that the provision of
Software is made by Scitor ITS strictly for use in conjunction with the
Service and Customer agrees not to produce, copy, alter, modify, or add to
the Software or any part thereof, nor to attempt or to allow a third party
to attempt to reverse engineer, translate or convert the Software from
machine readable to human readable form, except as permitted by applicable
law.
6. INTELLECTUAL PROPERTY RIGHTS AND CONFIDENTIALITY
6.1 It is understood and agreed by Customer that all intellectual property
rights in the Service including, all specifications, manuals and other
documents provided by Scitor ITS to Customer as part of or in relation to
the Service are either licensed to or the property of Scitor ITS and
nothing contained in this Agreement shall be deemed to convey any title or
ownership interest to Customer. Customer shall use its best efforts not to
disclose such proprietary information to third parties without Scitor ITS'
prior approval.
6.2 Customer and Scitor ITS acknowledge that they will receive confidential
information and trade secrets ("Confidential Information") from each other
in connection with the Agreement. Confidential Information shall be deemed
to include all information each Party receives from the other Party, except
anything designated as not confidential. Customer and Scitor ITS agree to
maintain the secrecy of Confidential Information and agree neither to use
it (except for the purposes of performing the Agreement) nor to disclose it
to anyone outside Customer or Scitor ITS or to anyone within Customer or
Scitor ITS who does not have a need to know it in order to perform under
the Agreement, except with the consent of the other Party or in accordance
with the order of a court of competent jurisdiction. Confidential
Information shall not include any information which is publicly available
at the time of disclosure or subsequently becomes publicly available
through no breach of this provision by Customer or Scitor ITS or is
rightfully acquired from a third party who is not in breach of an agreement
to keep such information confidential.
7. CHARGES AND PAYMENT
7.1 All charges shall be as specified in Attachment 1 shall be invoiced by
Scitor ITS to Customer, monthly in arrears unless otherwise provided in
Attachment 1, and shall be payable without deductions or set-off within 30
days of receipt of invoice by Customer.
7.2 All charges stated are exclusive of any value added tax, sales tax, excise
tax, gross receipts tax and any similar tax which may be applicable thereto
and Customer agrees to pay all such applicable taxes.
7.3 Scitor ITS reserves the right to make a reasonable charge for any work done
by Scitor ITS which is attributable to Customer's failure to perform its
obligations or not specified by Scitor ITS as part of any Service provided.
7.4 Charges for components and materials and for magnetic media, stationery and
other supplies and for travel and subsistence (when not specifically
included in the Service) are separately payable by Customer.
<PAGE>
7.5 Failure by Customer to pay any charge according to the terms of this
Agreement shall entitle Scitor ITS without prejudice to its other rights
and remedies under the Agreement to (a) suspend the provision of the
Service following 30 days written notice, provided that Customers has not
remedied its default within that time and /or (b) charge interest on a
daily basis from the original due date at the rate of 2 percentage points
above the Chase Manhattan Bank's prime rate in force from time to time.
8. EXCLUSIONS AND LIMITATIONS OF LIABILITY
8.1 Scitor ITS is not liable for any delay in performing its obligations or for
any failure to perform its obligations under the Agreement if the delay or
failure results from circumstances beyond Scitor ITS' reasonable control.
Scitor ITS will notify the customer in a reasonable timeframe of any delay
in performing its obligations or of any failure to perform its obligations
under this Agreement.
8.2 EXCEPT AS EXPRESSLY CONTAINED IN THIS AGREEMENT, SCITOR ITS GIVES NO
WARRANTIES AND HEREBY DISCLAIMS ANY WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE WITH RESPECT TO THE SERVICE OR ANY EQUIPMENT OR SOFTWARE PROVIDED
UNDER OR IN RELATION TO THIS AGREEMENT.
8.3 NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, SCITOR ITS
SHALL NOT BE LIABLE FOR ANY INDIRECT, CONSEQUENTIAL, SPECIAL, INCIDENTAL OR
PUNITIVE DAMAGES HOWSOEVER ARISING INCLUDING, BUT NOT LIMITED TO, SUCH
DAMAGES ARISING FROM THE USE OF THE SERVICE BY CUSTOMER OR BY ITS OFFICERS,
EMPLOYEES, OR AGENTS OR BY ANY THIRD PARTY, WHETHER OR NOT AUTHORIZED BY
CUSTOMER, EVEN IF SCITOR ITS WAS MADE AWARE OF THE POSSIBILITY OF SUCH
DAMAGES IN ADVANCE.
8.4 In the event that data furnished by Customers, whether transmitted via the
Network or otherwise, is lost, destroyed or damaged due to the negligence
of Scitor ITS, its agents or employees, Customer's sole remedy shall be the
repair or replacement by Scitor ITS of such lost, destroyed or damaged
data, provided however that such repair or restoration can reasonably be
performed by Scitor ITS and provided, further, that Customer furnishes
Scitor ITS with all source data, in machine readable form, necessary for
such repair or restoration.
5 SUBJECT TO THE EXCLUSIONS AND LIMITATIONS OF LIABILITY SET OUT IN CLAUSES
8.1, 8.2, 8.3 AND 8.4 ABOVE. SCITOR ITS' LIABILITY TO CUSTOMER UNDER THIS
AGREEMENT, WHETHER IN CONTRACT, TORT OR OTHERWISE, AND INCLUDING LIABILITY
FOR NEGLIGENCE, IS LIMITED IN RESPECT OF EACH EVENT OR SERIES OF CONNECTED
EVENTS TO $100,000.
8.6 Scitor ITS' sole obligations and liabilities are as stated herein and all
other representations, conditions, warranties and terms express or implied
whether by statute law or otherwise are hereby excluded to the full extent
permitted by law.
9. NETWORK PATH AVAILABILITY
9.1 Subject to Clause 9.2, Scitor ITS shall warrant Network Path Availability
(NPA) for each Location as set out in Attachment 4 (as updated from time to
time to incorporate additional Locations).
9.2 If Scitor ITS breaches any NPA warranty for 2 consecutive months or for any
4 months in any 12 month period, such breach to be clearly substantiated by
Customer, then Customer's sole remedy for such breach under this Agreement
shall be an entitlement to cancel the Service at the Location directly
affected by such breach, without financial liability, on giving Scitor ITS
30 days written notice. Nothing contained in this Clause 9.2 shall affect
Customer's liability to pay for Service rendered prior to the effective
date of such cancellation. A breach of the NPA warranty at any Location
shall not constitute a material breach of this Agreement.
10. NETWORK TRANSIT TIME
10.1 Subject to Clause 10.2. Scitor ITS shall warrant the Network Transit Times
(NTT) set out in Attachment 4 (as updated from time to time to incorporate
additional Locations).
10.2 If Scitor ITS breaches any NTT warranty for 3 consecutive months, such
breach to be clearly substantiated by Customer, then Customer's sole remedy
under this Agreement for such breach shall be an entitlement to cancel the
Service at the Location directly affected by such breach without financial
liability on giving Scitor ITS 30 days written notice. Nothing contained in
this Clause 10.2 shall affect Customer's liability to pay for Service
rendered prior to the effective date of such cancellation. A breach of the
NTT warranty at any Location shall not constitute a material breach of this
Agreement.
11. DURATION AND TERMINATION
11.1 This Agreement shall come into force on the Effective Date and shall then,
subject to Clause 11.2 below remain in force for the duration of the
initial Term. It will be renewed automatically for additional terms of 12
months unless either Party gives to the other notice of its intention to
terminate at least 60 prior days to the expiration of the initial Term or
any renewal term.
<PAGE>
11.2 Either Party may terminate this Agreement by notice in writing to the other
forthwith in any of the following events: (a) if the other Party is guilty
of any material breach, non-observance or non-performance of its
obligations hereunder or any of them and does not remedy the same (if it is
capable of remedy) within 30 days of notice of such failure or breach being
given by the non-defaulting Party; (b) if an order is made or an effective
resolution is passed for the dissolution or winding up the other Party
except for the purposes of an amalgamation, merger or reconstruction; (c)
if an encumbrancer takes possession or a receiver is appointed over the
whole or any part of the undertaking or assets of the other, or the other
fails to provide adequate assurance of its ability to render due
performance upon demand; or (d) if the other becomes insolvent or makes any
special arrangements or any special assignment for the benefit of its
creditors or is the subject of a voluntary or involuntary filing under the
bankruptcy laws of any jurisdiction.
11.3 Termination of this Agreement for any cause shall not affect any rights or
obligations of the Parties in relation to anything done prior to such
termination and the provisions of this Agreement shall continue to bind the
Parties insofar and so long as may be necessary to give effect to such
rights and obligations.
12. COMMISSIONING/ACCEPTANCE
12.1 Scitor ITS shall connect the Service at the Locations according to
procedures set out in Attachment 3.
12.2 Customer shall be deemed to have accepted the Service at each of the
Locations on completion of the commissioning tests specified in Attachment
3.
13. NOTICES
All notices under this Agreement shall be in writing addressed to the
Parties at their respective addresses stated in the cover page of this
Agreement, or as may be otherwise notified under this Clause 13. If sent
by first class mail, notices shall be deemed to have been given 2 days
after the date of mailing. Notices may also be sent by fax provided that
the sending Party obtains confirmation of the receipt of such notices from
the recipient. If so sent, such fax notices shall be deemed to have been
given on the first business day (in the country of receipt) after the date
of transmission.
14. ASSIGNMENT
Customer may not assign, sub-contract or otherwise, dispose of this
Agreement or any part hereof or any benefit hereunder without the prior
written consent of Scitor ITS.
15. GENERAL
15.1 No Waivers:- No failure or delay of either Party in exercising any right,
power, or privilege under this Agreement (and no course of dealing between
the Parties) shall operate as a waiver of any such right, power or
privilege. No waiver of any default on any one occasion shall constitute a
waiver of any subsequent default. No single or partial exercise of any
such right, power or privilege shall preclude the further or full exercise
thereof.
15.2 No Third Party Beneficiaries, Agency or Partnership:- The provisions of
this Agreement are solely for the benefit of the Parties. No other party,
including invitees, members of the general public and other third parties
are intended to have nor shall have any rights whatsoever under this
Agreement, whether for injury, loss or damage to persons or property, or
for economic loss, damage or injury otherwise. This Agreement is not
intended to create a joint venture or partnership between the Parties and
neither Party is authorized to act as the agent of the other.
15.3 Invalidity:- If any term, provision or clause of this Agreement or any
portion of such term, provision, or clause is held invalid or
unenforceable, the remainder of this Agreement will not be affected thereby
and each remaining term, provision or clause or portion thereof will be
valid and enforceable to the full extent permitted by law.
15.4 Entire Agreement:- This Agreement; including the Attachment, together with
any supplement hereto duly signed on behalf of Scitor ITS by an authorized
signatory, represents the entire agreements between the Parties and
supersedes all other agreements, oral or written, and all other
communications between the Parties relating to the subject matter hereof.
15.5 Supplements:- Each Party agrees to execute such additional documents as
may be reasonably necessary or appropriate to accomplish the purposes of
this Agreement.
15.6 Interpretation:- In this Agreement (a) the headings used are included for
convenience only and are not to be used in construing or interpreting this
Agreement (b) any reference to the plural includes the singular and any
reference to the singular includes the plural; and (c) any reference to a
clause, an attachment or to a schedule is to a clause, attachment or
schedule of this Agreement.
16. APPLICABLE LAW AND ARBITRATION
16.1 This Agreement and all matters regarding the interpretation and / or
enforcement hereof, shall be governed exclusively by the law of the State
of Delaware except insofar as the federal law of the United States of
America may control any aspect of this Agreement in which case federal law
shall govern such aspect.
<PAGE>
16.2 All disputes, controversies or claims arising out of, or relating to this
agreement shall be settled exclusively by arbitration before a single
arbitrator in District of Colombia in accordance with the Commercial
Arbitration Rules of the American Arbitration Association. Each Party
irrevocably consents to personal jurisdiction and to ex parte action
should any Party refuse to participate in such proceedings. The
arbitrator's award shall be final and binding on all Parties and judgement
on the award may be entered and the award enforced in any court having
jurisdiction thereof.
Page 6
<PAGE>
ATTACHMENT 1. CHARGES
Scitor ITS shall provide Customer with the Service in the Locations and in
accordance with the charges all as specified herein or in the schedule to
this Attachment 1 ("Schedule 1").
1. PORT CHARGES
The port charges applicable to the Locations shall be as specified in
Schedule 1. Except as set forth in Clause 8 of this Attachment 1, all port
charges are fixed for the Initial Term. Scitor ITS shall commence its port
charges 30 days after the date of acceptance of the Service at a Location
and the first invoice shall be for the first 2 months charges.
Notwithstanding the above, no port charges shall be charged for the San
Francisco and Mexico City Locations for the first 90 days following
acceptance of the Service at such Locations.
2. CONNECTION/PROJECT MANAGEMENT/DISCONNECTION CHARGES
The charges applicable for connections shall be as specified in Schedule 1
and for disconnections shall be $250 per disconnected Location. All such
charges are one time charges payable in the case of connections on the date
of acceptance of the Service at a Location; in the case of disconnections,
such charges are payable on the date disconnection of the Location from the
Network. Connection charges for additional ports in the same Location shall
be $1000.
3. TAIL CIRCUIT CHARGES
Tail Circuit charges shall be as notified to Customer by Scitor ITS. Tail
Circuit charges are monthly charges fixed for the Initial Term and then
adjusted in line with actual charges from PTTs at that time. Any revised
Tail Circuit charges shall be fixed for the duration of any renewal term.
4. TAIL CIRCUIT MANAGEMENT CHARGES
For the management of each Tail Circuit, Scitor ITS shall charge monthly
$100 or 15% of the monthly Tail Circuit charge, whichever is the greater.
5. EQUIPMENT LEASE CHARGES
5.1 Equipment lease charges applicable to this Agreement shall be as specified
in Schedule 1 or as otherwise notified by Scitor ITS (subject to precise
specification). Equipment lease charges shall be fixed for the first 3
years of the lease term. Thereafter the following shall apply: (a) Customer
may terminate the lease by paying Scitor ITS a lease buyout fee equal to
20% of the original price paid by Scitor ITS or its subcontractors for the
Equipment: or (b) the lease term will continue for a further 2 years at a
reduced lease charge equal to 40% of the charge prevailing during the first
3 year period. At the end of 5 years from the commencement of the lease
term all lease charges shall cease and Scitor ITS will transfer ownership
of the relevant Equipment to Customer. Equipment lease charges shall
commence on the date of acceptance of the Service at a Location.
5.2 In addition to the charges set out in Clause 5.1 above (and Schedule 1),
Scitor ITS shall charge Customer a fee for Equipment connected in a
Location controlled by Scitor ITS or an affiliated company of Scitor ITS.
Such charge shall be as notified by Scitor ITS and Scitor ITS shall have no
obligation to connect Equipment at any such Location unless and until
Customer has agreed said charges.
6. SOFTWARE LICENSE FEES
Any Software license fees shall be as notified by Scitor ITS from time to
time unless the Software is integral to the Equipment, in which case no
separate charges shall apply.
7. UPGRADES
With reference to Clause 1 of Attachment 3 of the Agreement, subject to
this Clause 7, Scitor ITS agrees that Customer will be entitled to upgrade
the Service at any Location without penalty. Scitor ITS will, however,
charge Customer for any difference in charges resulting therefrom and in
addition its reasonable connection, disconnection and project management
charges relating to such upgrades. Any changes to the Service which reduce
service capacity or function, result in lower charges and are not
compensated by equivalent increases in service capacity or function and
charges, are excluded from this provision and the Parties shall agree such
changes and the financial effects resulting therefrom on a case by case
basis.
8. DISCOUNTS
8.1 Additional port connections either at the same Location, or in additional
Locations within a country, will be charged at the then prevailing Scitor
ITS list prices less a 20% discount.
8.2 Customer shall also receive the following discounts against port charges
for each Location to be provided with X.25 Service in the 4th and 5th year
following acceptance of the Service at the Location:
4th year 5%
5th year 10%
Final Attachment 1 Page 1
<PAGE>
SCHEDULE 1
- ----------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
MONTHLY CHARGES (S) ONE TIME CHARGES (S)
-----------------------------------------------
PORT
LINE EQUIPMENT CONNECTION EQUIPMENT TOTAL TOTAL ONE
LOCATION SPEED PORT LEASE &PROJ MGMT CONNECTION MONTHLY TIME
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AMSTERDAM 64 $3,000 $3,150 $2,000 $3,400 $ 6,150 $5,400
- ----------------------------------------------------------------------------------------------------------
ATHENS 64 $4,000 $1,500 $2,000 $3,400 $ 5,500 $5,400
- ----------------------------------------------------------------------------------------------------------
AUCKLAND 64 $6,000 $3,150 $2,000 $3,400 $ 9,150 $5,400
- ----------------------------------------------------------------------------------------------------------
BANGKOK 64 $6,000 $1,500 $2,000 $3,400 $ 7,500 $5,400
- ----------------------------------------------------------------------------------------------------------
BARCELONA 64 $3,000 $3,150 $2,000 $3,400 $ 6,150 $5,400
- ----------------------------------------------------------------------------------------------------------
BEIJING 64 $6,000 $3,150 $2,000 $3,400 $ 9,150 $5,400
- ----------------------------------------------------------------------------------------------------------
BERLIN 64 $3,000 $3,150 $2,000 $3,400 $ 6,150 $5,400
- ----------------------------------------------------------------------------------------------------------
BOMBAY 64 $7,000 $3,150 $2,000 $3,400 $10,150 $5,400
- ----------------------------------------------------------------------------------------------------------
BRUSSELS 64 $3,000 $3,150 $2,000 $3,400 $ 6,150 $5,400
- ----------------------------------------------------------------------------------------------------------
BUDAPEST 64 $4,000 $3,150 $2,000 $3,400 $ 7,150 $5,400
- ----------------------------------------------------------------------------------------------------------
BUENOS AIRES 64 $6,000 $3,150 $2,000 $3,400 $ 9,150 $5,400
- ----------------------------------------------------------------------------------------------------------
CAIRO 64 $6,000 $1,500 $2,000 $3,400 $ 7,500 $5,400
- ----------------------------------------------------------------------------------------------------------
CAPE TOWN 64 $6,000 $1,500 $2,000 $3,400 $ 7,500 $5,400
- ----------------------------------------------------------------------------------------------------------
CARACAS 64 $6,000 $3,150 $2,000 $3,400 $ 9,150 $5,400
- ----------------------------------------------------------------------------------------------------------
COPENHAGEN 64 $3,000 $3,150 $2,000 $3,400 $ 6,150 $5,400
- ----------------------------------------------------------------------------------------------------------
DELHI 64 $7,000 $1,500 $2,000 $3,400 $ 8,500 $5,400
- ----------------------------------------------------------------------------------------------------------
DUBLIN 64 $3,000 $1,500 $2,000 $3,400 $ 4,500 $5,400
- ----------------------------------------------------------------------------------------------------------
DURBAN 64 $6,000 $1,500 $2,000 $3,400 $ 7,500 $5,400
- ----------------------------------------------------------------------------------------------------------
FRANKFURT 64 $3,000 $3,150 $2,000 $3,400 $ 6,150 $5,400
- ----------------------------------------------------------------------------------------------------------
GENEVA 64 $3,000 $3,150 $2,000 $3,400 $ 6,150 $5,400
- ----------------------------------------------------------------------------------------------------------
GUANGHOU 64 $6,000 $1,500 $2,000 $3,400 $ 7,500 $5,400
- ----------------------------------------------------------------------------------------------------------
HAMBURG 64 $3,000 $1,500 $2,000 $3,400 $ 4,500 $5,400
- ----------------------------------------------------------------------------------------------------------
HELSINKI 64 $3,000 $1,500 $2,000 $3,400 $ 4,500 $5,400
- ----------------------------------------------------------------------------------------------------------
HONG KONG 64 $6,000 $3,150 $2,000 $3,400 $ 9,150 $5,400
- ----------------------------------------------------------------------------------------------------------
ISTANBUL 64 $4,000 $1,500 $2,000 $3,400 $ 5,500 $5,400
- ----------------------------------------------------------------------------------------------------------
JAKARTA 64 $6,000 $1,500 $2,000 $3,400 $ 7,500 $5,400
- ----------------------------------------------------------------------------------------------------------
JOHANNESBURG 64 $6,000 $3,150 $2,000 $3,400 $ 9,150 $5,400
- ----------------------------------------------------------------------------------------------------------
KIEV 64 $7,000 $1,500 $2,000 $3,400 $ 8,500 $5,400
- ----------------------------------------------------------------------------------------------------------
KUALA LUMPUR 64 $6,000 $1,500 $2,000 $3,400 $ 7,500 $5,400
- ----------------------------------------------------------------------------------------------------------
LIMA 64 $6,000 $1,500 $2,000 $3,400 $ 7,500 $5,400
- ----------------------------------------------------------------------------------------------------------
LISBON 64 $3,000 $1,500 $2,000 $3,400 $ 4,500 $5,400
- ----------------------------------------------------------------------------------------------------------
LONDON 64 $3,000 $3,150 $2,000 $3,400 $ 6,150 $5,400
- ----------------------------------------------------------------------------------------------------------
MADRID 64 $3,000 $3,150 $2,000 $3,400 $ 6,150 $5,400
- ----------------------------------------------------------------------------------------------------------
MANILA 64 $6,000 $1,500 $2,000 $3,400 $ 7,500 $5,400
- ----------------------------------------------------------------------------------------------------------
MARTINIQUE 64 $6,000 $1,500 $2,000 $3,400 $ 7,500 $5,400
- ----------------------------------------------------------------------------------------------------------
MELBOURNE 64 $6,000 $1,500 $2,000 $3,400 $ 7,500 $5,400
- ----------------------------------------------------------------------------------------------------------
MEXICO 64 $3,000 $3,150 $2,000 $3,400 $ 6,150 $5,400
- ----------------------------------------------------------------------------------------------------------
MIAMI 64 $2,800 $1,500 $2,000 $3,400 $ 4,300 $5,400
- ----------------------------------------------------------------------------------------------------------
MILAN 64 $3,000 $1,500 $2,000 $3,400 $ 4,500 $5,400
- ----------------------------------------------------------------------------------------------------------
MONTEVIDEO 64 $6,000 $1,500 $2,000 $3,400 $ 7,500 $5,400
- ----------------------------------------------------------------------------------------------------------
MONTREAL 64 $2,800 $1,500 $2,000 $3,400 $ 4,300 $5,400
- ----------------------------------------------------------------------------------------------------------
MOSCOW 64 $4,000 $3,150 $2,000 $3,400 $ 7,150 $5,400
- ----------------------------------------------------------------------------------------------------------
MUNICH 64 $3,000 $3,150 $2,000 $3,400 $ 6,150 $5,400
- ----------------------------------------------------------------------------------------------------------
NEW YORK 64 $2,800 $3,150 $2,000 $3,400 $ 5,950 $5,400
- ----------------------------------------------------------------------------------------------------------
</TABLE>
FINAL ATTACHMENT 1, SCHEDULE 1, PAGE 1
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
MONTHLY CHARGES (S) ONE TIME CHARGES (S)
-----------------------------------------------
PORT
LINE EQUIPMENT CONNECTION EQUIPMENT TOTAL TOTAL ONE
LOCATION SPEED PORT LEASE &PROJ MGMT CONNECTION MONTHLY TIME
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OSAKA 64 $ 6,000 $ 3,150 $ 2,000 $ 3,400 $ 9,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
OSLO 64 $ 3,000 $ 3,150 $ 2,000 $ 3,400 $ 6,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
PANAMA CITY 64 $ 6,000 $ 1,500 $ 2,000 $ 3,400 $ 7,500 $ 5,400
- ----------------------------------------------------------------------------------------------------------
PARIS 64 $ 3,000 $ 3,150 $ 2,000 $ 3,400 $ 6,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
RIO DE JANEIRO 64 $ 6,000 $ 3,150 $ 2,000 $ 3,400 $ 9,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
ROME 64 $ 3,000 $ 3,150 $ 2,000 $ 3,400 $ 6,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
LOS ANGELES 64 $ 2,800 $ 3,150 $ 2,000 $ 3,400 $ 5,950 $ 5,400
- ----------------------------------------------------------------------------------------------------------
SAN JOSE, CR 64 $ 6,000 $ 3,150 $ 2,000 $ 3,400 $ 9,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
SAN JUAN 64 $ 6,000 $ 1,500 $ 2,000 $ 3,400 $ 7,500 $ 5,400
- ----------------------------------------------------------------------------------------------------------
SANTIAGO 64 $ 6,000 $ 1,500 $ 2,000 $ 3,400 $ 7,500 $ 5,400
- ----------------------------------------------------------------------------------------------------------
SANTO DOMINGO 64 $ 6,000 $ 1,500 $ 2,000 $ 3,400 $ 7,500 $ 5,400
- ----------------------------------------------------------------------------------------------------------
SAO PAULO 64 $ 6,000 $ 3,150 $ 2,000 $ 3,400 $ 9,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
SEOUL 64 $ 6,000 $ 3,150 $ 2,000 $ 3,400 $ 9,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
SHANGHAI 64 $ 6,000 $ 3,150 $ 2,000 $ 3,400 $ 9,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
SHANNON 64 $ 3,000 $ 1,500 $ 2,000 $ 3,400 $ 4,500 $ 5,400
- ----------------------------------------------------------------------------------------------------------
SHINGZEN 64 $ 6,000 $ 3,150 $ 2,000 $ 3,400 $ 9,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
SINGAPORE 64 $ 6,000 $ 3,150 $ 2,000 $ 3,400 $ 9,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
SOPHIA 64 $ 4,000 $ 1,500 $ 2,000 $ 3,400 $ 5,500 $ 5,400
- ----------------------------------------------------------------------------------------------------------
STOCKHOLM 64 $ 3,000 $ 3,150 $ 2,000 $ 3,400 $ 6,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
SYDNEY 64 $ 6,000 $ 3,150 $ 2,000 $ 3,400 $ 9,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
TEL AVIV 64 $ 6,000 $ 3,150 $ 2,000 $ 3,400 $ 9,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
TOKYO 64 $ 6,000 $ 3,150 $ 2,000 $ 3,400 $ 9,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
TORONTO 64 $ 2,800 $ 3,150 $ 2,000 $ 3,400 $ 5,950 $ 5,400
- ----------------------------------------------------------------------------------------------------------
VANCOUVER 64 $ 2,800 $ 1,500 $ 2,000 $ 3,400 $ 4,300 $ 5,400
- ----------------------------------------------------------------------------------------------------------
VIENNA 64 $ 3,000 $ 3,150 $ 2,000 $ 3,400 $ 6,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
WARSAW 64 $ 4,000 $ 3,150 $ 2,000 $ 3,400 $ 7,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
ZURICH 64 $ 3,000 $ 3,150 $ 2,000 $ 3,400 $ 6,150 $ 5,400
- ----------------------------------------------------------------------------------------------------------
TOTALS $328,800 $149,468 $142,000 $241,400 $502,950 $383,400
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
- - Connection/Port charges are for a five year term contract and are exclusive
of any taxes.
- - Equipment lease charges ares based on a minimum configuration of GMAX and
GM 16s with 4 faxboards each. Consequently, Equipment lease charges may
vary according to precise specification.
- - Tail Circuits are provided by Scitor ITS where Scitor ITS is legally
authorised to provided such circuits.
- - All connections are subject to local regulatory approval.
- - Local PSTN dial-up, telephone numbers and modem cost are not included are
are the responsibility of Customer.
FINAL ATTACHMENT 1, SCHEDULE 1, PAGE 2
<PAGE>
ATTACHMENT 2 - LOCATIONS
1.1 The Locations covered by this Agreement are as listed in the schedule to
this Attachment 2 ("Schedule 2"). Locations shall be added in phases and
Customer shall be entitled to modify which Locations are to be connected in
a phase. Notwithstanding the foregoing or anything else contained in this
Agreement. Scitor ITS shall be the preferred supplier for all Locations
listed in Schedule 2.
1.2 Customer may connect additional Locations not identified in Schedule 2 on
receiving written consent from Scitor ITS. Customer understands and agree
that Scitor ITS obligation to provide Service to any Location not
identified in Schedule 2 is subject to Scitor ITS ability to operate in any
country.
1.3 Customer agrees that subject only to the following exceptions, all Location
shall remain connected to the Network for the term of this Agreement from
the date of acceptance of the Service. The exceptions are as follows:
(a) Customer terminates this Agreement pursuant to Clause 11.2 or cancels
the Services at a Location pursuant to Clause 9.2 or 10.2;
(b) Customer may substitute any Location with a new Location provided
Scitor ITS is able to provide Service at the new Location. Scitor ITS
shall be entitled to charge Customer for connection and project
management for the new Location at prices agreed by the Parties;
(c) Customer may disconnect a Location due to force majeure. This right
may only be invoked by Customer after 30 continuous days of force
majeure;
(d) Customer may cancel the Service for convenience at the San Francisco
and Mexico City Locations within the first 90 days after the date of
acceptance of the Service and, at any other Location, within the
first 60 days after the date of acceptance of the Service.
1.4 Any cancellation of Service at a Location other than under Clauses 9.2,
10.2 or 11.2 of this Agreement shall be conditional on the Following:
1.5 Customer must give Scitor ITS at least 30 days prior written notice.
1.6 Customer shall remain responsible for any Tail Circuit charges relevant to
the cancellation Location, but Scitor ITS shall, on a best efforts basis,
mitigate such costs by terminating any rental contracts with PTTs as soon
as practically possible, following notification by Customer.
1.7 Customer shall remain responsible for the duration of the term of this
Agreement for payment of the monthly lease charges for the Equipment.
Customer may discharge this responsibility at any time by paying Scitor ITS
a lump sum equal to the depreciated value of the Equipment based on the
original price paid by Scitor ITS or its subcontractors for the Equipment
plus 15% of such original price as a fee for administration and
disconnection. On payment of the resulting sum, Scitor ITS will transfer
title in the relevant Equipment to Customer. Customer understands that
Scitor ITS depreciates the Equipment over 3 years. Scitor ITS will transfer
the Equipment to a substitute Location on payment of a reconnection charge
agreed by the Parties and in addition Scitor ITS' travel and out of pocket
expenses.
<PAGE>
SCHEDULE 2
- ----------
Africa/Middle East Europe Asia Pacific
- ------------------ ------ ------------
South Africa Austria Australia
- - Johannesburg - Vienna - Melbourne
- - Durban Belgium - Sydney
- - Cape Town - Brussels China
Egypt Bulgaria - Beijing
- - Cairo - Sophia - Shanghai
Israel Denmark - Guanghou
- - Tel Aviv - Copenhagen - Shingzen
Turkey Finland Hong Kong
- - Istanbul - Helsinki - Hong Kong
France India
South America - Paris - Bombay
- -------------
Argentina Germany - Delhi
- - Buenos Aires - Frankfurt Indonesia
Brazil - Hamburg - Jakarta
- - Rio De Janeiro - Munich Malasia
- - Sao Paulo - Berlin - Kuala Lumpur
Chile Greece Philippines
- - Santiago - Athens - Manila
Peru Hungary Singapore
- - Lima - Budapest - Singapore
Venezuela Ireland Thailand
- - Caracas - Dublin - Bangkok
Uruguay - Shannon Japan
Montevideo Italy - Tokyo
- Milan - Osaka
Central America/Carib - Rome South Korea
- --------------------- - Seoul
Costa Rica Netherlands
- - San Jose - Amsterdam New Zealand
Mexico Norway - Auckland
- - Mexico City - Oslo
Panama Poland All Locations are
- - Panama City - Warsaw subject to regulatory
Puerto Rico Portugal approvals.
- - San Juan - Lisbon
Dominican Rep. Russia
- - Santo Domingo - Moscow
Martinique Spain
- - Fort de France - Madrid
- Barcelon
Sweden
North America - Stockholm
- -------------
Canada - Switzerland
- - Toronto - Zurich
- - Montreal - Geneva
- - Vancouver Ukraine
USA - Kiev
- - San Francisco United Kingdom
New York - London
Miami
<PAGE>
ATTACHMENT 3- COMMISSIONING
1. CONNECTIONS
1.1 Scitor ITS shall use all reasonable efforts to connect the Service at the
Locations as soon as possible after the date the Tail Circuits are made
available by PTTs for Customer's use and in accordance with Customer's
requirements. Scitor ITS shall have no responsibility, nor liability for
delays caused by Customer or any third party. In the event of any such
delays Scitor ITS shall use all reasonable efforts to provide the Service
as set out in this Agreement at the earliest opportunity.
1.2 Should the Customer request to delay any connection date as agreed by the
Parties after Scitor ITS has ordered any Tail Circuit or Equipment, such
request shall be agreed by Scitor ITS but any delays in connection shall
not affect Customer's obligations to reimburse scitor ITS for all Tail
Circuit and Equipment charges incurred from the date of any contract
between Scitor ITS and any PTT or other supplier. Customer also understands
that should Scitor ITS or its agents or sub-contractors carry out a visit
to a Location in order to connect the Service, and be then unable to do so
as a result of any act or omission by the Customer, Scitor ITS reserves the
right to charge Customer for such visit at its then current rates for such
time and its reasonable travel expenses.
2. COMMISSIONING/ACCEPTANCE
2.1 Commissioning shall mean that Scitor ITS or its subcontractors shall carry
out the following Commissioning Tests at each Location as appropriate from
Scitor ITS sites remote to the Locations:
TAIL CIRCUIT
------------
To run three 15 minute Bit Error Rate Tests to ensure that no moe than one
error in 10/5/ data bits occur on the Tail Circuit.
X .25 FUNCTIONALITY TESTING
---------------------------
(a) An X.25 DTE attached via Tail Circuit to a Node is able to establish
link level communications with the Node local to the Location.
(b) An X.25 DTE attached via Tail Circuit to a Note is able to place an
X.25 call to pre-designated address, transfer data and then clear the
virtual connection than has been established.
ALTERNATIVE TESTING
-------------------
Where local PTT operating conditions are such that the above commissioning
tests are not appropriate, Scitor ITS shall be entitled to carry out
alternative commissioning tests as agreed by Customer. In this event Scitor
shall provide to the Customer a description of these alternative
commissioning tests.
FINAL ATTACHMENT 3. PAGE 1 NETSTAR
<PAGE>
ATTACHMENT 4 - NETWORK PATH AVAILABILITY / NETWORK TRANSIT TIME WARRANTIES
The following Service warranties shall apply:
<TABLE>
<CAPTION>
NTT NPA
From To (milliseconds) (%)
- ---- -- ------------ ---
<S> <C> <C> <C>
San Francisco Mexico City 375 98.81
</TABLE>
Service warranties for additional Locations shall be as specified in
supplements.
FINAL ATTACHMENT 4, PAGE 1 NETSTAR
<PAGE>
EXHIBIT C
SECTION 4.5 - RESTRICTIONS ON SHARE TRANSFERS. Notwithstanding Section
---------------------------------------------
4.4, the shares of the corporation are restricted shares and may not be sold,
resold, assigned, pledged, gifted, or otherwise transferred (collectively
"transferred") except in full compliance with federal and state securities laws,
which may require registration of such stock or an exemption from registration.
Shares thus may not be transferred by a shareholder unless that shareholder has
first obtained written assurance from the corporation's attorney, at the expense
of the shareholder, that such sale would not violate any federal or state law or
regulation. After receiving such an assurance, the transferring shareholder may
then freely transfer shares in a transaction in which no consideration is given
or received for those shares, including without limitation transfers by bequest,
by gift, in trust for estate planning purposes, and similar transfers.
After receiving such an assurance in the case of a sale of the shares,
if the proposed purchaser is not an existing shareholder, the selling
shareholder shall deliver to the corporation and the other shareholders an offer
in writing to sell all of those shares, at the price to be paid by the proposed
purchaser, to the corporation and the other shareholders, in that order. The
offer shall state the name of the prospective purchaser and shall include a copy
of the corporation's counsel's opinion that no federal or state law or
regulation would be violated by such sale to the other shareholders. The
corporation shall have ten (10) days after receipt of the offer within which to
accept or reject the offer, which may be accepted or rejected only as to all the
shares offered.
If the corporation rejects the offer, it shall immediately so notify
the other shareholders in writing. The other shareholders of the corporation
shall each have the right to purchase the same proportion of those offered
shares as their beneficially-owned shares bear to the beneficial ownership of
all issued and outstanding shares of the corporation, excluding those
beneficially owned by the selling shareholder. The other shareholders shall
have thirty (30) days after receipt of notice of the corporation's rejection of
the selling shareholder's offer to accept or reject the offer, as to all of the
shares offered, by a written notice delivered to the other shareholders
including the selling shareholder. If an individual shareholder rejects the
offer, the remaining shareholders may, within ten (10) days after receipt of
that notice, accept the offer as to that shareholder's proportionate share, in
the same proportion as their beneficial share ownership bears to the aggregate
beneficial ownerships of all shareholders electing to purchase that share.
Unless otherwise agreed, the purchase price to be paid for shares
purchased as provided for above shall be paid within ten (10) days after
delivery of the purchaser's acceptance of the offer to sell.
<PAGE>
All stock certificates of the corporation will bear legends stating
the foregoing restrictions.
SECTION 7.4 - AMENDMENTS. The Bylaws may be amended, altered or repealed,
------------------------
at any regular or special meeting of the Board, by a vote of the majority of the
whole Board, provided that a written statement of the proposed action shall have
been delivered personally or by facsimile transmission or mailed to all
directors with the notice of the meeting. Section 4. 5 of the Bylaws may be
amended by the shareholders of the corporation only by the affirmative vote of
the holders of two-thirds (2/3) of the issued and outstanding shares of the
corporation.
<PAGE>
EXHIBIT D
ACQUISITION AND MANAGEMENT AGREEMENT
A. PARTIES.
-------
The parties to this Agreement are RATSTEN INTERNATIONAL TELECOMMUNICATIONS,
INC., ("Ratsten"), a California corporation, GFP GROUP, INC., ("GFP Group"), a
Washington corporation, GERMAN BURTSCHER, FRANK KRENTZMAN, and SIRIUS
INTERNATIONAL TELECOMMUNICATIONS, a California partnership composed of Burtscher
and Krentzman.
B. PURPOSE OF THIS AGREEMENT.
-------------------------
The purpose of this Agreement is to provide for GFP Group's acquisition of
Ratsten, and to state GFP Group's commitment to provide certain working capital
necessary to meet the GFP Group's obligations to SCITOR International
Telecommunications Services, Inc., a SITA Group Company, pursuant to a contract
between SCITOR and Ratsten, d/b/a Netstar Telecommunications Services, Inc.,
("SITA/SCITOR Agreement"), a copy of which is attached to this Agreement as
Exhibit A. A statement of the working capital requirements of the SITA/SCITOR
Agreement is attached to this agreement as Exhibit B. Finally, this Agreement
sets forth the terms by which GFP Group shall negotiate the acquisition of GFP
Group (after its acquisition of Ratsten) by GlobalTel Resources, Inc., a
Washington corporation.
C. GFP GROUP'S PURCHASE OF SELECTNET SHARES.
----------------------------------------
Selectnet Telemanagement, Inc. owns 14,948 shares of common stock in
Ratsten. GFP Group shall purchase all Selectnet shares by cash payment of
$100,000 to the Selectnet Telemanagement, Inc. The purchase of the Selectnet
shares shall be completed within 30 days after the effective date of this
Agreement.
D. WORKING CAPITAL FOR SITA/SCITOR CONTRACT.
----------------------------------------
GFP Group shall provide interim working capital to fulfill the requirements
of the SITA/SCITOR Agreement pending acquisition by GlobalTel. Burtscher and
Krentzman shall prepare a detailed list of expenditures needed to sustain the
contract, which expenditures shall be listed in Exhibit B and approved by GFP
Group. GFP Group shall provide a loan in the amount, stated in Exhibit B, not
to exceed $100,000 by December 1, 1995 and $50,000 per month, thereafter until
the acquisition by GlobalTel is completed. The loaned funds shall also provide
for necessary travel, including travel to, Mexico, Russia, and the Ukraine, to
establish various joint venture and license agreements for the facsimile service
on the SITA network.
1
<PAGE>
E. CONTRIBUTION OF SIRIUS STOCK IN RATSTEN TO GFP GROUP STOCK FOR GFP GROUP
------------------------------------------------------------------------
STOCK AND OTHER CONSIDERATION.
-----------------------------
Burtscher and Krentzman represent that they own all interest in a
partnership known as Sirius Telecommunications. The principal asset of Sirius
is 14,948 shares of common stock in Ratsten. Krentzman and Burtscher shall
cause Sirius to transfer all of these shares to GFP Group. In consideration of
such transfer, GFP Group shall issue 250,000 of shares of common stock to
Krentzman and 250,000 shares of common stock to Burtscher and obtain agreement
from GlobalTel to exchange such shares for the same number of shares of
GlobalTel common stock and to issue 75,000 additional shares of GlobalTel common
stock to each at the beginning of the second and third years of employment with
GlobalTel and provide Krentzman and Burtscher with the compensation package
provided in this Agreement.
F. TERMS FOR ACQUISITION OF GFP GROUP BY GLOBALTEL.
-----------------------------------------------
GFP Group shall immediately commence negotiations with GlobalTel for
GlobalTel's acquisition of GFP Group after GFP Group successfully acquires
Ratsten and Ratsten's interest in the SITA/SCITOR contract. Acquisition of GFP
Group by GlobalTel shall be accomplished by GlobalTel's acquisition of all
shares of GFP Group and GlobalTel's issuance to GFP Group of 1,250,000 shares,
including the 500,000 shares initially issued to Krentzman and Burtscher
collectively.
G. OBLIGATIONS IN CONNECTION WITH GLOBALTEL ACQUISITION.
----------------------------------------------------
1. GENERAL OBLIGATIONS AND CONDITIONS. GFP Group shall structure the
----------------------------------
acquisition of GFP Group by GlobalTel so that Burtscher and Krentzman receive
the stock interest, compensation package and operational duties generally
described in this Agreement. The primary reason for GlobalTel's interest in
acquiring GFP Group after GFP Group acquires Ratsten is to the benefit of the
SITA/SCITOR contract and the services of Burtscher and Krentzman. The parties
to this Agreement acknowledge that the terms and conditions of the final
acquisition of GFP Group by GlobalTel have yet to be determined. The parties,
further acknowledge that additional agreements among them, such as a Shareholder
Agreement and agreements with funding sources, will need to be prepared and
executed. Nonetheless, the parties agree that any acquisition by GlobalTel must
meet the minimal requirements stated in this Agreement and that any material
deviation from these requirements must be agreed upon in writing by the party
adversely affected. The parties also agree that it is GFP Group's
responsibility to conduct negotiations with GlobalTel and to obtain GlobalTel's
agreement to structure the acquisition of GFP Group to meet the requirements of
this Agreement.
2. BENEFITS TO KRENTZMAN AND BURTSCHER. As part of the acquisition by
-----------------------------------
GlobalTel, Krentzman and Burtscher shall each personally receive the following:
a. SHARES IN GLOBALTEL. GlobalTel shall restructure its stock so
-------------------
that there is only a single class of voting common stock. GlobalTel shall issue
250,000 shares of GlobalTel voting common stock and enter into a binding
obligation to issue additional
2
<PAGE>
stock to each of Burtscher and Krentzman at the first anniversary and second
anniversary of employment with GlobalTel. Issuance of these shares shall be
sufficient to cause Krentzman and Burtscher to achieve stock parity with Alan
Chin and Curtis Lew. Stock parity includes all stock that represents an equity
interest in GlobalTel, or convertible to an equity interest, but does not
include debt instruments. The Corporation shall make financing available on
renewable terms to Krentzman and Burtscher to purchase any instruments or rights
possessed by Chin or Lew that are convertible to equity. Stock parity may be
achieved either by direct issuance of stock to Krentzman and Burtscher or
pursuant to the terms of an ISOP, or by any other means that accomplishes stock
parity. GFP Group agrees to increase its capitalization by 40,000 shares and to
issue 25,000 shares to Peter Gust and 15,000 shares to Donald Kovaks or a
nominee identified by October 31, 1995, with the parties to this Agreement
retaining the proxy rights to vote these shares until the acquisition by
GlobalTel is complete, at which time these shares shall be exchanged for a like
number of GlobalTel shares. Issuance of these shares is subject to, and
conditioned on, the shareholders: (a) executing appropriate investment letters
required by applicable securities laws and meeting the legal requirements for
investing in GFP Group or GlobalTel; (b) executing the appropriate shareholder
agreement restricting resale of such shares, voting, redemption and similar
matters; and (c) acknowledging in writing that issuance of these shares
satisfies the obligations of Krentzman and Burtscher to each of them. The
parties shall select a means that will have the least overall adverse tax impact
upon the parties as a whole. The parties shall execute a shareholder agreement
by no later than October 28, 1995 that provides in part that these stock
acquisition rights terminate, and all issued shares redeemed by the Corporation
pursuant to the valuation methods detailed in the shareholder agreement, upon
termination of employment by the employee or by GlobalTel, material breach of
the employment agreements, material failure to perform operational duties to
GlobalTel for any reason, or termination by SCITOR of the SITA/SCITOR contract,
for any reason, within 135 days from the effective date of this Agreement.
b. DUTIES, COMPENSATION AND EMPLOYMENT AGREEMENTS. Krentzman and
----------------------------------------------
Burtscher shall each become officers of GlobalTel and, to the extent necessary
or. desirable under the SITA/SCITOR contract, officers of GFP Group. Burtscher
and Krentzman shall have operational responsibilities for managing the
relationship with SCITOR and supervising compliance with the SITA/SCITOR
contract and GlobalTel's growth in relation to such services, under the
direction of Ronald P. Erickson, who shall become GlobalTel's President and
Chief Executive Officer. Krentzman and Burtscher shall also alternate one of
them serving as a member of the seven-person Board of Directors of GlobalTel
each calendar year and shall have the right to nominate one outside Board
member, subject to approval of the Board as to qualifications. Krentzman shall
serve on the Board during the initial 1995 term and Burtscher shall serve on the
Board during 1996. Krentzman and Burtscher shall each receive notice of, and
have the right to attend, meetings of the Board of Directors whether or not he
is a member of the Board at the time the meeting is held. Krentzman and
Burtscher hereby nominate Donald Sledge as the first outside director, which
nomination is acceptable to GFP Group. Each shall execute an employment
agreement in substantially the form attached to this Agreement as Exhibit C-1
and C-2. The duration of the obligations stated in this section and the term of
the employment agreements shall be a rolling three years. Krentzman
3
<PAGE>
and Burtscher shall each, be officers of the Corporation of equal rank with Alan
Chin and Curtis Lew, who are currently vice-presidents. Their initial monthly
compensation shall equal the monthly compensation provided to Mr. Chin and Mr.
Lew. Krentzman and Burtscher shall receive the same regular retirement, health,
stock, and expense benefits ("Senior Management Benefit Package), that GlobalTel
provides to Alan Chin and Curtis Lew during, the term of the employment
agreement. This parity arrangement shall not apply to merit bonuses tied to
performance of the corporation which will be available.
c. LOANS FOR PRIOR RATSTEN AND PERSONAL EXPENSES. Krentzman and
---------------------------------------------
Burtscher have each borrowed funds to pay for Ratsten operating expenses and to
pay for living expenses during Ratsten's startup phase. After the GlobalTel
acquisition has been completed and at such time as GlobalTel receives
significant institutional financing, GlobalTel shall loan Burtscher $14,500 and
shall loan Krentzman $31,500, to repay personal loans, upon presentation of
documents evidencing such loans and the outstanding balance of each. GlobalTel
shall have the option of making payments directly to the creditors. These loans
shall be evidenced by a note in the usual form, shall be at 6 percent per annum
interest, compounded monthly and shall be repaid by deductions from net merit or
operating bonuses payable to Krentzman or Burtscher during, the first three
years of employment. Each loan shall be fully repaid before any portion of a
bonus is paid the employee borrowing the funds. The loans shall not, however,
be payable from or chargeable against merit or operating bonuses earned after
the third anniversary of this Agreement. Termination of employment at GlobalTel
for cause shall cause the entire loan balance to become due and payable in four
equal quarterly installments. In addition to and at the same time as these
loans, GlobalTel shall pay up to an aggregate of $30,000 to repay person who
have advanced funds to Krentzman and Burtscher for Ratsten operations. The
identities of these persons and amount that each advanced for Ratsten operations
is stated in Exhibit D to be prepared by Krentzman and Burtscher and approved by
GFP Group. Payments shall be made directly to the persons identified in Exhibit
D upon execution of a release acknowledging that the amount paid fully satisfies
the repayment obligation of Ratsten and Burtscher or Krentzman.
3. REIMBURSEMENT OF ACQUISITION EXPENSES AND WORKING CAPITAL CONTRIBUTED
---------------------------------------------------------------------
BY GFP GROUP. As part of the acquisition of GFP Group, in addition to transfer
- ------------
of stock, GlobalTel shall make cash payments to GFP Group or to any lender to
GFP Group sufficient to repay working capital provided by GFP Group as part of
its acquisition of Ratsten and sufficient cash to reimburse GFP Group, or pay
for, GFP Group's expenses in acquiring Ratsten and in negotiating and obtaining
GFP Group's acquisition by GlobalTel.
H. WARRANTIES.
----------
1. WARRANTIES CONCERNING SITA/SCITOR AGREEMENT. Krentzman, Burtscher,
-------------------------------------------
and Ratsten each warrant that Ratsten obtained the SITA/SCITOR Agreement under
the name Netstar International Telecommunications, Inc., a corporation to be
formed, and that such corporation was subsequently formed under the name Ratsten
International Telecommunications, Inc. Ratsten, Krentzman and Burtscher warrant
that no other party has an interest of any nature in the SITA/SCITOR Agreement
and that the
4
<PAGE>
SITA/SCITOR Agreement does not prevent, prohibit, or place conditions upon the
transactions contemplated by this Agreement or that, if so, any necessary
consent from SCITOR has been obtained or will be obtained within 45 days after
the effective date of this Agreement.
2. WARRANTY CONCERNING SIRIUS. Krentzman and Burtscher warrant that they
--------------------------
are the sole partners of Sirius International Telecommunications, a partnership,
and that no other party has any interest in, or rights to, any asset of Sirius
International Communications.
3. WARRANTY AS TO OWNERSHIP OF RATSTEN INTERNATIONAL TELECOMMUNICATIONS,
---------------------------------------------------------------------
INC. Krentzman and Burtscher warrant that Sirius International
- ---
Telecommunications and Selectnet Telemanagement, Inc. are the sole shareholders
of Ratsten International Telecommunications, Inc. and that Selectnet's sole
interest in and to the assets of Ratsten is by virtue of its 14,948 shares of
stock.
4. WARRANTIES AS TO BOOKS OF ACCOUNT. Krentzman and Burtscher warrant
---------------------------------
that they have provided GFP Group with a full accounting of Ratsten's assets and
obligations and, to the best of their ability, set forth the interim
requirements for carrying out Ratsten's obligations under the SITA/SCITOR
contract, which obligations are stated in Exhibit B to this Agreement.
I. GENERAL PROVISIONS.
------------------
1. EXCLUSIVE DEALING. The parties to this Agreement shall not, directly
-----------------
or indirectly, through any representative or otherwise, solicit or entertain
offers from, negotiate with, or in manner encourage, discuss, accept, or
consider proposals relating to the SITA/SCITOR contract, the acquisition of GFP
Group or Ratsten or any of its assets, with any person, group, or entity that is
not a party to this Agreement, except GlobalTel, during the term of this
Agreement.
2. NONDISCLOSURE. Except as required by law, no party shall make any
-------------
public comment, statement, or communication with respect to the transactions
contemplated by this Agreement, nor shall a party permit an agent to disclose
the existence of this Agreement or discussions concerning this Agreement without
the prior Written consent of the other parties to this Agreement. This
obligation shall survive termination of this Agreement for any reason.
3. CONFIDENTIALITY. No party shall disclose or use any confidential
---------------
information furnished by a party to this Agreement in contemplation of this
Agreement. This confidentiality obligation shall extend to the representatives
of the parties, their agents, and assign. Confidential information includes any
information that is valuable and unique to the supplying party, is not generally
known outside of the supplying party's organization, and is either stamped
"confidential" or the party has taken other reasonable precautions to keep
confidential. Confidential information does not include information that the
disclosing party can demonstrate is generally available to the public, other
than as a result of improper disclosure, or was obtained by the receiving party
from a third
5
<PAGE>
party who owed no duty of confidentiality to the disclosing party. If this
Agreement is terminated for any reason, the parties shall promptly return all
confidential information to the supplying parties. The confidentiality
obligation shall survive termination of this Agreement for a period of two
years.
4. COSTS. Except as provided by this Agreement and exhibits, each party
-----
shall be responsible for and bear all of that party's expenses incurred in
connection with this Agreement and the actions contemplated by this Agreement.
5. AUTHORITY. Each signator on behalf of a corporation or partnership
---------
warrants that he has authority to bind that entity to this Agreement. Each
married signator shall obtain the written consent of the signator's spouse to
this Agreement.
6. CONSENTS AND REGULATORY APPROVAL. Each party shall cooperate to
--------------------------------
obtain the consent of any third party or regulatory agency that is necessary to
complete the transactions contemplated by this Agreement.
7. COMPLIANCE WITH LAWS. Each party shall comply with all state and
--------------------
federal securities laws and regulations in connection with any of the
transactions contemplated by this Agreement. To the extent that any such laws
or regulations require that the transactions contemplated by this Agreement be
accomplished in a different manner or modified, this Agreement shall be amended
to comply with such laws or regulations and such amendment shall not be deemed
an event that permits any party to terminate this Agreement.
8. TERM AND TERMINATION. The parties shall have 45 days from the date of
--------------------
this Agreement to accomplish the acquisition of Ratsten by GFP Group, and 90
days from the date that the Ratsten/GFP Group acquisition is complete to
complete the acquisition of GFP Group by GlobalTel. The term may be extended by
mutual written agreement of the parties. This Agreement may be terminated by
any of the following
a. TERMINATING EVENTS.
(1) Mutual written consent of the parties;
(2) As to a party, by material breach by the party after written
notice stating nature of the breach and a 30-day opportunity to
cure;
(3) Failure by GFP Group to provide the interim funding contemplated
by this Agreement;
(4) Failure of Burtscher or Krentzman to obtain SCITOR's consent to
assignment of the SITA/SCITOR Agreement to GFP Group or any
approval that May be required to assure GFP Group that
transactions contemplated by this Agreement do not violate the
SITA/SCITOR contract;
6
<PAGE>
(5) Notice from GlobalTel that GlobalTel does not intend to acquire
Ratsten or GFP Group after GFP Group acquires Ratsten.
b. OBLIGATIONS ON TERMINATION. The parties shall have the following
obligations on termination:
(1) In the event that this Agreement is terminated by GFP Group
because of Krentzman's and Burtscher's failure to obtain the
benefit of the SITA/SCITOR contract for GFP Group and GlobalTel,
Krentzman and Burtscher agree to reimburse GFP Group for all
funds devoted by GFP Group to maintenance of the SITA/SCITOR
Agreement and all expenses incurred by GFP Group in connection
with the transactions contemplated by this Agreement, unless
otherwise agreed in writing. Such amounts shall be determined by
application of GAAP and shall be repaid over a three-year period
at 6 percent per annum interest, compounded monthly, and shall be
evidenced by a note. The full repayment obligation shall be an
independent, joint and several obligation of Krentzman and of
Burtscher. The expenses to be repaid shall not include attorneys
fees incurred in preparation or negotiation of this Agreement or
amounts paid to purchase shares in Ratsten from Selectnet.
(2) If the Agreement terminates because GFP Group fails to provide
sufficient interim funding in excess of that required by this
Agreement, if the benefit of the SITA/SCITOR contract is not
available through no fault of Burtscher or Krentzman, or for any
reason other than a material beach of this Agreement, Krentzman
and Burtscher shall return all stock to GFP Group and GFP Group
shall return Krentzman's and Burtscher's Ratsten stock and the
parties shall have no further obligation to each other, except
the nondisclosure and confidentiality obligations which survive
termination of the Agreement.
(3) If GlobalTel decides not to acquire GFP Group, Palmer and
Erickson shall arrange for alternative financing for the
operations contemplated by this Agreement within 120 days from
the date that GFP Group receives notice of GlobalTel's decision.
This Agreement shall continue in force during the 120 day time
period and thereafter if suitable financing is achieved. If
suitable financing is not located within that time, Krentzman
and Burtscher shall have the right to repurchase the Selectnet
shares for a cash payment of $100,000.
9. GOVERNING LAW. This Agreement shall be construed, interpreted, and
-------------
governed by the laws of the State of Washington.
10. ARBITRATION OF DISPUTES. Any controversy or claim arising out of,
-----------------------
or relating to, the meaning or enforceability of any provision of this Agreement
shall be
7
<PAGE>
settled by binding arbitration before a single arbitrator of the Judicial
Arbitration and Mediation Service in the city of Seattle, Washington, or any
other arbitrator that is agreed upon by the parties or selected by the King
County Presiding Judge. The arbitration shall be conducted in accordance with
the then existing Washington Civil Court Rules and judgment upon the award shall
be final and enforced in any court of competent jurisdiction.
11. ATTORNEYS FEES. In the event of any dispute arising out of this
--------------
Agreement or the employment relationship, the substantially prevailing party in
such dispute shall be entitled, in addition to any other relief, to an award of
attorneys fees and actual costs, including expert fees and arbitration fees. The
award shall include fees and costs incurred before any proceeding or arbitration
is commenced. If a proceeding is commenced and neither party wholly prevails,
the party receiving substantially greater relief shall be considered the
prevailing party as to all fees and costs relating to the dispute. The actual
attorneys fees and costs incurred by the substantially prevailing party shall be
presumptively reasonable, which presumption is rebuttable.
12. ENTIRE AGREEMENT. The terms and provisions of this Agreement constitute
----------------
the entire agreement between the parties and supersede all previous
communications, negotiations, proposals, representations, conditions, or
agreements, either oral or written. In the event of any, conflict between the
provisions of this Agreement and the Proposal, this Agreement shall control.
This Agreement may not be enlarged, modified or altered except in writing signed
by the duly authorized officer or representative of each party. To the extent
that this Agreement contemplates that other agreements are necessary to carry
out the transactions required by this Agreement, such further agreements shall
be consistent with the terms of this agreement and with the requirements for
those transactions stated in this Agreement.
13. EXECUTION OF SHAREHOLDER AGREEMENT AND OTHER DOCUMENTS. The parties
------------------------------------------------------
shall execute such further agreements, documents, and consents, as are
reasonable and necessary to carry out the undertakings contemplated by this
Agreement. The parties shall also execute a shareholder agreement that will
prohibit the transfer of shares except upon approval of the corporation and
compliance with applicable law, will prohibit disposition of shares in event of
divorce, death or bankruptcy, and will provide for redemption of shares, upon
termination of employment at a fair and reasonable market value, if termination
is without cause, pursuant to a valuation formula stated in the agreement, and
will state terms for permitting continuation as shareholders if GlobalTel shares
become publicly traded.
14. EFFECTIVE DATE. This Agreement is effective and binding, as of the
--------------
date executed by the last party to execute it.
15. COUNTERPARTS. This Agreement may be signed in counterparts, each of
------------
which shall be as effective as an original.
IN WITNESS WHEREOF, each party has executed this Agreement in
duplicate, as of the dates stated below:
8
<PAGE>
GFP GROUP, INC. RATSTEN INTERNATIONAL
TELECOMMUNICATIONS, INC.
By /s/ Ronald P. Erickson By /s/ German Burtscher
---------------------- --------------------
RONALD P. ERICKSON, CHP. GERMAN BURTSCHER, President
Dated 10 October 1995 Dated 10/10/95
--------------- --------
/s/ German Burtscher /s/ Frank Krentzman
- ------------------------------ -----------------------------
GERMAN BURTSCHER, Individually FRANK KRENTZMAN, Individually
Dated 10/10/95 Dated 10/10/95
-------- --------
- -------------------------------- ------------------------------
Spouse Spouse
Name ___________________________ Name _________________________
Dated __________________________ Dated ________________________
SIRIUS INTERNATIONAL
TELECOMMUNICATIONS, a California
Partnership
/s/ German Burtscher
- -------------------------
GERMAN BURTSCHER, Partner
Dated 10/10/95
--------
/s/ Frank Krentzman
- ------------------------
FRANK KRENTZMAN, Partner
Dated 10/10/95
--------
9
<PAGE>
AMENDMENT TO ACQUISITION & MANAGEMENT AGREEMENT
FOR
GFP GROUP, INC., FRANK KRENTZMAN & GERMAN BURTSCHER
GFP Group, Inc. ("GFP Group"), Frank Krentzman ("Krentzman"), and
German Burtscher ("Burtscher") are parties to the Acquisition and Management
Agreement for GFP Group, Inc., Frank Krentzman, and German Burtscher, signed
October 10, 1995 ("A&M Agreement"). The following amendments are necessary to
conform the A&M Agreement to the intent of the parties at the time the A&M
Agreement was signed. As the parties intended, these amendments give Krentzman
and Burtscher the bargained for shares they expected in the exchange.
The parties agree that the A&M Agreement is amended as follows:
1. Krentzman and Burtscher at no cost to either shall each receive
150,000 additional shares of GlobalTel Resources, Inc. ("GlobalTel") common
stock at such time as GlobalTel receives significant funding, or other
significant developments in GlobalTel's operations and plans such that the Board
of Directors of GlobalTel deems it appropriate to issue the shares, distribution
not to be unreasonably withheld (the "date of significant funding"). The
issuance of the 150,000 shares each shall satisfy the obligation in Section E of
the A&M Agreement to issue 75,000 additional shares of GlobalTel common stock
each to Krentzman and Burtscher beginning in the second and third years of
employment with GlobalTel.
2. Krentzman and Burtscher shall, at the closing of the share
exchange under which GlobalTel is acquiring Krentzman and Burtscher's GFP shares
(the "closing"), receive sufficient GlobalTel shares to give Krentzman and
Burtscher the share parity with Alan Chin and Curtis Lew required by Section
G.2(a) of the A&M Agreement. Krentzman and Burtscher each agree to pay $1.10
per share for these parity shares, payable without interest at the earlier of
(i) the date of significant funding (as stated in paragraph 1 above) or (ii) the
date upon which they individually receive a raise in salary under their
employment agreement.
3. Except for those shares being paid for as set forth in section 2
above, all shares issued pursuant to the A&M Agreement, including as amended by
this Amendment, are part of the exchange unrelated to any compensation due
Krentzman and Burtscher under their employment agreements.
1
<PAGE>
EFFECTIVE this day 10th day of October 1995.
GFP GROUP, INC., a Washington
Corporation
By /s/ Ronald P. Erickson
---------------------------- --------------------------------
Ronald P. Erickson, President German Burtscher
Dated December 29, 1995
------------------------------- -------------------------------
Spouse
-------------------------------
Frank Krentzman, a Single Person
2
<PAGE>
EXHIBIT E
1. Carrier Agreements with MCI and Hi-Rim.
2. Month-to-month lease of headquarters building.
3. Lease agreement for office copier.
4. Stock Purchase Agreement, Promissory Note, Purchase Money Security
Agreement and Pledge of Shares Agreement, all with Okunuki, Nakamura, Wong,
HBICC, Inc. and Sato, or their agents, and Agreement and Release of Claims with
Ken Sato, all dated October 19, 1995.
<PAGE>
EXHIBIT 10.29
LETTER OF INTENT
----------------
Date: June 16, 1997
Place: Kunming, China
Companies US Company:
PRIMECALL, INC.
1520 Eastlake Ave East, Second Floor, Seattle, WA 98102
USA
China Companies:
NETLINK INTERNATIONAL INC.
No. 46 Sanlitun, Chaoyang District, Beijing 100027
Peoples Republic of China
KUNMING DAYU BIOLOGICAL ENGINEERING CO. LTD.
R406 4/th/ Floor A Building of Skycity Garden
257 Nanba Lu Rd of Double Dragon Bridge, Kunming,
650034
Peoples Republic of China
By and among the above listed companies:
This letter (the "Letter of Intent") confirms the tentative agreement of
Primecall, Inc. and China Companies to proceed to evaluate the proposed
transaction described below (the "Transaction"). This Letter of Intent
represents only our current good faith intention to proceed to evaluate the
Transaction, subject to a more complete review of a definitive agreement in a
form acceptable to both parties. It is not, and is not intended to be, a binding
agreement between us, and none of us shall have any liability to the other if we
fail to execute a definitive agreement for any reason. Statements below as to
what either party will do, or agrees to do, or the like, are so expressed for
convenience only, and are understood in all instances to be subject to our
mutual continued willingness to proceed with any transaction as our negotiations
take place.
1. Project and Market
------------------
Development of a four (4) year exclusive relationship in China where Primecall
grants to the above China Companies the right to market its International
Callback services and such right to be based on performance conditions to be
identified.
Construct parameters for future additions to the agreement to provide additional
communications services to the China market as identified in Netlink
International Inc's Business License description of scope of business. [See
attached business license registration no. 10002369-9(4-2)]
Primecall, Inc. to provide favorable rates to the cooperate relationship to
market International Callback services in China.
<PAGE>
2. Cooperation of Joint Relationship
---------------------------------
Refine the organizational relationship between Primecall and China Companies to
perform the business in China. (See exhibit A)
Both parties agree that time is of the essence and shall proceed to research and
deliver information to each other on the legal structure of the cooperate
relationship, banking and payments, taxation and other relevant items to move
the relationship forward to a successful agreement.
3. Financial Relationship
----------------------
Develop a suitable financial relationship that encompasses:
(a) Securing customer deposits and payments via direct bank transfer
of funds.
(b) Securing payments from China companies to Primecall, Inc.
(c) Providing a one time payment requirement of US$500,000.00.
necessary to obtain approval through the National Ministry of Public
Security in order to sell communications services in China by the
cooperate relationship. A schedule of payments shall be worked out to
pay the deposit from profits of the new cooperate relationship.
(d) Primecall, Inc. must negotiate a satisfactory compensation for
the liaison and individuals or company that make the cooperate
relationship possible.
AGREED BY:
/s/ Alan Chin 6/16/97
- ------------------------------------------- --------------------
Alan Chin, Senior Vice President and Co-founder Date
PRIMECALL, INC.
/s/ Zhang Yu 17/6/97
- ------------------------------------------- --------------------
Zhang Yu, President Date
NETLINK INTERNATIONAL, INC.
/s/ Yuan Hua 6/16/97
- ------------------------------------------- --------------------
Yuan Hua, President Date
KUNMING DAYU BIOLOGICAL ENGINEERING CO., LTD.
<PAGE>
EXHIBIT "A"
COOPERATE RELATIONSHIP
----------------------
[GRAPH APPEARS HERE]
---------------------- 100% ----------------------
--------------
NEWCO NEWCO
(outside of China) 100% (inside of China)
--------------
---------------------- ----------------------
- ------------------------------------- ------------------------------------
- ------ --------- ----------- ------ --------- ----------
DAYU NETLINK PRIMECALL DAYU NETLINK PRIMECALL
30% 30% 40% 30% 30% 40%
- ------ --------- ----------- ------ --------- ----------
<PAGE>
EXHIBIT 10.30
GLOBALTEL
6 November 1997
GlobalTel Resources, Inc.
1520 Eastlake Avenue East
Seattle, WA 98112
Dear Sirs:
The undersigned, Curt Lew and Alan Chin, hereby agree that they accept the
terms of the agreement between themselves and GlobalTel Resources, Inc.
regarding the proposed venture between the Company, Netlink and Dayu, as set
forth in the minutes of the meeting of the Board of Director's of the COmpany of
September 11, 1997, a copy of the relevant page of which is attached hereto and
incorporated herein by this reference.
The undersigned agree to enter into a formal written contract in a form and
substance to be mutually agreed upon between the parties should the Company so
require.
Sincerely,
/s/ Curt Lew /s/ Alan Chin
Curt Lew Alan Chin
Attachment (The relevant portion of the minutes of the Board of Director's
meeting of GlobalTel Resources, September 11, 1997)
<PAGE>
MINUTES OF A SPECIAL MEETING
OF
BOARD OF DIRECTORS
OF GLOBALTEL RESOURCES, INC.
September 11, 1997
A special meeting of the Board of Directors of GlobalTel Resources, Inc., a
Washington corporation (the "Corporation"), was held on September 11, 1997, at
the Corporation's offices, 1520 Eastlake Avenue East, Suite 210, Seattle,
Washington 98102.
The following members of the Board of Directors were in attendance,
constituting a quorum of the Board: Ronald P. Erickson, Curt E. Lew, Alan H.
Chin, Ulrich Kallausch (by telephone), Steven S. V. Wong (by telephone), Michael
Brownfield (by Telephone), Randy Ottinger (by telephone) and Frank Krentzman (by
telephone). Also in attendance as guests were Mike Sims, Bruce Crockett (by
telephone), John W. Hanley, Jr. (by telephone), Douglas C. Maclellan and Ronald
Fox. All telephone connections were by speakerphone, by which all participants
could be heard by all other participants.
The Chairman called the meeting to order at 3:05 p.m. Ronald P. Erickson
acted as Chairman of the meeting, and asked John W. Hanley, Jr. to act as
secretary. All directors in attendance waived notice of the meeting.
2
<PAGE>
The next order of business was review of a proposed agency agreement
submitted to the Corporation by Mr. Chin and Mr. Lew. Mr. Brownfield reported
for the Compensation Committee that the Committee had reviewed the proposal,
which features future compensation to the agents based on the lesser of 3% of
gross receipts of 25% net margin realized on revenues from the proposed China
venture. In addition, the Corporation would provide, as an additional incentive,
5% of the ownership interest in the China venture entity that will come to the
Corporation, but only when the venture entity achieves a liquidation event. Mr.
Brownfield confirmed that the Committee determined that these were fair terms
reflective of market conditions. Mr Chin indicated his (and Mr. Lew's)
willingness to proceed on the basis of these terms. After further discussion,
upon motion to be made and seconded (Wong/Brownfield), and with directors Chin
and Lew abstaining, it was, by unanimous vote
3
<PAGE>
RESOLVED that the terms of the proposed agency agreement with Messrs. Chin
and Lew approved by the Compensation Committee are hereby adopted and
approved by the Board of Directors, and the Chairman and the President of
the Corporation are each authorized to execute and deliver an agency
agreement incorporating those terms on behalf of the Corporation.
4
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No. 333-
47045 of Communications Systems International, Inc. of our report dated June 2,
1997, August 11, 1997, September 17, 1997, October 9, 1997, October 31, 1997,
December 30, 1997 and April 22, 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
April 24, 1998
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
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. 1 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
April 24, 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
April 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
COMMUNICATIONS SYSTEMS INTERNATIONAL SHARES AND STATEMENT AND IS QUALIFIED IN
ITS ENTIRETY BY PERFORMANCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> APR-30-1997 APR-30-1998
<PERIOD-START> MAY-01-1996 MAY-01-1997
<PERIOD-END> APR-30-1997 JAN-31-1998
<CASH> 146,686 566,124
<SECURITIES> 0 0
<RECEIVABLES> 1,239,722 1,239,015
<ALLOWANCES> (186,489) (403,991)
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,283,881 1,420,834
<PP&E> 650,218 812,174
<DEPRECIATION> (192,427) 297,031
<TOTAL-ASSETS> 1,946,491 2,942,667
<CURRENT-LIABILITIES> 3,615,136 4,397,400
<BONDS> 0 0
0 0
0 0
<COMMON> 2,366,066 2,760,127
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 1,946,491 2,942,667
<SALES> 11,865,412 8,894,803
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<CGS> 7,754,897 5,393,796
<TOTAL-COSTS> 7,754,897 5,393,796
<OTHER-EXPENSES> 4,207,386 4,669,615
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (162,602) (348,122)
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (259,473) (769,730)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (259,473) (769,730)
<EPS-PRIMARY> (.03) (.08)
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</TABLE>
