<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27, 1998
REGISTRATION NO. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
(EXACT NAME OF ISSUER AS SPECIFIED IN ITS CHARTER)
COLORADO
(STATE OF INCORPORATION)
4813 84-1238018
(PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
CLASSIFICATION CODE NUMBER) NO.)
8 S. NEVADA AVENUE, SUITE 200 ROBERT A. SPADE, CHAIRMAN OF THE
COLORADO SPRINGS, COLORADO 80903 BOARD
(719) 471-3332 AND CHIEF EXECUTIVE OFFICER
(ADDRESS AND TELEPHONE NUMBER OF 8 S. NEVADA AVENUE, SUITE 200
PRINCIPAL EXECUTIVE OFFICE) COLORADO SPRINGS, COLORADO 80903
(719) 471-3332
(NAME, ADDRESS AND TELEPHONE
NUMBER OF AGENT FOR SERVICE)
Copies to:
DOUGLAS R. WRIGHT, ESQ. ROBERT W. WALTER, ESQ.
PARCEL, MAURO & SPAANSTRA, P.C. BERLINER ZISSER WALTER & GALLEGOS,
1801 CALIFORNIA STREET, SUITE 3600 P.C.
DENVER, COLORADO 80202 1700 LINCOLN, SUITE 4700
(303) 292-6400 DENVER, COLORADO 80203
(303) 830-1700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
===============================================================================
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY OFFERING PRICE REGISTRATION FEE (1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock (2)....... 1,265,000 $11.00 $13,915,000 $4,104.92
- ------------------------------------------------------------------------------------------------
Common Stock (3)....... 263,600 $11.00 $ 2,899,600 $ 855.38
- ------------------------------------------------------------------------------------------------
Representative's
Warrants (4).......... 110,000 $ -- $ -- $ -- (5)
- ------------------------------------------------------------------------------------------------
Common Stock Underlying
Representative's
Warrants (6).......... 110,000 $13.75 $ 1,512,500 $ 446.18
- ------------------------------------------------------------------------------------------------
TOTAL.................. $18,327,100 $5,406.49
================================================================================================
</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 165,000 shares that the representative of the
underwriters (the "Representative") has 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 Representative at the closing of this
offering warrants to purchase 110,000 shares of Common Stock (the
"Representative's Warrants").
(5) No fee pursuant to Rule 457(g).
(6) These shares of Common Stock are issuable upon exercise of the
Representative's Warrants. An indeterminate number of additional shares of
Common Stock are registered hereunder which may be issued as provided in
the Representative's Warrants in the event that the provisions against
dilution in the Representative's 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 the Company 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 1,100,000 shares of Common Stock (the "Common Stock") by
Communications Systems International Inc. (the "Company") (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
the Company 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 Shareholder 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 FEBRUARY 27, 1998
PRELIMINARY PROSPECTUS
1,100,000 SHARES
[LOGO OF COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.]
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
COMMON STOCK
Communications Systems International, Inc. is offering 1,100,000 shares (the
"Shares") of common stock of the Company ("Common Stock") hereby. The Common
Stock is traded sporadically in limited amounts on the OTC Bulletin Board under
the symbol CSYG. On February 25, 1998, the 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 $9.00 and $11.00 per share after giving effect
to a proposed 1 for 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 [CSIL]. See "Price Range of Common
Stock."
Concurrently 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 Securityholders' Shares"). The Selling
Securityholders' Shares are not part of the underwritten offering. Other than
receipt of the exercise price of those certain warrants, the Company will not
receive any proceeds from the sale of the Selling Securityholders' Shares. In
addition, the Selling Securityholders have agreed not to sell or transfer the
Selling Securityholders' Shares for a period of 180 days following the date of
this Prospectus. See "Selling Securityholders and Plan of Distribution."
-----------
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.
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS (1) COMPANY (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................... $ $ $
- --------------------------------------------------------------------------------
Total(3).................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to pay the Representative of the Underwriters (the
"Representative") a non-accountable expense allowance equal to 3% of the
offering proceeds and to issue to it the Representative's Warrants (as
defined herein). The Company has also agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting estimated offering expenses of $680,000, which includes
the non-accountable expense allowance, exclusive of the Selling
Securityholders' expenses.
(3) The Company has granted to the Representative an option, exercisable within
45 days after the date of this Prospectus, to purchase up to an additional
165,000 shares of Common Stock on the same terms as set forth above solely
to cover over-allotments, if any. If the option is exercised in full the
total Price to Public, Underwriting Discounts and Proceeds to Company will
be $ , $ , and $ , respectively. See "Underwriting."
The Shares are being offered severally by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and
subject to their right to reject orders in whole or in part and certain other
conditions. It is expected that delivery of certificates representing the
Shares will be made on or about , 1998.
COHIG & ASSOCIATES, INC.
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 COMMONSTOCK OF
THE 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."
The Company intends to furnish its security holders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited interim financial
information.
On the effective date of the Registration Statement of which this Prospectus
forms a part, the Company will become a "reporting company" under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
intends to register the Common Stock under the Exchange Act as of the
effective date of the Registration Statement. The Company is a "small business
issuer" as defined under Regulation S-B adopted under the Securities Act of
1933, as amended (the "Securities Act"), and will file reports with the
Securities and Exchange Commission (the "Commission") pursuant to the Exchange
Act on forms applicable to small business issuers.
The Company claims proprietary rights in its logo and the terms "LINK-US"
and "DIAL." This Prospectus also includes trademarks of other companies.
<PAGE>
SUMMARY
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in "Risk Factors" and elsewhere in this
Prospectus. Certain information contained herein is derived from industry
sources. Although the Company believes that this information is reliable, it
has not independently verified this information. The following summary is
qualified in its entirety by the more detailed information and Financial
Statements, including notes thereto, appearing elsewhere in this Prospectus.
Per share and other financial information assumes a proposed 1 for reverse
stock split that will be completed prior to the date of this Prospectus. CSI
has an agreement in principle to acquire all of the outstanding stock of
International Telephone Company. The consummation of this acquisition (the "ITC
Acquisition") is conditioned upon, and will occur simultaneously with, the
completion of this Offering. Unless the context otherwise requires, (i)
references to the "Combined Company" refer to Communications Systems
International, Inc. and International Telephone Company, assuming the ITC
Acquisition is consummated, (ii) references to the "Company" or "CSI" refer to
Communications Systems International, Inc. and (iii) references to "ITC" refer
to International Telephone Company. References to the present action of the
Combined Company refer to activities or matters that are common to each of CSI
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 ITC Acquisition.
Unless otherwise indicated, information contained in this Prospectus does not
give effect to exercise of the Representative's over-allotment option.
THE COMPANY
Communications Systems International, Inc. is a growing provider of
international long distance telecommunications services principally to
customers in South America, Europe, the Pacific Rim, South Africa and Central
America. CSI emphasizes innovative software solutions and technical expertise
to provide higher quality, lower cost alternative routing of telecommunications
for its customer base. CSI is focusing its marketing efforts on high volume
customers such as hotels, large local businesses and foreign branches of
multinational businesses in addition to individuals and small businesses.
International Telephone Company is a provider of international long distance
telecommunications service principally to customers in Africa, Europe and the
Middle East. Existing customers of the Combined Company include the Inter-
Continental Hotel in Rio de Janiero, Brazil and foreign offices of Nike Inc.,
Microsoft Corporation, Mitsubishi Corporation, Chrysler International, Warner
Lambert Corporation, Diners Club International, DHL Aviation, Holiday Inn
Hotels, Best Western Hotel, Wal-Mart Stores, Inc., Citibank, N.A., Bank of
Tokyo, Royal Bank of Canada and the United States embassies in Chile, Korea,
Australia and the Ukraine, the United Nations consulate in South Africa and
other countries' embassies and international agencies.
As a switch-based reseller of international long distance services, the
Combined Company purchases access to multiple telecommunications networks from
companies such as AT&T Corporation ("AT&T"), Sprint Communications L.P.
("Sprint"), and Cable & Wireless plc ("Cable & Wireless"). Through its least
cost routing capabilities, the Combined Company routes calls via
telecommunications networks that offer the Combined Company the lowest cost
available among its carriers ("least cost routing"). The Combined Company
resells network time by providing customized telecommunications services to its
international business and residential customers that may not typically be
available from incumbent telecommunications operators ("ITOs"). Decisions as to
how such services are technically delivered to its international customers are
based on several factors, including the local regulatory environment, market
conditions, telecommunications traffic volume and strategic economic
considerations.
1
<PAGE>
The current means by which the Combined Company provides long distance
service is reverse origination, or "call-reorigination," in which a customer
seeking to make an international call is connected to the United States
telephone system by a computer signal at its telecommunications center, located
in Florida at the U.S. telecommunications gateway to Latin America. The
computer triggers a call to be originated in the United States and routed back
to the caller. The caller is then connected to the international destination by
a second call also originating in the United States. The lines are joined and
the call is completed using two high quality, low cost outgoing calls from the
United States. The result is an effortless, high quality, rapid connection
typically at a cost savings for the customer compared to ITO-provided service.
Through utilization of proprietary software technologies, dedicated lines,
automated call triggering circuits and the Internet, CSI is increasingly making
its service seamless (or "transparent") to the customer. When customers use the
Combined Company's transparent call-reorigination service, callers may not even
be aware they are using call-reorigination because transparent call-
reorigination requires no additional actions by the caller other than the
normal dialing process. CSI has installed its proprietary call-reorigination
systems, DIAL and LINK-US, and other call-reorigination technologies in several
major hotel properties in Brazil and South Africa and has received indications
of interest regarding commencement of call-reorigination service from several
additional hotels in Brazil, Argentina, South Africa and Hong Kong. Management
of the Company believes call-reorigination will remain a viable technical,
economic telecommunications solution in many countries for years to come.
As regulatory and competitive environments evolve around the world, the
Combined Company intends to employ other telecommunications bypass solutions
including "call through" international long-distance services to serve its
customers and expand its customer base in specific target countries which have
deregulated telecommunications industries. Unlike call-reorigination,
"callthrough" service does not re-originate a call from another country.
Instead, the call bypasses the ITO, is sent through an alternate switch and is
then routed to the desired destination by means of least cost routing.
Of the Combined Company's telecommunications revenue for the ten months ended
October 31, 1997, approximately 42.5% was generated from customers located in
South America (primarily in Argentina), 20.5% from Europe, 18.7% from Africa,
11.2% from Asia, and 7.1% from Central America and other areas. Nearly all of
this revenue was generated from call-reorigination services which are
anticipated to continue to provide the majority of revenue in the near term.
Both CSI and ITC have achieved significant growth since their respective
inceptions in 1993. CSI's revenue increased from $1.8 million in the fiscal
year ended April 30, 1995 to $6.7 million in the fiscal year ended April 30,
1996 and $11.9 million in the fiscal year April 30, 1997. The number of CSI's
customers increased from approximately 8,400 at January 31, 1997 to
approximately 10,200 at January 31, 1998. The Combined Company defines
customers as those persons or businesses who have used the Combined Company's
services within the previous four months. ITC's revenue increased from $1.4
million in the fiscal year ended December 31, 1994 to $7.6 million in the
fiscal year ended December 31, 1996. The number of ITC's customers was
approximately 8,800 at January 31, 1998. As of December 31, 1997, the Combined
Company had a network of approximately 95 local sales agents who have engaged
over 400 sub-agents to market the Combined Company's services. Based in the
Combined Company's telecommunications center, the Combined Company's
multilingual sales and customer service departments assist the agents, sub-
agents and customers. A portion of the proceeds from this Offering will enable
the Combined Company to recruit additional sales agents and sub-agents to
support its growth strategy.
The global market for international telecommunications services is undergoing
significant deregulation and reform. The industry is being shaped by: (i)
deregulation and privatization of telecommunications markets worldwide; (ii)
diversification of services through technological innovation; and (iii)
globalization of major carriers through market expansion, consolidation and
strategic alliances. As a result of these factors, it is anticipated that the
industry will experience considerable growth in the foreseeable future, both in
terms of traffic volume and revenue. According to the International
Telecommunications Union ("ITU"), the international
2
<PAGE>
telecommunications industry accounted for $53 billion in revenue and over 60
billion minutes of use in 1995, increasing from $21.7 billion in revenue and
16.7 billion minutes of use in 1986, which represents compound annual growth
rates of 10% and 15%, respectively. The ITU projects that international
telecommunications revenue will approach $76.0 billion by the year 2000 with
the volume of traffic expanding to 107.0 billion minutes of use, representing
compound annual growth rates of 7% and 12%, respectively, from 1995. Based on
information available to the Company from the ITU and telecommunications
industry publications, the call-reorigination, and call through segments of the
telecommunications industry accounted for approximately $1.4 billion in revenue
in 1997 and is growing at a rate of approximately 15% per year.
CSI believes that its emphasis on innovative software solutions to
telecommunications services strategically positions the Combined Company to
take advantage of the multiple changes occurring in the telecommunications
industry as a result of global deregulation and rapid technological change. Key
elements of CSI's business strategy include: (1) integrating the ITC business
and capitalizing on the resulting economies of scale; (2) increasing sales to
larger customers through deployment of its proprietary transparent technology;
(3) offering additional products, such as Internet, facsimile and hotel
operator services; (4) applying resources to increase its sales agent base and
sales and marketing activities; (5) utilizing technology to reduce costs; (6)
pursuing and implementing strategic acquisitions; and (7) broadening and
improving relationships with U.S. and international telecommunications
providers.
CSI is a Colorado corporation formed in April 1993. The Combined Company's
executive offices are located at 8 South Nevada, Colorado Springs, Colorado
80903, and its telephone number is (719) 471-3332. The Combined Company's
Internet address is http://www.csil.com.
RECENT DEVELOPMENTS
ITC ACQUISITION
CSI has a agreement in principle to acquire all of the outstanding capital
stock of ITC for $3.1 million in cash and 207,000 shares of Common Stock based
on an assumed initial offering price of $10.00 per Share, to be issued one year
from the closing of this Offering. A portion of the cash will be held in escrow
for one year and the Common Stock will be subject to set-off to secure certain
indemnification obligations of the stockholders of ITC. ITC is currently owned
by Lynch Family, LLC, Philip Thomas and Sean Thomas. Upon completion of the ITC
Acquisition, Philip Thomas and Sean Thomas will become employees of the
Combined Company. The ITC Acquisition is conditioned on, among other things,
the consummation of this Offering. See "ITC Acquisition" and ITC's Financial
Statements and the Notes related thereto included elsewhere is this Prospectus.
DECEMBER 1997 FINANCING
In December 1997, CSI completed a private placement (the "December 1997
Financing") of an aggregate of $2.84 million principal amount Mandatorily
Redeemable Convertible Promissory Notes (the "Bridge Notes"). Based on an
assumed offering price of $10.00 per Share, the holders of the Bridge Notes
will receive 4,000 shares of Common Stock (the "Bridge Shares") for each
$100,000 principal amount of Bridge Notes held by such noteholder. The
Representative acted as placement agent in connection with the December 1997
Financing. The Combined Company intends to use a portion of the net proceeds of
this Offering to repay the entire principal amount and accrued interest on the
Bridge Notes. The net proceeds from the December 1997 Financing were used to
repay notes payable of $850,000 and accounts payable of $1.1 million and for
payments representing a deposit to a carrier of $150,000 and a standstill
payment to ITC of $100,000. The repayment of the notes payable will result in a
gain on early extinguishment of debt totaling $747,000, net of related
expenses, in December 1997. See "Use of Proceeds."
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities offered................ 1,100,000 shares
Common Stock outstanding before shares (1)
the Offering.....................
Common Stock outstanding after the shares (1)
Offering.........................
Use of proceeds................... To repay the Bridge Notes; to consummate
the ITC Acquisition; to further develop and
expand the Combined Company's sales and
marketing capabilities; to install
equipment to facilitate transparent call-
reorigination services for additional
hotels and large multinational businesses;
to locate regional switches or other
telecommunications equipment in Europe,
Africa and Asia to facilitate least cost
routing; for research and development and
system capacity expansion associated with
the Combined Company's enhanced services,
including facsimile and debit card services
and compression technology that is intended
to improve service and reduce operating
costs; and for working capital to fund
operating expenses. See "Use of Proceeds"
and "Business."
Proposed Nasdaq SmallCap Market
Symbol for the Common Stock...... [CSIL]
</TABLE>
- --------
(1) Includes 113,600 Bridge Shares to be issued immediately prior to the
closing of this Offering based on an assumed offering price of $10.00 per
Share. 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 $30,000 which have a conversion price per
share equal to 90% of the average bid and ask price of the Common Stock on
the day before conversion, (iv) up to 110,000 shares of Common Stock
issuable upon exercise of the Representative's Warrants and (v) any shares
issuable in connection with the ITC Acquisition (collectively referred to
herein as "Additional Securities"). See "Management," "Description of
Securities" and "Underwriting."
4
<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 and ITC, the unaudited financial statements of CSI
and ITC, and the unaudited pro forma condensed combined financial statements of
CSI 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>
CSI ACTUAL ITC ACTUAL PRO FORMA COMBINED(1)
----------------------------- ------------------------------ ---------------------------
YEAR ENDED SIX MONTHS
APRIL 30, ENDED YEAR ENDED TEN MONTHS YEAR ENDED SIX MONTHS ENDED
---------------- OCTOBER 31, DECEMBER 31, ENDED OCTOBER 31, APRIL 30, OCTOBER 31,
1996 1997 1997 1996 1997 1997 1997
------- ------- ----------- ------------ ----------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................ $ 6,741 $11,865 $6,372 $7,603 $8,054 $19,732 $11,426
Cost of revenue................ 5,963 7,755 3,807 5,070 6,790 13,253 8,357
------- ------- ------ ------ ------ ------- -------
Gross margin................... 778 4,110 2,565 2,533 1,264 6,479 3,069
Operating expenses:
Sales and marketing.......... 1,573 2,080 1,271 1,099 715 2,928 1,703
General and administrative... 1,258 1,302 1,326 1,446 1,388 2,929 2,183
Technical and developmental.. 394 722 389 -- -- 722 389
Depreciation................. 58 103 68 69 73 179 113
Amortization of intangibles.. -- -- -- -- -- 937 468
------- ------- ------ ------ ------ ------- -------
Total operating expenses....... 3,283 4,207 3,054 2,614 2,176 7,695 4,856
------- ------- ------ ------ ------ ------- -------
Income (loss) from operations.. (2,505) (97) (489) (81) (912) (1,216) (1,787)
Other income (expense)--net.... (19) (162) (88) 88 62 (62) (109)
------- ------- ------ ------ ------ ------- -------
Net income (loss).............. (2,524) (259) (577) 7 (850) (1,278) (1,896)
======= ======= ====== ====== ====== ======= =======
Net income (loss) per
share(2)......................
Weighted average number of
shares outstanding............
</TABLE>
<TABLE>
<CAPTION>
CSI ACTUAL ITC ACTUAL PRO FORMA
--------------------- ----------- COMBINED
APRIL 30, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1997 1997 1997(1)(3)
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.................. $ 1,284 $ 1,499 $ 1,950 $ 8,369
Long-term assets................ 662 779 770 1,452
Intangible assets............... -- -- -- 4,683
Total assets.................... 1,946 2,278 2,720 14,505
Current liabilities............. 3,615 3,532 3,209 5,543
Long-term liabilities........... -- 850 292 292
Total liabilities............... 3,615 4,382 3,501 5,835
Working capital (deficit)....... (2,331) (2,033) (1,259) 2,826
Shareholders' equity
(deficiency)................... (1,669) (2,104) (781) 8,670
</TABLE>
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(1) Refer to the Pro Forma Condensed Combined Financial Statements contained
herein.
(2) Based on the weighted average number of shares outstanding.
(3) Gives effect to the December 1997 Financing, the ITC Acquisition and the
sale of the Shares offered hereby at the assumed offering price of $10.00
per Share and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
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RISK FACTORS
Investment in the Securities involves substantial risks, some of which are
summarized below. Prospective investors should carefully consider the
following risk factors, among others, relating to the Combined Company and
this Offering prior to making an investment. The discussions and information
in this Prospectus contain both historical and forward-looking statements.
Forward-looking statements are those identified with words such as "believes,"
"expects," "anticipates" and similar terms. To the extent that this Prospectus
contains forward-looking statements regarding the financial condition,
operating results, business prospects or any other operations of the Combined
Company, please be advised that the Combined Company's actual financial
condition, operating results and business prospects may differ materially from
that projected or estimated by the Combined Company in forward-looking
statements. Actual results will differ from the Combined Company's current
expectations. The differences may be caused by a variety of factors, including
but not limited to adverse economic conditions, intense competition, including
entry of new competitors, loss of agents and their customer bases, the
introduction of more competitive pricing structures by long distance carriers,
adverse government regulation, both foreign and domestic, inadequate capital,
unexpected costs, the imposition of new, or the increase of existing, tariffs,
lower revenue and net income than anticipated, failure to obtain new
customers, higher than anticipated costs, difficulties of consummating and
integrating the ITC Acquisition and the acquisitions of other businesses that
do not perform as anticipated, the potential fluctuation and volatility of the
Combined Company's operating results and financial condition, inability to
carry out marketing and sales plans, loss of key executives, changes in
interest rates or international exchange rates, inflationary factors, and
other specific risks that may be alluded to in this Prospectus or in other
reports issued by the Combined Company.
Risks Related to the Combined Company and the Telecommunications Industry
LIMITED RELEVANT OPERATING HISTORY; SIGNIFICANT AND CONTINUING LOSSES
Both CSI and ITC began operations in 1993. Accordingly, CSI and ITC have
limited operating histories upon which an evaluation of their combined
prospects and future performance can be made. Such prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered in the operation and expansion of a business in the highly
competitive telecommunications industry, which is characterized by an
increasing number of market entrants. The Combined Company has no combined
operating history. Therefore, there is no assurance 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 years ended April 30, 1996 and 1997,
respectively, and a loss of approximately $577,000, during the six months
ended October 31, 1997, resulting in an accumulated deficit of approximately
$4.6 million at October 31, 1997. In addition, ITC incurred a loss of
approximately $850,000 during the ten 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 significant increased
revenue or profitable operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements.
SIGNIFICANT CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL FINANCING
The capital requirements of CSI and ITC have been and will continue to be
significant and their cash requirements have been exceeding cash flow from
operations. At October 31, 1997, CSI and ITC had working capital deficits of
approximately $2.0 million and $1.3 million respectively. The Combined Company
has been substantially dependent upon sales of its equity and debt securities
and financing from trade creditors. Based on the Combined Company's current
proposed plans, the Combined Company anticipates that the net proceeds of this
Offering will be sufficient to satisfy its contemplated cash requirements for
at least 12 months following the consummation of this Offering. If the
Combined Company's plans change or its assumptions prove inaccurate (due to
unanticipated expenses, delays or difficulties or otherwise), or the proceeds
of this Offering otherwise prove insufficient to fund operations and implement
the Combined Company's proposed expansion strategy, the Combined Company could
be required to seek additional financing sooner than currently anticipated.
The
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Combined Company has no current arrangements with respect to, or potential
sources of, additional financing and it is not anticipated that any current
shareholders will provide any additional guarantees for Combined Company
obligations. Consequently, there can be no assurance that any additional
financing will be available to the Combined Company when needed, on
commercially reasonable terms, or at all. The inability to obtain additional
financing when needed would have a material adverse effect on the Combined
Company, requiring it to curtail its expansion efforts. In addition, any
additional equity financing may involve substantial dilution to the interests
of the Combined Company's then existing shareholders. See "Use of Proceeds,"
"Dilution," "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON KEY SALES AGENTS
CSI currently depends on approximately 40 independent sales agents to sell
its services, including Edward Stoever, who operates in Argentina, and CS do
Brazil. These two sales agents accounted for approximately 54.3%, and 11.5%,
respectively, of CSI's revenue in the six months ended October 31, 1997, and
the ten largest sales agents accounted for approximately 91.3% of CSI's
revenue in the six months ended October 31, 1997. ITC currently depends on
approximately 55 independent sales agents to sell its services, including
Generic Telecom, Inc., Zohair Attoue and Janel Richards. These three sales
agents accounted for approximately 26.6%, 21.4% and 12.7%, respectively, of
ITC's revenue in the ten months ended October 31, 1997, and the ten largest
sales agents accounted for approximately 89.1% of ITC's revenue in the ten
months ended October 31, 1997.
If the Combined Company fails to retain the services of Mr. Stoever, CS do
Brazil, Generic Telecom, Inc., Mr. Attoue or Ms. Richards for any reason or
loses the services of other 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 due to the loss of sales agents. The Combined Company also depends
on these sales agents and persons engaged by them to install and service much
of the Combined Company's call-reorigination technology. The failure of such
persons to properly install or service the Combined Company's systems could
adversely affect the Combined Company. Although sales agents are subject to
distributor agreements, the agreements may be difficult to enforce because the
sales agents are domiciled in foreign countries. Under the terms of the sales
agent agreements, the sales agents are responsible for collecting customer
payments except for credit card payments, and sales agents generally are
responsible for customer bad debts less, in some cases, an allowance granted
by the Combined Company. Failure of sales agents to collect and remit customer
payments to the Combined Company presents a risk to the Combined Company.
CSI's former Singapore distributor recently failed to remit payments of
$215,000. CSI is aggressively pursuing collection of this debt. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General" and "Business--Sales and Marketing."
NEED TO INTEGRATE AND MANAGE ITC; SELECTION AND INTEGRATION OF UNSPECIFIED
ACQUISITIONS
Management believes that the consummation of the ITC Acquisition will
substantially increase the Combined Company's sales agent base, technological
capabilities, management expertise and carrier relationships. The Combined
Company's ability to realize any long-term advantages from the ITC Acquisition
will depend in large part on successfully integrating, managing and improving
the operations of 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 ITC's executive officers,
including Philip Thomas and Sean Thomas, the loss of key sales agents of CSI
or ITC or adverse changes in relationships with carriers or other strategic
relationships. There can be no assurance that the Combined Company will be
able to successfully integrate ITC. Failure to successfully integrate ITC
would have a material adverse effect on the business of the Combined Company.
A key element to the Combined Company's strategy is expansion through the
additional acquisition of products, technologies, businesses or customer
bases. Except for the agreement with respect to the ITC Acquisition, the
Combined Company has no commitment for any such acquisition as of the date of
this
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Prospectus, and 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. Any future
acquisitions or related activity such as strategic alliances or licensing
arrangements will be accompanied by the risks commonly encountered in such
transactions. Such risks include, 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, the inability of management to
capitalize on the opportunities presented by the acquisitions or related
efforts, the failure to successfully incorporate licensed or 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 of amortization of intangibles, such as goodwill,
in the Combined Company's financial statements. In addition, to the extent the
Company uses cash to complete acquisitions, it may deplete its tangible
assets. If the Company's tangible assets falls below $2 million, the Common
Stock may be delisted from the Nasdaq. 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 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
and marketing, and technical development efforts. There can be no assurance
that present and potential customers of the Combined Company and any acquired
entity would continue their historic usage patterns without regard to the
acquisition, and any significant delay or reduction in usage could have an
adverse effect on the Combined Company's business, financial condition and
results of operations. The process of integrating companies 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. In addition, the process of combining two organizations
could cause the interruption of, or loss of momentum in, the activities of
either or both companies' businesses, which could have an adverse impact on
their combined operations.
The difficulty of combining companies may be increased by the need to
integrate the personnel and the geographic distances between companies.
Changes brought about by any acquisition may cause key employees, 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, 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, particularly in the fiscal quarters immediately
following the consummation of any acquisition, while the operations of the
acquired business are being integrated into the Combined Company's operations.
There can be no assurance that, following any acquisition, the Combined
Company will be able to operate any acquired business on a profitable basis.
RELATIONSHIP WITH LONG DISTANCE CARRIERS
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 telephone carriers based in the United States. The
Combined Company uses the long distance telephone systems of these carriers to
provide its long distance telephone service to customers located outside the
United States. 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 long
distance carriers. Most of the Combined Company's agreements with its long
distance telephone 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 long distance carriers. 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
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Combined Company is continually attempting 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. 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. 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. 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 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
$400,000, which represent approximately 28.7% of the Combined Company's
average monthly cost of revenue for the six months ended October 31, 1997.
Failure to maintain favorable carrier contracts would increase the Combined
Company's direct cost and the ability to achieve and maintain profitability.
See "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CHANGING INDUSTRY ENVIRONMENT
The majority of the Combined Company's operations involve the telephone
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 non-U.S. 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 non-U.S.
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 if the Combined Company in turn is required to reduce its
rates. 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, but there can be no assurance
such an adverse effect will not occur in the future as a result of this or
other pending legislation. See "Business."
COMPETITION
General. The Combined Company faces a high level of competition for
customers and 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 competes with other
organizations that have greater resources than the Combined Company. The
Combined Company believes that there are more than 150
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companies engaged in the international call-reorigination industry. Many of
the Combined Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources, larger
networks and a broader portfolio of services than the Combined Company.
Additionally, many competitors have strong name recognition and "brand"
loyalty, long-standing relationships with the Combined Company's target
customers, and economies of scale that can result in a lower relative cost
structure for transmission and related costs.
Competition for customers and sales agents in the telecommunication markets
in which the Combined Company operates is on the basis of price and on the
basis of the type and quality of service 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 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 the existence of spreads between the rates offered by
the Combined Company and those offered by the providers with whom it competes
as well as those from whom it obtains service for resale. 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 or 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
domestic interstate long distance telecommunications services to the Combined
Company's target customer base of high volume customers such as hotels, large
local businesses and foreign branches of multinational businesses, such action
could have a material adverse effect on the Combined Company's business,
financial condition and results of operations. There can be no assurance that
the Combined Company will be able to compete successfully against new or
existing competitors. See "Business--Competition."
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 of the domestic customers of the ITOs. 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 Corp, Kallback, NetSource Communications,
Telegroup, USA Global Link, UTG Communications, Viatel, Inc. and Worldpass,
and as well as providers of traditional long distance services such as AT&T,
MCI, Sprint, WorldCom, Cable & Wireless, Frontier Corp., LCI International,
Inc., GTE Communications, Qwest Communications and Regional Bell Operating
Companies ("RBOCs") outside their exchange territories.
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 in France; PTT Telecom B.V. in the
Netherlands; 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; Deutsche
Telecom AG in Germany; Optus in Australia and Kokusan Denshin Denwa
International Telecom Japan (KDD) and International Digital Communications in
Japan. 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 local 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, 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 and
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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 approval, or
failure to obtain 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 direct-dial 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 "Business--Government Regulation."
GOVERNMENT REGULATION
The Combined Company's international telecommunications services are subject
to the jurisdiction of many 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 ITU agreed that any country
could ban call-reorigination services, and the provision of some forms of
call-reorigination services is illegal in Uruguay, Venezuela, the Philippines
and certain other countries. In addition, approximately 30 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 7.8% of the Combined Company's revenue
in the ten months ended October 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, but rules or
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 vary and are often based on the informal views of the local
ministries which, in some cases, are subject to influence by government owned
or sanctioned local telephone companies. 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. 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, results of operations and financial condition. See "Business--
Regulation."
As a switch-based reseller of international long distance telecommunications
services, the Combined Company is regulated by the FCC. The Combined Company
is currently authorized by the FCC as a reseller of international long
distance telephone services. The Combined Company has not been the subject of
any action by the FCC or any other regulatory entity that would affect its
ability to resell international long distance services. The FCC has determined
that call-reorigination service using uncompleted call signaling, such as that
used by the Combined Company, does not violate United States or international
law, but has held that United States companies providing such services must
comply with the laws of the countries in which they operate as a condition of
such companies' FCC authorizations. The FCC reserves the right to condition,
modify or revoke any authorizations and impose fines for violations of the
Communications Act of 1934, as amended (the "Communications Act") or the FCC's
regulations, rules or policies promulgated thereunder, or for violations of
the clear and explicit telecommunications laws of other countries that are
unable to enforce their laws against U.S. carriers. See "Business--
Regulation."
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RISKS OF OPERATIONS IN FOREIGN COUNTRIES
At the present time, substantially all of the Combined Company's revenue is
from international customers. The Combined Company anticipates that revenue
from international customers will continue to account for substantially all of
its total revenue. Therefore, the Combined Company is particularly exposed to
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, difficulties in collecting
accounts receivable, longer payment cycles, difficulties in establishing,
maintaining and managing independent sales agents, difficulties in staffing
and managing international operations, difficulties in installing, maintaining
and repairing equipment abroad, difficulties in protecting the Combined
Company's intellectual property overseas, potential confiscation of property
and equipment, potentially adverse tax consequences and the regulation of
telecommunications companies by foreign jurisdictions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
RELIANCE ON RAPIDLY CHANGING TECHNOLOGY; DEPENDENCE ON THIRD PARTY SUPPLIERS
The market for long distance services is characterized by rapidly changing
technology, evolving industry standards and customer demands, and frequent new
product, service and software introductions and enhancements. The Combined
Company has invested significantly in sophisticated and specialized
telecommunications and computer technologies such as the LINK-US and DIAL, and
has focused on the application of these and other technologies to provide
customized solutions to meet its customers' needs. Future technological
advances in the industry may result in the availability of new services or
products that could compete directly with the services currently provided by
the Combined Company or could lower the cost of competitive services and
products to a level where the Combined Company's services and products could
lose any competitive technological advantage. 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 will be successful in anticipating
technological changes or in selecting and developing new and enhanced
information technology on a timely basis.
The Combined Company is dependent on certain third-party suppliers of
equipment and hardware components, including its integrated computer systems
and switching platform, 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 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."
DEPENDENCE ON EFFECTIVE MANAGEMENT INFORMATION SYSTEMS
The Combined Company believes that the integration of its management
information systems and switching platforms is important in order to best
provide least cost routing and efficient billing of customers. Although the
Combined Company's computer system and switching platform located at its
telecommunications center in Ft. Lauderdale are integrated, there can be no
assurance, if its current system becomes damaged or obsolete, that the
Combined Company will be able to upgrade or replace such system with another
integrated system at commercially reasonable prices, or at all. Failure to
maintain an integrated system could have a material adverse effect on the
Combined Company.
The computer system that runs ITC's switches and billing operation has not
yet been upgraded to be Year 2000 compliant. A new system called NTS 2000,
which is Year 2000 compliant, is expected to be released and implemented in
1998 at an estimated cost of $30,000 to the Combined Company. Failure to
achieve Year 2000 compliance could have a material adverse effect on the
Combined Company.
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The Combined Company believes, based on its current business plan, that its
management information systems will be sufficient for the next 12 months, but
will require substantial additional investments to continue their
effectiveness after such time as the Combined Company continues to expand its
operations and process a higher volume of calls. The failure to successfully
implement enhancements, replacements and investments in a timely fashion could
result in a material adverse effect on the Combined Company's business,
financial condition and results of operations. Furthermore, even if the
Combined Company is successful in implementing such investments in a timely
fashion there can be no assurance that the Combined Company's management
information systems will not require further investments.
DEPENDENCE UPON EXECUTIVE OFFICERS AND MANAGEMENT PERSONNEL
The Combined Company's operations are dependent upon the continued services
of Robert Spade, its Chairman and Chief Executive Officer, and Patrick
Scanlon, its President and Chief Operating Officer. The loss of the services
of either of Messrs. Spade or Scanlon could have a material adverse effect on
the Combined Company. The Combined Company has an employment agreement with
Mr. Spade that expires April 30, 2000. The Combined Company maintains a key-
person life insurance policy on the life of Mr. Spade in the amount of $2
million. The Company has applied for key-person life insurance on the life of
Mr. Scanlon in the amount of $2 million. The Company has an employment
agreement with Mr. Scanlon which expires on August 25, 2000. The Combined
Company's success also is dependent on its ability to hire and retain other
qualified management, technical, marketing, sales and customer service
personnel. There can be no assurance that the Combined Company will be
successful in recruiting and retaining such personnel. See "Management."
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
continue to upgrade operating and financial control systems, to recruit
qualified staff 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 operation.
PROPRIETARY RIGHTS AND LICENSES
The Combined Company does not have a formal patent or other intellectual
property protection program. 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 data. While the Combined
Company has attempted to limit unauthorized use of its software products or
the dissemination of its proprietary information, there can be no assurance
that the Combined Company will be able to retain its proprietary software
rights 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--Sales and
Marketing" and "--Technology and Intellectual Property."
INTERNATIONAL CURRENCY FLUCTUATIONS
The Combined Company's operations may be adversely affected by fluctuations
in the value of the U.S. dollar against certain non-U.S. currencies, and the
enactment of exchange controls or non-U.S. government restrictions on the
transfer of funds. The Combined Company currently prices all of its products
and services in U.S. dollars. However, swings in the relative value of the
U.S. dollar in relation to currencies in nations in which the Combined Company
conducts operations can affect the prices of the Combined Company's products
and
13
<PAGE>
services. There is no assurance that the Combined Company will be able to
maintain a competitive position in foreign countries where the domestic
currency is experiencing devaluation. To the extent the Combined Company
expands its international operations or changes its pricing practices to
denominate prices in foreign currencies, the Combined Company will be exposed
to increased risks of currency fluctuation as the Combined Company does not,
and has no plans to, engage in hedging activities designed to protect against
currency fluctuations.
Risks Related to the Offering
DETERMINATION OF OFFERING PRICE
The offering price of the Shares was determined through negotiations between
CSI and the Representative. Among the factors considered were the limited
financial resources of the Combined Company, the Combined Company's potential
revenue and cash flow, the industry in which the Combined Company operates and
the general condition of the securities market. The offering price of the
Shares is not necessarily reflective of the Combined Company's assets, history
of revenue and cash flow, book value or any other objective criteria of value.
See "Underwriting."
MARKET FOR THE COMMON STOCK; PRICE FLUCTUATIONS
Prior to this Offering, there has been only a limited market for the Common
Stock. The Common Stock is traded sporadically in limited quantities on the
OTC Bulletin Board, and the Combined Company has applied to have the Common
Stock quoted on the Nasdaq SmallCap Market. There can be no assurance that a
regular, active trading market will develop or that the market price of the
Common Stock will not decline below the public offering price. The price at
which the Common Stock trades may be highly volatile. In addition, other
events, such as quarter-to-quarter variations in operating results, news
announcements, trading volume, general market trends and other factors, could
result in wide fluctuations in the market price of the Common Stock. The stock
market is subject to 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 for many
small capitalization companies. Factors such as those cited above, as well as
other factors which may be unrelated to the operating performance of the
Combined Company, may adversely affect the price of the Combined Company's
securities. See "Price Range of Common Stock."
SHARES AVAILABLE FOR RESALE
As of 1998, there were shares of CSI's Common Stock issued and
outstanding. Of this amount, approximately shares are "restricted
securities" as defined by Rule 144 of the Securities Act. Of the shares of
restricted stock which are presently outstanding, approximately shares of
restricted stock 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 January 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 have agreed not to sell such shares for a
period of 270 days following the date of this Prospectus. The Selling
Securityholders have agreed not to sell their shares for a period of 180 days
following the date of this Prospectus.
No prediction can be made as to the effect, if any, that the sale of Common
Stock (or the availability of such Common Stock for sale) by the holders of
the Company's restricted stock will have on the market price of the Common
Stock. Nevertheless, the possibility of a substantial number of shares of
Common Stock being offered for sale in the public market may adversely affect
prevailing market prices for the Common Stock and could impair investors'
ability to sell the Common Stock or the Combined Company's ability to raise
capital through the sale of its equity securities. See "Shares Eligible for
Future Sale."
14
<PAGE>
DIVIDENDS
CSI has paid no dividends since inception. The payment of dividends on the
Common Stock rests with the discretion of the Board of Directors. Payment of
dividends is contingent upon, among other things, future earnings, if any, and
the financial condition of the Combined Company, capital requirements, general
business conditions, and other factors which cannot now be predicted. There
can be no assurance that the future operations of the Combined Company will be
profitable or that dividends will ever be paid by the Combined Company. See
"Dividend Policy."
IMMEDIATE SUBSTANTIAL DILUTION
A purchaser of Common Stock in this Offering will experience immediate
substantial dilution of $ per Share or %, which amount represents the
difference between the pro forma net tangible book value per share of Common
Stock after the Offering and the assumed public offering price of $10.00 per
share. See "Dilution."
POTENTIAL FUTURE DILUTION
Currently, the Combined Company has outstanding (i) options to purchase up
to shares of Common Stock, which have weighted average exercise prices of
$ per share, (ii) warrants to purchase up to shares of Common Stock,
which have weighted average exercise prices of $ per share, and
(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
ask price of the Common Stock on the day before conversion. The issuance of
any Common Stock pursuant to the exercise or conversion of any options,
warrants, or convertible promissory notes at a price less than the book value
per share of the Common Stock will dilute the book value of the Common Stock.
POSSIBLE ADVERSE EFFECT OF ISSUANCE OF PREFERRED STOCK; POTENTIAL ANTI-
TAKEOVER EFFECT OF COLORADO LAW
CSI is authorized to issue up to 5,000,000 shares of Preferred Stock, and
the Board of Directors may fix the preferences, limitations and relative
rights of those shares without any vote or action by the shareholders. The
potential issuance of Preferred Stock may delay, deter, or prevent a change in
control of the Combined Company, may discourage bids for the Common Stock at a
premium over the market price of the Common Stock, and may adversely affect
the market price of, and the voting and other rights of the holders of, the
Common Stock. The Combined Company presently has no plans to issue shares of
Preferred Stock. In addition, certain provisions of Colorado law could have
the effect of delaying, deterring or preventing a change in control of the
Combined Company. See "Description of Securities."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Combined Company from this Offering, after deduction
for estimated offering expenses and underwriting discounts of $1,780,000, are
estimated to be $9,220,000 ($10,655,500 if the Representative's over-allotment
option is exercised in full), assuming a public offering price of $10.00 per
share of Common Stock. The Combined Company expects to use the net proceeds
during the 12 months following the Offering as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
APPLICATION OF PROCEEDS DOLLAR AMOUNT NET PROCEEDS
----------------------- ------------- -------------
<S> <C> <C>
Repayment of Bridge Notes(1)...................... $2,911,000 31.6%
Completion of ITC Acquisition(2).................. 2,975,000 32.3
Expansion of marketing capability(3).............. 750,000 8.1
Installation of automated switching equipment(4).. 500,000 5.4
Purchase or lease and installation of regional
switches(5)...................................... 500,000 5.4
Technical development(6).......................... 300,000 3.3
Working capital and general corporate
purposes(7)...................................... 1,284,000 13.9
---------- -----
$9,220,000 100.0%
========== =====
</TABLE>
- --------
(1) Represents amounts to be used for the repayment of the entire $2,840,000
amount of Bridge Notes and estimated accrued interest thereon. The Bridge
Notes bear interest at a rate of 10% per annum and are repayable on the
earlier of five days after the consummation of this Offering or December
30, 1998. CSI used the proceeds of the December 1997 Financing principally
in connection with the repayment of trade payables and notes payable to
telecommunications carriers. See "Description of Securities--Description
of Indebtedness."
(2) Represents amounts to be paid to Lynch Family, LLC, Philip Thomas and Sean
Thomas as partial consideration for all of the capital stock of ITC and
estimated acquisition costs of $100,000. In addition, on the first
anniversary of the closing of this Offering, Lynch Family, LLC and Messrs.
Thomas and Thomas will receive 207,000 shares of Common Stock based on an
assumed initial offering price of $10.00 per Share. See "Business--The ITC
Acquisition."
(3) Represents amounts to be paid for recruiting and for salaries of
specialized sales personnel to promote hotel and large business, operator
services, cellular and other specialized services. This amount also
represents funds to be used to pay for additional technical, customer
service and overhead resulting from the expansion of the sales and
marketing effort. See "Business--Business Strategy."
(4) Represents amounts to be used to install DIAL, LINK-US and other automated
switching equipment which facilitate transparent call-reorigination
services for hotels and large businesses in select countries. See
"Business--Business Strategy."
(5) Represents amounts to be used to purchase or lease and locate regional
switches or other telecommunications equipment in South America, Europe,
Africa or Asia to facilitate least cost routing. See "Business--Business
Strategy."
(6) Represents amounts to be used to continue technical development associated
with the Combined Company's enhanced services, including facsimile and
debit card services and compression technology, which is intended to
improve service and reduce operating costs. See "Business--Business
Strategy."
(7) Working capital will be used, among other things, to pay security deposits
in connection with carrier agreements and to pay general and
administrative expenses. This amount includes approximately $80,000
payable to a former employee of CSI and $50,000 payable to a director of
CSI.
Pending use of the proceeds, the Combined Company intends to invest the net
proceeds in short term, interest bearing, investment grade securities,
including government obligations and other money market instruments.
16
<PAGE>
The amounts set forth above represent the Combined Company's present
intentions for the use of the proceeds from this Offering. Actual expenditures
could vary considerably depending upon many factors, including, without
limitation, changes in economic conditions, unanticipated complications,
delays and expenses, or the availability of alternative financing. Any
reallocation of net proceeds of this Offering will be made at the discretion
of the Board of Directors but will be in furtherance of the Combined Company's
strategy as described in this Prospectus.
DIVIDEND POLICY
CSI has paid no dividends since inception. The payment of dividends on the
Common Stock rests with the discretion of the Board of Directors. There are no
restrictions on payment of dividends under any agreements to which the
Combined Company is a party. Payment of dividends is contingent upon, among
other things, future earnings, if any, and the financial condition of the
Combined Company, capital requirements, general business conditions, and other
factors which cannot now be predicted. There can be no assurance that the
future operations of the Combined Company will be profitable or that dividends
will ever be paid by the Combined Company. To the extent the Combined Company
issues preferred stock, it may have a preference over the Common Stock with
respect to dividends.
17
<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 , 1998)............................
</TABLE>
On , 1998, the closing bid price of the Common Stock as reported on the
OTC Bulletin Board was $ per share. As of , 1998, there were holders
of record of the Common Stock.
18
<PAGE>
DILUTION
The difference between the public offering price per Share and the adjusted
net tangible book value (deficit) per share of Common Stock after this
Offering constitutes the dilution to investors in this Offering. Net tangible
book value per share of Common Stock on any given date is determined by
dividing the net tangible book value (total tangible assets less total
liabilities) on that date, by the number of shares of Common Stock outstanding
on that date.
CSI's net tangible book value (deficit) at October 31, 1997 was ($2.1
million) or ($ ) per share of Common Stock. After giving effect to the
December 1997 Financing (the "Pro Forma Adjustments"), the Pro Forma net
tangible book value (deficit) of CSI as of October 31, 1997 would have been
($562,000) or ($ ) per share. After also giving effect to the sale by the
Combined Company of 1,100,000 shares of Common Stock at an assumed offering
price of $10.00 per share and the receipt of the estimated net proceeds
thereof and the ITC Acquisition, the adjusted net tangible book value of the
Combined Company at October 31, 1997 would have been approximately $4.1
million or $ per share. This represents an immediate increase in net
tangible book value of $ per share to existing shareholders and an immediate
dilution of $ per share to new investors purchasing in this Offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C>
Assumed public offering price...................................... $10.00
Net tangible book value (deficit) before Pro Forma Adjustments...
Increase attributable to the Pro Forma Adjustments...............
Pro Forma net tangible book value (deficit) per share of Common
Stock before Offering...........................................
Increase per share of Common Stock attributable to this Offering
and the ITC Acquisition.........................................
Adjusted net tangible book value per share of Common Stock after
this Offering..................................................... $
------
Dilution per share of Common Stock to new investors in this
Offering.......................................................... $
======
Dilution as a percentage of assumed offering price................. %
======
</TABLE>
The following table summarizes as of October 31, 1997, the difference
between existing shareholders and new investors with respect to the number of
shares of Common Stock purchased from the Combined Company, the total
consideration paid and the average price paid per share by the Combined
Company hereby (before deducting underwriting discounts and estimated offering
expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT (PER SHARE)
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing
shareholders(1)(2)...... % $ 2,750,285 20.0% $
New shareholders......... 1,100,000 11,000,000 80.0% $10.00
---------- ----- ----------- -----
Total.................... 100.0% $13,750,285 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Includes 113,600 Bridge Shares to be issued immediately prior to the
closing of this Offering based on an assumed offering price of $10.00 per
share. Excludes the Additional Securities. See "Management," "Description
of Securities" and "Underwriting."
(2) Includes shares issued in exchange for services rendered, rent and
equipment valued at $423,114. Statements of Shareholders' Equity
(Deficiency) in the Financial Statements.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of CSI at October 31,
1997, the Pro Forma capitalization of CSI to reflect the December 1997
Financing, and the Pro Forma Combined capitalization to reflect the December
1997 Financing, the ITC Acquisition and the sale of the Common Stock at an
assumed public offering price of $10.00 and the application of the estimated
net proceeds therefrom. The table should be read together with the Financial
Statements and the notes thereto.
<TABLE>
<CAPTION>
OCTOBER 31, 1997
------------------------------------------
PRO FORMA
CSI ACTUAL CSI PRO FORMA(1) COMBINED(2)(3)
---------- ---------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term liabilities, net of
current portion.................... $ 850 $ 2,045 $ 292
Shareholders' equity (deficiency):
Preferred stock, no par value;
5,000,000 shares authorized, none
issued or outstanding............ 0 0 0
Common Stock, no par value;
25,000,000 shares authorized;
shares issued and outstanding
actual; shares issued and
outstanding pro forma; and
shares issued and outstanding, as
adjusted......................... 2,750 2,750 14,008
Common Stock subscribed............. -- 795 --
Notes receivable from shareholder... (35) (35) (35)
Accumulated deficit................. (4,577) (3,830) (5,061)
Treasury Stock, at cost............. (243) (243) (243)
------- ------- -------
Total shareholders' equity
(deficiency)....................... (2,104) (562) 8,670
------- ------- -------
Total capitalization (deficiency)... $(1,254) $ 1,483 $ 8,962
======= ======= =======
</TABLE>
- --------
(1) Gives effect to the December 1997 Financing.
(2) Adjusted to reflect the December 1997 Financing, the ITC Acquisition and
net proceeds from the sale by the Combined Company in this Offering of
1,100,000 Shares at an assumed public offering price of $10.00 per Share.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(3) Does not include the Additional Securities.
20
<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 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 statement of operations data for the years ended April 30, 1996 and
1997, and the balance sheet data as of April 30, 1996 and 1997, from ITC's
audited statement of operations data for the ten months ended October 31, 1997
and the year ended December 31, 1996, and the balance sheet data as of October
31, 1997. The selected financial data for CSI with respect to the periods
ended October 31, 1996 and 1997 and the balance sheet data as of October 31,
1997 have been derived from CSI's unaudited financial statements. Management
believes that CSI's interim financial statements as of October 31, 1996 and
1997 and for the periods ended October 31, 1996 and 1997 include all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the financial position and the results of operations of the
CSI for such interim periods. Prior results are not a prediction of future
results of operations. The Pro Forma Combined 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 and ITC and the pro
forma condensed combined financial statements of CSI and ITC.
<TABLE>
<CAPTION>
CSI ACTUAL ITC ACTUAL PRO FORMA COMBINED(1)
-------------------------------- ------------------------ ----------------------
SIX MONTHS
YEAR ENDED ENDED TEN MONTHS SIX MONTHS
APRIL 30, OCTOBER 31, YEAR ENDED ENDED YEAR ENDED ENDED
---------------- -------------- DECEMBER 31, OCTOBER 31, APRIL 30, OCTOBER 31,
1996 1997 1996 1997 1996 1997 1997 1997
------- ------- ------ ------ ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ 6,741 $11,865 $5,530 $6,372 $7,603 $8,054 $19,732 $11,426
Cost of revenue......... 5,963 7,755 3,608 3,807 5,070 6,790 13,253 8,357
------- ------- ------ ------ ------ ------ ------- -------
Gross margin............ 778 4,110 1,922 2,565 2,533 1,264 6,479 3,069
Operating expenses:
Sales and marketing... 1,573 2,080 877 1,271 1,099 715 2,928 1,703
General and
administrative......... 1,258 1,302 609 1,326 1,446 1,388 2,929 2,183
Technical and
developmental.......... 394 722 294 389 -- -- 722 389
Depreciation.......... 58 103 42 68 69 73 179 113
Amortization of
intangibles............ -- -- -- -- -- -- 937 468
------- ------- ------ ------ ------ ------ ------- -------
Total operating
expenses............... 3,283 4,207 1,822 3,054 2,614 2,176 7,695 4,856
------- ------- ------ ------ ------ ------ ------- -------
Income (loss) from
operations............. (2,505) (97) 100 (489) (81) (912) (1,216) (1,787)
Other income (expense)-
net.................... (19) (162) (76) (88) 88 62 (62) (109)
------- ------- ------ ------ ------ ------ ------- -------
Net income (loss)....... (2,524) (259) 24 (577) 7 (850) (1,278) (1,896)
======= ======= ====== ====== ====== ====== ======= =======
Net income (loss) per
share(2)...............
Weighted average number
of shares outstanding..
</TABLE>
<TABLE>
<CAPTION>
CSI ACTUAL ITC ACTUAL PRO FORMA
------------------------------- ----------- COMBINED
APRIL 30, APRIL 30, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1997 1997 1997 1997(1)(3)
--------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.......... $ 1,223 $ 1,284 $ 1,499 $ 1,950 $ 8,369
Long-term assets........ 296 662 779 770 1,452
Intangible assets....... -- -- -- -- 4,683
Total assets............ 1,519 1,946 2,278 2,720 14,505
Current liabilities..... 3,375 3,615 3,532 3,209 5,543
Long-term liabilities... -- -- 850 292 292
Total liabilities....... 3,375 3,615 4,382 3,501 5,835
Working capital
(deficit).............. (2,152) (2,331) (2,033) (1,259) 2,826
Shareholders' equity
(deficiency)........... (1,856) (1,669) (2,104) (781) 8,670
</TABLE>
- --------
(1) Refer to the Pro Forma Condensed Combined Financial Statements contained
herein.
(2) Based on the weighted average number of shares outstanding.
(3) Gives effect to the December 1997 Financing, the ITC Acquisition and the
sale of the Shares at an assumed offering price of $10.00 per Share
offered hereby and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
21
<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
GENERAL
Communications Systems International, Inc. and International Telephone
Company are growing providers of international long distance
telecommunications services. CSI's customers are principally located in South
America, the Pacific Rim, South Africa and Central America, while ITC's
customers are principally located in Africa, Europe and the Middle East. CSI
emphasizes innovative software solutions and technical expertise to provide
higher quality, lower cost alternative routing of telecommunications for its
customer base. CSI focuses its marketing efforts on high volume customers such
as hotels, large local businesses and foreign branches of multinational
businesses in addition to individuals and small businesses. ITC emphasizes its
wholesale long distance services, least cost routing capabilities and superior
customer service for its individual and small business customers. The Combined
Company expects to benefit from the synergies of a complementary customer
base, geographic diversity, technical expertise and marketing and customer
support services; however, no assurance can be given that such synergies will
occur. The Combined Company contracts with several United States and other
long distance carriers to ensure a ready supply of long distance service at
competitive rates.
Prices in the international long distance telecommunications industry in
many of the countries in which the Combined Company provides its services have
declined in recent years due to increased competition and deregulation, and
the Combined Company believes that prices are likely to continue to decrease.
In addition, the Combined Company believes that the deregulation trends in
some international markets will result in greater competition that could
reduce telecommunications revenue per minute and the Combined Company's
operating margins. For example, representatives of 69 countries, including the
United States, recently entered into an agreement with the World Trade
Organization, which became effective on February 5, 1998 (the "WTO
Agreement"), with the goal of increasing competition among telecommunications
providers in those markets. The Combined Company believes, however, that any
decreases in prices as a result of deregulation and increased competition will
be at least partially offset by increased telecommunications usage and the
decreased cost structure discussed below. See "Business--Competition" and "--
Regulation."
CSI and ITC experienced rapid growth in revenue in fiscal years 1996 and
1997. 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. An international call-reorigination call has two
segments: an origination segment and a destination segment. Revenue is
recorded and billed from the beginning of the origination segment to the
completion of the destination segment, if the destination segment is answered
or otherwise connected. If the destination segment is not answered or
connected, the origination segment is not completed and not billable, and the
Combined Company incurs a nonrecoverable cost. CSI and ITC estimate that less
than 6.0% of all minutes charged by its carriers resulted from non-billable
calls during the 12 months ended April 30, 1997. The Combined Company's gross
margin on each completed call or service placed through its facility is equal
to the difference between the amount charged its customer for a call or
service and the amount it is charged by the long distance carrier for the same
call or service.
22
<PAGE>
Approximately 60.0% of all revenue is collected through weekly automatic
charges to pre-approved customer credit cards. Under the terms of the sales
agent agreements, the sales agents are responsible for collecting customer
payments except for credit card payments, and sales agents generally are
responsible for customer bad debts less, in some cases, an allowance granted
by the Combined Company. Failure of sales agents to collect and remit customer
payments to the Combined Company presents a risk to the Combined Company.
Although collection terms for other customers are net 30 days, the time
necessary to process billings and collect billings through the Combined
Company's 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, transmission and termination of voice and data telecommunications
services and to a lesser extent, debit card costs and agent 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 and termination costs
being the Combined Company's most significant expense.
One of the Combined Company's business strategies is to minimize costs
through efficient call management. The Combined Company continually seeks to
negotiate more favorable rates with its existing long distance carriers. Under
certain carrier contracts, the Combined Company obtains guaranteed rates,
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 its minimum monthly commitment as
a penalty. The Combined Company's aggregate minimum monthly commitments are
approximately $400,000, which represents approximately 28.7% of the Combined
Company's monthly variable transmission cost. The Combined Company is seeking
to enter into agreements with additional long distance carriers in order to
access the lowest transmission and termination costs for each call segment.
This "least cost routing" allows the Combined Company to route each call
segment on the carrier with the least cost for that segment. In addition, the
Combined Company intends to establish additional switching facilities outside
the U.S. in order to utilize a larger number of long distance carriers and
reduce its call per unit operating costs. See "Use of Proceeds" and
"Business--Business Strategy."
The Combined Company generally realizes higher gross margins from its call-
reorigination services than from its wholesale services. Wholesale services,
however, provide a source of additional revenue and add significant minutes
originating and terminating on the Combined Company's network, thus enhancing
the Combined Company's purchasing power for leased lines and switched minutes
from its carriers and enabling it to take advantage of volume discounts. The
Combined Company expects gross margin percentages may decline if wholesale
revenue increases as a percentage of total revenue. CSI intends to expand its
wholesale business following the ITC Acquisition. In addition, gross margin
percentages could be adversely affected by price reductions due to market
competition.
Due to ITC's more sophisticated switching platform, the Combined Company has
the capacity of offering wholesale telecommunications services to its
customers. Wholesale services enable ITC to improve its operating results
despite lower gross margins on its wholesale sales because all wholesale
minutes generally are "billable" minutes even if the destination segment of
the call is not answered or connected. Furthermore, ITC is not responsible for
billing end users. Therefore, operating expenses are generally lower for
wholesale services.
Sales and marketing expenses primarily represent commissions paid to
independent sales agents, compensation paid to internal salespersons and
advertising expense. The Combined Company's decision to use independent agents
to date has been primarily driven by the low initial fixed costs associated
with this distribution channel, and the agents' familiarity with local
business and marketing practices. CSI currently depends on approximately 40
independent sales agents to sell its services, including Edward Stoever, who
operates in Argentina, and CS do Brazil. These two sales agents accounted for
approximately 54.3%, and 11.5%, respectively, of revenue in the six months
ended October 31, 1997, and the ten largest sales agents accounted for
approximately 91.3% of CSI's revenue in the six months ended October 31, 1997.
ITC currently depends on approximately 55 independent sales agents to sell its
services, including Generic Telecom, Inc., Zohair Attoue
23
<PAGE>
and Janel Richards. These three sales agents accounted for approximately
26.6%, 21.4% and 12.7%, respectively, of ITC's revenue in the ten months ended
October 31, 1997, and the ten largest sales agents accounted for approximately
89.1% of ITC's revenue in the ten months ended October 31, 1997. The Combined
Company expects that sales and marketing expenses will continue to increase as
the Combined Company obtains additional sales agents either directly or in
connection with acquisitions, and otherwise generally expands its sales and
marketing activities. The Combined Company anticipates, however, that as sales
networks become fully integrated and economies of scale are realized, sales
and marketing expenses ultimately will decline as a percent of revenue and
that its dependence on the five principal sales agents also will be reduced.
See "Use of Proceeds" and "Business--Business Strategy" and "--Sales and
Marketing--Sales Agents."
General and administrative expenses are primarily compensation paid for
agent and customer support, executives and accounting personnel, credit card
merchant charges, bad debt expense and other corporate overhead costs. The
Combined Company devotes considerable resources to collect receivables from
agents and customers who fail to remit payment in a timely manner. While the
Combined Company continually seeks to minimize bad debt, the Combined
Company's experience indicates that a certain portion of past due receivables
will never be collected, and that such bad debt is a necessary cost of
conducting business in the telecommunications industry. The Combined Company
expects that general and administrative expenses will increase in absolute
terms as the Company integrates personnel from the ITC Acquisition and
implements its growth strategy; however, The Combined Company expects general
and administrative expenses will decrease as a percent of revenue due to
anticipated cost reductions resulting from the efficiencies of combining CSI
and ITC.
In conjunction with the December 1997 Financing, CSI will incur additional
monthly non-cash expenses totaling $117,000, including: accrued interest
expense of $24,000 on the Bridge Notes; amortized interest expense of $66,000
from the accretion of a $795,000 discount on the Bridge Notes; and $27,000 of
amortized prepaid debt offering expenses totaling $323,000. Upon repayment of
the Bridge Notes and accrued interest, CSI will recognize an extraordinary
item from loss on early retirement of debt equal to the unamortized balances
of the $795,000 discount on the Bridge Notes and $323,000 prepaid offering
expenses.
EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE
Although increases in salaries, carrier costs and operating overhead can
adversely affect the Combined Company's operations, The Combined Company does
not believe that inflation has had a material effect on its operating results.
However, because future increases in inflation may cause the Combined
Company's suppliers to increase prices of materials and services to the
Combined Company, an increase in inflation could increase the Combined
Company's cost of revenue and operating expenses. The Combined Company
generally believes the Combined Company will be able to adjust its rates to
offset such increases. Because the Combined Company prices its services in
United States dollars, foreign currency exchange rates have not had, and are
not expected to have, a material effect on the Combined Company.
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
The Financial Accounting Standards Board (FASB) has issued FAS No. 128,
"Earnings per Share," FAS No. 129, "Disclosure of Information about Capital
Structure," FAS No. 130, "Reporting Comprehensive Income" and FAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" and FAS
No. 132, "Employers' Disclosures about Pensions and Other Post Retirement
Benefits. FAS No. 128 modifies the standards for computing and presenting
earnings per share and applies to entities with publicly held common stock or
potential common stock and is effective for periods ending after December 15,
1997, including interim periods; the Combined Company expects that the
adoption of this statement will have a negative effect on
24
<PAGE>
previously presented or future earnings per share amounts. FAS No. 129
provides for increased disclosure information about an entity's capital
structure and is effective for periods ending after December 15, 1997; the
Combined Company does not expect the adoption of this standard to
significantly affect its capital structure disclosures. FAS No. 130
establishes standards for reporting and display of comprehensive income and
its components and is effective for years beginning after December 15, 1997;
the Combined Company does not believe the adoption of this Statement will have
an effect on earlier periods. FAS No. 131 modifies the disclosure requirements
for reportable segments and is effective for the Combined Company's year
ending April 30, 1999; the Combined Company has not determined if the effect
of the adoption of this Statement would require the Combined Company to report
industry segments. FAS No. 132 modifies the disclosure requirements for
pensions and other postretirement benefits and is effective for the Combined
Company's fiscal year ending April 30, 1999. The Combined Company currently
does not have any benefit plan that would be affected by this Statement.
YEAR 2000 STATEMENT
The computer system that runs ITC's switches and billing operation has not
yet been upgraded to be Year 2000 compliant. A new system called NTS 2000,
which is Year 2000 compliant, is expected to be released and implemented in
1998 at an estimated cost of $30,000 to the Combined Company.
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
CSI OVERVIEW
CSI was incorporated in April 1993 as a provider of international
telecommunications services. CSI had an accumulated deficit of approximately
$4.6 million as of October 31, 1997. CSI incurred significant net operating
losses totaling $633,000 and $2.5 million during the fiscal years ended April
30, 1995 and 1996, respectively, primarily because of low gross margins
resulting from contractual commitments with its primary long distance
carriers. Gross margin was approximately $582,000 for fiscal year 1995 and
approximately $778,000 for fiscal year 1996. Gross margin as a percent of
revenue was 29.4% and 11.5% for fiscal years 1995 and 1996, respectively. In
fiscal year 1997, CSI improved its gross margin to approximately $4.1 million,
or 34.6% of revenues, due to increased revenue and improved per unit costs
that principally resulted from lower rates charged CSI by long distance
carriers. As a result, CSI's net loss was reduced to $259,000 for the fiscal
year ended April 30, 1997.
In March 1997 and November 1997, CSI completed negotiations with its two
largest carriers to further improve its rate structure which resulted in
agreements that are expected to improve CSI's per unit carrier costs.
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>
SIX MONTHS ENDED
YEAR ENDED APRIL 30, OCTOBER 31,
----------------------- ------------------
1996 1997 1996 1997
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Revenue................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue........... 88.5 65.4 65.2 59.7
Gross margin.............. 11.5 34.6 34.8 40.3
Operating expenses:
Sales and marketing..... 23.3 17.5 15.9 19.9
General and
administrative......... 18.7 11.0 11.0 20.8
Technical and
developmental.......... 5.8 6.1 5.3 6.1
Depreciation and
amortization........... 0.9 0.9 0.8 1.1
Total operating expenses.. 48.7 35.5 32.9 47.9
Income (loss) from
operations............... (37.2) (0.8) 1.8 (7.7)
Interest income
(expense)................ (0.3) (1.4) (1.4) (1.4)
Net income (loss)......... (37.4)% (2.2)% 0.4% (9.1)%
</TABLE>
25
<PAGE>
COMPARISON OF SIX MONTHS ENDED OCTOBER 31, 1996 AND 1997
Revenue. Revenue increased 15.2% from approximately $5.5 million for the six
months ended October 31, 1996 to $6.4 million for the six months ended October
31, 1997. The increase was due primarily to a 27.9% increase in billable
minutes from approximately 5.2 million billable minutes for the six months
ended October 31, 1996 to approximately 6.7 million billable minutes for the
six months ended October 31, 1997. The number of customers increased from
approximately 8,400 customers at January 31, 1997 to approximately 10,200
customers at January 31, 1998. The increase in customers, billable minutes,
and revenue was due to the improved performance of CSI's sales agent base.
Customers are defined as those persons or businesses who have used the
Combined Company's services within the previous four months. These increases
were offset by a 9.4% decrease in the average revenue per billable minute.
Cost of revenue. CSI's cost of revenue increased by 5.5% from approximately
$3.6 million in the six months ended October 31, 1996 to approximately $3.8
million for the six months ended October 31, 1997. As a percentage of revenue,
these costs decreased from 65.2% to 59.7% for the six months ended October 31,
1996 and 1997, respectively. As of March 1997, CSI had in place new
contractual commitments with its primary carriers reflecting more favorable
rates that resulted in improved gross margins during the six months ended
October 31, 1997. Management continues to negotiate improved pricing and
expects to continue to reduce costs per minute as a result of improved
technology which reduces the percentage of non-completed calls and therefore
reduces origination minutes and costs. Origination and destination segment
minute usage increased 27.0% from approximately 9.7 million switched minutes
for the six months ended October 31, 1996 to approximately 12.3 million
switched minutes for the six months ended October 31, 1997.
Sales and marketing. Sales and marketing expenses increased 44.9% from
$877,000 for the six months ended October 31, 1996 to $1.3 million for the six
months ended October 31, 1997. As a percentage of revenue, these costs
increased from 15.9% to 19.9% for the six months ended October 31, 1996 and
1997, respectively. The increase in absolute dollars was due primarily to an
increase in agent commissions caused by the increase in revenue, while the
increase as a percentage of revenue was due primarily to an increase in
advertising expense and hiring of additional internal sales personnel.
General and administrative. General and administrative expenses increased
117.7% from $609,000 for the six months ended October 31, 1996 to $1.3 million
for the six months ended October 31, 1997. As a percentage of revenue, these
costs increased from 11.0% to 20.8% for the six months ended October 31, 1996
and 1997, respectively. The significant increase in expenses was due to
several non-recurring costs incurred by CSI, including: a $215,000 reserve for
bad debt associated with a former sales agent; a $188,000 compensation expense
associated with a severance agreement with a former employee; a $50,000
accrued consulting fee to a director of CSI for negotiating a settlement with
a carrier and a more favorable contractual commitment to one of its primary
long distance carriers; and a $35,000 expense associated with the relocation
of CSI employees to the Combined Company's operations center in Florida.
Excluding these non-recurring costs, general and administrative expenses
increased 37.6% to $838,000 and increased to 13.2% of revenue. The remaining
increase in costs was due to additional customer support and administrative
personnel hired to support the growth of CSI's operations. CSI has implemented
internal control procedures to mitigate the risk of significant loss in the
future from individual sales agents. CSI continues to vigorously pursue the
collections of all bad debt expenses from former customers and sales agents.
Technical and developmental. Technical and developmental expenses are
primarily compensation paid to internal technical personnel, fixed telephone
circuit and line costs and other costs associated with the development,
operation and maintenance of CSI's proprietary products and services.
Technical and development expenses increased 32.3% from $294,000 for the six
months ended October 31, 1996 to $389,000 for the six months ended October 31,
1997. As a percentage of revenue, these costs increased from 5.3% to 6.1% for
the six months ended October 31, 1996 and 1997, respectively. The increase in
absolute dollars was due primarily to an increase in fixed telephone circuit
and line costs due to the significant increase in revenue. The Company expects
the technical and developmental expenses will increase in absolute dollars in
the near future as the Combined Company incurs additional costs related to the
installation of automated switching equipment and technical and developmental
costs associated with the Combined Company's enhanced services. The Combined
26
<PAGE>
Company expects technical and developmental expenses to decrease as a
percentage of revenue in the future because revenue is expected to increase at
a rate greater than that of technical and developmental expenses.
Depreciation and amortization. Depreciation and amortization expense
increased 61.9% from approximately $42,000 for the six months ended October
31, 1996 to approximately $68,000 for the six months ended October 31, 1997.
These costs increased primarily as a result of CSI's higher fixed asset base
during the six months ended October 31, 1997 as compared with the six months
ended October 31, 1996. The Combined Company expects depreciation and
amortization expense to increase significantly in the future as the Combined
Company continues it growth strategy which includes purchases and
installations of automated switching equipment for its hotel and larger
business customers, purchases and installation of regional switches and
amortization of intangible assets associated with the ITC acquisition.
Interest income/expense. Interest income/expense, which represents primarily
interest expense, increased 15.8% from approximately $76,000 for the six
months ended October 31, 1996 to approximately $88,000 for the six months
ended October 31, 1997. Interest expense for the six months ended October 31,
1997 includes accrued interest of approximately $117,000 to one of CSI's
carriers, which was forgiven in December 1997 as a part of a settlement
agreement reached in October 1997. Interest and other expense will increase
significantly until completion of this Offering due to accrued interest
expense on the Bridge Notes, amortization of other debt offering costs,
accretion of the discount on the Bridge Notes associated with the December
1997 Financing and issuance of 113,600 shares of Common Stock (based on an
assumed initial offering price of $10.00 per Share).
Income taxes. CSI did not record an income tax expense or benefit for the
six months ended October 31, 1996 or 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.
Net income/loss. CSI had a net loss of $577,000 for the six months ended
October 31, 1997 compared to net income of $24,000 for the six months ended
October 31, 1996. The decrease in net income was primarily due to significant
non-recurring expenses including a $215,000 bad debt expense from a sales
agent, a $188,000 compensation expense related to a severance agreement with a
former employee, a $50,000 accrued consulting fee to a director of CSI for
negotiating a more favorable contractual commitment to one of its primary
carriers, and $35,000 associated with relocation expenses. Excluding the
effects of these non-recurring costs, CSI would have incurred a net loss of
$89,000 for the six months ended October 31, 1997.
Net income/loss per share. CSI had a net loss per share of $ for the six
months ended October 31, 1997 compared to net income per share of less than
$ for the six months ended October 31, 1997. The change in per share
results was due primarily to an increase in net loss and by an increase in
weighted average shares outstanding.
EBITDA. EBITDA represents net earnings (loss) plus interest expense
(income), income taxes, depreciation and amortization. CSI had a negative
EBITDA of $421,000 for the six months ended October 31, 1997 compared to a
positive EBITDA of $142,000 for the six months ended October 31, 1996. The
decrease in EBITDA was primarily due to the non-recurring costs discussed
herein. Excluding the effects of these non-recurring costs, CSI would have a
positive EBITDA of $67,000 for the six months ended October 31, 1997.
COMPARISON OF FISCAL YEARS ENDED APRIL 30, 1996 AND 1997
Revenue. Revenue increased 76.0% from $6.7 million for the year ended April
30, 1996 to $11.9 million for the year ended April 30, 1997. This increase was
primarily due to growth in the number of customers and the resultant rise in
billable minutes. Billable minutes increased accordingly, reaching
approximately 11.5 million minutes in fiscal year 1997. The significant
increase in customers, billable minutes and revenue was primarily due to CSI's
efforts to increase its sales agent base in its target markets.
Cost of revenue. Cost of revenue increased 30.1% from $6.0 million for
fiscal year 1996 to $7.8 million for fiscal year 1997 and as a percentage of
revenue decreased from 88.5% to 65.4%, respectively. During fiscal year 1996,
CSI increased minute volume, in advance of its ability to secure more
favorable volume discount rates with its carriers.
27
<PAGE>
Sales and marketing. Sales and marketing expenses increased 32.2% from $1.6
million for the year ended April 30, 1996 to $2.1 million for the year ended
April 30, 1997. As a percentage of revenue, these costs decreased from 23.3%
to 17.5% for the years ended April 30, 1996 and 1997, respectively. The
increase in absolute dollars was due primarily to commissions from increased
revenue while the decrease as a percentage of revenue was due primarily to
revenues increasing at a greater rate than marketing expenses and costs
associated with internal salespersons.
General and administrative. General and administrative expenses increased
3.5% from less than $1.3 million for the year ended April 30, 1996 to slightly
more than $1.3 million for the year ended April 30, 1997. As a percentage of
revenue, these costs decreased from 18.7% to 11.0% for the years ended April
30, 1996 and 1997, respectively. The increase in costs were due to additional
customer support and administrative personnel hired to support the growth of
CSI's operations.
Technical and developmental. Technical and developmental expenses increased
83.2% from $394,000 for the year ended April 30, 1996 to $722,000 for the year
ended April 30, 1997. As a percentage of revenue, these costs increased from
5.8% to 6.1% for the years ended April 30, 1996 and 1997, respectively. The
increase in absolute dollars was due primarily to an increase in fixed
telephone circuit and line costs due to the significant increase in revenue
and to increased costs associated with the development of CSI's transparent
automated call processors.
Depreciation and amortization. Depreciation and amortization expenses
increased 77.6% from approximately $58,000 for fiscal year 1996 to
approximately $103,000 for fiscal year 1997. These expenses increased
primarily as a result of CSI's higher fixed asset base in fiscal year 1997
which was principally due to investments in telecommunications equipment and
infrastructure and facility expansion.
Interest income/expense. Interest income/expense, which represents primarily
interest expense, increased from approximately $19,000 for the year ended
April 30, 1996 to approximately $162,000 for the year ended April 30, 1997.
The increase in interest expense was due primarily to the issuance of notes
payable to satisfy carrier obligations.
Income taxes. CSI did not record an income tax benefit in either fiscal year
1996 or 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. As of April 30, 1997, CSI had federal net operating loss
carryforwards of approximately $3.4 million. These carryforwards will begin
expiring in the year 2009. The amount of these carryforwards that can be used
in any given year may be limited in the event of certain changes in the
ownership of CSI. CSI is currently not able to determine the effect that a
change in ownership that will result from this Offering may have on CSI's
ability to use its net operating loss carryforwards.
Net loss. The net loss decreased from $2.5 million for the year ended April
30, 1996 to $259,000 for the year ended April 30, 1997. The decrease in net
loss was primarily due to CSI's obtaining more favorable carrier rates and
increases in customer volume.
Net income (loss) per share. CSI had net loss per share of $ for the year
ended April 30, 1997 compared to net loss per share of $ for the year ended
April 30, 1996. The decrease in net 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.
EBITDA. CSI had a negative EBITDA of $2.5 million for the year ended April
30, 1996 compared to a positive EBITDA of $6,000 for the year ended April 30,
1997. The increase in EBITDA was primarily due to CSI's obtaining more
favorable carrier rates resulting in improved gross margin percentages and
overall operating results.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, CSI has experienced net losses and negative cash flow
from operations. As of October 31, 1997, CSI had a working capital deficit of
approximately $2.0 million. CSI has satisfied its capital
28
<PAGE>
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 development and expansion, and other general corporate
purposes, including working capital. During fiscal year 1996 and 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
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 year 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 ask price on the day preceding the date of
conversion. As of October 31, 1997, $375,000 of the convertible notes had been
converted. In fiscal year 1997, CSI also raised $85,000 through the issuance
of notes that bear interest at 15% per annum and mature in March 1998. In
December 1997, the Company issued Bridge Notes in the principal amount of
$2,840,000. The Bridge Notes bear interest at 10% per annum and are due five
days following the closing of this Offering. See "Description of Securities."
Net cash used in operating activities was approximately $25,000 for the six
months ended October 31, 1997, as compared to cash provided by operating
activities of approximately $406,000 for the six months ended October 31,
1996. The decrease in cash provided was primarily due to a $601,000 decrease
in net income offset by an increase in accounts payable and accrued expenses.
Net cash used in investing activities was approximately $163,000 for the six
months ended October 31, 1997, as compared to approximately $178,000 for the
six months ended October 31, 1996. The increase was primarily due to
acquisition to ITC. Net cash provided by financing activities was
approximately $185,000 for the six months ended October 31, 1997, compared to
cash used in financing activities of approximately $208,000 for the six months
ended October 31, 1996. The increase in cash provided was primarily due to
proceeds from the issuance of stock, net of cash payments to acquire treasury
stock from former CSI employees, and decreased debt service requirements.
Net cash provided by operating activities was approximately $730,000 for the
year ended April 30, 1997, as compared to cash used in operating activities of
approximately $362,000 for the year ended April 30, 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 the year ended April 30,
1997, as compared to approximately $223,000 for the year ended April 30, 1996.
The increase was primarily due to acquisition standstill payments to ITC. Net
cash used in financing activities as approximately $397,000 for the year ended
April 30, 1997, compared to cash provided by financing activities of
approximately $560,000 for the year ended April 30, 1996. The increase in cash
used was primarily due to repayment of notes payable, net of proceeds from the
sale of stock and issuances of notes.
During fiscal year 1996 and 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
Bridge Financing. CSI anticipates that its minimum commitments to carriers
(exclusive of any carrier commitments of ITC) will be approximately $3.7
million and $1.45 million for fiscal year 1998 and fiscal year 1999,
respectively.
Although CSI realized a significant increase in revenue, a greater
percentage of CSI's customers paid amounts due by credit card, thus resulting
in lower receivable balances in relation to revenue billed. CSI is
experiencing improved cash flow from increased volume, a higher percentage of
credit card customers which enhances collections, improved pricing structure,
least cost routing, reduced carrier costs and the implementation of cost
containment policies.
CSI believes that, based upon its present business plan, the net proceeds
from the sale of the Shares offered hereby, together with its increased cash
flow from operations, will be sufficient to meet its currently anticipated
working capital and capital expenditure requirements for at least the next 12
months. Thereafter, if cash generated from operations is insufficient to
satisfy the Combined Company's requirements, the Combined Company would likely
seek to establish credit facilities or sell additional securities.
29
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
ITC OVERVIEW
ITC was incorporated in March 1993 as a provider of international
telecommunications services. ITC had an accumulated deficit of approximately
$782,000 as of October 31, 1997 primarily because ITC reported a net loss of
approximately $850,000 for the ten months ended October 31, 1997. The net loss
includes a $1.1 million claim against ITC by a carrier for usage charges, a
portion of which ITC is disputing. ITC was committed to purchase transmission
capacity from WorldCom, but was not able to meet these minimum usage
commitments due to the unavailability of sufficient capacity from the carrier.
ITC is currently negotiating with the carrier to resolve the dispute and has
requested credits from the carrier for the minimum usage charges and losses
incurred by ITC resulting from the carrier's inability to provide ITC with
sufficient capacity. ITC and the carrier have not reached a settlement. ITC
intends to vigorously defend its position and will continue to attempt to
reach a settlement with the carrier.
RESULTS OF OPERATIONS
Due to the pendency of the ITC Acquisition, ITC's financial statements are
being presented for the period ending October 31, 1997. The statement of
operations data for the ten months ended October 31, 1997 is therefore not
directly comparable to the statement of operations data for the year ended
December 31, 1996. The results of operations for the ten-month period ended
October 31, 1997 may also not be reflective of results achieved in the 12
months ended December 31, 1997. The following table sets forth, for the
periods indicated, the percentage relationship to revenue of certain items in
ITC's statements of operations:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
DECEMBER 31, 1996 OCTOBER 31, 1997
----------------- ----------------
<S> <C> <C>
Revenue...................................... 100.0% 100.0%
Cost of revenue.............................. 66.7 84.3
Gross margin................................. 33.3 15.7
Operating expenses:
Sales and marketing........................ 14.5 8.9
General and administrative................. 19.0 17.2
Technical and developmental................ 0.0 0.0
Depreciation............................... 0.9 0.9
Total operating expenses..................... 34.4 (27.0)
Income (loss) from operations................ (0.1) (11.3)
Interest and other income (expense).......... 0.1 0.7
Income (loss) before taxes................... 0.0 (10.6)
Income tax expense........................... 0.0 0.0
Net income (loss)............................ 0.1 (10.6)
</TABLE>
COMPARISON OF TEN MONTHS ENDED OCTOBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996
Revenue. Revenue increased 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 billable
minutes. During this period of time, the number of customers, billable
minutes, and revenue increased due to an increase in ITC's sale agent base as
well as the improved performance of ITC's existing sales agent base.
Cost of revenue. Cost of revenue increased 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 origination and destination segment minute usage as well as the
carrier dispute previously discussed. The increased cost of revenue as a
30
<PAGE>
percentage of total revenue was due to an increase in revenue from wholesale
services as a percentage of total revenue, which has lower gross margin
percentages, and an increase in costs associated with the carrier dispute.
Sales and marketing. Sales and marketing expenses decreased 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 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 lower commissions to agents resulting from an
increase in the revenue from wholesale services, which the Company does not
pay.
General and administrative. General and administrative expenses decreased
4.0% from over $1.4 million for the year ended December 31, 1996 to slightly
under $1.4 million for the ten months ended October 31, 1997. The decrease in
these costs was due primarily to the different length of the time periods
presented.
Depreciation. Depreciation expense increased 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 related to the acquisition of
telecommunication equipment.
Interest and other income/expense. Interest and other income/expense
decreased 32.6% from approximately $88,000 for the year ended December 31,
1996 compared to approximately $62,000 for the ten months ended October 31,
1997. The decrease in interest and other income/expense 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 incurred
to acquire telecommunications equipment. ITC also had consulting fees totaling
approximately $113,000, net of related consulting expenses, received from CSI
in conjunction with ITC assisting CSI in the settlement of a note with a
carrier.
Income taxes. 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.
Net income/loss. 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $626,000 for the
ten months ended October 31, 1997, as compared to cash provided by operating
activities of approximately $286,000 for the year ended December 31, 1996. The
increase in cash provided 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, as 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.
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BUSINESS
GENERAL
Communications Systems International, Inc. is a growing provider of
international long distance telecommunications services principally to
customers in South America, Europe, the Pacific Rim, South Africa and Central
America. CSI emphasizes innovative software solutions and technical expertise
to provide higher quality, lower cost alternative routing of
telecommunications for its customer base. CSI is focusing its marketing
efforts on high volume customers such as hotels, large local businesses and
foreign branches of multinational businesses in addition to individuals and
small businesses. International Telephone Company is a provider of
international long distance telecommunications service principally to
customers in Africa, Europe and the Middle East. Existing customers of the
Combined Company include the Inter-Continental Hotel in Rio de Janeiro, Brazil
and foreign offices of Nike Inc., Microsoft Corporation, Mitsubishi
Corporation, Chrysler International, Warner Lambert Corporation, Diners Club
International, DHL Aviation, Holiday Inn Hotels, Best Western Hotel, Wal-Mart
Stores, Inc., Citibank, N.A., Bank of Tokyo, Royal Bank of Canada and the
United States embassies in Chile, Korea, Australia and the Ukraine, the United
Nations consulate in South Africa and other countries' embassies and
international agencies.
THE ITC ACQUISITION
The ITC Acquisition is CSI's first step in its acquisition strategy. ITC is
a provider of international long distance telecommunication services, with
approximately $7.6 million in revenue for the year ended December 31, 1996 and
$8.1 million for the ten months ended October 31, 1997 and approximately 8,800
customers. ITC currently focuses its marketing efforts on individuals and
small businesses.
Although ITC provides services to customers in many regions of the world,
ITC primarily targets customers in Europe, Africa and the Middle East. These
three regions comprised approximately 33.2%, 33.7% and 14.7%, respectively, of
ITC's revenue for the ten months ended October 31, 1997.
Sales of ITC's call-reorigination services are conducted through a network
of approximately 55 independent sales agents based in the countries in which
ITC conducts business. The sales agents have engaged approximately 100 sub-
agents to assist in sales and marketing on behalf of ITC. The agents earn
commissions on revenue collected from their customers. ITC generally recruits
agents through advertisements in international newspapers.
ITC services its customers through a switching platform located at its
telecommunications center in Ft. Lauderdale, Florida. The center is a fiber
optic facility that directs international telephone and facsimile traffic and
has 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 of
its customers.
CSI believes that the acquisition of ITC will provide a number of advantages
to the combined entity. These advantages include:
Combined Cost Structures. Although there can be no assurance, management
believes the integration of existing cost structures will result in
immediate savings. ITC has traditionally concentrated its marketing on
Africa and Europe, while CSI has focused on South America. As a result,
through relationships with their respective carriers, each company believes
it has achieved superior rate structures in its area of emphasis. CSI
anticipates that the combined entity will integrate the best of both rate
structures, realizing cost reductions on each of the pre-existing customer
bases.
Increased Buying Power with Carriers. CSI entered into a reciprocal
telecommunications agreement with ITC in July 1997 (the "Reciprocal
Telecommunications Agreement"), which entitles CSI to use ITC's volume of
minutes, in addition to its own, to negotiate with carriers for reduced
rates. As a result, the Combined Company is beginning to realize additional
savings via its increased bargaining power with its carriers. CSI believes
minimum volume commitments will be easier to fulfill, and will be increased
where there are cost benefits, while redundancy in carrier deposits may be
eliminated when the ITC Acquisition is consummated.
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Customer and Agent Diversification. As the combined entity attains
greater geographic diversity, management believes capacity efficiencies can
be achieved by spreading traffic more evenly over the 24-hour day.
Equipment and personnel can be allocated and optimized over 24 hours,
rather than over the shorter "peak" periods associated with each continent.
This diversification also reduces the concentration of the Combined
Company's exposure to regulatory and business risk and reduces its
dependence upon individual sales agents.
Additional Products. In addition to the basic telecommunications products
and services presently offered by CSI, the ITC switch makes it possible for
CSI to significantly expand its wholesale business, and to introduce new
value-added services such as facsimile, debit card and hotel long-distance
operator services to its hotel and business customers. The Combined Company
also will have the opportunity to market CSI's proprietary DIAL and LINK-US
transparent, automated, call re-origination systems through ITC's
established agent network in Europe, the Middle East and Africa.
Elimination of Redundant Overhead. The Combined Company believes it will
be able to reduce employee headcount and its hiring of outside contractors
through the consolidation of functional areas such as accounting, customer
service and technical operations. The Combined Company intends that
marketing services, accounting and administration functions will be
centralized in Colorado Springs, Colorado, while technical and customer
service functions will reside in Fort Lauderdale, Florida.
Personnel Experience and Expertise. Both ITC and CSI possess broad
telecommunications industry experience. The Combined Company anticipates
that synergies will be achieved in the areas of marketing, collections,
customer provisioning, carrier relationships, development and enhancement
of switch technologies and Internet expertise.
CSI has entered into an agreement in principle to acquire all of the
outstanding capital stock of ITC for $3.1 million in cash and 207,000 shares
of Common Stock based on an assumed initial offering price of $10.00 per
Share, to be issued on the first anniversary of the closing of this Offering.
A portion of the cash will be held in escrow for one year to secure certain
indemnification obligations of the stockholders of ITC. ITC is currently owned
by Lynch Family, LLC, Philip Thomas and Sean Thomas. Upon completion of the
ITC Acquisition, Philip Thomas and Sean Thomas will become employees of the
Combined Company. The ITC Acquisition is conditioned upon, and will occur
immediately following, the consummation of this Offering. See the Financial
Statements and the Notes related thereto included elsewhere in this
Prospectus.
INDUSTRY OVERVIEW
International telecommunications services consist of wire and cable,
wireless and satellite transmissions that originate in one country and
terminate in a different country. The international long distance
telecommunications services market is divided into two major segments:
telecommunications that either originate or terminate in the United States;
and telecommunications between countries other than the United States. The ITU
estimates that in 1995, the international long distance telecommunications
services market was approximately $53 billion, with AT&T, Deutsche Telekom AG,
MCI, France Telcom and British Telecommunications plc generating the largest
share of global long distance carrier revenue, and numerous other
telecommunications carriers and resellers accounting for the balance of the
market. The ITU projects that by the year 2000 revenue will approach $76
billion with the volume of traffic expanding to 107 billion minutes of use.
Based on information available to the Company from the ITU and
telecommunications industry sources, the call-reorigination and call through
segments of the telecommunications industry accounted for approximately $1.4
billion in revenue in 1997 and is growing at a rate of approximately 15% per
year. Historically, ITOs provided all of the telephone services required by
their respective countries, leaving customers with no choice but to use those
services and pay the prices charged by ITOs. Additionally, ITOs have
historically controlled much of the inter-country traffic. Due to this lack of
competition, the historical cost of making international telephone calls from
points of origin outside of the United States has been significantly higher
than that of making international calls from inside the United States. In
connection with increasing deregulation in international markets,
telecommunications providers such as the Combined Company offered savings over
the rates charged by local telephone companies in countries with
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regulated telecommunications markets through a process known as "call-
reorigination." Call-reorigination technology allows telecommunications
providers to purchase telecommunications capacity from service providers
outside the regulated countries at lower rates and resell the service to
customers at a favorable rate relative to that offered by the local telephone
companies. The reduced costs afforded by call-reorigination technology,
coupled with the introduction of value-added services such as debit cards,
facsimile and data transmission, have resulted in new competitors to ITOs in
providing international telecommunications services.
CSI believes that continuing deregulation of international
telecommunications markets coupled with technological advances will lead to
increased international competition similar to that within the United States.
Specifically, CSI believes that increased utilization of high-speed fiber
optic cable and technologically advanced switching software may increase
capacity, speed and quality and may offer value-added features while reducing
cost. CSI believes that these developments will result in decreased demand for
basic, traditional call-reorigination services in deregulated markets, but
that these factors should also lead to increased traffic volume for high
quality, state-of-the-art international facilities-based carriers with an
established customer base, carrier relationships and switches.
The international telecommunications industry provides voice and data
transmission from one national telephone network to another. The industry has
experienced dramatic changes during the past decade that have resulted in
significant growth in the use of services and in enhancements to technology.
The industry is expecting similar growth in revenue and traffic volume in the
foreseeable future. The market for telecommunications services is highly
concentrated, with Europe and the United States accounting for approximately
43% and 25%, respectively, of the industry's worldwide minutes of use in 1995.
AT&T, Deutsche Telecom, MCI, France Telecom and BT originated approximately
40% of the aggregate international long distance traffic minutes in 1995.
Growth and change in the international telecommunications industry have been
fueled by a number of factors, including greater consumer demand,
globalization of the industry, increases in international business travel,
privatization of ITOs, and growth of computerized transmission of voice and
data information, including the Internet. These trends have sharply increased
the use of, and reliance upon, telecommunications services throughout the
world. CSI believes that despite these trends, a high percentage of the
world's businesses and residential consumers continue to be subject to high
prices with poor quality of service which have been characteristic of many
ITOs. Demand for improved service and lower prices has created opportunities
for private industry to compete in the international telecommunications
market. Increased competition, in turn, has spurred a broadening of products
and services, and new technologies which have contributed to improved quality
and increased transmission capacity and speed.
Consumer demand and competitive initiatives have also acted as catalysts for
government deregulation, especially in developed countries. Deregulation in
the domestic interstate long distance market accelerated in the United States
in 1984 with the divestiture by AT&T of the RBOCs. Today, there are over 500
U.S. long distance companies, most of which are small- or medium-sized
companies. In order to be successful, these small- and medium-sized companies
have to offer their customers a full range of services, including
international long distance. However, most of these carriers do not have the
critical mass of customers to receive volume discounts on international
traffic from the larger facilities-based carriers such as AT&T, MCI and
Sprint. In addition, these small- and medium-sized companies have only a
limited ability to invest in international facilities. Alternative
international carriers such as the Combined Company have capitalized on this
demand for less expensive international transmission facilities. These
emerging international carriers are able to take advantage of larger traffic
volumes to obtain volume discounts on international routes (resale traffic)
and/or invest in facilities when volume on particular routes justify such
investments. As these emerging international carriers have become established,
they have also begun to carry overflow traffic from the larger long distance
providers that own overseas transmission facilities.
On February 15, 1997, pursuant to the WTO Agreement, which became effective
on February 5, 1998, 69 members, including the United States, of the WTO
agreed to open their respective telecommunications markets
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to competition and foreign ownership committed to and adopted regulatory
measures to protect market entrants against anticompetitive behavior by
dominant telecommunications providers. Although CSI believes that the WTO
Agreement could provide the Combined Company with significant opportunities to
compete in markets that were not previously accessible, the WTO Agreement
could also provide similar opportunities to the Combined Company's
competitors. In some countries, for example, the Combined Company will be
allowed to own facilities or to interconnect to the public switched network on
reasonable and non-discriminatory terms. There can be no assurance, however,
that the pro-competitive effects of the WTO Agreement will not have a material
adverse effect on the Combined Company's business, financial condition and
results of operations or that members of the WTO will implement the terms of
the WTO Agreement.
By eroding the traditional monopolies held by ITOs, many of which are wholly
or partially government owned, implementation of the WTO Agreement will
provide U.S.-based providers the opportunity to negotiate more favorable
agreements with both the traditional ITOs and emerging foreign providers. 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 begin to carry international long distance
traffic originating in those countries.
BUSINESS STRATEGY
The Combined Company is a switch-based reseller of international, long
distance telecommunications products and services within South America,
Europe, the Middle East, Africa, Pacific Rim and Central America markets.
Management's strategy is to grow its business through aggressive marketing and
agent expansion programs, provision of higher margin products and provision of
enhanced services such as Internet fax and its proprietary DIAL and LINK-US
automated call processors, and strategic acquisitions of complementary
telecommunications companies and customer bases. CSI believes that its DIAL
and LINK-US high volume, automated call processors and high quality service
provide it with advantages over other similar telecommunications providers. As
regulatory and competitive environments around the world evolve and change,
CSI expects to respond in a prudent fashion to maintain and increase its
customer base and competitive position. Key elements of CSI's business
strategy include the following:
Integrate ITC. In July, 1997, CSI entered into a Reciprocal Operating
Agreement with ITC wherein the two companies agreed to combine their
respective technologies and operating strengths in order to take advantage
of resulting synergies and economies of scale. This relationship has
yielded improved rates from carriers; greater CSI and ITC flexibility in
marketing new, customized wholesale and retail products; and improved CSI
cost savings due to superior least-cost routing capabilities of the ITC
switch and its location at a major telecommunication's gateway for
terminating Latin American traffic. In addition to overall carrier rate
reductions, ITC has also benefited from CSI's automated, Internet
triggering technology allowing it to expand its customer base in Middle
Eastern markets where standard call-reorigination has not been an effective
product offering.
Management of CSI believes that the Combined Company will generate
additional synergies and efficiencies. In order to increase revenue, the
Combined Company will offer new and expanded products and services, such as
its proprietary DIAL and LINK-US high volume PBX installations and Internet
fax products, to ITC's existing agents in Europe, the Middle East and
Africa. To decrease costs, the Combined Company intends to optimize its
equipment utilization over a full 24-hour day at the Ft. Lauderdale
operations and customer service center. In addition, consolidation of
administrative, financial and customer service staffs should yield
additional efficiencies.
Increase Number of Larger Customers Through the Deployment of Transparent
Technology. The Combined Company's customers consist primarily of small
businesses and individuals who do not require transparent service and who
are rate sensitive. CSI has developed its proprietary DIAL and LINK-US
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transparent technologies that, coupled with its offering of other
transparent technologies manufactured by other suppliers, are attractive to
high volume customers, such as hotels, embassies and the local offices of
large multinational businesses which are seeking improved international
telecommunications services. CSI has found that its target market of hotel
and other business customers are willing to pay a premium for high quality,
transparent access to call-reorigination services. CSI has installed
transparent switches in hotels and in offices of large multinational
companies located in Brazil, South Africa and Argentina. Following
completion of the ITC Acquisition, CSI expects ITC's sales force, which
does not currently market transparent technologies to its customers, to
begin marketing transparent services to large customers in ITC's target
markets as well as to ITC's current customer base.
Rapidly Expand Service Offerings. For existing and potential hotel and
multinational business customers, the Combined Company is developing a
complement of enhanced services, including operator services for hotel
customers, custom debit calling cards, Internet/private network fax and
data services with substantial savings over normal telephone rates, and
Internet-managed conference calling.
Increase Sales Agent Base and Sales and Marketing Activities. The
Combined Company has a network of approximately 95 local sales agents and
400 sub-agents employed by such sales agents. CSI believes that it can most
effectively increase its customer base and revenue through the attraction
of qualified additional local sales agents, and believes that it can
attract sales agents because of its advanced technology, its focus on
higher volume hotel and business customers and its emphasis on high quality
service. The Combined Company also will seek to expand its business by
increasing its sales and marketing activities and by hiring additional
personnel to support its increased sales and marketing efforts.
Utilize Technology to Reduce Costs. The Combined Company is seeking to
reduce its costs through the use of automated "least cost routing" of its
call segments. The Combined Company's least cost routing system coordinates
the worldwide process of selecting the lowest cost route for each call
based on the time of day and the requirements for optimal quality among
available routes. The Combined Company, under the Reciprocal
Telecommunications Agreement, runs its telecommunications traffic over
ITC's switch, taking advantage of its least cost routing capabilities and
its proximity to the South American switch gateway. In addition, this
switch platform enhances the Combined Company's ability to provide
customized wholesale services. In addition, where conditions warrant, the
Combined Company also plans to install switches capable of performing least
cost routing in Europe, South America, the Pacific Rim and elsewhere to
achieve cost savings by reducing the need to route a call through the
United States. Instead, calls would use the long distance services of non-
U.S. countries that have favorable rates. The Combined Company has acquired
full Internet capability to provide a wide range of enhancements to its
services. These include lower cost transmission of data and facsimile
traffic, assisting in least cost routing and providing real time billing
and accounting information.
Pursue and Implement Strategic Acquisitions. As a key part of its growth
strategy, the Combined Company intends to actively pursue and execute
strategic acquisitions of complementary international customer bases,
products and telecommunications companies. ITC is the first such
significant acquisition. Management believes the worldwide
telecommunications industry will continue to undergo a period of strong
consolidation activity due to the general cost advantages of economies of
scale associated with larger operations. The Combined Company intends on
being an active participant during this consolidation period acquiring
those products and companies that fit its strategy of providing business
and other customers with high quality, state-of-the-art telecommunications
service.
Broaden and Improve Strategic Relationships with U.S. Carriers and
International Telecommunications Providers. The Combined Company intends to
forge strategic alliances with major U.S. and international
telecommunications companies when and where such alliances can be an
advantage to the Combined Company. Such alliances may be attractive in the
case of large corporate accounts involving multiple locations of high
volume international long distance traffic. This business potential is
possible due to CSI's capabilities using its proprietary DIAL and LINK-US
PBX automated call-reorigination installations in Brazil and South Africa.
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SERVICES
Call-reorigination. The largest segment of the Combined Company's business
involves call-reorigination services. When the Combined Company provides call-
reorigination service, it connects its 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. The Combined Company provides two basic types of call-
reorigination: transparent and non-transparent. When customers use the
Combined Company's transparent call-reorigination service, callers may not
even be aware they are using call-reorigination because transparent call-
reorigination requires no additional actions by the caller other than the
normal dialing process. When customers use the Combined Company's non-
transparent call-reorigination service, they are required to make an initial
telephone call to the Combined Company's computer and then wait for a "call
back" from the Combined Company's computer to complete the call. As of the
date of this Prospectus, most of the Combined Company's customers utilize non-
transparent call-reorigination services. Customers who use non-transparent
call-reorigination typically are individuals or smaller businesses. The
Combined Company intends to focus its future sales and marketing efforts
toward recruitment of larger transparent call-reorigination customers.
Non-transparent Call-reorigination. Customers of the Combined Company that
do not make a large number of international calls, usually residential
customers and some small businesses, do not normally require or demand
transparent call-reorigination, which is more expensive and requires more
sophisticated equipment. These customers are each assigned a special telephone
number to dial when they want to make an international call. The caller dials
this special number that triggers the Combined Company's computer to make the
call-reorigination. Because the computer does not answer the call, the caller
is not charged for a completed call. When the caller answers the call-
reorigination, he or she can dial any location in the world via the Combined
Company's computer and typically at lower rates than those charged by the ITO.
The Combined Company believes that the quality of the calls made using the
Combined Company's system is normally as good as, or better than, the quality
obtained by using the ITO. Approximately 81% of the Combined Company's traffic
is currently non-transparent.
Transparent Call-reorigination. CSI has developed advanced call triggering
methods which, when used along with standard triggering methods and
commercially available, state-of-the-art call processing devices, provide
transparent access to the Combined Company's call-reorigination system. These
methods take advantage of global data networks such as X.25, Internet and
frame relay, and digital services such as Integrated Services Digital Networks
(ISDN), to provide extremely fast and reliable call-reorigination initiation.
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 and New Zealand in
the near future. The utilization of proprietary, software-based triggering
methods and commercially produced, full-featured call processing devices
provide the Combined Company with a transparent solution to a wide array of
telecommunications situations. The Combined Company is able to quickly adapt
its call processors to virtually any type of customer's requirements,
providing extremely fast and reliable service.
CSI's transparent call processors function by recognizing the customer's
dialed digits and routing the customer's call through a predetermined route
for call completion. When a call processor recognizes the initiation of an
international call, typically by detecting the leading "00" in a customer's
dialed string, the call processor triggers the Combined Company's switch in
the United States, indicating that a call-reorigination has been requested by
the call processor at the customer's site. The call-reorigination request is
processed and the call processor receives the call-reorigination, often by the
time the customer has finished dialing his or her international call. The call
processor answers the incoming call-reorigination and immediately sends the
international number dialed by the customer to the Combined Company's switch,
which places the call on another outgoing telephone line to the number dialed
by the customer. The call-reorigination call to the customer and the call to
the customer's dialed destination are then joined and the international call
is completed. This procedure, while complex in nature, actually only takes a
few seconds to occur.
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CSI has developed proprietary call processors called "DIAL" and "LINK-US,"
which allow hotels and other large businesses that have PBX telephone systems
to use its transparent call-reorigination services. Prior to the development
of this proprietary technology, the PBX telephone systems used by these
organizations were incompatible with CSI's switching technology. The Company
installs its PBX processors in hotels and large businesses and offers similar
but less sophisticated and less expensive switches that are manufactured by
third parties to small businesses and other customers.
CSI estimates that approximately 19% of the Combined Company's traffic is
currently routed through transparent call processors. The Combined Company has
approximately 200 DIAL and five LINK-US as well as approximately 200 other
transparent call processors installed at various hotels and businesses. DIAL
or LINK-US processors or other transparent call-reorigination processors are
installed at the Inter-Continental, Caesar Park, Copacabana Palace, Marina
Palace and Atlantico Hotels in Rio de Janeiro, and the Austacem business park
in Sao Paulo, several Holiday Inns in South Africa and are proposed to be
installed in several additional hotels and businesses in Brazil, Argentina,
South Africa and Hong Kong.
RELATED SERVICES
In addition to call-reorigination service, the Combined Company intends to
offer facsimile and debit card services. The Combined Company plans to provide
value-added services such as hotel operator services and Internet services.
The Combined Company currently provides domestic long distance reselling as an
agent for several domestic carriers.
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 his 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 the revenue from these
calls. The Combined Company may share a small percentage of its revenue from
operator services with the hotel by agreement in order to introduce operator
services into the hotel. The Combined Company intends to offer a variety of
other services to hotel customers and their guests, including direct dial
call-reorigination, facsimile and Internet services, voice-mail and debit card
services.
Wholesale Long Distance Reselling. The Combined Company intends to expand
its wholesale call-reorigination services. The provision of wholesale services
enables the Combined Company to resell its services to companies and sales
agents wanting to sell long distance services under their own names. Companies
and sales agents purchasing wholesale services will receive such services at
rates below the retail rates the Combined Company traditionally charges its
retail customer because the Combined Company will not incur the overhead costs
associated with servicing retail accounts. The Combined Company will be able
to provide customized billing formats and rate structures for its wholesale
clients. The Combined Company anticipates that the additional traffic from
wholesale customers will enable it to negotiate further rate reductions with
its carriers.
Facsimile Services. The Combined Company offers its customers the ability to
send quality, high-speed facsimiles internationally. The Combined Company
currently transmits facsimiles over its call-reorigination network. The
Combined Company intends to commence offering the transmission of facsimiles
via the Internet or private data networks. Both facsimile and Internet usage
are increasing significantly worldwide. The Combined Company's switching
facilities are equipped with redundant, dedicated T-1 access to the Internet.
The Combined Company believes that the integration of call-reorigination
technology, facsimile and Internet capabilities will provide it with important
competitive data telecommunication advantages over other call-reorigination
companies. The Company intends to use a portion of the proceeds of this
Offering to implement and expand these services.
Debit Card Services. The Combined Company offers rechargeable debit cards to
its customers. The use of debit calling cards is a common practice in Western
Europe and Asian countries. Debit cards operate the same as conventional
"charge-a-call" cards issued by AT&T, MCI and Sprint, but are purchased with a
set amount of
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time available. For the cardholder, toll fraud is no longer a concern. If the
card is lost or stolen, the loss is limited to the amount of the time
remaining on the card, and then the card simply expires and is of no further
value to the holder. The Combined Company plans to offer debit cards through
its hotel and business customers that will combine call-reorigination with
local debit card platforms.
SALES AND MARKETING
General
Sales of the Combined Company's call-reorigination services are conducted
through a network of approximately 95 independent sales agents based in the
countries in which the Combined Company conducts business. The sales agents
have engaged approximately 400 sub-agents, many of whom may be employed by
such sales agents on a part-time basis, to assist in sales and marketing on
behalf of the Combined Company. The agents earn commissions on revenue
collected from their customers. These commissions generally range between ten
to fifteen percent of the revenue collected by the agents and sub-agents. The
Combined Company trains and supplies agents and sub-agents with necessary
promotional materials for use in attracting customers and product and service
updates through printed material and access to the Combined Company's
operations center in Ft. Lauderdale, Florida. The Combined Company provides
order entry and product fulfillment services through customer service
personnel located at its operations center. The Combined Company currently
advertises its services in international newspapers and on a limited basis via
a web site on the Internet to attract sales agents, sub-agents and customers.
Historically, the Combined Company has had a limited marketing budget. CSI
intends to use a portion of the net proceeds of this Offering to increase
significantly its marketing program in order to further develop its Latin
American and Pacific Rim markets, and recruit new agents around the world.
Agents
All of the Company's sales agents are required to enter into one of two
forms of agreement: a "CSI Distributor Agreement," or a "CSI Branch Office
Distributor Agreement." ITC has entered into an "ITC Independent Contractor
Agreement," a wholesale agreement or a consulting agreement with certain of
its sales agents. After the consummation of the ITC Acquisition, CSI intends
to review the forms of sales agent agreements currently used by both companies
and maintain only those forms which management believes will provide the best
relationship between the Combined Company and its sales agents. See "Risk
Factors--Dependence on Key Sales Agents."
CSI Distributor Agreement. The distributor agreements grant authority to
agents to solicit offers to subscribe for or purchase CSI's services and
products, but grants no authority to bind the Company. All customer orders are
subject to the approval of the Company. Although the distributor agreements do
not establish a specific territory, each agent must obtain the Company's
permission with respect to each area in which such sales agent intends to
solicit offers. The agent generally is responsible for soliciting and
servicing of customers, but the Company is responsible for all billing and
collections. The agent is responsible to the Company for all bad debts less,
in certain circumstances, an allowance granted by the Company.
Each agent earns commissions on collected revenue from its customers. Such
commissions are on a scale ranging from 10% for less than $50,000 of monthly
collected revenue to 15% for monthly collected revenue of $250,000 or more.
Certain distributor agreements relating to high volume large businesses such
as hotels limit commissions to a maximum of 10% of monthly collected revenue.
Generally, each sales agent must meet sales goals ranging from $3,000 in
billings per month after six months from the effective date of such
distributor's agreement to $33,000 in billings per month after 36 months.
Branch Office Distributor Agreement. Under CSI's branch office distributor
agreements, agents establish offices designed to serve specific territories.
In addition, such agents may solicit customers outside their territories with
the Company's prior consent. Except as set forth below, the terms of the
branch office distributor agreements are the same as the distributor
agreements. CSI's two largest agents are engaged under branch office
distribution agreements.
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<PAGE>
Unlike the distributor agreements, the branch offices are responsible for
billing and collection, except for bills paid by credit card, which are paid
directly to the Company. The branch offices are required to remit all revenue
collected, twice monthly. The branch offices are responsible to the Company
for all bad debts less, in certain cases, an allowance granted by the Company.
Each branch office is paid commissions on monthly collected revenue based on
a scale ranging from 13% for up to $50,000 of monthly collected revenue to 15%
for monthly collected revenue of $100,000 or more. Generally, each branch
office agent must meet the sales goals ranging from $20,000 per month in
billings after six months from the effective date of such branch office
distributor's agreement to $250,000 in billings per month after 36 months.
ITC Independent Contractor Agreement. Under ITC's Independent Contractor
Agreement, each sales agent can market and sell ITC's services within a
defined geographical region. Generally, within six months of the agreement,
each sales agent must meet certain sales and customer quotas and must maintain
a monthly billing of $100,000 per month to be authorized exclusive rights to
market the services of ITC in that region. ITC is responsible for billing and
maintaining all records for the sales agent's accounts.
Sales agents collect, in advance, payments from each of their customers
equal to the customer's average monthly telephone bill. Sales agents are
responsible for their customers' account balances. Each sales agent earns
commissions on collected revenue from customers such sales agent has solicited
on a scale ranging from 6% for less than $25,000 of collected monthly revenue
to 10% for collected monthly revenue of $100,000 or more. ITC has made certain
exceptions to this scale and pays certain agents commissions higher than 10%
of monthly collected revenue. The agreements are generally in effect for one
calendar year and are renewed yearly unless terminated by ITC or the agent.
Technicians
CSI currently has three technicians available to install and program its
DIAL and LINK-US transparent call-reorigination technologies at customer
sites. Before the Company sends one of its technicians to an international
customer's location to perform an installation, the Company verifies that the
customer's site is equipped to handle the type of equipment to be installed.
The Company's technicians typically perform the first few equipment
installations for each sales agent. The sales agents are responsible for
hiring technical consultants, who are trained by CSI's technicians, to perform
additional transparent equipment installations. CSI plans to hire additional
in-house technicians as needed to support the demand for the Company's
automated call-reorigination systems.
Customers
The Combined Company believes that its customers prefer the Combined
Company's service to their local telephone ITO's service for several reasons,
including: (1) lower international, and in some cases intra-country, telephone
rates; (2) increased system reliability and call completion rates; (3)
improved line quality, with less echo, static and snow; and (4) available and
responsive customer service support. The Combined Company's system is also
easy to use, particularly with transparent call-reorigination. Large corporate
users, especially hotels, benefit from CSI's transparent system, through which
employees and hotel guests are able to dial just as they would on the local
ITO's system.
The Combined Company's primary customers currently are residential and
individual customers, hotels and small and medium-sized businesses. The
Combined Company also serves large corporations and non-profit entities such
as missions, schools and churches. The Combined Company provides
telecommunications services to approximately 19,000 customers as of January
31, 1998. The Combined Company defines customers as those persons or
businesses who have used the Combined Company's services within the prior four
months; however, a high level of customer attrition is typical in the call-
reorigination industry. South America (particularly Argentina and Brazil),
Europe and Africa currently represent the greatest areas of market penetration
for the Combined Company.
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<PAGE>
The Combined Company is developing a variety of service and payment
structures to attract a broader base of customers and to retain existing price
sensitive accounts. New payment methods are necessary for customers in many
parts of the world where credit cards are not as prevalent or easily
accessible as in the United States. The two leading methods are pre-payment by
guaranteed funds or direct bank debit (automatic bank withdrawal), which is a
method of payment preferred by larger businesses in several countries.
CSI has recently entered into cellular markets in South Africa and Italy.
Cellular providers are natural competitors to ITOs and are open to alliances
with call-reorigination providers such as the Combined Company that have
similar competitive objectives. The Combined Company will seek to market its
services to the existing subscriber base of the cellular providers with which
it has contracts.
CARRIER CONTRACTS
Carrier costs constitute a significant portion of the Combined Company's
variable costs. The Combined Company has entered into contracts to purchase
switched minute capacity from various domestic and foreign carriers and
depends on such contracts for origination and termination of its
telecommunications. Pursuant to these contracts, the Combined Company obtains
rates, which are generally more favorable than otherwise would be available,
by committing to purchase switched minute minimums from such carriers. If the
Combined Company fails to meet its switched minute minimum requirements 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 $400,000
which represent approximately 31% of the Combined Company's monthly variable
transmission expense. 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 these carriers. Most of the
Combined Company's agreements with its long distance telephone carriers 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 is continually attempting to renegotiate rates with its
current carriers and to establish relationships with new long distance
carriers that provide the most favorable rates. Due to its financial
condition, the Combined Company defaulted on payment obligations to certain
carriers in 1995, 1996 and 1997. Although the Combined Company was able to
negotiate deferred payment arrangements with these carriers (and subsequently
payoff such arrangements), there is no assurance that it will be able to make
such arrangements with these or other carriers if required in the future. In
November 1997, WorldCom commenced an action against ITC in Connecticut state
court 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. 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--Relationship With Long Distance
Carriers" and "Management's Discussion of Financial Condition and Results of
Operations."
COMPETITION
General
The Combined Company faces a high level of competition for customers and
sales agents in all of its markets, and expects competition to intensify in
the future. There are no substantial barriers to entry in the call-
reorigination industry. The Combined Company believes that there are more than
150 companies engaged in the international call-reorigination 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 which can result in a lower relative cost structure for
transmission and related costs.
41
<PAGE>
Inasmuch as the Combined Company believes that competition for customers and
sales agents is based primarily on price, transmission quality, services
offered and the ability of the supplier to "bundle" various telecommunications
services to meet customer requirements, the U.S.-based providers of
international call-reorigination service typically set pricing, quality,
service, and standards that the Combined Company seeks to match or exceed in
order to compete. 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 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 continue to offer rates lower than the ITOs. A decrease in the
arbitrage spreads could have a material adverse effect on the Combined
Company's business, financial condition or 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 of high-volume residential consumers and small- and
medium-sized businesses, such action could have a material adverse effect on
the Combined Company's business, financial condition and results of
operations. There can be no assurance that the Combined Company will be able
to compete successfully against new or existing competitors.
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 world-wide 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 acquire, establish
or hold a significant stake in telecommunications companies in the countries
which are a party to the WTO Agreement, and (iii) the ability to take
advantage of these opportunities within a framework of procompetitive
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.
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 of the domestic
customers of the ITOs. 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
AT&T, Access Authority, IDT Corporation, Justice Technology Corp., Kallback,
NetSource Communications, Telegroup, USA Global Link, UTG Communications,
Viatel, Inc. and Worldpass as well as providers of traditional long distance
services such as AT&T, Cable & Wireless, Inc., Frontier Corp., GTE
Communications, LCI International, Inc., MCI, Qwest Communications
International, Inc., RBOCs, Sprint, WorldCom, outside their exchange
territories providing long distance services in the United States.
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
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<PAGE>
Brazil; France Telecom in France; 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 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 these international 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, 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 service 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 fact that regulation of
telecommunications services in foreign countries has created a 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 so much
that customers are no longer willing to use the Combined Company's
international call-reorigination services.
TECHNOLOGY AND INTELLECTUAL PROPERTY
The Combined Company does not have a formal patent or other intellectual
property program. 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 data.
Although the Combined Company believes that its success is more dependent
upon its technical expertise than its proprietary rights, the Combined
Company's success and ability to compete is dependent in part upon its ability
to enhance its technology. The Combined Company continually strives to provide
faster, higher quality, enhanced service for its customers. Part of the
Combined Company's success in speed and reliability of its call-reoriginations
can be attributed to its use of transparent X.25 and Internet automated call-
reorigination-triggering technology.
Redundancy. The Combined Company's operations center in Ft. Lauderdale,
Florida has redundant computer systems and fiber optics that provide two
advantages. First, its telecommunications services are rarely off-line. The
Combined Company believes that this gives it an advantage compared to many of
the Combined Company's smaller competitors, and enhances the Combined
Company's reputation for quality, service and uninterrupted system
availability. Second, the Combined Company's redundant system architecture
permits the Combined Company the flexibility to take individual computers off
line intentionally for scheduled maintenance, upgrades and enhancements.
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<PAGE>
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 automatic call-
reorigination to occur when interconnected with PBX's of hotels, large
businesses and other high volume customers. As of October 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 or any restrictions or financial
penalties whatsoever regarding its deployment or lack of 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 is a system
that facilitates transparent call-reorigination through the utilization of
X.25 and Internet triggering technologies interconnected with commercial PBX
environments. The Company plans to emphasize the installation of its Enhanced
DIAL technology at the sites of its largest customers in the future. The
Enhanced DIAL system can support the same volume of traffic as 64 of the Basic
DIAL systems. The Company's Basic DIAL system is more of an entry-level system
that is installed to facilitate transparent call-reorigination for smaller
companies. The Basic DIAL system is able to utilize X.25 and Internet
triggering, but is also commonly used in locations that do not currently have
X.25 or Internet access.
CSI has entered into a consulting agreement with Gary Kamienski with respect
to the LINK-US technology. Mr. Kamienski has worked in the computer science
field for over 24 years, specializing in systems programming and data
communications and spent 17 years working with Bell Communications Research.
Pursuant to Mr. Kamienski's agreement, dated September 19, 1996, Mr. Kamienski
transferred the LINK-US switch technology to the Company. The 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 Company's gross revenue
related to LINK-US. The Company has the option to buy out the royalty for an
amount equal to the greater of $2,500,000 or three times the aggregate royalty
payments for the first twelve months of the Agreement. In addition, for each
installation of LINK-US, the Company agrees 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 stays in effect for as long as
the LINK-US is operational 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 the royalty. 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
10 years or the period of time the Company is utilizing the technology
associated with LINK-US.
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 makes X.25 triggering technology work with its call-
reorigination system. The Company uses X.25 technology in areas where it has
several business customers. The Company currently has X.25 triggering
available in Argentina and Brazil.
In countries with underdeveloped telecommunications systems, it can be
difficult and time consuming to make an international phone call. With X.25
triggering technology installed, up to 100% of the trigger calls to the
Combined Company's switch make it out of the country and nearly 100% of the
call-reorigination calls make it back into the country. The combination of
X.25 triggering technology with a DIAL or LINK-US switch is especially
appealing to hotels and business owners. See "--Call-reorigination--
Transparent Call-reorigination."
By utilizing these 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
44
<PAGE>
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 of Operations
in Foreign Countries."
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 Argentina, Brazil,
Venezuela, South Africa and Lebanon and intends to have it installed in New
Zealand and Singapore. CSI has found that call-reoriginations using Internet
triggering usually take four to six seconds and are nearly 100% effective at
getting back to the customer.
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 and
are often based on the informal views of the local ministries which, in some
cases, are subject to influence by the local telephone companies. 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 approximately 30 countries have notified the
FCC that they have declared certain call-reorigination services illegal. The
Combined Company's services in such countries comprised approximately 7.8% of
its revenue for the ten months ended October 31, 1997. The Combined Company
generates a significant portion of its revenue from customers originating
calls in Argentina, Brazil, Europe, the Middle East and South Africa. In the
event that any of these countries prohibited the Combined Company's services
or regulated the pricing or profit levels of such services, the Combined
Company's business, results of operations and financial condition 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 the probability that the FCC would rescind the
Combined Company's grant of authority to provide call-reorigination services
for failure to comply with non-U.S. law is unlikely, such action by the FCC
would have a material adverse effect on the Combined Company's business. The
Combined Company intends to expand its international service offerings to
continue to be competitive in additional countries. To facilitate this
expansion, the Combined Company may deploy additional switching facilities to
be located in a number of countries. As a result, the Combined Company will be
directly subject to regulation in an increasing number of countries, and there
can be no assurance that such regulation will not have a material adverse
effect on the Combined Company's business, results of operations and financial
condition. 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--Government
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 as well as on the number and types of competitors in the market. 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 will not raise material issues with regard
to the Combined Company's compliance with regulations or that existing or
future regulations will not have a material adverse effect on the Combined
Company's business, financial condition and results of operations.
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<PAGE>
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 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 30 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, and could have a material adverse effect on the Combined
Company's business, financial condition and results of operations.
EMPLOYEES AND CONSULTANTS
As of December 31, 1997, CSI had 21 full-time employees and two consultants.
As of December 31, 1997, ITC had 14 full-time employees and one consultant.
CSI plans to hire additional employees and consultants as may be required to
support expansion of the Combined Company's operations and the Combined
Company's 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.
FACILITIES
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. See
"Certain Transactions."
ITC's executive offices are located at 290 Pratt Road, Meriden, Connecticut
06450. The telecommunications and customer service center for the Combined
Company is leased by ITC and located at 110 East Broward Boulevard, Suite 610,
Ft. Lauderdale, Florida 33301.
LITIGATION
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 the ordinary course of business, the Combined Company is a party to
several legal proceedings, the outcome of which, singly or in the aggregate,
is not expected to be material to the Combined Company's financial position,
results of operations or cash flows. The Combined Company intends to
aggressively pursue collection of debts, including those owed by a former
distributor in Singapore.
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MANAGEMENT
OFFICERS AND DIRECTORS
The following table contains the name, age and position with CSI of each
executive officer and director of CSI as of the date of this Prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH CSI
- ---- --- -----------------
<S> <C> <C>
Robert A. Spade........................ 51 Chief Executive Officer and Chairman
of the Board
Patrick R. Scanlon..................... 51 President, Chief Operating Officer
and Director
Daniel R. Hudspeth..................... 35 Chief Financial Officer and
Treasurer
Philip A. Thomas....................... 52 Vice President and General Manager
(upon completion of the ITC
Acquisition)
Cassandra A. Zajac..................... 26 Vice President of Investor Relations
and Secretary
Dean H. Cary........................... 49 Director
Richard F. Nipert...................... 41 Director
</TABLE>
Robert A. Spade has been the Chairman of the Board since March 1994 and
CSI's Chief Executive Officer since January 1995. 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. He devotes substantially all of his time to the
business of CSI. Mr. Spade is a director of MedPlus Corporation, a company
that operates a workers' compensation medical clinic and arranges financing
for patients. He was a director of World Information Networks On The Net, Inc.
("WIN"), a company that provides Internet access, designs web pages and
broadcasts facsimiles via the Internet, from August 1995 to March 1997. 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 graduated from the Johns Hopkins School of
Advanced International Studies in 1971 with a Masters Degree, and from
University of California, Santa Barbara in 1968 with a B.A. Degree 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 the Company 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 earned an M.S. Degree in Finance in 1971
from the UCLA Graduate School of Management and a B.A. Degree in Economics
from the University of California, Santa Barbara in 1968.
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
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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 earned his B.S. Degree in Business Administration from
Colorado State University in 1985.
Philip Thomas will become Vice President-General Manager of CSI upon the
closing of this Offering. Mr. Thomas was a co-founder and 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 College of Technology.
Cassandra A. Zajac has been CSI's Secretary since June 1996, Vice President
of Investor Relations since September 1995 and an employee of CSI since June
1995. From January 1994 to May 1995, Ms. Zajac was a Business Analyst for
Amoco Production Company. From June 1992 to December 1993, Ms. Zajac was a
licensed real estate agent in the State of Colorado and worked for Woodland
Real Estate Better Homes and Gardens. Ms. Zajac was a director of World
Information Network ("WIN") from August 1995 to July 1996. Ms. Zajac graduated
in 1993 from Colorado State University with a B.S. Degree in Finance and
Computer Information Systems. Ms. Zajac is the step-daughter of Mr. Spade.
Dean H. Cary has been a director of CSI since January 1997. Since November
1995 he has been an Executive Director 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 earned a B.A. Degree in Business, Education and
Psychology from the University of Minnesota in 1969.
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 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 earned his J.D. Degree
from the University of Southern California in 1980 and a B.A. Degree in Social
Ecology from the University of California at Irvine in 1977.
BOARD COMMITTEES
The Board of Directors maintains a Compensation Committee and an Audit
Committee. The Compensation Committee, consisting of Messrs. Nipert and Cary,
reviews compensation and option matters and makes recommendations to the Board
regarding changes in executive compensation. The Audit Committee, consisting
of Messrs. Nipert and Cary, reviews CSI's internal audit controls.
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.
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
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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
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 earned a B.S. Degree in Finance from Utah State
University in 1983 and has earned graduate credits in telecommunications from
the University of Denver.
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 Thomas.
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.
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 earned 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.
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 in 1991.
EXECUTIVE COMPENSATION
No executive officer of CSI received total compensation in excess of
$100,000 in any of the last three fiscal years. Robert A. Spade, Chief
Executive Officer of CSI since 1995, received total salary and bonus of $9,000
in fiscal year 1995 and $48,000 in fiscal year 1996. In fiscal year 1996, CSI
granted to Mr. Spade, pursuant to CSI's Non-Qualified Stock Option Plan,
options to purchase shares of Common Stock at an exercise price of $ per
share, that expire on August 31, 1998, options to purchase shares of
Common Stock at an exercise price of $ that expire on October 31, 1999,
options to purchase shares of Common Stock at $ per share that expire on
July 31, 1999, and options to purchase shares of Common Stock at $ per
share that expire on August 29, 2007. The options Mr. Spade received in 1997
represent approximately 5.7% of all options granted to employees in fiscal
year 1997. Mr. Spade did not exercise any of his options in fiscal year 1996.
Based on the closing high bid price of the Common Stock of $ per share as
quoted on the OTC Bulletin Board on , 1998, Mr. Spade's unexercised
vested options on that date had no value.
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EMPLOYMENT AGREEMENTS
CSI has entered into an employment agreement with Mr. Spade. Mr. Spade's
employment agreement, dated May 1, 1997, provides for a base salary of a
minimum of $150,000 which will be increased by 4% annually during the three
year term of the agreement. CSI may terminate Mr. Spade's employment only for
cause (as defined in the agreement). Mr. Spade also is entitled to receive an
annual bonus of up to 65% of his salary pursuant to any cash bonus plan
adopted by the Board of Directors. He has the option to convert any cash bonus
to stock options having an exercise price equal to the price of CSI's Common
Stock on the first day of the fiscal year on which a bonus is calculated.
Pursuant to the agreement, Mr. Spade has agreed not to compete with CSI for a
period of three years following termination of the agreement.
CSI has entered into an employment agreement with Mr. Scanlon. Mr. Scanlon's
employment agreement, dated October 31, 1997, provides for a base salary of a
minimum of $140,000, which may be increased to reflect the market rate for
persons in comparable positions. CSI may terminate Mr. Scanlon's employment
only for cause (as defined in the agreement). Mr. Scanlon also is entitled to
receive an annual bonus pursuant to any cash bonus plan adopted by the Board
of Directors and stock options. He has the option to convert any cash bonus to
stock options having an exercise price of CSI's Common Stock on the first day
of the fiscal year on which a bonus is calculated. Pursuant to the agreement,
Mr. Scanlon has agreed not to compete with CSI for a period of three years
following termination of the agreement.
CSI has entered into an employment agreement with Mr. Hudspeth. Mr.
Hudspeth's employment agreement, dated December 1997, provides for a base
salary of a minimum of $110,000 which may be increased to reflect the market
rate for persons in comparable positions. CSI may terminate Mr. Hudspeth's
employment only for cause (as defined in the agreement). Mr. Hudspeth also is
entitled to receive an annual bonus pursuant to any cash bonus plan adopted by
the Board of Directors and stock options. He has the option to convert any
cash bonus to stock options having an exercise price of CSI's Common Stock on
the first day of the fiscal year on which a bonus is calculated. Pursuant to
the agreement, Mr. Hudspeth has agreed not to compete with CSI for a period of
three years following termination of the agreement.
Upon the completion of the ITC Acquisition, CSI will enter into one year
employment agreements with Philip 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 Company for a
period of six months following termination of the respective agreements.
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 this 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 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 plans are 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. In
January 1998, CSI terminated its Stock Bonus 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
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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 either plan.
Options may not be transferred other than by will and the laws of descent and
distribution without the express consent of the Board of Directors or a
committee thereof.
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 alter, suspend, or
discontinue the plans, 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 plans, if any, change the
qualification of its members, or withdraw the plans 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 plans; increase the number of shares for which an option is
exercisable to any one employee; extend the term of the plan or the maximum
option periods; decrease the minimum exercise price; or materially increase
the benefits accruing to plan participants.
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PRINCIPAL SHAREHOLDERS
The following table sets forth, as of January 31, 1998, the number of and
percentage of outstanding shares of Common Stock owned of record or
beneficially by (i) each director and executive officer of the Combined
Company; (ii) each person who owns beneficially more than five percent (5%) of
the Company's outstanding Common Stock; and (iii) all directors and executive
officers as a group. 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>
PERCENT OF COMMON STOCK(1)
---------------------------------------
SHARES AFTER OFFERING
BENEFICIALLY BEFORE AND ITC
NAME AND ADDRESS OWNED OFFERING(2) ACQUISITION
- ---------------- ------------ ----------- --------------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Robert A. Spade(3)..................
Patrick R. Scanlon(4)...............
Cassandra A. Zajac(5)...............
Daniel R. Hudspeth..................
Dean H. Cary(6).....................
71 Burnwood Lane
Upper Saddle River, NJ 07458
Richard F. Nipert(7)................
1140 Grant Street, Suite 100
Denver, CO 80203
Philip A. Thomas(8).................
All directors and executive officers
as a group (6 persons)(9)..........
OTHER SHAREHOLDERS:
James L. Williams(10)...............
123 Vientos Road
Camarillo, CA 93010
</TABLE>
- --------
*Less than 1%.
(1) Calculated pursuant to Rule 13d-3(d) of the Exchange Act. Under Rule 13d-
3(d), shares not outstanding which are subject to options, warrants,
rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage
owned by such person, but are not deemed outstanding for the purpose of
calculating the percentage owned by each other person listed.
(2) Shares outstanding before offering include 113,600 Bridge Shares to be
issued immediately prior to this Offering.
(3) Of such shares, are held of record by Mr. Spade or his spouse and
shares are issuable upon exercise of options held by Mr. Spade.
(4) Of such shares, are held of record and shares are issuable upon
exercise of options held by Mr. Scanlon.
(5) Of such shares, are held of record and shares are issuable upon
exercise of options held by Ms. Zajac.
(6) Of such shares, none are held of record and are issuable upon exercise
of options held by Mr. Cary.
(7) Of such shares, are held of record and are issuable upon exercise
of options held by Mr. Nipert.
(8) Mr. Thomas will receive shares on the first anniversary of the closing
of this Offering in connection with the ITC Acquisition.
(9) Of such shares, are held of record and shares are issuable upon
exercise of options.
(10) Of such shares, are held of record and shares are issuable upon
exercise of warrants.
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CERTAIN TRANSACTIONS
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 Spade purchased approximately 80% of Redden's
outstanding common stock in May 1995 from certain shareholders of Redden for
$34,500. Mr. Spade was then elected President and a director of Redden. 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 the following: Mr. Nipert ( shares); Mr.
Scanlon ( shares); and Ms. Zajac ( shares).
CSI has received periodic advances from Robert Spade. On April 30, 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 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 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. Ms.
Zajac and certain other 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 Spade. Robert 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."
On January 10, 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 consideration of business consulting
services.
In November 1997, CSI entered into an agreement in principle with ITC and
its stockholders, Lynch Family, LLC, Sean Thomas and Philip Thomas. Upon
consummation of this Offering and the ITC Acquisition, Lynch Family, LLC and
Messrs. Thomas and Thomas will receive an aggregate of $3.1 million in cash
and 207,000 shares of Common Stock based on an assumed initial offering price
of $10.00 per Share to be issued on the first anniversary of the closing of
this Offering. Furthermore, John Lynch, a manager of Lynch Family, LLC, will
enter into a one year consulting agreement with the Combined Company under
which he will receive $125,000,
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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 John Lynch, a manager of Lynch Family, LLC, in
negotiating a carrier agreement on behalf of CSI.
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. The Combined Company has adopted a policy that future transactions
between the Company and its officers, directors and 5% or more shareholders
are subject to approval by a majority of the disinterested directors of the
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 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.
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.
CSI used the proceeds from the sales of Common Stock discussed above to fund
its operations. CSI believes that these transactions were conducted on terms
that were fair and reasonable to CSI and at prices that approximated the fair
market value of the Common Stock at the time of the transactions. See
"Principal Shareholders."
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DESCRIPTION OF SECURITIES
The following description of CSI's securities is qualified in its entirety
by reference to CSI's Articles of Incorporation and Bylaws, copies of which
have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. As of December 31, 1997, the Common Stock was held of
record by 621 shareholders. See "Additional Information."
COMMON STOCK
CSI is authorized to issue 25,000,000 shares of Common Stock, no par value.
As of the date of this Prospectus, the Company had shares of Common Stock
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 the
Company'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 the Company. 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
CSI is authorized to issue up to 5,000,000 shares of Preferred Stock, no par
value. As of the date of this Prospectus, no shares of Preferred Stock were
outstanding. The Board of Directors has the authority to issue Preferred Stock
in one or more series and to fix the number of shares constituting any such
series and the preferences, limitations, and relative rights, including
dividend rights, and liquidation preferences of the Shares constituting any
series, without any further vote or action by the shareholders of the Company.
The issuance of Preferred Stock by the Board of Directors could adversely
affect the rights of holders of Common Stock.
The potential issuance of Preferred Stock may have the effect of delaying,
deterring, or preventing a change in control of the Company, may discourage
bids for the Common Stock at a premium over the market price of the Common
Stock and may adversely affect the market price of, and the voting and other
rights of the holders of, Common Stock. The Company has no current intention
to issue 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 $2,840,000. 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 Spade, the Chairman and Chief
Executive Officer of CSI, and Patrick 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 4,000 Bridge Shares upon the closing of this Offering,
based on a $10.00 per share initial offering price. Such Bridge Shares are
offered by this Registration Statement. See "Selling Securityholders and Plan
of Distribution."
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
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<PAGE>
is two years from the respective dates of investment. The aggregate
outstanding principal amount of the 10% Notes is due on the maturity date. The
10% Notes may be converted into shares of Common Stock at a conversion price
of 90% of the average high bid and low asked price of the Common Stock on the
day before conversion. CSI may prepay any of the 10% Notes in full at any time
without penalty, and any note holders may cause CSI to repay such holder's
note at the end of each six-month period that any principal is outstanding
upon 30 days written notice. As of 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.
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 the Company 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 Stockholders") 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 Stockholders, to file within 30 days of such demand (subject to
an extension in the event CSI is then involved in certain transactions not in
the ordinary course of business) a registration statement on Form S-3 covering
the ITC Acquisition Stock. The Former ITC Stockholders are not required to
bear any expenses incurred by CSI in connection with registering the ITC
Acquisition Stock.
TRANSFER AGENT
American Securities Transfer & Trust, Inc. is the Transfer Agent and
registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering and after giving effect to the ITC
Acquisition, CSI will have shares of Common Stock outstanding ( shares
if the Representative's over-allotment option with respect to the Common Stock
is exercised in full). The 1,100,000 shares of Common Stock sold in this
Offering will be freely transferable and tradeable without restriction or
further registration under the Securities Act except for any shares purchased
or held by any "affiliate" of CSI, which will be subject to the resale
limitation of Rule 144 promulgated under the Securities Act.
56
<PAGE>
Of CSI's approximately million shares of Common Stock outstanding
immediately prior to the date of this Prospectus, million are "restricted
securities" as that term is defined under Rule 144 of the Securities Act.
Restricted securities may be sold in open market transactions in compliance
with Rule 144 if the conditions of such rule are satisfied. Under Rule 144 any
person (or persons whose shares are aggregated) who has beneficially owned
restricted shares for at least one year is entitled to sell, within any three-
month period, a number of shares that does not exceed the greater of (i) 1% of
the then outstanding shares of CSI's Common Stock ( shares immediately
after this Offering) or (ii) the average weekly trading volume during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Commission. Sales pursuant to Rule 144 are also subject to
certain requirements relating to the manner of sale, notice and availability
of current public information about CSI. A person who is not deemed to have
been an affiliate of CSI at any time during the 90 days immediately preceding
the sale and whose restricted shares have been fully paid for two years since
the later of the date they were acquired from CSI or the date they were
acquired from an affiliate of CSI may sell such restricted shares under Rule
144(k) without regard to the limitations described above.
Up to 110,000 additional shares of Common Stock may be purchased by the
Representative after the first anniversary date of this Prospectus through the
exercise of the Representative's Warrants. Any and all shares of Common Stock
purchased upon exercise of the Representative's Warrant may be freely
tradeable, provided that CSI satisfies certain securities registration and
qualification requirements in accordance with the terms of the
Representative's Warrants. See "Underwriting."
CSI, its officers and directors and persons known by CSI to be greater than
2% shareholders, have agreed not, directly or indirectly, to sell, offer to
sell, contract to sell, grant any option for the sale of, otherwise dispose
of, or register or announce the sale or Offering of any shares of capital
stock of CSI beneficially owned by them or any securities beneficially owned
by them convertible into, or exercisable or exchangeable for capital stock of
CSI for a period of 270 days after the date of this Prospectus without the
prior written consent of the Representative. Furthermore, the holders of the
Selling Securityholders' Warrants have agreed not to sell or offer for sale
the share of Common Stock underlying the Selling Securityholders' Warrants for
a period of 180 days after this Prospectus.
Sales of substantial numbers of shares of Common Stock pursuant to Rule 144
or otherwise could adversely affect the market price of the Common Stock,
should any such market develop.
57
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the Underwriters named below (the "Underwriters"), have
severally agreed, through Cohig & Associates, Inc., the Representative of the
Underwriters, to purchase from CSI, and CSI has agreed to sell the
Underwriters, the aggregate number of shares of Common Stock set forth
opposite their respective names.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Cohig & Associates, Inc...................................
Total................................................... 1,100,000
=========
</TABLE>
The Common Stock are being offered by the several Underwriters, subject to
prior sale, when, as, and if delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part and subject to
approval of certain legal matters by counsel and to various other conditions.
The nature of the Underwriters' obligation is such that they must purchase all
of the Common Stock offered hereby if any are purchased.
CSI has granted to the Representative a separate option, exercisable within
45 days from the effective date of the Registration Statement, to purchase an
additional number of shares of Common Stock as will be equal to not more than
15% each of the total number of shares of Common Stock initially offered at
the public offering price less the underwriting discount of $ per share of
Common Stock. The Representative may exercise such option only for the purpose
of covering any over-allotments in the sale of the Common Stock offered
hereby.
The Underwriters have advised CSI that the Underwriters propose to offer the
Common Stock directly to the public at the public offering prices set forth on
the cover page of this Prospectus, and to selected dealers at that price, less
a concession of not more than $ per share of Common Stock. After the public
offering, the price to the public and the concession may be changed by the
Underwriters.
The Underwriters have informed CSI that they do not expect to sell any
Common Stock offered hereby to accounts over which they exercise discretionary
authority in excess of 5% of the Offering.
CSI will pay the Representative a non-accountable expense allowance of 3% of
the offering proceeds, which will include proceeds from the over-allotment
option to the extent exercised. CSI has paid to the Representative $40,000
against the non-accountable expense allowance. The Representative's expenses
in excess of the non-accountable expense allowance will be borne by the
Representative. To the extent that the expenses of the Representative are less
than the non-accountable expense allowance, the excess shall be deemed to be
compensation to the Representative.
CSI has granted the Representative a right of first refusal with respect to
additional public or private offerings proposed to be undertaken by CSI for a
period of 12 months after the date of this Prospectus.
CSI and the Underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the 1933 Act, and, if such
indemnifications are unavailable or insufficient, CSI and the Underwriters
have agreed to damage contribution agreements between them based upon relative
benefits received from this Offering and relative fault resulting in such
damages. CSI also has agreed with the Underwriters that CSI will use its best
efforts to cause a registration statement pursuant to Section 12(g) of the
Exchange Act to become effective no later than the date of this Prospectus.
Although there is no contractual agreement or other obligation, officers,
directors and affiliates of CSI might be sold a portion of the Common Stock,
but only on the same terms and conditions as will be offered to the public.
Such persons will be required to represent that purchases by such persons, if
any, will be for investment purposes only with no present intent to sell.
58
<PAGE>
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the 1934 Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transaction permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession from a
syndicate 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 the Company 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.
The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement, copies of which are on file at the
offices of the Representative, CSI and the Commission. See "Additional
Information."
The Common Stock is traded infrequently in limited quantities on the OTC
Bulletin Board under the symbol CSYG. The public offering prices of the Common
Stock was determined by negotiations between the Representative and CSI. Among
the factors considered in determining the public offering prices were the
prospects for CSI, an assessment of the industry in which CSI operates, the
assessment of management, the number of shares of Common Stock offered, and
the price that purchasers of such securities might be expected to pay given
the nature of CSI and the general condition of the securities markets at the
time of the Offering. Accordingly, the offering price set forth on the cover
page of this Prospectus should not be considered an indication of the actual
value of CSI or the Common Stock.
REPRESENTATIVE'S WARRANTS
At the closing of the Offering, CSI will sell and deliver to the
Representative for an aggregate purchase price of $100, warrants (the
"Representative's Warrants"), consisting of 110,000 warrants to purchase
110,000 shares of Common Stock (the "Representative's Warrants") at a price
that is equal to 125% of the public offering price for the Common Stock.
The Representative's Warrants will be non-transferable for a period of one
year following the date of this Prospectus except to the Underwriters, other
selling group members, and their respective officers or partners. The
Representative's Warrants contain anti-dilution provisions for stock splits,
recombinations and reorganizations, a one-time demand registration provision
(at CSI's expense), piggyback registration rights (both of which expire five
years from the date of this Prospectus), a cashless exercise provision, and
will otherwise be in form and substance satisfactory to the Representative.
The Representative's Warrants will be exercisable during the four-year period
commencing one year after the date of this Prospectus.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for CSI by
Parcel, Mauro & Spaanstra, P.C., Denver, Colorado and for the Representative
by Berliner Zisser Walter & Gallegos, P.C., Denver, Colorado.
59
<PAGE>
EXPERTS
The financial statements of CSI as of April 30, 1997 and for the years ended
April 30, 1996 and 1997 included in this prospectus, have been audited by
Stockman Kast Ryan & Scruggs, P.C., 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.
The financial statements of ITC as of October 31, 1997 and for the year ended
December 31, 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
ADDITIONAL INFORMATION
CSI has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street, N.W., Washington, D.C. 20549, a Registration
Statement on Form SB-2 under the Securities Act with respect to the Securities
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and exhibits and schedules thereto. For
further information with respect to CSI and the Securities, reference is made
to the Registration Statement, including exhibits and schedules thereto, which
may be inspected without charge at, and copies of which may be obtained at
prescribed rates from, the public reference facilities of the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of all or any part of the Registration Statement may be obtained
from the Public Reference Section of the Commission in Washington, D.C. upon
the payment of the fees prescribed by the Commission. The Commission maintains
a Web site (http://www.sec.gov) that contains reports, proxy statements, and
other information that will be filed by the Company.
60
<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 at of October 31, 1997...... F-3
Pro Forma Condensed Combined Statement of Operations for the year ended
April 30, 1997........................................................ F-4
Pro Forma Condensed Combined Statement of Operations for six months
ended October 31, 1997................................................ F-5
Notes to Pro Forma Condensed Combined Financial Statements............. F-6
HISTORICAL FINANCIAL STATEMENTS
Independent Auditors' Report........................................... F-7
Balance Sheets as of April 30, 1997 and October 31, 1997 (unaudited)... F-8
Statements of Operations for the year ended April 30, 1997 and six
months ended October 31, 1996 and 1997 (unaudited).................... F-9
Statements of Shareholders' Equity (Deficiency) for the year ended
April 30, 1997 and six months ended October 31, 1997 (unaudited)...... F-10
Statements of Cash Flows for the year ended April 30, 1997 and six
months ended October 31, 1996 and 1997 (unaudited).................... F-11
Notes to Financial Statements.......................................... F-12
INTERNATIONAL TELEPHONE COMPANY
HISTORICAL FINANCIAL STATEMENTS
Report of Independent Auditors......................................... F-20
Balance Sheet as of October 31, 1997................................... F-21
Statements of Operations for the ten months ended October 31, 1997 and
year ended December 31, 1996.......................................... F-22
Statements of Stockholders' Equity for the ten months ended October 31,
1997 and year ended December 31, 1996................................. F-23
Statements of Cash Flows for the ten months ended October 31, 1997 and
year ended December 31, 1996.......................................... F-24
Notes to Financial Statements.......................................... F-25
</TABLE>
F-1
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma condensed combined financial statements
have been prepared to give effect to the private placement of promissory
notes, completion of the public offering and the acquisition of International
Telephone Company (ITC) described below.
On December 30, 1997, Communications Systems International, Inc. (the
Company) completed a private placement of mandatorily redeemable convertible
promissory notes (the "Bridge Notes") totalling $2,840,000. The holders of the
Bridge Notes are also entitled to receive shares valued at $1,136,000, the
number of shares to be issued by the Company will be based on the public
offering per share price. The Company also has entered into a proposed
agreement to acquire all of the stock of ITC for $3,100,000 cash and the
issuance of shares of the Company's common stock valued at $2,070,000, the
number of shares to be issued by the Company will be based on the public
offering per share price. The pro forma condensed combined financial
statements for the year ended April 30, 1997 and the six months ended October
31, 1997 assume the Bridge Notes and related shares were issued and the
proposed acquisition was consummated on May 1, 1996 and May 1, 1997,
respectively.
In management's opinion, all material adjustments necessary to reflect the
transactions are presented in the pro forma adjustments for the year ended
April 30, 1997 and the six months ended October 31, 1997 which are based upon
available information and the currently agreed upon terms of the proposed
acquisition. The pro forma condensed combined financial statements do not
purport to present the 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 Company'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 the Company and ITC.
F-2
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
OCTOBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA HISTORICAL PRO FORMA PRO FORMA
CSI ADJUSTMENTS CSI ITC ADJUSTMENTS COMBINED
---------- ----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.................... $ 143,632 $ 2,516,550 (a) $ 468,182 $ 847,994 $ 7,895,000 (b) $ 4,943,457
(2,192,000)(a) (2,840,000)(c)
122,281 (b)
(1,550,000)(d)
Restricted cash......... -- -- -- -- 1,325,000 (b) 1,325,000
Accounts receivable--
net.................... 1,092,111 -- 1,092,111 1,045,061 (178,047)(e) 1,959,125
Other................... 263,081 (178,047)(a) 85,034 56,424 -- 141,458
---------- ----------- ---------- ---------- ----------- -----------
Total current assets.... 1,498,824 146,503 1,645,327 1,949,479 4,774,234 8,369,040
Property and equipment--
net.................... 453,090 -- 453,090 640,167 -- 1,093,257
Deferred offering
costs.................. 122,281 323,450 (a) 445,731 -- (122,281)(b) --
(323,450)(c)
Deposits................ 203,820 250,000 (a) 453,820 130,250 (225,000)(d) 359,070
Intangible assets....... -- -- -- -- 4,683,358 (d) 4,683,358
---------- ----------- ---------- ---------- ----------- -----------
Total assets........... $2,278,015 $ 719,953 $2,997,968 $2,719,896 $ 8,786,861 $14,504,725
========== =========== ========== ========== =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable........ $1,540,935 $(1,091,810)(a) $ 449,125 $2,455,784 $ (65,505)(e) $ 2,839,404
Accrued commissions..... 264,361 -- 264,361 145,000 -- 409,361
Accrued expenses and
customer deposits...... 401,912 (116,755)(a) 285,157 317,083 -- 602,240
Accrued income taxes
payable................ -- -- -- 7,227 -- 7,227
Payables to former
shareholders........... 242,619 -- 242,619 -- -- 242,619
Debt to related party... 148,761 -- 148,761 -- 884,284 (d) 1,033,045
Capitalized lease
obligations............ -- -- -- 281,385 -- 281,385
Notes payable........... 933,292 (808,292)(a) 125,000 2,686 -- 127,686
---------- ----------- ---------- ---------- ----------- -----------
Total current
liabilities............ 3,531,880 (2,016,857) 1,515,023 3,209,165 818,779 5,542,967
---------- ----------- ---------- ---------- ----------- -----------
Long-term liabilities... 850,190 2,840,000 (a) 2,044,800 291,804 (2,840,000)(c) 291,804
(795,200)(a) 795,200 (c)
(850,190)(a)
---------- ----------- ---------- ---------- ----------- -----------
Shareholders' equity
(deficiency):
Common stock............ 2,750,285 -- 2,750,285 12 9,220,000 (b) 14,008,486
795,200 (b)
1,243,001 (d)
(12)(d)
Additional paid-in
capital................ -- -- -- 988 (988)(d) --
Common stock
subscribed............. -- 795,200 (a) 795,200 -- (795,200)(b) --
Notes receivable from
shareholder............ (35,000) -- (35,000) -- -- (35,000)
Accumulated deficit..... (4,576,721) 747,000 (a) (3,829,721) (782,073) (1,118,650)(c) (5,060,913)
(112,542)(e)
782,073 (d)
Treasury stock, at
cost................... (242,619) -- (242,619) -- -- (242,619)
---------- ----------- ---------- ---------- ----------- -----------
Total shareholders'
equity (deficiency)... (2,104,055) 1,542,200 (561,855) (781,073) 10,012,882 8,669,954
---------- ----------- ---------- ---------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY
(DEFICIENCY)........... $2,278,015 $ 719,953 $2,997,968 $2,719,896 $ 8,786,861 $14,504,725
========== =========== ========== ========== =========== ===========
</TABLE>
See notes to pro forma condensed combined financial statements.
F-3
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED APRIL 30, 1997
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
CSI ITC
YEAR ENDED TWELVE MONTHS
APRIL 30, ENDED PRO FORMA PRO FORMA
1997 APRIL 30, 1997 ADJUSTMENTS(G) COMBINED
----------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
REVENUE................. $11,865,412 $7,867,078 $ -- $19,732,490
COST OF REVENUE......... 7,754,897 5,498,553 -- 13,253,450
----------- ---------- --------- -----------
GROSS MARGIN............ 4,110,515 2,368,525 -- 6,479,040
----------- ---------- --------- -----------
OPERATING EXPENSES
Sales and marketing..... 2,080,020 848,012 -- 2,928,032
General and
administrative......... 1,302,272 1,626,845 -- 2,929,117
Technical and
developmental.......... 722,111 -- -- 722,111
Depreciation............ 102,983 76,231 -- 179,214
Amortization............ -- -- 936,672 (f) 936,672
----------- ---------- --------- -----------
Total operating
expenses............. 4,207,386 2,551,088 936,672 7,695,146
----------- ---------- --------- -----------
LOSS FROM OPERATIONS.... (96,871) (182,563) (936,672) (1,216,106)
OTHER INCOME (EXPENSE)--
Net.................... (162,602) 100,238 -- (62,364)
----------- ---------- --------- -----------
NET LOSS................ $ (259,473) $ (82,325) $(936,672) $(1,278,470)
=========== ========== ========= ===========
NET LOSS PER SHARE...... $ $
=========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING............
=========== ===========
</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 SIX MONTHS ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31, 1997
----------------------
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
CSI ITC ADJUSTMENTS(G) COMBINED
---------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
REVENUE................. $6,371,549 $5,054,014 $ -- $11,425,563
COST OF REVENUE......... 3,807,066 4,549,470 -- 8,356,536
---------- ---------- --------- -----------
GROSS MARGIN............ 2,564,483 504,544 -- 3,069,027
---------- ---------- --------- -----------
OPERATING EXPENSES
Sales and marketing..... 1,270,857 432,260 -- 1,703,117
General and
administrative......... 1,326,260 856,530 -- 2,182,790
Technical and
developmental.......... 388,663 -- -- 388,663
Depreciation............ 67,808 45,000 -- 112,808
Amortization............ -- -- 468,336 (f) 468,336
---------- ---------- --------- -----------
Total operating
expenses............. 3,053,588 1,333,790 468,336 4,855,714
---------- ---------- --------- -----------
LOSS FROM OPERATIONS.... (489,105) (829,246) (468,336) (1,786,687)
OTHER INCOME (EXPENSE)--
Net.................... (87,905) 91,307 (178,047)(e) (109,140)
65,505 (e)
---------- ---------- --------- -----------
NET LOSS................ $ (577,010) $ (737,939) $(580,878) $(1,895,827)
========== ========== ========= ===========
NET LOSS PER SHARE...... $ $
========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING............
========== ===========
</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 private placement
of the Bridge Notes as of October 31, 1997, (ii) the completion of the
offering and the proposed acquisition of ITC as of October 31, 1997, and (iii)
the proposed acquisition of ITC as of the beginning of each period presented
for the statements of operations:
(a) Reflects the private placement of promissory notes of $2,840,000, net of a
discount of $795,200 for the value of common stock to be issued, debt
offering costs of $323,450, and the net proceeds of $2,516,550. Reflects
$2,192,000 of the net proceeds used for the repayment of notes payable of
$850,190 and accounts payable of $1,091,810 and for deposits of $250,000.
Reflects the forgiveness of $808,292 of notes payable and $116,755 of
accrued interest, offset by prepaid consulting fees of $178,047 incurred
to obtain such forgiveness, resulting in a gain of $747,000.
The common stock to be issued to the holders of the Bridge Notes, valued at
$1,136,000 based on the public offering per share price, which value has
been discounted by 30% to $795,200 as a result of the limitations on the
transferability of the shares subsequent to their issuance.
(b) Reflects the estimated net proceeds of the offering of $9,220,000, of
which $1,325,000 is to be placed in escrow to satisfy the terms of the
proposed ITC acquisition agreement. Reflects the reclassification of
deferred offering costs of $122,281, which have been included as a
reduction in determining the estimated net proceeds of the offering.
Reflects the issuance of the common stock valued at $795,200 to the
holders of the Bridge Notes.
(c) Reflects the repayment of the Bridge Notes of $2,840,000. Reflects the
loss totalling $1,118,650 from the early retirement of the Bridge Notes
resulting from the write-off of the debt placement offering costs of
$323,450 and the full and immediate amortization of the discount on the
Bridge Notes of $795,200.
(d) Reflects the proposed acquisition of ITC based on currently agreed upon
terms which includes: cash payments of $1,325,000, excluding deposits
previously made, to the ITC shareholders; the commitment to issue an
estimated number of shares of stock valued at $1,243,001 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 $884,284; 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 price,
however, is not expected to be adjusted.
(e) Reflects the elimination of intercompany transactions and balances.
(f) Reflects the increase in amortization expense due to the amortization of
the intangible assets recorded in the acquisition of ITC. The intangible
assets are amortized over a five-year period using the straight-line
method.
(g) Does not reflect pro forma adjustments for the following material
nonrecurring charges and credit which result directly from the Bridge
Notes and which will be included in the Company's statements of operations
within the twelve months subsequent to such placement: an extraordinary
gain of $747,000 resulting from the forgiveness of debt and accrued
interest; interest expense, excluding amortization of the discount on the
Bridge Notes, of $284,000 for the twelve months subsequent to the
placement, respectively; and, amortization to interest expense of the
discount on the Bridge Notes and the deferred placement offering costs of
$1,118,650 for the twelve months subsequent to the placement,
respectively.
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
Communications Systems International, Inc.
Colorado Springs, Colorado
We have audited the accompanying balance sheet of Communications Systems
International, Inc. as of April 30, 1997, and the related statements of
operations, stockholders' equity (deficiency) and cash flows for each of the
years in the two-year period ended April 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1997, and the results of its operations and its cash flows for
each of the years in the two-year period ended April 30, 1997 in conformity
with generally accepted accounting principles.
Stockman Kast Ryan & Scruggs, P.C.
Colorado Springs, Colorado
June 2, 1997
(August 11, 1997 as to the matters discussed in the tenth paragraph of Note
4; September 17, 1997 as to the matters discussed in the fourth paragraph
of Note 10; October 9, 1997 as to the matters discussed in the second
paragraph of Note 3; October 31, 1997 as to the matters discussed in the
last paragraph of Note 4, the first paragraph of Note 10, and Note 13; and,
December 30, 1997 as to the matters discussed in the third paragraph of
Note 3 and Note 14)
F-7
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1997 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash................................................. $ 146,686 $ 143,632
Accounts receivable--net............................. 1,053,233 1,092,111
Prepaid expenses and other current assets............ 83,962 263,081
----------- -----------
Total current assets................................. 1,283,881 1,498,824
PROPERTY AND EQUIPMENT--Net (Note 2)................. 457,791 453,090
DEFERRED OFFERING COSTS (Notes 12 and 14)............ 83,939 122,281
DEPOSITS (Note 13)................................... 120,880 203,820
----------- -----------
TOTAL ASSETS....................................... $ 1,946,491 $ 2,278,015
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable (including bank overdraft of $85,035
at October 31)...................................... $ 1,287,187 $ 1,540,935
Accrued commissions.................................. 145,352 264,361
Accrued expenses and customer deposits (Note 10)..... 88,940 401,912
Payables to former shareholders (Note 4)............. -- 242,619
Debt to related party (Note 8)....................... 148,761 148,761
Current portion of notes payable (Note 3)............ 1,944,896 933,292
----------- -----------
Total current liabilities.......................... 3,615,136 3,531,880
----------- -----------
NOTES PAYABLE (Note 3)............................... -- 850,190
-----------
COMMITMENTS AND CONTINGENCIES
(Notes 4, 8 and 10)
SHAREHOLDERS' EQUITY (DEFICIENCY)
(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;
9,765,590 and 10,047,091 shares issued and
outstanding at April 30, 1997 and October 31, 1997.. 2,366,066 2,750,285
Notes receivable from shareholder.................... (35,000) (35,000)
Accumulated deficit.................................. (3,999,711) (4,576,721)
Treasury stock, at cost.............................. -- (242,619)
----------- -----------
Total shareholders' equity (deficiency)............ (1,668,645) (2,104,055)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY)...................................... $ 1,946,491 $ 2,278,015
=========== ===========
</TABLE>
See notes to financial statements.
F-8
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTH
YEAR ENDED APRIL 30, PERIOD ENDED OCTOBER
------------------------ ------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE.................... $ 6,741,022 $11,865,412 $5,530,847 $6,371,549
COST OF REVENUE............ 5,962,609 7,754,897 3,608,465 3,807,066
----------- ----------- ---------- ----------
GROSS MARGIN............... 778,413 4,110,515 1,922,382 2,564,483
----------- ----------- ---------- ----------
OPERATING EXPENSES
Sales and marketing........ 1,572,747 2,080,020 876,630 1,270,857
General and administrative
(Note 10)................. 1,257,964 1,302,272 608,689 1,326,260
Technical and
developmental............. 394,410 722,111 294,512 388,663
Depreciation and
amortization.............. 57,843 102,983 42,219 67,808
----------- ----------- ---------- ----------
Total operating
expenses................ 3,282,964 4,207,386 1,822,050 3,053,588
----------- ----------- ---------- ----------
INCOME (LOSS) FROM
OPERATIONS................ (2,504,551) (96,871) 100,332 (489,105)
INTEREST INCOME (EXPENSE)--
Net....................... (19,389) (162,602) (76,142) (87,905)
----------- ----------- ---------- ----------
NET INCOME (LOSS).......... $(2,523,940) $ (259,473) $ 24,190 $ (577,010)
=========== =========== ========== ==========
NET INCOME (LOSS) PER
SHARE..................... $ (.30) $ (.03) $ .00 $ (.06)
=========== =========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING............... 8,394,451 9,414,238 9,388,938 9,996,455
=========== =========== ========== ==========
</TABLE>
See notes to financial statements.
F-9
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK COMMON RECEIVABLE TREASURY STOCK
---------------------- STOCK FROM ACCUMULATED -------------------
SHARES AMOUNT SUBSCRIBED SHAREHOLDER DEFICIT SHARES AMOUNT TOTAL
---------- ---------- ---------- ----------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
May 1, 1995............ 4,901,040 $ 530,929 $ 503,437 $ -- $(1,216,298) -- $ -- $ (181,932)
Issuance of subscribed
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
acquisition............ 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 exchange
for note............... 60,000 30,000 -- (30,000) -- -- -- --
Stock issued for
services............... 140,000 34,224 -- -- -- -- -- 34,224
Stock issued in
acquisition 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.................. 213,986 104,467 -- -- -- -- -- 104,467
Sale of stock for cash.. 908,641 499,752 -- -- -- -- -- 499,752
Purchase of common
stock.................. -- -- -- -- -- (841,126) (462,619) (462,619)
Retirement of treasury
stock.................. (400,000) (220,000) -- -- -- 400,000 220,000 --
Net loss................ -- -- -- -- (577,010) -- -- (577,010)
---------- ---------- --------- -------- ----------- -------- --------- -----------
BALANCES,
October 31, 1997
(unaudited)........... 10,488,217 $2,750,285 $ -- $(35,000) $(4,576,721) (441,126) $(242,619) $(2,104,055)
========== ========== ========= ======== =========== ======== ========= ===========
</TABLE>
See notes to financial statements.
F-10
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTH
YEAR ENDED APRIL 30, PERIOD ENDED OCTOBER 31,
---------------------- ---------------------------
1996 1997 1996 1997
----------- --------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....... $(2,523,940) $(259,473) $ 24,190 $ (577,010)
Adjustments to reconcile
net income (loss) to
cash provided by (used
in) operating
activities:
Stock issued or
subscribed for services
and interest........... 312,775 38,566 -- --
Depreciation and
amortization.......... 57,843 102,983 42,219 67,808
Changes in operating
assets and
liabilities:
Accounts receivable.... (904,447) 52,565 138,973 (38,878)
Other assets........... (15,393) (115,783) (21,274) (162,767)
Accounts payable and
accrued expenses...... 2,711,390 911,463 222,116 685,904
----------- --------- ----------- ------------
Net cash provided by
(used in) operating
activities............. (361,772) 730,321 406,224 (24,943)
----------- --------- ----------- ------------
INVESTING ACTIVITIES
Purchases of property
and equipment.......... (222,813) (218,668) (177,581) (63,107)
Increase in deposits for
acquisition............ -- (25,000) -- (100,000)
----------- --------- ----------- ------------
Net cash used in
investing activities... (222,813) (243,668) (177,581) (163,107)
----------- --------- ----------- ------------
FINANCING ACTIVITIES
Proceeds from issuance
of notes............... 7,000 405,000 100,000 95,000
Proceeds from the
issuance of stock...... 537,000 111,200 225,417 499,752
Repayment of notes
payable................ (78,530) (818,418) (533,573) (151,414)
Increase in deferred
offering costs......... -- (83,989) -- (38,342)
Payment for treasury
stock.................. -- -- -- (220,000)
Net proceeds
(repayments) from
issuances of debt to
related party.......... 94,915 (11,154) -- -
----------- --------- ----------- ------------
Net cash provided by
(used in) financing
activities............. 560,385 (397,361) (208,156) 184,996
----------- --------- ----------- ------------
NET INCREASE (DECREASE)
IN CASH................ (24,200) 89,292 20,487 (3,054)
CASH, Beginning of
period................. 81,594 57,394 57,394 146,686
----------- --------- ----------- ------------
CASH, End of period..... $ 57,394 $ 146,686 $ 77,881 $ 143,632
=========== ========= =========== ============
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest paid.......... $ 7,879 $ 126,066 $ 56,892 $ 28,610
SUPPLEMENTAL NONCASH
INVESTING AND FINANCING
ACTIVITIES
Stock issued or
subscribed for
services and
interest.............. $ 312,775 $ 38,566 -- --
Conversion of accounts
payable to notes
payable............... 1,938,227 761,617 -- --
Issuance of stock in
exchange for note..... 5,000 30,000 -- --
Stock issued in
acquisition of
affiliate (Note 4).... -- 49,993 -- --
Conversion of notes and
accrued interest to
stock (Note 4)........ -- 274,342 -- $ 104,467
Purchase of treasury
stock................. -- -- -- 242,619
</TABLE>
See notes to financial statements.
F-11
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED OCTOBER 31, 1996 AND 1997 IS
UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Communications Systems International, Inc. (the Company) is a rapidly
growing provider of international long distance telecommunications services
principally in South America, Europe, the Pacific Rim, Central America and
South Africa. The Company emphasizes innovative software solutions and
technical expertise to provide higher quality, lower cost alternative routing
of telecommunications for its customer base. The Company's telecommunications
center is a fiber optic facility which directs international telephone and fax
traffic and has a broad spectrum of Internet capabilities. The Company
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 not typically available from local
telecommunications providers. The Company's principal service is reverse
origination, in which a customer seeking to make an international call is
connected to the United States telephone system by a computer signal that
triggers a call to be originated in the United States and routed back to the
caller who is then connected to the international destination by a second call
also originating in the United States.
In fiscal 1997, the Company's management took actions to increase its
revenue through increased calling volume and, as a result, the Company has
been able to negotiate more favorable rates with its long distance telephone
carriers enabling the Company to reduce its cost of revenues per unit of
service sold. These steps have enabled the Company to significantly improve
its gross margins and improve its results of operations during the year ended
April 30, 1997 and the six-month period ended October 31, 1997.
In fiscal 1998, in order to raise additional working capital and satisfy
certain obligations, the Company issued mandatorily redeemable convertible
promissory notes in a private offering (see Note 14). 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 a pending acquisition (see Note 13) as well as repay
existing obligations, working capital, development of new product and service
offerings and enhancement and expansion of existing products and services.
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, 1997 and October 31, 1997, the allowance for doubtful
accounts was $186,489 and $318,693, 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 the Company'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. The Company 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 the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. See Note 5.
F-12
<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. The net income per share amount
for the six-month period ended October 31, 1996 is de minimis; the effect of
the outstanding stock options and warrants on the computation of fully diluted
net income per share is less than $.01.
Interim Financial Statements--The financial statements of the Company for
the six months ended October 31, 1996 and 1997 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. The Company'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, OCTOBER 31,
1997 1997
--------- -----------
<S> <C> <C>
Equipment.............................................. $574,966 $636,337
Furniture and fixtures................................. 61,601 61,601
Leasehold improvements................................. 13,651 15,387
-------- --------
Total................................................ 650,218 713,325
Less accumulated depreciation and amortization......... 192,427 260,235
-------- --------
Property and equipment--net............................ $457,791 $453,090
======== ========
</TABLE>
3. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1997 1997
---------- -----------
<S> <C> <C>
Unsecured note payable to a long distance carrier,
bearing interest at 10%, payable in monthly
installments of $40,000 due January 2001, repaid
December 1997; see below and Note 14............... $1,485,909 $1,458,292
Unsecured note payable to a long distance carrier,
bearing interest at 12%, payable in varying monthly
installments ranging from $60,000 to $123,117,
repaid December 1997; see below and Note 14........ 323,987 200,190
Unsecured notes payable, bearing interest at 15%,
principal and interest due March 1998.............. 85,000 85,000
Unsecured convertible notes payable bearing interest
at 10% which is payable semi-annually on March 31
and September 30; the outstanding principal is due
in 1998, however, the notes are callable at the
option of the noteholders at any interest payment
date............................................... 50,000 40,000
---------- ----------
Total............................................. 1,944,896 1,783,482
Current portion..................................... 1,944,896 933,292
---------- ----------
Long-term portion of notes payable.................. $ -- $ 850,190
========== ==========
</TABLE>
On October 9, 1997, the Company entered into an agreement with the long
distance carrier to which the Company had a note payable with an outstanding
balance of $1,458,292 as of October 31, 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 and all accrued and unpaid interest
thereon ($116,755 at October 31, 1997). The Company was also obligated to pay
a fee of $178,047 to the company which the Company intends to acquire (see
Note 13) for assistance in obtaining this agreement.
F-13
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On December 30, 1997 the Company issued promissory notes totalling
$2,840,000, due December 30, 1998 or five days after the closing of the
proposed public offering (see Notes 12 and 14). A portion of the proceeds from
the issuance of such notes was used to satisfy the reduced liability of
$650,000 to the carrier and to repay the note with the outstanding balance of
$200,190 at October 31, 1997 and, accordingly, such amounts have been
classified as long-term as of October 31, 1997. The Company will recognize a
gain of $747,000 in December 1997 upon the payment of the $650,000 liability.
As of April 30, 1997, all of the Company's obligations are classified as
current liabilities due to their repayment terms or the Company's failure to
make timely principal and interest payments.
4. SHAREHOLDERS' EQUITY
The Company 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 May 1, 1995, 185,000 shares had been subscribed. During
the year ended April 30, 1996, the offering was fully subscribed.
In September 1995, the Company's shareholders authorized a 10-for-1 stock
split of the Company's common stock. The split was effective for shares issued
and shares subscribed as of March 1, 1995. See also Note 11.
In September 1995, in an effort to increase the number of shareholders of
the Company's common stock, the Company'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 the Company's common stock.
Under the plan of merger, the shareholders of Redden received one share of the
Company'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 the Company and Redden ceased to exist.
Redden's only recorded asset consisted of $11,050 of organizational costs.
Redden had no liabilities and had no revenues or expenses since inception.
Subsequent to the merger, the Company determined that Redden's assets were of
no value to the Company. Accordingly, no amounts have been recognized for the
issuance of the common stock in connection with the merger of Redden.
During the year ended April 30, 1996, the Company 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, the Company sold 61,500 shares for
$2.00 per share and received $111,200 after offering costs of $11,800.
In August 1996, the Company acquired the net assets of an affiliated company
through the issuance of 179,076 shares of the Company's common stock to
certain shareholders of the affiliate and granted options to purchase 97,000
shares of the Company'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 the Company at the
affiliate's net book value. Pro forma information combining the results of
operations of the Company 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, the Company sold convertible notes
totalling $320,000. The notes, bearing interest at 10%, are convertible into
shares of the Company'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, the Company charged the remaining unamortized deferred
financing costs of $22,834 relating to such notes against the recorded amount
of common stock. During the six months ended October 31, 1997, the Company
sold an additional $95,000 principal amount of the convertible notes, and
F-14
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
noteholders converted notes totalling $105,000 principal amount and accrued
interest of $175 into 213,986 shares of stock. Upon conversion, the Company
charged unamortized deferred financing costs of $708 relating to such notes
against the recorded amount of common stock.
During the year ended April 30, 1997, the Company 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.
The Company has notes receivable from a shareholder totalling $35,000 which
resulted from the issuance of stock, bear interest at 10% and are payable on
demand.
In August 1997, the Company entered into settlement agreements with two
former employees who were also shareholders of the Company 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 the Company
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 October 31, 1997,
the Company has made payments totalling $220,000 to these individuals and
received 400,000 shares of its common stock which have been retired. As of
October 31, 1997, the Company 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, the Company 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 the Company's non-qualified stock option plan, options to
purchase shares of the Company'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 the Company's common stock which may be issued upon the exercise of
options granted under the plan shall not exceed 3,000,000. The Company 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
October 31, 1997............................ 954,800 $.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.......................................................... 317,700
Exercised........................................................ --
Expired or cancelled............................................. (247,100)
--------
Outstanding at October 31, 1997.................................... 954,800
========
</TABLE>
F-15
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company 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 the Company's stock option plans
been determined based on the fair value at the grant date for awards in the
years ended April 30, 1996 and 1997 consistent with the provisions of SFAS No.
123, the Company'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, the Company issued warrants in
connection with common stock in exchange for financial services. The warrants
provide for the purchase of 150,000 shares of the Company'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), the Company also is committed to deliver to the noteholders
58,500 warrants to purchase shares of the Company'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 $0.27 to $1.38 per share; the warrants
expire in 1998 and 1999.
7. INCOME TAXES
The tax effects of temporary differences to significant portions of deferred
taxes are as follows:
<TABLE>
<CAPTION>
APRIL 30,
1997
----------
<S> <C>
Deferred tax asset--
Net operating loss carryforwards................................. $1,330,000
Less valuation allowance......................................... 1,330,000
----------
$ --
==========
</TABLE>
As of April 30, 1997, the Company'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, the Company 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 $860,000
and $60,000 during the years ended April 30, 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 the
Company (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 the Company.
F-16
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. RELATED PARTY TRANSACTIONS
The Company leases office space from a partnership in which the Company's
principal shareholder owns a general partnership interest. Rental expense
under such leases totalled $37,592 and $87,259 for the years ended April 30,
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>
The Company receives periodic advances from its principal shareholder. At
April 30, 1997 and October 31, 1997, the Company had an unsecured note payable
of $148,761 to its principal shareholder, payable on May 31, 1999 and bearing
interest at 10%.
9. MAJOR CUSTOMERS, SUPPLIERS AND FOREIGN MARKETS
The Company's major markets are currently in Argentina, Brazil, Europe and
South Africa. As a result, the Company'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. The Company
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 the Company conducts operations can greatly
affect the competitive price position of the Company's products and services.
The Company's distributors in Argentina and Brazil generated revenues (as a
percentage of the Company's total revenues) as follows:
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
-------------
1996 1997
----- -----
<S> <C> <C>
Argentina.................................................... 49% 56%
Brazil....................................................... 14 10
</TABLE>
The Company's ability to provide its telephone services is heavily dependent
upon the agreements the Company has with its long distance telephone carriers.
The Company's long distance services were provided by various carriers as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
-------------
1996 1997
----- -----
<S> <C> <C>
Carrier A.................................................... 39% 59%
Carrier B.................................................... 49 23
Other carriers............................................... 12 18
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
In October 1997, the Company entered into a release and settlement agreement
with one of its carriers, pursuant to which the carrier has agreed to accept
payment of $391,800 for usage charges for the period February 1996 through
August 1997 and $150,000 as a security deposit to ensure payment of future
usage charges. The carrier also agreed, upon receipt of the Company's payment
on December 30, 1997, to release the Company from its minimum usage commitment
shortfall and early termination charges which totalled $3,651,300. The Company
also concurrently entered into an agreement for minimum annual usage, as
discussed in the last paragraph of this note.
F-17
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In September 1996, the Company 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, the Company is required
to pay the developer a monthly royalty equal to 4% of the Company's gross
collected revenues related to the system. In addition, the Company is also
required to provide monthly funding for the installation of two systems. In
the event that the Company 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%. The Company 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, the Company agrees to pay the
developer $1,500 if such installation produces gross revenues between $10,000
and $20,000 in the first full billing month, and $3,000 if such revenues
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.
The Company 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%.
In fiscal year 1998, the Company entered into a settlement agreement with
one of its former officers which provides for payments totalling $188,000
through January 1998. Such amount has been reflected as a general and
administrative expense for the six months ended October 31,1997.
The Company is subject to a $100,000 claim by a manufacturer from which the
Company received telecommunications equipment. The Company believes that the
equipment is not suitable for its intended purpose and that the manufacturer
misrepresented certain matters pertaining to this equipment. The Company has
offered to return the equipment in exchange for a release of the
manufacturer's claim and the manufacturer has rejected the Company's offer.
The Company has not made a provision for any loss that might result from the
outcome of this matter; however, the Company believes that the ultimate
resolution of this claim will not have a material adverse effect on its
financial position or results of operations.
The Company has agreements with certain of its carriers which provide for
guaranteed rates and minimum annual usage. 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, the Company's Board of Directors authorized a reverse
split of the Company's common stock (not to exceed 1-for-30) whereby the
Company will issue one share of common stock in exchange for a number of
shares yet to be determined. The authorization for the reverse split is
subject to approval by the Company's shareholders. 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
The Company is planning a public offering of its common stock in 1998, the
net proceeds from which are expected to be used to complete the acquisition
described in Note 13, to repay the debt described in Note 14, for working
capital, development of new product and service offerings, and enhancement and
expansion of existing products and services.
F-18
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. PENDING ACQUISITION
The Company has entered into an agreement to acquire all of the outstanding
stock of another telecommunications company which provides services similar to
that of the Company. The purchase price of $5,170,000 is to be satisfied by
the payment of $3,100,000 cash and the issuance of shares of the Company's
common stock valued at $2,070,000 (before any discount) based on the public
offering per share price in the Company'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 the Company's common stock to be issued to
the selling shareholders one year after the acquisition is completed to ensure
compliance with the specific performance provisions of the agreement.
Included in deposits in the accompanying balance sheets at April 30, 1997
and October 31, 1997 are deposits totalling $25,000 and $125,000,
respectively, which are nonrefundable and to be credited against the purchase
price. The Company made an additional deposit of $100,000 on December 30, 1997
with a portion of the proceeds received from the issuance of the mandatorily
redeemable convertible promissory notes (see Note 14).
The acquisition is expected to occur upon closing of the Company's proposed
public offering.
14. MANDATORILY REDEEMABLE CONVERTIBLE PROMISSORY NOTES
The Company issued mandatory redeemable convertible promissory notes
totalling $2,840,000 on December 30, 1997 in a private placement offering. The
notes, which bear interest at 10% and are payable semiannually, are due one
year from the date of issuance or five days after the closing of the proposed
public offering, whichever is earlier. The notes are collateralized by a first
security interest on all unpledged assets of the Company 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 the Company's
officers and directors ($750,000 guaranteed by each, severally). The net
proceeds from the issuance of the notes were primarily used to satisfy the
Company's obligations to carriers (see Note 3), to pay the consulting fee
incurred in connection with obtaining the reduction in an obligation to a
carrier (see Note 3), and to make an additional deposit for the Company's
pending acquisition (see Note 13).
The Company is to file a registration statement for a public offering that
meets certain conditions by February 28, 1998; if the filing is not made by
the required date, the notes become freely convertible. The notes otherwise
are convertible into the Company'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 the Company'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.
The Company also issued to the placement agent 284,000 warrants to purchase
shares of the Company's common stock. The warrants are exercisable at 125% of
proposed public offering price per share; if no offering occurs within one
year from the closing of the offering of the notes, the exercise price is
reduced to 50% of the closing bid price, as defined above.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
International Telephone Company
Meriden, Connecticut
We have audited the accompanying balance sheet of International Telephone
Company (the "Company") as of October 31, 1997 and the related statements of
operations, changes in stockholders' equity and cash flows for the ten months
ended October 31, 1997 and the year ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 October 31, 1997, and the results of its operations and its cash
flows for the ten months ended October 31, 1997 and the year ended December
31, 1996 in accordance with generally accepted accounting principles.
As discussed in Note G[2], one of the Company's carriers has initiated
litigation against the Company for collection of approximately $1.1 million.
Richard A. Eisner & Company, LLP
New York, New York
December 12, 1997
F-20
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
BALANCE SHEET
OCTOBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents (Notes B[1] and D)................... $ 848,000
Accounts receivable (net of allowance for doubtful accounts of
$25,000)...................................................... 1,045,000
Other current assets........................................... 57,000
-----------
Total current assets......................................... 1,950,000
Furniture and equipment (net of accumulated depreciation of
$87,000) (Notes B[4] and C)..................................... 640,000
Security deposits................................................ 130,000
-----------
$ 2,720,000
===========
LIABILITIES
Current liabilities:
Loan payable (Note D).......................................... $ 3,000
Accounts payable............................................... 2,463,000
Accrued expenses............................................... 167,000
Accrued commissions............................................ 145,000
Customer advances.............................................. 150,000
Equipment lease obligations--current portion (Note E).......... 281,000
-----------
Total current liabilities.................................... 3,209,000
Equipment leases obligations, less current portion (Note E)...... 292,000
-----------
3,501,000
-----------
Commitments and contingencies (Note G)
STOCKHOLDERS' EQUITY
Common stock--$.01 par value, 1,200 shares authorized, 1,200
shares issued and outstanding
Additional paid-in capital..................................... 1,000
Accumulated deficit............................................ (782,000)
-----------
Total stockholders' equity................................... (781,000)
-----------
$ 2,720,000
===========
</TABLE>
See notes to financial statements
F-21
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED
OCTOBER 31, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
Operating revenue:
Telecommunication services (Notes B[2] and H)..... $ 8,054,000 $ 7,603,000
----------- -----------
Operating expenses:
Cost of telecommunication services (Note B[3]).... 6,790,000 5,070,000
Selling expenses (Note B[3])...................... 715,000 1,099,000
General and administrative expenses............... 1,205,000 1,022,000
Officers salaries................................. 256,000 493,000
----------- -----------
8,966,000 7,684,000
----------- -----------
Loss from operations before other income (expense).. (912,000) (81,000)
Other income (expense):
Miscellaneous..................................... 101,000
Consulting fee.................................... 113,000
Loss on sale of equipment......................... (22,000)
Interest income................................... 28,000 12,000
Interest expense.................................. (57,000) (21,000)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAX PROVISION........... (850,000) 11,000
Income tax provision (Note F)....................... 0 4,000
----------- -----------
NET INCOME (LOSS)................................... $ (850,000) $ 7,000
=========== ===========
</TABLE>
See notes to financial statements
F-22
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
1,200 SHARES
AUTHORIZED
---------------- RETAINED STOCKHOLDERS'
NUMBER OF ADDITIONAL EARNINGS EQUITY
SHARES PAID-IN (ACCUMULATED (CAPITAL
ISSUED AMOUNT CAPITAL DEFICIT) DEFICIENCY)
--------- ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance--January 1,
1996................... 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)
===== === ====== ========= =========
</TABLE>
See notes to financial statements
F-23
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED
OCTOBER 31, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ (850,000) $ 7,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation....................................... 73,000 69,000
Provision for doubtful accounts.................... 25,000 43,000
Loss on sale of equipment.......................... 22,000
Deferred taxes..................................... (6,000) 2,000
Changes in:
Accounts receivable............................... 180,000 (33,000)
Other assets...................................... (42,000) 1,000
Customer advance payments......................... (20,000) 38,000
Commissions payable............................... (20,000) (24,000)
Accrued expenses.................................. 26,000 91,000
Accounts payable.................................. 1,239,000 108,000
Income taxes payable.............................. (1,000) (16,000)
---------- ---------
Net cash provided by operating activities....... 626,000 286,000
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment................ (17,000) (29,000)
Proceeds from sale of equipment..................... 259,000
---------- ---------
Net cash provided by (used in) investing
activities..................................... 242,000 (29,000)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) loan payable.......... (63,000) 66,000
Payments under capital leases....................... (175,000) (112,000)
Repayment of note payable........................... (140,000)
---------- ---------
Net cash used in financing activities........... (238,000) (186,000)
---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS............. 630,000 71,000
Cash and cash equivalents--beginning of year.......... 218,000 147,000
---------- ---------
CASH AND CASH EQUIVALENTS--END OF YEAR................ $ 848,000 $ 218,000
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.......................................... $ 57,000 $ 21,000
Income taxes...................................... $ 26,000
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Equipment acquired under capital lease obligations
(Note E).............................................
</TABLE>
See notes to financial statements
F-24
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE A--ORGANIZATION AND BUSINESS
International Telephone Company (the "Company") was organized in the state
of Delaware on March 3, 1993. The Company operates an international
telecommunications system offering long distance telephone service to
corporations and individuals located outside the United States.
The Company incurred a loss of $850,000 during the ten months ended October
31, 1997, resulting principally from the accrual of a $1.1 million claim
against the Company by a carrier for usage charges that the Company is
disputing (see Note G[2]). The Company intends to vigorously defend such claim
and is attempting to settle with the carrier. If the Company is not successful
in its defense or in reaching a settlement, the Company believes that by
reducing its administrative expenses, including officers' compensation, the
cash flow from operations will be sufficient for the Company to pay such claim
and to operate as a going concern. In addition, the Company believes that it
will be able to obtain financing, if necessary.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) Cash equivalents:
The Company considers money-market funds to be cash equivalents.
(2) Revenue recognition:
Telecommunication revenues are recognized at the time services are provided.
(3) Cost of telecommunication revenues 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 the Company
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(6) Deferred income taxes:
The Company 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
F-25
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1997
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.
NOTE C--FURNITURE AND EQUIPMENT
Furniture and equipment at October 31, 1997 consists of the following:
<TABLE>
<S> <C>
Telecommunications equipment....................................... $634,000
Furniture and fixtures............................................. 6,000
Office equipment................................................... 87,000
--------
727,000
Less accumulated depreciation and amortization..................... 87,000
--------
$640,000
========
</TABLE>
NOTE D--LOAN PAYABLE
The Company has a $250,000 line of credit, which expires on September 30,
1998, with a financial institution. At October 31, 1997 the balance due under
this line of credit was $3,000, which is collateralized by the assets of the
Company, 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
The Company leases equipment under agreements with terms of thirty-six
months, which are accounted for as capital leases. During the ten months ended
October 31, 1997 the Company acquired telecommunications equipment with a cost
of $634,000 under a capital lease. Simultaneously, the Company 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 $609,000 at October 31,
1997.
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-26
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1997
NOTE F--INCOME TAXES
The provision for federal and state income taxes for the year ended December
31, 1996 is comprised of the following:
<TABLE>
<S> <C>
Current:
Federal............................................................. $1,000
State............................................................... 0
------
1,000
------
Deferred:
Federal............................................................. 2,000
State............................................................... 1,000
------
3,000
------
$4,000
======
</TABLE>
At October 31, 1997 the Company has a net operating loss carryforward of
$1,008,000 resulting from its loss for income tax purposes for the ten months
then ended. As a result the Company has a deferred tax asset of $393,000 at
October 31, 1997. The Company has provided a valuation allowance, which
increased by $323,000 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.
The deferred tax liability of $88,000 at October 31, 1997, represents the
anticipated future tax consequences attributable to temporary differences
between the basis of assets and liabilities for financial and tax reporting
purposes. Such differences relate to depreciation and the acquisition of
equipment under a capital lease.
The difference between the tax provision (benefit) and the amount that would
be computed by applying the statutory federal income tax rate to income before
taxes is attributable to the following:
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED
OCTOBER 31, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
Federal income tax provision (benefit) at
statutory rate................................... $(289,000) $3,000
Provision (benefit) for state income taxes--net of
U.S. federal taxes............................... (34,000) 1,000
Valuation allowance............................... 323,000
--------- ------
$ 0 $4,000
========= ======
</TABLE>
NOTE G--COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
[1] Operating leases:
The Company 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 period ended
October 31, 1997 totaled $73,000.
F-27
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1997
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, the Company was committed to purchase transmission
capacity from a certain carrier. The Company 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
the Company for collection of approximately $1.1 million, which is included in
accounts payable at October 31, 1997. The Company 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 the Company and the Company agreed
to pay the outstanding balance by December 1, 1997. The carrier subsequently
presented an invoice to the Company which did not reflect such credit and the
Company believes that such statement does not acknowledge a $100,000 payment
made in January 1997. As a result, the Company has not made the scheduled
payments and accounts payable at October 31, 1997 includes $400,000 due to
this carrier.
[3] Concentration of carriers:
The Company purchases transmissions capacity from a limited number of
domestic telephone carriers 85% of such capacity was purchased from 3
telephone carriers and 75% of such capacity was purchased from 3 carriers
during the ten months ended October 31, 1997 and the year ended December 31,
1996, respectively.
[4] Concentration of agents:
During the ten months ended October 31, 1997 and the year ended December 31,
1996 3 agents were responsible for 53% and 3 agents were responsible for 66%
of the Company's telecommunications revenues, respectively.
NOTE H--TELECOMMUNICATION REVENUES:
The information below summarizes telecommunication revenues by geographic
area:
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED
OCTOBER 31, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
Europe................................................. $2,416,000 $ 2,742,000
Africa................................................. 2,511,000 2,508,000
Middle East............................................ 1,593,000 1,095,000
Latin America.......................................... 1,110,000 626,000
Asia................................................... 74,000 529,000
Other.................................................. 350,000 103,000
---------- -----------
$8,054,000 $ 7,603,000
========== ===========
</TABLE>
F-28
<PAGE>
INTERNATIONAL TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1997
NOTE I--OTHER INCOME
During the year ended December 31, 1996 the Company 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 the Company 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
Company's Application for Authority under Section 214 of the Communications
Act of 1934, as amended. Pursuant to such action the Company is authorized to
resell the public switched telecommunications services of other U.S. carriers.
The Company is subject to regulation in other countries in which it does
business. The Company believes that an adverse determination as to the
permissibility of the Company'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 THE COMPANY
The Company has received a letter of intent related to the purchase, by
another telecommunications company, of all of the outstanding shares of common
stock of the Company. A final agreement has not been
executed. The Company's stockholders have received $125,000 from this
telecommunications company in connection with such anticipated sale.
F-29
<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............................................................. 6
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 17
Price Range of Common Stock.............................................. 18
Dilution................................................................. 19
Capitalization........................................................... 20
Selected Financial Data.................................................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 32
Management............................................................... 47
Principal Shareholders................................................... 52
Certain Transactions..................................................... 53
Description of Securities................................................ 55
Shares Eligible for Future Sale.......................................... 56
Underwriting............................................................. 58
Legal Matters............................................................ 59
Experts.................................................................. 60
Additional Information................................................... 60
Index to Financial Statements............................................ F-1
</TABLE>
----------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,100,000 SHARES OF COMMON STOCK
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
----------------
P R O S P E C T U S
----------------
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 FEBRUARY 27, 1998
PRELIMINARY PROSPECTUS
SHARES
[LOGO OF COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.]
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. The Company will not receive any proceeds from the
sale of the Selling Securityholders' Shares. See "Selling Securityholders and
Plan of Distribution."
The Common Stock is traded sporadically in limited amounts on the OTC
Bulletin Board under the symbol CSYG. On February 25, 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 $9.00 and
$11.00 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 [CSIL].
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 Securityholders and intermediaries through whom such securities
are sold may be deemed "underwriters" within the meaning of the Securities Act
of 1933, as amended (the "Securities Act") with respect to the securities
offered, and any profits realized or commission received may be deemed
underwriting compensation.
On the date of this Prospectus, a registration statement including a
prospectus of even date filed under the Securities Act with respect to an
underwritten public offering by the Company of 1,100,000 shares of Common Stock
and up to an additional 165,000 shares of Common Stock to cover over-
allotments, if any, was declared effective by the Securities and Exchange
Commission (the "Commission"). The Company will receive net proceeds of
approximately $ 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>
<C> <S>
Common Stock offered....................... shares
Common Stock outstanding before the Offer-
ing....................................... shares (1)
Common Stock outstanding after the Offer-
ing....................................... shares (1)
Use of proceeds............................ The Company will receive no pro-
ceeds from the sale of the Sell-
ing Securityholders' Shares. Upon
exercise of warrants underlying
certain selling Securityholders'
Shares, the Company will receive
the applicable exercise price.
Proposed Nasdaq SmallCap Market Symbol for
the Common Stock.......................... [CSIL]
</TABLE>
- --------
(1) Includes 1,100,000 shares of Common Stock to be issued in connection with
an underwritten public offering by the Company and 113,600 Bridge Shares to
be issued immediately prior to the closing of this Offering based on an
assumed offering price of $10.00 per Share. 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 110,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants and (v) any shares issuable in connection with
the ITC Acquisition (collectively referred to herein as "Additional
Securities"). See "Management," "Description of Securities" and
"Underwriting."
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 Company of 1,100,000 shares of Common Stock
and up to an additional 165,000 shares of Common Stock to cover over-
allotments, if any, was declared effective by 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.
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. None of the Selling Securityholders'
Shares may be sold by the Selling Securityholders prior to 180 days after the
date of this Prospectus. 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
SECURITYHOLDERS' COMMON
SHARES STOCK AFTER
SELLING SECURITYHOLDERS OFFERED 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-current
market price, or in negotiated transactions. The Selling Securityholders'
Shares may be sold by one or
A-6
<PAGE>
[ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS]
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 arrange for other brokers or dealers 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 Network/National 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 24. 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.
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 25. 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............................................. $ 5,309
NASD filing fee.................................................. 2,054
Blue Sky filing fees............................................. 5,000*
Nasdaq SmallCap Market application fee........................... 10,000
Legal fees and expenses.......................................... 80,000*
Blue Sky legal fees.............................................. 20,000*
Accounting fees and expenses..................................... 129,000*
Registrar and transfer agent fees................................ 8,000
Printing and engraving........................................... 50,000*
Representative's nonaccountable/expense allowance................ 330,000
Miscellaneous.................................................... 40,637
--------
TOTAL.......................................................... $680,000
========
</TABLE>
- --------
* Estimated.
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Note: The information contained in this Item 26 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:
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. (Note 3)
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"). (Note 3)
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. (Note 2)
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. (Note 3)
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. (Note 1)
On September 26, 1995, the Registrant issued 30,000 shares of Common Stock
to one purchaser for $3.00 per share. (Note 1)
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. (Note 2)
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.
(Note 2)
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. (Note 1)
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. (Note 2)
II-2
<PAGE>
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 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. (Note 2)
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 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. (Note 2)
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. (Note 1)
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. (Note 2)
- --------
(1) The Registrant believes that the issuance of such securities was exempt
from registration pursuant to Section 4(2) of the Securities Act.
(2) The Registrant believes that the issuance of such securities was exempt
from registration pursuant to Rules 504, 505 and/or 506 of Regulation D
and Sections 3(b), 4(2) and/or 4(6) of the Securities Act.
(3) The Registrant believes that the issuance of such securities was exempt
from registration pursuant to Rule 701 and Section 3(b) of the Securities
Act.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement between CSI and the Underwriters
Form of Selected Dealer Agreement between the Representative and
1.2 certain selected dealers
Plan and Articles of Merger dated September 14, 1995 between CSI
2.1 and Redden Dynamics, Inc.
Stock Purchase Agreement, dated February , 1997, among the
2.2* Registrant, ITC and its Stockholders
3.1 Articles of Incorporation of CSI
3.2 Bylaws of CSI
4.1 Specimen Common Stock certificate
Form of Warrant Agreement, including Form of Representative's
4.2 Warrant
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
5* Opinion of Parcel, Mauro & Spaanstra, P.C.
Form of 10% Convertible Promissory Note from to Registrant to
10.1 various investors
Form of Warrant and Terms of Warrant between Registrant and
10.2 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
Lease Agreement dated January 1, 1994 between CSI and The Mining
10.6 Exchange Partners Limited
LINK-US/PC Agreement dated September 19, 1996 between CSI and Gary
10.7 Kamienski
Form of Distributor Agreement between CSI and certain of its
10.8 distributors
Form of Branch Office Agency Agreement between the Registrant and
10.9 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
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
24 Power of Attorney (included on page II-6 hereof)
27 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
ITEM 28. UNDERTAKINGS.
(a) Rule 415 Offering. The Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-4
<PAGE>
(d) Prompt Delivery. The Registrant undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(e) Indemnification. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(f) Rule 430A.
The Registrant hereby undertakes that it will:
(i) For determining any liability under the Securities Act, treat the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the
time the Commission declared it effective.
(ii) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of Prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on their behalf by the undersigned in
Colorado Springs, Colorado, on February 26, 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 SB-2
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
registration statement has been signed by the following persons in the
capacities and on the dates stated.
/s/ Robert A. Spade Chief Executive February 26,
- ------------------------------------- Officer and 1998
ROBERT A. SPADE Chairman of the
Board (Principal
Executive Officer)
/s/ Patrick R. Scanlon President, Chief February 26,
- ------------------------------------- Operating Officer 1998
PATRICK R. SCANLON and Director
/s/ Daniel R. Hudspeth Chief Financial February 26,
- ------------------------------------- Officer and 1998
DANIEL R. HUDSPETH Treasurer
(Principal
Financial and
Accounting Officer)
/s/ Dean H. Cary Director February 26,
- ------------------------------------- 1998
DEAN H. CARY
/s/ Richard F. Nipert Director February 26,
- ------------------------------------- 1998
RICHARD F. NIPERT
II-6
<PAGE>
Exhibit 1.1
1,000,000 SHARES OF COMMON STOCK
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
UNDERWRITING AGREEMENT
----------------------
, 1998
Cohig & Associates, Inc.
6300 South Syracuse Way
Suite 400
Englewood, Colorado 80111
Dear Sirs:
Communications Systems International, Inc., a Colorado corporation (the
"Company") hereby confirms its agreement with you (who are sometimes hereinafter
referred to as the "Representative") and with the other members of the
underwriting group (the "Underwriters") named on Schedule 1 hereto as follows:
1. Introductory. Subject to the terms and conditions contained herein,
------------
the Company proposes to issue and sell to the Underwriters 1,000,000 shares of
common stock (the "Firm Shares"). In addition, solely for the purpose of
covering over-allotments, the Company grants to the Representative the option to
purchase up to an additional 150,000 shares of Common Stock (the "Additional
Shares"), which option to purchase shall be exercisable, in whole or in part,
from time to time during the forty-five (45) day period commencing on the date
on which the Registration Statement (as hereinafter defined) is initially
declared effective (the "Effective Date") by the Securities and Exchange
Commission (the "Commission"). Unless otherwise noted, the Firm Shares,
together with the Additional Shares issuable on exercise of the over-allotment
option, are referred to hereinafter as the "Shares". The Shares are more fully
described in the Prospectus referred to below. All references to the Company
below shall be deemed to include, where appropriate, the Company's subsidiaries,
if any.
2. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, each of the Underwriters that:
a. The Company has filed with the Commission a registration
statement, and may have filed one or more amendments thereto, on Form SB-2
(Registration No. 333- ), including in such registration statement
and each such amendment a facing sheet, audited
<PAGE>
financial statements for the past two fiscal years or such other period as
may be appropriate, the information called for by Part II, the undertakings
to deliver certificates, file reports and file post-effective amendments,
the required signatures, consents of experts, exhibits, a related
preliminary prospectus (a "Preliminary Prospectus") and any other
information or documents which are required for the registration of the
Shares, the purchase warrants referred to in Section 2(n) and Section 5(p)
entitling the Representative or its assigns to purchase shares of Common
Stock of the Company (the "Representative's Warrants"), and the shares
referred to in Section 2(n) and Section 5(p) purchasable upon exercise of
the Representative's Warrants (the "Representative's Warrant Shares"),
under the Securities Act of 1933, as amended (the "Act"). As used in this
Agreement, the term "Registration Statement" means such registration
statement, including incorporated documents, all exhibits and financial
statements and schedules thereto, as amended, when it becomes effective,
and shall include information with respect to the Shares, the
Representative's Warrants, and the Representative's Warrant Shares and the
offering thereof permitted to be omitted from the Registration Statement
when it becomes effective pursuant to Rule 430A of the General Rules and
Regulations promulgated under the Act (the "Regulations"), which
information is deemed to be included therein when it becomes effective as
provided by Rule 430A; the term "Preliminary Prospectus" means each
prospectus included in the Registration Statement, or any amendments
thereto, before it becomes effective under the Act and any prospectus filed
by the Company with the consent of the Representative pursuant to Rule
424(a) of the Regulations; and the term "Prospectus" means the final
prospectus included as part of the Registration Statement, except that if
the prospectus relating to the securities covered by the Registration
Statement in the form first filed on behalf of the Company with the
Commission pursuant to Rule 424(b) of the Regulations shall differ from
such final prospectus, the term "Prospectus" shall mean the prospectus as
filed pursuant to Rule 424(b) from and after the date on which it shall
have first been used.
b. When the Registration Statement becomes effective, and at all
times subsequent thereto, to and including the Closing Date (as defined in
Section 3) and each Additional Closing Date (as defined in Section 3), and
during such longer period as the Prospectus may be required to be delivered
in connection with sales by the Representative or any dealer, and during
such longer period until any post-effective amendment thereto shall become
effective, the Registration Statement (and any post-effective amendment
thereto) and the Prospectus (as amended or as supplemented if the Company
shall have filed with the Commission any amendment or supplement to the
Registration Statement or the Prospectus)
-2-
<PAGE>
will contain all statements which are required to be stated therein in
accordance with the Act and the Regulations, will comply with the Act and
the Regulations, and will 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 not misleading, and no event will
have occurred which should have been set forth in an amendment or
supplement to the Registration Statement or the Prospectus which has not
then been set forth in such an amendment or supplement; and no Preliminary
Prospectus, as of the date filed with the Commission, included 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; except that no representation or warranty is made in this
Section 2(b) with respect to statements or omissions made in reliance upon
and in conformity with written information furnished to the Company as
stated in Section 8(b) with respect to the Underwriters by or on behalf of
the Underwriters expressly for inclusion in any Preliminary Prospectus, the
Registration Statement, or the Prospectus, or any amendment or supplement
thereto.
c. Neither the Commission nor the "blue sky" or securities authority
of any jurisdiction have issued an order (a "Stop Order") suspending the
effectiveness of the Registration Statement, preventing or suspending the
use of any Preliminary Prospectus, the Prospectus, the Registration
Statement, or any amendment or supplement thereto, refusing to permit the
effectiveness of the Registration Statement, or suspending the registration
or qualification of the Shares, the Representative's Warrants, or the
Representative's Warrant Shares, nor has any of such authorities instituted
or threatened to institute any proceedings with respect to a Stop Order.
d. Any contract, agreement, instrument, lease, or license required to
be described in the Registration Statement or the Prospectus has been
properly described therein. Any contract, agreement, instrument, lease, or
license required to be filed as an exhibit to the Registration Statement
has been filed with the Commission as an exhibit to or has been
incorporated as an exhibit by reference into the Registration Statement.
e. The Company is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Colorado, with full power
and authority, and all necessary consents, authorizations, approvals,
orders, licenses, certificates, and permits of and from, and declarations
and filings with, all federal, state, local, and other governmental
authorities and all courts and other tribunals, to own, lease, license, and
use its properties and assets and to carry on the business in the manner
described in the Prospectus. The Company is duly qualified to do business
and is in good standing in every jurisdiction in
-3-
<PAGE>
which its ownership, leasing, licensing, or use of property and assets or
the conduct of its business makes such qualifications necessary. The
Company has no subsidiaries except as disclosed in the Prospectus.
f. The authorized capital stock of the Company consists of 25,000,000
shares of Common Stock, no par value per share, of which __________ shares
of Common Stock are issued and outstanding, __________ shares of Common
Stock are reserved for issuance upon the exercise of currently outstanding
options, __________ shares of Common Stock are reserved for issuance upon
the exercise of the remaining options authorized under the Company's option
plans, __________ shares of Common Stock are reserved for issuance on
exercise of __________ outstanding warrants and convertible promissory
notes and 230,000 shares of Common Stock are reserved for issuance on
consummation of the Stock Purchase Agreement between the Company and
International Telephone Company ("ITC") whereby ITC will become a wholly
owned subsidiary of the Company (the "ITC Acquisition"); and 5,000,000
shares of Preferred Stock, no par value per share, none of which are issued
or outstanding. Each outstanding share of Common Stock is validly
authorized, validly issued, fully paid, and nonassessable, without any
personal liability attaching to the ownership thereof, and has not been
issued and is not owned or held in violation of any preemptive rights of
shareholders. There is no commitment, plan, or arrangement to issue, and
no outstanding option, warrant, or other right calling for the issuance of,
any share of capital stock of the Company or any security or other
instrument which by its terms is convertible into, exercisable for, or
exchangeable for capital stock of the Company, except as set forth above,
and as may be properly described in the Prospectus.
g. The financial statements of the Company included in the
Registration Statement and the Prospectus fairly present with respect to
the Company and ITC the financial position, the results of operations, and
the other information purported to be shown therein at the respective dates
and for the respective periods to which they apply. Such financial
statements have been prepared in accordance with generally accepted
accounting principles, except to the extent that certain footnote
disclosures regarding any stub period may have been omitted in accordance
with the applicable rules of the Commission under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), consistently applied
throughout the periods involved, are correct and complete, and are in
accordance with the books and records of the Company and ITC. The
accountants whose reports on the audited financial statements are filed
with the Commission as a part of the Registration Statement are, and during
the periods covered by their report(s) included in the Registration
Statement and
-4-
<PAGE>
the Prospectus were, independent certified public accountants with respect
to the Company and ITC within the meaning of the Act and the Regulations.
No other financial statements are required by Form SB-2 or otherwise to be
included in the Registration Statement or the Prospectus. There has at no
time been a material adverse change in the financial condition, results of
operations, business, properties, assets, liabilities, or future prospects
of the Company or ITC from the latest information set forth in the
Registration Statement or the Prospectus, except as may be properly
described in the Prospectus.
h. There is no litigation, arbitration, claim, governmental or other
proceeding (formal or informal), or investigation pending, or, to the
knowledge of the Company, threatened, or in prospect with respect to the
Company or ITC or any of their operations, businesses, properties, or
assets, except as may be properly described in the Prospectus or such as
individually or in the aggregate do not now have and will not in the future
have a material adverse effect upon the operations, business, properties,
or assets of the Company or ITC (sometimes hereinafter collectively, the
"Combined Company"). The Combined Company is not in violation of, or in
default with respect to, any law, rule, regulation, order, judgment, or
decree except as may be properly described in the Prospectus or such as in
the aggregate do not now have and will not in the future have a material
adverse effect upon the operations, business, properties, or assets of the
Combined Company; nor is the Combined Company required to take any action
in order to avoid any such violation or default.
i. The Combined Company has good and marketable title in fee simple
absolute to all real properties and good title to all other properties and
assets which the Prospectus indicates are owned by it, free and clear of
all liens, security interests, pledges, charges, encumbrances, and
mortgages except as may be properly described in the Prospectus or such as
in the aggregate do not now have and will not in the future have a material
adverse effect upon the operations, business, properties, or assets of the
Combined Company. No real property owned, leased, licensed, or used by the
Combined Company lies in an area which is, or to the knowledge of the
Combined Company will be, subject to zoning, use, or building code
restrictions which would prohibit, and no state of facts relating to the
actions or inaction of another person or entity or his or its ownership,
leasing, licensing, or use of any real or personal property exists or will
exist which would prevent, the continued effective ownership, leasing,
licensing, or use of such real property in the business of the Combined
Company as presently conducted or as the Prospectus indicates it
contemplates conducting, except as may be properly described in the
Prospectus or such as in the
-5-
<PAGE>
aggregate do not now have and will not in the future have a material
adverse effect upon the operations, business, properties, or assets of the
Combined Company.
j. Neither the Company nor ITC is now or is expected by the Company
to be in violation or breach of, or in default with respect to complying
with, any material provision of any contract, agreement, instrument, lease,
license, arrangement, or understanding which is material to the Company or
ITC, and each such contract, agreement, instrument, lease, license,
arrangement, and understanding is in full force and is the legal, valid,
and binding obligation of the parties thereto and is enforceable as to them
in accordance with its terms. The Combined Company enjoys peaceful and
undisturbed possession under all leases and licenses under which it is
operating. Neither the Company nor ITC is a party to or bound by any
contract, agreement, instrument, lease, license, arrangement, or
understanding, or subject to any charter or other restriction, which has
had or may in the future have a material adverse effect on the financial
condition, results of operations, business, properties, assets,
liabilities, or future prospects of the Combined Company. Neither the
Company nor ITC is in violation or breach of, or in default with respect
to, any term of its respective Articles of Incorporation (or other charter
document) or by-laws.
k. All patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights, franchises,
technology, know-how and other intangible properties and assets (all of the
foregoing being herein called "Intangibles") that the Company or ITC owns
or has pending, or under which either of them is licensed, are in good
standing and uncontested. Except as otherwise disclosed in the
Registration Statement, the Intangibles are owned by the Company or ITC,
free and clear of all liens, security interests, pledges, and encumbrances.
The Company claims proprietary rights in its stylized logo and
"Communications Systems International" and proprietary rights in the "LINK-
US" and "DIAL" technologies described in the Registration Statement. There
is no right under any Intangible necessary to the business of the Company
or ITC as presently conducted or as the Prospectus indicates they
contemplate conducting (except as may be so designated in the Prospectus).
Neither the Company nor ITC has infringed, is infringing, and has received
notice of infringement with respect to asserted Intangibles of others. To
the knowledge of the Company, there is no infringement by others of
Intangibles of the Company or ITC. To the knowledge of the Company, there
is no Intangible of others which has had or may in the future have a
materially adverse effect on the financial condition, results of
operations, business, properties, assets, liabilities, or future prospects
of the Company or ITC.
-6-
<PAGE>
l. Neither the Company nor ITC, nor any director, officer, agent,
employee, or other person associated with or acting on behalf of the
Company or ITC has, directly or indirectly: used any corporate funds for
unlawful contributions, gifts, entertainment, or other unlawful expenses
relating to political activity; made any unlawful payment to foreign or
domestic government officials or employees or to foreign or domestic
political parties or campaigns from corporate funds; violated any provision
of the Foreign Corrupt Practices Act of 1977, as amended; or made any
bribe, rebate, payoff, influence payment, kickback, or other unlawful
payment. Neither the Company nor ITC has accepted any material advertising
allowances or marketing allowances from suppliers to the Company or ITC
and, to the extent any advertising allowance has been accepted, the Company
or ITC has provided proper documentation to the supplier with respect to
such advertising as to which the advertising allowance has been granted.
m. The Company has all requisite power and authority to execute and
deliver, and to perform thereunder each of this Agreement and the
Representative's Warrants. All necessary corporate proceedings of the
Company have been duly taken to authorize the execution and delivery, and
performance thereunder by the Company of this Agreement and the
Representative's Warrants. This Agreement has been duly authorized,
executed, and delivered by the Company, is a legal, valid, and binding
obligation of the Company, and is enforceable as to the Company in
accordance with its terms. The Representative's Warrants have been duly
authorized by the Company and, when executed and delivered by the Company,
will be a legal, valid, and binding obligation of the Company, and will be
enforceable against the Company in accordance with their terms. No
consent, authorization, approval, order, license, certificate, or permit of
or from, or declaration or filing with, any federal, state, local, or other
governmental authority or any court or other tribunal is required by the
Company for the execution and delivery, or performance thereunder by the
Company of this Agreement or the Representative's Warrants except filings
under the Act which have been or will be made before the Closing Date and
such consents consisting only of consents under "blue sky" or securities
laws which are required in connection with the transactions contemplated by
this Agreement and which have been obtained at or prior to the date of this
Agreement. No consent of any party to any contract, agreement, instrument,
lease, license, arrangement, or understanding to which the Company is a
party, or to which any of its properties or assets are subject, is required
for the execution or delivery, or performance thereunder of this Agreement
or the Representative's Warrants; and the execution and delivery, and
performance thereunder of this Agreement and the Representative's Warrants
-7-
<PAGE>
will not violate, result in a breach of, conflict with, or (with or without
the giving of notice or the passage of time or both) entitle any party to
terminate or call a default under any such contract, agreement, instrument,
lease, license, arrangement, or understanding, or violate or result in a
breach of any term of the Articles of Incorporation or by-laws of the
Company, or violate, result in a breach of, or conflict with any law, rule,
regulation, order, judgment, or decree binding on the Company or to which
any of its operations, businesses, properties, or assets are subject.
n. The Shares, the Representative's Warrants and the Representative's
Warrant Shares are validly authorized and reserved for issuance. The
Shares, when issued and delivered in accordance with this Agreement, the
Representative's Warrant Shares, when issued and delivered upon exercise of
the Representative's Warrants and upon payment of the exercise price
therefor, will be validly issued, fully paid, and nonassessable, without
any personal liability attaching to the ownership thereof, and will not be
issued in violation of any preemptive rights of shareholders, and the
Underwriters will receive good title to the Shares, the Representative will
receive good title to the Representative's Warrants purchased and any
purchaser of the Representative's Warrant Shares will receive good title
thereto, all such title free and clear of all liens, security interests,
pledges, charges, encumbrances, shareholders' agreements, and voting
trusts.
o. The Shares, the Representative's Warrants and the Representative's
Warrant Shares conform to all statements relating thereto contained in the
Registration Statement and the Prospectus.
p. Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as may
otherwise be properly described in the Prospectus, neither the Company nor
ITC has (i) issued any securities or incurred any liability or obligation,
primary or contingent, for borrowed money, (ii) entered into any
transaction not in the ordinary course of business, or (iii) declared or
paid any dividend on its capital stock.
q. Neither the Company, nor ITC, nor any of their officers,
directors, or affiliates (as defined in the Regulations), has taken or will
take, directly or indirectly, prior to the termination of the distribution
of securities contemplated by this Agreement, any action designed to
stabilize or manipulate the price of any security of the Company, or which
has caused or resulted in, or which might in the future reasonably be
expected to cause or result in, stabilization or manipulation of the price
of any security of the Company, to facilitate the sale or resale of the
Shares.
-8-
<PAGE>
r. Neither the Company nor ITC has incurred any liability for, nor is
any period entitled, directly or indirectly, to receive a fee, commission,
or other compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement. Further,
neither the Company nor ITC has any agreement with any financial consultant
or advisor nor has it paid any financial consulting or advisory fees or
other compensation in connection with the transactions contemplated by this
Agreement, except as the Company has advised the Representative in writing
and as disclosed in the Registration Statement.
s. The Company has obtained from each officer, director and person
known to the Company who beneficially owns 2% or more of the Company's
capital stock (including derivative securities convertible into shares of
the Company's capital stock) his or her enforceable written agreement that
for a period of 270 days from the Effective Date, he or she will not,
without the Representative's prior written consent, offer, pledge, sell,
contract to sell, grant any option for the sale of, or otherwise dispose
of, directly or indirectly, any shares of capital stock or any security or
other instrument which by its terms is convertible into, exercisable for,
or exchangeable for shares of Common Stock except that, subject to
compliance with applicable securities laws, any such officer, director or
shareholder may transfer his or her stock in a private transaction,
provided that any such transferee shall agree, as a condition to such
transfer, to be bound by the restrictions set forth in this Agreement.
Moreover, the Company, on behalf of itself, and all officers, directors and
holders of five percent or more of the Common Stock of the Company, agrees
that if will not, for a minimum period of twenty-four (24) months from the
Effective Date, sell, transfer, hypothecate capital stock or derivative
securities of the Company in an offering under the exemption from the
registration requirements afforded under Regulation S as promulgated under
the Act without the prior written consent of the Representative. The
Company has obtained from each of the three shareholders of ITC who will
receive shares of the Company's capital stock upon consummation of the ITC
Acquisition, his enforceable agreement that all such shares will be placed
in escrow for a period of one year from the Effective Date and that each
such person will not, without the Representative's prior written consent,
offer, pledge, sell, contract to sell, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, any shares of capital stock
or any security or other instrument which by its terms is convertible into,
exercisable for, or exchangeable for shares of Common Stock.
-9-
<PAGE>
t. Except as otherwise provided in the Registration Statement, no
person or entity has the right to require registration of any shares of
Common Stock or other securities of the Company because of the filing or
effectiveness of the Registration Statement. The Rights Holders (as
defined in the Registration Statement) have waived their rights to have
shares of Common Stock included in the Registration Statement.
u. The Company is eligible to use Form SB-2 for registration of the
Shares, the Representative's Warrants and the Representative's Warrant
Shares.
v. No unregistered securities of the Company, of an affiliate of the
Company or of a predecessor of the Company have been sold within three
years prior to the date hereof, except as described in the Registration
Statement.
w. Except as set forth in the Registration Statement, there is and at
the Closing Date there will be no action, suit or proceeding before any
court, arbitration tribunal or governmental agency, authority or body
pending or, to the knowledge of the Company, threatened which might result
in judgments against the Company or ITC not adequately covered by insurance
or which collectively might result in any material adverse change in the
condition (financial or otherwise), the business or the prospects of the
Company or ITC or would materially affect the properties or assets of the
Company or ITC.
x. Each of the Company and ITC has filed all federal and state tax
returns which are required to be filed by it and has paid all taxes shown
on such returns and all assessments received by it to the extent such taxes
have become due. All taxes with respect to which the Company or ITC is
obligated have been paid or adequate accruals have been set up to cover any
such unpaid taxes.
y. Except as set forth in the Registration Statement:
i. The Company and ITC have obtained all permits, licenses and
other authorizations which are required under the Environmental Laws
for the ownership, use and operation of each location operated or
leased by the Company and/or ITC (the "Property"), all such permits,
licenses and authorizations are in effect, no appeal nor any other
action is pending to revoke any such permit, license or authorization,
and the Combined Company is in full compliance with all terms and
conditions of all such permits, licenses and authorizations.
ii. The Combined Company and the Property are in compliance with
all Environmental Laws including, without limitation, all
restrictions, conditions, standards, limitations, prohibitions,
requirements, obligations, schedules and timetables contained in the
Environmental Laws or contained in any regulation, code,
-10-
<PAGE>
plan, order, decree, judgment, injunction, notice or demand letter
issued, entered, promulgated or approved thereunder.
iii. The Combined Company has not, and to the best knowledge of
the Company's executive officers, no other person has, released,
placed, stored, buried or dumped any Hazardous Substances, Oils,
Pollutants or Contaminants or any other wastes produced by, or
resulting from, any business, commercial, or industrial activities,
operations, or processes, on, beneath, or adjacent to the Property or
any property formerly owned, operated or leased by the Combined
Company except for inventories of such substances to be used, and
wastes generated therefrom, in the ordinary course of business of the
Company and ITC, (which inventories and wastes, if any, were and are
stored or disposed of in accordance with applicable laws and
regulations and in a manner such that there has been no release of any
such substances into the environment).
iv. Except as provided to the Representative, there exists no
written or tangible report, synopsis or summary of any asbestos, toxic
waste or Hazardous Substances, Oils, Pollutants or Contaminants
investigation made with respect to all or any portion of the assets of
the Company or ITC (whether or not prepared by experts and whether or
not in the possession of the executive officers of the Company or
ITC).
v. Definitions: As used herein:
(1) Environmental Laws means all federal, state and local
------------------
laws, regulations, rules and ordinances relating to pollution or
protection of the environment, including, without limitation,
laws relating to Releases or threatened Releases of Hazardous
Substances, Oils, Pollutants or Contaminants into the indoor or
outdoor environment (including, without limitation, ambient air,
surface water, groundwater, land, surface and subsurface strata)
or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, Release, transport or
handling of Hazardous Substances, Oils, Pollutants or
Contaminants.
(2) Hazardous Substances, Oils, Pollutants or Contaminants
------------------------------------------------------
means all substances defined as such in the National Oil and
Hazardous Substances Pollutant Contingency Plan, 40 C.F.R.
(S)300.6, or defined as such under any Environmental Law.
-11-
<PAGE>
(3) Release means any release, spill, emission, discharge,
-------
leaking, pumping, injection, deposit, disposal, discharge,
dispersal, leaching or migration into the indoor or outdoor
environmental (including, without limitation, ambient air,
surface water, groundwater, and surface or subsurface strata) or
into or out of any property, including the movement of Hazardous
Substances, Oils, Pollutants or Contaminants through or in the
air, soil, surface water, groundwater or any property.
z. Neither the Company nor ITC have any subsidiaries.
aa. Neither the Company nor ITC has distributed, and will not
distribute, any prospectus or other offering material in connection with
the offering and sale of the Shares other than any Preliminary Prospectus
or the Prospectus or other materials that the Act or the Exchange Act
permit to be distributed by the Company.
bb. The Company and ITC maintain systems of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions
are executed in accordance with management's general or specific
authorization, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii)
access to assets is permitted only in accordance with management's general
or specific authorization, and (iv) the recorded accountability for assets
is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
cc. Neither the Company, nor ITC, nor any of their subsidiaries or
affiliates is presently doing business with the government of Cuba or with
any person or affiliate located in Cuba.
dd. Each of the Company and ITC maintains insurance which is in full
force and effect, of the types and in the amounts that are adequate, in its
reasonable opinion, for its business and in line with the insurance
maintained by similar companies and businesses.
All of the above representations and warranties shall survive the
performance or termination of this Agreement. Any certificate signed by any
officer of the Company and delivered to you or to counsel for the Representative
shall be deemed a representation and warranty by the Company to the
Representative as to the matters covered thereby.
3. Purchase, Sale, and Delivery of the Shares. On the basis of the
------------------------------------------
representations, warranties, covenants, and agreements of the Company herein
contained, but subject to the terms and conditions herein set forth, the Company
agrees to sell to the Underwriters, severally and not
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jointly, and the Underwriters, severally and not jointly, agree to purchase from
the Company the number of Firm Shares set forth opposite the Underwriters' names
in Schedule 1 hereto.
The purchase price per Firm Share to be paid by the Underwriters shall be
$________ and the initial public offering price per Firm Share shall be
$________.
Payment for the Firm Shares by the Underwriters shall be made by certified
or official bank check in clearing house funds, payable to the order of the
Company at the offices of Cohig & Associates, Inc., Suite 400, 6300 South
Syracuse Way, Englewood, Colorado 80111, or at such other place as the
Representative shall determine and advise the Company by at least two full days'
notice in writing, upon delivery of the Shares. Such delivery and payment shall
be made at 10:00 a.m., Mountain Time, on the third business day following the
time of the initial public offering, as defined in Section 10(a). The time and
date of such delivery and payment are herein called the "Closing Date."
In addition, the Company hereby grants to the Representative the option to
purchase all or a portion of the Additional Shares as may be necessary to cover
over-allotments, at the same purchase price per Additional Share as the price
per Share of the Firm Shares provided for in this Section 3. The Representative
may purchase Additional Shares when exercising such option, in its sole
discretion. This option may be exercised by the Representative on the basis of
the representations, warranties, covenants, and agreements of the Company herein
contained, but subject to the terms and conditions herein set forth, at any time
and from time to time on or before the 45th day following the Effective Date of
the Registration Statement, by written notice by the Representative to the
Company. Such notice shall set forth the aggregate number of Additional Shares
as to which the option is being exercised, and the time and date, as determined
by the Representative, when such Additional Shares are to be delivered (such
time and date are herein called an "Additional Closing Date"); provided,
however, that no Additional Closing Date shall be earlier than the Closing Date
nor earlier than the third business day after the date on which the notice of
the exercise of the option shall have been given nor later than the eighth
business day after the date on which such notice shall have been given.
Payment for the Additional Shares shall be made by certified or official
bank check in clearing house funds payable to the order of the Company at the
offices of Cohig & Associates, Inc., Suite 400, 6300 South Syracuse Way,
Englewood, Colorado, or at such other place as you shall determine and advise
the Company by at least two full days' notice in writing, upon delivery of
certificates representing the Additional Shares to you.
Certificates for the Shares purchased shall be registered in such name or
names and in such authorized denominations as you may request in writing at
least two full business days prior to the
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<PAGE>
Closing Date or Additional Closing Date, as applicable. The Company shall
permit you to examine and package such certificates for delivery at least one
full business day prior to any such closing with respect thereto.
If for any reason one or more Underwriters shall fail or refuse (otherwise
than for a reason sufficient to justify the termination of this Agreement under
the provisions of Section 10 hereof) to purchase and pay for Shares agreed to be
purchased by such Underwriter, the Company shall immediately give notice thereof
to the Representative, and the non-defaulting Underwriters shall have the right
within 24 hours after the receipt by the Representative of such notice, to
purchase or procure one or more other Underwriters to purchase, in such
proportions as may be agreed upon among the Representative and such purchasing
Underwriter or Underwriters and upon the terms herein set forth, the Shares
which such defaulting Underwriter or Underwriters agreed to purchase. If the
non-defaulting Underwriters fail so to make such arrangements with respect to
all such Shares, the Shares which each non-defaulting Underwriter is otherwise
obligated to purchase under the Agreement shall be automatically increased pro
rata to absorb the remaining Shares which the defaulting Underwriter or
Underwriters agreed to purchase; provided, however, that the non-defaulting
Underwriters shall not be obligated to purchase the Shares which the defaulting
Underwriter or Underwriters agreed to purchase in excess of 10% of the total
number of Shares which such non-defaulting Underwriter agreed to purchase
hereunder, and provided further that the non-defaulting Underwriters shall not
be obligated to purchase any Shares which the defaulting Underwriter or
Underwriters agreed to purchase if such additional purchase would cause the
Underwriter to be in violation of the net capital rule of the Commission or
other applicable law. If the Shares which the defaulting Underwriter or
Underwriters agreed to purchase shall not be purchased or absorbed in accordance
with the two preceding sentences, the Company shall have the right, within 24
hours next succeeding the 24-hour period above referred to, to make arrangements
with other underwriters or purchasers satisfactory to the Representative for the
purchase of such Shares on the terms herein set forth. In any such case, either
the Representative or the Company shall have the right to postpone the Closing
for not more than seven business days after the date originally fixed as the
Closing in order that any necessary changes in the Registration Statement, the
Prospectus or any other documents or arrangements may be made. If neither the
non-defaulting Underwriters nor the Company shall make arrangements within the
24-hour periods stated above for the purchase of all the Shares which the
defaulting Underwriter or Underwriters agreed to purchase hereunder, this
Agreement shall be terminated without further act or deed and without any
liability on the part of the Company to any non-defaulting Underwriter, except
the Company
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<PAGE>
shall be liable for actual expenses incurred by the Representative as provided
in Section 10 hereof, and without any liability on the part of any non-
defaulting Underwriter to the Company.
Nothing contained herein shall relieve any defaulting Underwriter of its
liability, if any, to the Company or to the remaining Underwriters for damages
occasioned by its default hereunder.
4. Offering. The Underwriters are to make a public offering of the
--------
Shares as soon, on or after the effective date of the Registration Statement, as
the Representative deems it advisable so to do. The Shares are to be initially
offered to the public at the initial public offering price provided for in
Section 3 (such price being herein called the "public offering price"). After
the initial public offering, you may from time to time increase or decrease the
price of the Shares, in your sole discretion, by reason of changes in general
market conditions or otherwise.
5. Covenants of the Company. The Company covenants that it will:
------------------------
a. Use its best efforts to cause the Registration Statement to become
effective as promptly as possible. If the Registration Statement has
become or becomes effective with a form of Prospectus omitting certain
information pursuant to Rule 430A of the Regulations, or filing of the
Prospectus is otherwise required under Rule 424(b), the Company will file
the Prospectus, properly completed, pursuant to Rule 424(b) within the time
period prescribed and will provide evidence satisfactory to you of such
timely filing.
b. Notify you immediately, and confirm such notice in writing, (i)
when the Registration Statement and any post-effective amendment thereto
become effective, (ii) of the receipt of any comments from the Commission
or the "blue sky" or securities authority of any jurisdiction regarding the
Registration Statement, any post-effective amendment thereto, the
Prospectus, or any amendment or supplement thereto, and (iii) of the
receipt of any notification with respect to a Stop Order or the initiation
or threatening of any proceeding with respect to a Stop Order. The Company
will use its best efforts to prevent the issuance of any Stop Order and, if
any Stop Order is issued, to obtain the lifting thereof as promptly as
possible.
c. During the time when a prospectus relating to the Shares are
required to be delivered hereunder or under the Act or the Regulations,
comply so far as it is able with all requirements imposed upon it by the
Act, as now existing and as hereafter amended, and by the Regulations, as
from time to time in force, so far as necessary to permit the continuance
of sales of or dealings in the Shares in accordance with the provisions
hereof and the Prospectus. If, at any time when a prospectus relating to
the Shares is required to be delivered hereunder or under the Act or the
Regulations, any event shall have occurred as a result of which, in the
reasonable opinion of counsel for the Company or counsel for the
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<PAGE>
Representative, the Registration Statement or the Prospectus, as then
amended or supplemented, contains any untrue statement of a material fact
or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, or if, in the
opinion of either of such counsel, it is necessary at any time to amend or
supplement the Registration Statement or the Prospectus to comply with the
Act or the Regulations, the Company will immediately notify you and
promptly prepare and file with the Commission an appropriate amendment or
supplement (in form and substance satisfactory to you) which will correct
such statement or omission or which will effect such compliance and will
use its best efforts to have any such amendment declared effective as soon
as possible.
d. Deliver without charge to you such number of copies of each
Preliminary Prospectus as you may reasonably request and, as soon as the
Registration Statement or any amendment thereto becomes effective or a
supplement is filed, deliver without charge to you two signed copies of the
Registration Statement or such amendment thereto, as the case may be,
including exhibits, and two copies of any supplement thereto, and deliver
without charge to you such number of copies of the Prospectus, the
Registration Statement, and amendments and supplements thereto, if any,
without exhibits, as you may reasonably request for the purposes
contemplated by the Act.
e. Endeavor in good faith, in cooperation with you, at or prior to
the time the Registration Statement becomes effective, to qualify the
Shares for offering and sale under the "blue sky" or securities laws of
such jurisdictions as you may reasonably request; provided, however, that
no such qualification shall be required in any jurisdiction where, as a
result thereof, the Company would be subject to service of general process
or to taxation as a foreign corporation doing business in such jurisdiction
to which it is not then subject. In each jurisdiction where such
qualification shall be effected, the Company will, unless you agree in
writing that such action is not at the time necessary or advisable, file
and make such statements or reports at such times as are or may be required
by the laws of such jurisdiction.
f. Make generally available (within the meaning of Section 11(a) of
the Act and the Regulations) to its security holders as soon as
practicable, but not later than fifteen (15) months after the date of the
Prospectus, an earnings statement (which need not be certified by
independent certified public accountants unless required by the Act or the
Regulations, but which shall satisfy the provisions of Section 11(a) of the
Act and the Regulations) covering a period of at least 12 months beginning
after the effective date of the Registration Statement.
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<PAGE>
g. For a period of 12 months after the date of the Prospectus, not,
without your prior written consent, offer, issue, sell, contract to sell,
grant any option for the sale of, or otherwise dispose of, directly or
indirectly, any shares of Common Stock (or any security or other instrument
which by its terms is convertible into, exercisable for, or exchangeable
for shares of Common Stock) except as provided in Section 3 and except for
(i) the issuance of Common Stock underlying options outstanding on the date
hereof which are properly described in the Prospectus, (ii) the issuance of
Representative's Warrant Shares, (iii) the grant or exercise of options
pursuant to the Company's existing stock option plan or (iv) the issuance
of Common Stock in the ITC Acquisition.
h. For a period of five years after the Effective Date of the
Registration Statement, furnish you, without charge, the following:
i. Within 90 days after the end of each fiscal year, three
copies of financial statements certified by independent certified
public accountants, including a balance sheet, statement of
operations, and statement of cash flows of the Company and its then
existing subsidiaries, with supporting schedules, prepared in
accordance with generally accepted accounting principles, at the end
of such fiscal year and for the 12 months then ended;
ii. As soon as practicable after they have been sent to
shareholders of the Company or filed with the Commission, three copies
of each annual and interim financial and other report or communication
sent by the Company to its shareholders or filed with the Commission;
iii. As soon as practicable, two copies of every press release
and every material news item and article in respect of the Company or
its affairs which was released by the Company;
iv. Notice of any regular quarterly or special meeting of the
Company's Board of Directors concurrently with the sending of such
notice to the Company's directors; and
v. Such additional documents and information with respect to
the Company and its affairs and the affairs of any of its subsidiaries
as you may from time to time reasonably request.
i. Designate an Audit Committee, the members of which shall be
subject to your reasonable approval, which will generally supervise the
financial affairs of the Company, and a Compensation Committee, which will
supervise and act upon executive compensation and issuance of options. The
Audit Committee and the Compensation Committee will be
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<PAGE>
comprised of a majority of independent, outside directors. The Company
agrees that at least two members of the Board of Directors shall be
independent, outside directors and that the Company will keep at least two
independent, outside persons as members of the Board of Directors and as a
majority of the members of the Audit Committee and the Compensation
Committee for at least two full fiscal years from the Effective Date or as
otherwise required by The Nasdaq Stock Market, Inc.
j. Furnish to you as early as practicable prior to the Closing Date
and any Additional Closing Date, as the case may be, but not less than two
full business days prior thereto, a copy of the latest available unaudited
interim financial statements of the Company which have been read by the
Company's independent certified public accountants, as stated in their
letters to be furnished pursuant to Section 7(f).
k. File no amendment or supplement to the Registration Statement or
Prospectus at any time, whether before or after the Effective Date of the
Registration Statement, unless such filing shall comply with the Act and
the Regulations and unless you shall previously have been advised of such
filing and furnished with a copy thereof, and you and counsel for the
Representative shall have approved such filing in writing within a
reasonable time of receipt thereof.
l. 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.
m. Comply with all provisions of all undertakings contained in the
Registration Statement.
n. Prior to the Closing Date or any Additional Closing Date, as the
case may be, issue no press release or other communication, directly or
indirectly, and hold no press conference and grant no interviews with
respect to the Company, the financial condition, results of operations,
business, properties, assets, or liabilities of the Company, or this
offering, without your prior written consent.
o. File timely with the Commission and the National Association of
Securities Dealers, Inc. (the "NASD"), if required, a report on Form 10-C
in accordance with the Rules and Regulations of the Commission under the
Exchange Act.
p. On or prior to the Closing Date, sell to the Representative for a
total purchase price of $50, Representative's Warrants entitling the
Representative or its assigns to purchase 100,000 shares of Common Stock at
a price equal to 125% of the public offering price of the Shares, with the
terms of the Representative's Warrants, including exercise period, anti-
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<PAGE>
dilution provisions, exercise price, exercise provisions, transferability,
and registration rights, to be substantially in the form filed as an
exhibit to the Registration Statement. With respect to such registration
rights, the holders of the Representative's Warrants may demand
registration without first exercising the Representative's Warrants.
q. Until expiration of the Representative's Warrants, keep reserved
sufficient shares of Common Stock for issuance as Representative's Warrant
Shares upon exercise of the Representative's Warrants.
r. If the Representative, any employee of the Representative or any
company controlled by or under control of the Representative acts as a
broker or finder during the five year period commencing on the Effective
Date with regard to (i) the sale of all or substantially all of the assets
and properties of the Company, (ii) the merger or consolidation of the
Company (other than a merger or consolidation effected for the purpose of
changing the Company's domicile or the ITC Merger) or (iii) the acquisition
by the Company of the assets or stock of another business entity, which
agreement or understanding is thereafter consummated, whether or not during
such five (5) year period, pay to the Representative or such person(s) as
the Representative may designate an amount equal to 5% of the first
$1,000,000 or portion thereof in value or consideration received by the
Company, 4% of the second $1,000,000 or portion thereof in value or
consideration received by the Company and 3% of such value or consideration
received by the Company in excess of the first $2,000,000 of such value or
consideration. The fee payable to the Representative will be in the same
form of consideration as that paid by or to the Company, as the case may
be, in any such transaction.
s. Prior to the Closing Date and for at least one year thereafter,
retain a financial public relations firm acceptable to the Representative,
to assist the Company in preparing regular announcements and disseminating
such information to the financial community.
t. Qualify the Shares for secondary trading, as soon as legally
possible, in California and Texas and such other states as are requested by
the Representative from time to time and within 120 days of the Effective
Date, cause its counsel to issue an after-market "blue sky" survey which
shall address all states in which "after-market" trading of the Common
Stock is permissible.
u. Adopt procedures for the application of the net proceeds it
receives from the sale of the Shares and apply the net proceeds from the
sale of the Shares substantially in the manner set forth in the
Registration Statement unless any deviation from such application is
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<PAGE>
in accordance with the Registration Statement and occurs only after review
and approval by the Board of Directors of the Company and then only after
the Board of Directors has obtained the written opinion of recognized legal
counsel experienced in the federal and state securities laws as to the
propriety of any such deviation.
v. Within the time period which the Prospectus is required to be
delivered under the Act, comply, at its own expense, with all requirements
imposed upon it by the Act, as now or hereafter amended, by the Rules and
Regulations, as from time to time may be enforced, and by any order of the
Commission, so far as necessary to permit the continuance of sales or
dealing in the Shares.
w. At the Closing, deliver to the Representative true and correct
copies of the Articles of Incorporation of the Company and all amendments
thereto, all such copies to be certified by the Secretary of the Company;
true and correct copies of the by-laws of the Company and of the minutes of
all meetings of the directors and shareholders of the Company held prior to
the Closing which in any way relate to the subject matter of this Agreement
or the Registration Statement.
x. Use all reasonable efforts to comply or cause to be complied with
the conditions precedent to the several obligations of the Underwriters in
Section 7 hereof.
y. File with the Commission all required reports in accordance with
the provisions of Section 13, 14 or 15(d) under the Exchange Act and to
provide a copy of such reports to the Representative and its counsel.
z. Supply to the Representative and the Representative's counsel at
the Company's cost, three bound volumes each containing material documents
relating to the offering of the Shares within a reasonable time after the
Closing, not to exceed 90 days.
aa. As soon as possible prior to the Effective Date, and as a
condition of the Underwriter's obligations hereunder, (i) have the Company
listed on an accelerated basis, and to maintain such listing for not less
than ten years from the Closing Date, in Standard & Poor's Standard
Corporation Records; and (ii) have the Common Stock included on The Nasdaq
SmallCap Market(SM) as of the Effective Date, on the Closing Date, on the
Additional Closing Date and thereafter for at least ten years provided the
Company is in compliance with The Nasdaq SmallCap Market(SM) maintenance
requirements.
bb. As soon as possible prior to the Effective Date and at such time
as the Company qualifies for listing on the Nasdaq National Market(R), take
all steps necessary to
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have the Company's Common Stock, to the extent eligible, listed on the
Nasdaq National Market(R).
cc. Take all necessary and appropriate measures to insure continuity
of management.
dd. Continue, for a period of at least five years following the
Effective Date of the Registration Statement, to appoint such auditors as
are reasonably acceptable to the Representative, which auditors shall (i)
prepare financial statements in accordance with Regulation S-B or, if
required, Regulation S-X under the General Rules and Regulations of the Act
and (ii) examine (but not audit) the Company's financial statements for
each of the first three (3) fiscal quarters prior to the announcement of
quarterly financial information, the filing of the Company's 10-QSB
quarterly report and the mailing of quarterly financial information to
security holders.
ee. Within 90 days of the Effective Date of the Registration
Statement, obtain "key man" life insurance policies in the amount of
$1,000,000 each on the lives of such key employees as may be mutually
agreed upon between the Company and the Representative, with the Company
designated as the beneficiary of such policies, and pay the annual premiums
thereon for a period of not less than five years from the Effective Date of
the Registration Statement.
ff. Cause its transfer agent to furnish the Representative a
duplicate copy of the daily transfer sheets prepared by the transfer agent
during the six-month period commencing on the Effective Date of the
Registration Statement and instruct the transfer agent to timely provide,
upon the request of the Representative, duplicate copies of such transfer
sheets and/or a duplicate copy of a list of shareholders, all at the
Company's expense, for a period of 1 1/2 years after such six-month period.
In addition, if requested to do so in writing by the Representative, the
Company shall furnish to the Representative, at the Company's expense,
copies of the DTC Special Security Position Listing Reports for a period of
five years commencing on the Effective Date.
gg. 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 consultants or advisors for services for a
period of twenty-four (24) months from the Effective Date of the
Registration Statement without the Representative's prior written consent.
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hh. During a period of three years from the Effective Date of the
Registration Statement, afford the Representative the right, either using
its own personnel or through a consultant retained by the Representative at
its expense, to review the Company's books, records and operations upon
seven days' prior written notice; provided that the Representative and any
person designated by the Representative to conduct such review will execute
a confidentiality agreement, if requested to do so by the Company, which
will in relevant part prohibit disclosure of information to any party
except the Representative and which shall specify that the information
received as a result of such review shall be held in confidence unless
otherwise agreed to by the parties thereto.
ii. Afford the Representative the right, but not the obligation,
commencing on the Closing Date and surviving for a period of thirty-six
(36) months, to designate an observer to attend meetings of the Board of
Directors; give notice to the designee, if any, and the Representative of
each meeting of the Board of Directors in accordance with Colorado law, of
which no less than four in-person meetings will be held each year;
reimburse any such designee for all reasonable costs and expenses incurred
in attending meetings of the Board of Directors, including but not limited
to, food, lodging and transportation, together with such other fee or
compensation as is paid by the Company to other members of the Board of
Directors; and to the extent permitted by law, indemnify the Representative
and its designee for the actions of such designee as an observer to the
Board of Directors and in the event the Company maintains a liability
insurance policy affording coverage for the acts of its officers and/or
directors, to the extent permitted under such policy, cause each of the
Representative and its designee to be named as an insured under such
policy.
jj. Maintain American Securities Transfer & Trust, Inc. as its
transfer agent for a minimum period of two years from the Effective Date,
unless the prior written consent of the Representative to substitution is
obtained.
kk. Declare and hold an annual meeting of shareholders for the
election of directors and such other business as may properly come before
the shareholders of the Company within 180 days after the end of each of
the Company's fiscal years for a minimum period of five years from the
Effective Date; and provide the shareholders an annual report meeting the
requirements of Rule 14c-3 under the Exchange Act and with quarterly
summary operating financial statements.
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ll. 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
Representative 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.
mm. Inform the Florida Department of Banking and Finance at any time
prior to the consummation of the distribution of the Firm Shares and the
Additional Shares by the Representative 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.
nn. Grant to the Representative the right to act as managing
underwriter for any public or private offerings of the Company's securities
or of its subsidiaries for a period of twelve (12) months from the
Effective Date. Such right will continue in effect during the entire
twelve (12) month period despite the exercise of the right or the refusal
to exercise the right during such period. The Representative shall have
thirty (3) days after receipt of notice of an offering within which to
determine whether to exercise the right.
6. Payment of Expenses. The Company hereby agrees to pay all expenses
-------------------
(subject to the last sentence of this Section 6) in connection with the
offering, including but not limited to (a) the preparation, printing, filing,
distribution, and mailing of the Registration Statement and the Prospectus,
including NASD, SEC, Nasdaq filing and/or application fees, and the printing,
filing, distribution, and mailing of this Agreement, any Agreement Among
Underwriters, Selected Dealers Agreement, preliminary and final Blue Sky
Memorandums, material to be circulated to the Underwriters by you and other
incidental or related documents, including the cost of all copies thereof and of
the Preliminary Prospectuses and of the Prospectus, and any amendments or
supplements thereto, supplied to the Representative in quantities as hereinabove
stated, (b) the is suance, sale, transfer, and delivery of the Firm Shares, the
Additional Shares, the Representative's Warrants and the Representative's
Warrant Shares, including, without limitation, any original issue, transfer or
other taxes payable thereon and the costs of preparation, printing and delivery
of certificates representing such securities, as applicable, (c) the
qualification of the Firm Shares, Additional Shares, Representative's Warrants
and the Representative's Warrant Shares under state or
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foreign "blue sky" or securities laws, (d) the fees and disbursements or counsel
for the Company and the accountants for the Company, (e) the listing of the
Common Stock on The Nasdaq SmallCap Market(SM), and (f) the Representative's
non-accountable expense allowance equal to 3% of the aggregate gross proceeds
from the sale of the Firm Shares and the Additional Shares. In addition, the
Company shall, upon receipt of an invoice from the Representative, reimburse the
Representative for any expenses of its attendance at informational (roadshow)
meetings related to the offering. Prior to the Closing Date, the Company shall
bear the costs of tombstone announcements not to exceed $10,000, if requested to
do so by the Representative.
The Company has remitted to the Representative the sum of $40,000 prior to
the date hereof, all of which has been credited as partial payment in advance of
the non-accountable expense allowance provided for in Section 6(f) above.
Except as otherwise provided herein, such advances shall be non-refundable.
7. Conditions of Underwriters' Obligations. The Underwriters' obligation
---------------------------------------
to purchase and pay for the Firm Shares and the Additional Shares, as provided
herein, shall be subject to the continuing accuracy of the representations and
warranties of the Company contained herein and in each certificate and document
contemplated under this Agreement to be delivered to you, as of the date hereof
and as of the Closing Date (or the Additional Closing Date, as the case may be),
to the performance by the Company of its obligations hereunder, and to the
following conditions:
a. The Registration Statement shall have become effective not later
than 5:00 p.m., Mountain time, on the date of this Agreement or such later
date and time as shall be consented to in writing by you.
b. At the Closing Date and any Additional Closing Date, you shall
have received the favorable opinion of Parcel, Mauro, Hultin & Spaanstra,
P.C., 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. The Company is a corporation duly organized, validly
existing, and in good standing under the laws of the State of
Colorado, with full power and authority, and all necessary consents,
authorizations, approvals, orders, certificates, and permits of and
from, and declarations and filings with, all federal, state, local,
and other governmental authorities and all courts and other tribunals,
including all necessary Grant of Equipment Authorizations issued by
the Federal Communications Commission under FCC Rule Part 15, to own,
lease, license, and use its properties
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and assets and to conduct its business in the manner described in the
Prospectus. The Company is duly qualified to do business and is in
good standing in every jurisdiction in which its ownership, leasing,
licensing, or use of property and assets or the conduct of its
business makes such qualification necessary;
ii. The authorized capital stock of the Company as of the date
of this Agreement consisted of 25,000,000 shares of Common Stock, no
par value per share, of which __________ shares of Common Stock were
issued and outstanding, __________ shares of Common Stock were
reserved for issuance upon the exercise of outstanding options,
__________ shares of Common Stock were reserved for issuance upon the
exercise of the remaining options authorized under the Company's
option plan, ___________ shares of Common Stock were reserved for
issuance upon the exercise of outstanding warrants and convertible
promissory notes and debentures and 230,000 shares of Common Stock
were reserved for issuance on consummation of the Stock Purchase
Agreement between the Company and ITC; and 5,000,000 shares of
Preferred Stock, no par value per share, none of which were issued and
outstanding; and there have been no changes in the authorized and
outstanding capital stock of the Company since the date of this
Agreement, except as contemplated by the Registration Statement and
the Prospectus. Each outstanding share of capital stock 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, or other right calling
for the issuance of, any share of capital stock of the Company or any
security or other instrument which by its terms is convertible into,
exercisable for, or exchangeable for capital stock of the Company,
except as set forth above, and except as is properly described in the
Prospectus. There is outstanding no security or other instrument
which by its terms is convertible into or exchangeable for capital
stock of the Company, except as described in the Prospectus;
iii. There is no litigation, arbitration, claim, governmental or
other proceeding (formal or informal), or investigation pending,
threatened, or in prospect (or any basis therefor) with respect to the
Company, ITC or any of their respective
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operations, businesses, properties, or assets, except as may be
properly described in the Prospectus or such as individually or in the
aggregate do not now have and will not in the future have a material
adverse effect upon the operations, business, properties, or assets of
the Combined Company. Neither the Company nor ITC is in violation of,
or in default with respect to, any law, rule, regulation, order,
judgment, or decree, except as may be properly described in the
Prospectus or such as in the aggregate have been disclosed to the
Representative and do not now have and will not in the future have a
material adverse effect upon the operations, business, properties, or
assets of the Combined Company; nor is the Company or ITC required to
take any action in order to avoid any such violation or default;
iv. Neither the Company, nor ITC nor any other party is now or
is expected by the Company or ITC to be in violation or breach of, or
in default with respect to, complying with any material provision of
any contract, agreement, instrument, lease, license, arrangement, or
understanding which is material to the Combined Company;
v. The Company is not in violation or breach of, or in default
with respect to, any term of its Articles of Incorporation or by-laws;
vi. The Company has all requisite power and authority to execute
and deliver and to perform thereunder this Agreement and the
Representative's Warrants. All necessary corporate proceedings of the
Company have been taken to authorize the execution and delivery and
performance thereunder by the Company of this Agreement and the
Representative's Warrants. Each of this Agreement and the
Representative's Warrants has been duly authorized, executed and
delivered by the Company, and is a legal, valid, and binding
obligation of the Company, and (subject to applicable bankruptcy,
insolvency, and other laws affecting the enforceability of creditors'
rights generally) enforceable as to the Company in accordance with its
respective terms. No consent, authorization, approval, order,
license, certificate, or permit of or from, or declaration or filing
with, any federal, state, local, or other governmental authority or
any court or other tribunal is required by the Company for the
execution or delivery, or performance thereunder by the Company of
this Agreement and the Representative's Warrants (except filings under
the Act which have been made prior to the Closing Date and consents
consisting only of consents
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under "blue sky" or securities laws which are required in connection
with the transactions contemplated by this Agreement, and which have
been obtained on or prior to the date the Registration Statement
becomes effective under the Act). No consent of any party to any
contract, agreement, instrument, lease, license, arrangement, or
understanding to which the Company is a party, or to which any of its
properties or assets are subject, is required for the execution or
delivery, or performance thereunder of this Agreement or the
Representative's Warrants; and the execution and delivery and
performance thereunder of this Agreement and the Representative's
Warrants will not violate, result in a breach of, conflict with, or
(with or without the giving of notice or the passage of time or both)
entitle any party to terminate or call a default under any such
contract, agreement, instrument, lease, license, arrangement, or
understanding, or violate or result in a breach of any term of the
Articles of Incorporation or by-laws of the Company, or violate,
result in a breach of, or conflict with any law, rule, regulation,
order, judgment, or decree binding on the Company or to which any of
its operations, businesses, properties, or assets are subject;
vii. The Shares are, and the Representative's Warrant Shares
will be upon exercise of the Representative's Warrants, validly
authorized, validly issued, fully paid, and nonassessable and are not
issued in violation of any preemptive rights of shareholders, and the
Underwriters have received good title to the Shares purchased by them
from the Company, free and clear of all liens, security interests,
pledges, charges, encumbrances, shareholders' agreements, and voting
trusts. The Representative's Warrant Shares have been duly and
validly reserved for issuance pursuant to the terms of the
Representative's Warrants. The Shares, the Representative's Warrants
and the Representative's Warrant Shares conform to all statements
relating thereto contained in the Registration Statement or the
Prospectus;
viii. Any contract, agreement, instrument, lease, or license
required to be described in the Registration Statement or the
Prospectus has been properly described therein. Any contract,
agreement, instrument, lease, or license required to be filed as an
exhibit to the Registration Statement has been filed with the
Commission as an exhibit to or has been incorporated as an exhibit by
reference into the Registration Statement;
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ix. Insofar as statements in the Prospectus purport to
summarize the status of litigation or the provisions of laws, rules,
regulations, orders, judgments, decrees, contracts, agreements,
instruments, leases, or licenses, such statements have been prepared
or reviewed by such counsel and accurately reflect the status of such
litigation and provisions purported to be summarized and are correct
in all material respects;
x. Except as provided in the Registration Statement, no
person or entity has the right to require registration of shares of
Common Stock or other securities of the Company because of the filing
or effectiveness of the Registration Statement;
xi. The Registration Statement has become effective under the
Act. No Stop Order has been issued and no proceedings for that
purpose have been instituted or threatened;
xii. The Registration Statement and the Prospectus, and any
amendment or supplement thereto, comply as to form in all material
respects with the requirements of the Act and the Regulations;
xiii. Such counsel has no reason to believe that either the
Registration Statement or the Prospectus, or any amendment or
supplement thereto, contains any untrue statement of a material fact
or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading (except that
no opinion need be expressed as to financial statements and other
financial data and schedules which are or should be contained
therein);
xiv. Since the Effective Date of the Registration Statement,
any event which has occurred which should have been set forth in an
amendment or supplement to the Registration Statement or the
Prospectus has been set forth in such an amendment or supplement;
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;
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
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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 ITC is a party to any agreement
giving rise to any obligation by the Company, any subsidiary or ITC 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 any 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, ITC and all of their Property are in
compliance with all Environmental Laws and the Company and ITC 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 ITC, and shall have
received good title to such shares of common stock of ITC, free and
clear of all liens, security interests, pledges, charges,
encumbrances, shareholders' agreements and voting trusts. Each
outstanding share of common stock of ITC 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
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stock of ITC or any other security or other instrument which by its
terms is convertible into, exercisable for, or exchangeable for
capital stock of ITC, except as is properly described in the
Prospectus.
In rendering such opinion, counsel for the Company may rely (A) as to
matters involving the application of laws other than the laws of the United
States and the laws of the State of Colorado, to the extent counsel for the
Company deems proper and to the extent specified in such opinion, upon an
opinion or opinions (in form and substance satisfactory to counsel for the
Representative) of other counsel, acceptable to counsel for the
Representative, familiar with the applicable laws, in which case the
opinion of counsel for the Company shall state that the opinion or opinions
of such other counsel are satisfactory in scope, form, and substance to
counsel for the Company and that reliance thereon by counsel for the
Company is reasonable; (B) as to matters involving ITC, upon an opinion or
opinions of other counsel (in form and substance satisfactory to counsel
for the Representative); (C) as to matters of fact, to the extent the
Representative deems proper, on certificates of responsible officers of the
Company; and (D) to the extent they deem proper, upon written statements or
certificates of officers of departments of various jurisdictions having
custody of documents respecting the corporate existence or good standing of
the Company, provided that copies of any such statements or certificates
shall be delivered to counsel for the Representative.
c. At the Closing Date and any Additional 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 ITC 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 to rules, regulations and
tariffs promulgated by the Federal Communications Commission;
ii. To the best knowledge of such counsel after due
investigation, each of the Company and ITC is in compliance in all
material respects with applicable telecommunications-related rules and
regulations of foreign countries in which the Company or ITC currently
operates, including specifically the countries of Argentina, Brazil,
Italy, Lebanon, South Africa and South Korea;
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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 Closing Date and any Additional 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. On or prior to the Closing Date and any Additional Closing Date,
as the case may be, you shall have been furnished such information,
documents, certificates, and opinions as you may reasonably require for the
purpose of enabling you to review the matters referred to in Sections 7(b)
and (c), and in order to evidence the accuracy, complete ness, or
satisfaction of any of the representations, warranties, covenants,
agreements, or conditions herein contained, or as you may reasonably
request.
e. At the Closing Date and any Additional Closing Date, as the case
may be, you shall have received a certificate of the chief executive
officer and of the chief financial officer of the Company, dated the
Closing Date or such Additional Closing Date, as the case may be, to the
effect that the conditions set forth in Section 7(a) have been satisfied,
that as of the date of this Agreement and as of the Closing Date or such
Additional Closing Date, as the case may be, the representations and
warranties of the Company contained herein were and are accurate, and that
as of the Closing Date or such Additional Closing Date, as the case may be,
the obligations to be performed by the Company hereunder on or prior
thereto have been fully performed.
f. At the time this Agreement is executed and at the Closing Date and
any Additional Closing Date, as the case may be, you shall have received a
letter from Stockman Kast Ryan & Scruggs, P.C., Certified Public
Accountants, addressed to you and dated the date of delivery but covering a
period within three business days of such date, in form and substance
satisfactory to you.
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g. All proceedings taken in connection with the issuance, sale,
transfer, and delivery of the Firm Shares and the Additional Shares shall
be satisfactory in form and substance to you and to counsel for the
Representative, and you shall have received a favorable opinion from
counsel to the Company, dated as of the Closing Date or the Additional
Closing Date, as the case may be, with respect to such of the matters set
forth under Sections 7(b) and 7(c), respectively, and with respect to such
other related matters, as you may reasonably request.
h. The NASD, upon review of the terms of the public offering of the
Firm Shares and the Additional Shares, shall not have objected to your
participation in such offering.
i. The Company shall have received notice that the Company's Common
Stock will be quoted on The Nasdaq SmallCap Market/sm/ as of the Effective
Date.
j. The ITC Acquisition shall have been completed or shall be
completed simultaneously with the Closing.
k. The Company shall have engaged the services of the Representative
pursuant to the terms of a corporate consulting agreement for a minimum of
nine (9) months for a monthly fee payable to the Representative of $7,250.
Any certificate or other document signed by any officer of the Company and
delivered to you or to counsel for the Representative shall be deemed a
representation and warranty by such officer individually and by the Company
hereunder to the Representative as to the statements made therein. If any
condition to your obligations hereunder to be fulfilled prior to or at the
Closing Date or any Additional Closing Date, as the case may be, is not so
fulfilled, you may terminate this Agreement or, if you so elect, in writing
waive any such conditions which have not been fulfilled or extend the time for
their fulfillment.
8. Indemnification and Contribution.
--------------------------------
a. Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless the Underwriters, the Representative, and each
of their officers, directors, partners, employees, agents, and counsel, and
each person, if any, who controls the Representative or any one of the
Underwriters within the meaning of Section 15 of the Act or Section 20(a)
of the Exchange Act, against any and all loss, liability, claim, damage,
and expense whatsoever (which shall include, for all purposes of this
Section 8, but not be limited to, attorneys' fees and any and all expense
whatsoever incurred in investigating, preparing, or defending against any
litigation, commenced or threatened, or any claim
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whatsoever and any and all amounts paid in settlement of any claim or
litigation) as and when incurred arising out of, based upon, or in
connection with (i) any untrue statement or alleged untrue statement of a
material fact contained (A) in any Preliminary Prospectus, the Registration
Statement, or the Prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto, or (B) in any
application or other document or communication (in this Section 8
collectively called an "application") in any jurisdiction in order to
qualify the Common Stock under the "blue sky" or securities laws thereof or
filed with the Commission or any securities exchange; or any omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any breach
of any representation, warranty, covenant, or agreement of the Company
contained in this Agreement. The foregoing agreement to indemnify shall be
in addition to any liability the Company may otherwise have, including
liabilities arising under this Agreement; however, the Company shall have
no liability under this Section 8 if such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Company as stated in Section 8(b) with respect to the Underwriters by or on
behalf of the Underwriters expressly for inclusion in any Preliminary
Prospectus, the Registration Statement, or the Prospectus, or any amendment
or supplement thereto, or in any application, as the case may be.
If any action is brought against the Underwriters, the Representative
or any of their officers, directors, partners, employees, agents, or
counsel, or any controlling persons of an Underwriter or the Representative
(an "indemnified party") in respect of which indemnity may be sought
against the Company pursuant to the foregoing paragraph, such indemnified
party or parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall not relieve
the Company from any liability it may have other than pursuant to this
Section 8(a)) and the Company shall promptly assume the defense of such
action, including the employment of counsel (satisfactory to such
indemnified party or parties) and payment of expenses. Such indemnified
party or parties shall have the right to employ its or their own counsel in
any such case, but the fees and expenses of such counsel shall be at the
expense of such indemnified party or parties unless the employment of such
counsel shall have been authorized in writing by the Company in connection
with the defense of such action or the Company shall not have promptly
employed counsel satisfactory to such indemnified party or parties to have
charge of the defense of such action
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or such indemnified party or parties shall have reasonably concluded that
there may be one or more legal defenses available to it or them or to other
indemnified parties which are different from or additional to those
available to the Company, in any of which events such fees and expenses
shall be borne by the Company. Anything in this paragraph to the contrary
notwithstanding, the Company shall not be liable for any settlement of any
such claim or action effected without its written consent. The Company
agrees promptly to notify the Underwriters and the Representative of the
commencement of any litigation or proceedings against the Company or
against any of its officers or directors in connection with the sale of the
Shares, any Preliminary Prospectus, the Registration Statement, or the
Prospectus, or any amendment or supplement thereto, or any application.
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, which is the subject of indemnification hereunder, it will
reimburse the Representative and each of the Underwriters 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 Representative or Underwriters for
such expenses and notwithstanding the possibility that 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 Representative and each Underwriter which is the recipient of
an interim reimbursement payment shall promptly return such payment 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 Norwest Bank Colorado, N.A. (the "Prime Rate"). Any such
interim reimbursement payments which are not made to the Representative or
the Underwriters within 30 days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request. This expense
indemnity shall be in addition to any other liabilities which the Company
may otherwise have hereunder.
b. The Underwriters agree to indemnify and hold harmless the Company,
each director of the Company, each officer of the Company who shall have
signed the Registration
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Statement, each other person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to
the same extent as the foregoing indemnity from the Company to the
Underwriters in Section 8(a), but only with respect to statements or
omissions, if any, made in any Preliminary Prospectus, the Regis tration
Statement, or the Prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto, or in any
application, in reliance upon and in con formity with written information
furnished to the Company as stated in this Section 8(b) with respect to the
Underwriters by or on behalf of the Underwriters expressly for inclusion in
any Preliminary Prospectus, the Registration Statement, or the Prospectus,
or any amendment or supplement thereto, or in any application, as the case
may be; provided, however, that the obligation of the Underwriters to
provide indemnity under the provisions of this Section 8(b) shall be
limited to the amount which represents the product of the number of Firm
Shares and Additional Shares sold hereunder and the initial public offering
price per Share set forth on the cover page of the Prospectus. For all
purposes of this Agreement, the amounts of the selling concession and
reallowance set forth in the Prospectus, the information under
"UNDERWRITING" and the identification of counsel to the Representative
under "LEGAL MATTERS" constitute the only information furnished in writing
by or on behalf of the Underwriters expressly for inclusion in any
Preliminary Prospectus, the Registration Statement, or the Prospectus (as
from time to time amended or supplemented), or any amendment or supplement
thereto, or in any application, as the case may be. If any action shall be
brought against the Company or any other person so indemnified based on any
Preliminary Prospectus, the Registration Statement, or the Prospectus, or
any amendment or supplement thereto, or any application, and in respect of
which indemnity may be sought against the Underwriters pursuant to this
Section 8(b), the Underwriters shall have the rights and duties given to
the Company, and the Company and each other person so indemnified shall
have the rights and duties given to the indemnified parties, by the
provisions of Section 8(a).
c. In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in this Section
8 is for any reason held to be unavailable to the Underwriters or the
Company, then the Company shall contribute to the damages paid by the
several Underwriters, and the several Underwriters shall contribute to the
damages paid by the Company; provided, however, that no person guilty of
fraudulent
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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. In determining the amount of contribution to
which the respective parties are entitled, there shall be considered the
relative benefits received by each party from the sale of the Firm Shares
and Additional Shares (taking into account the portion of the proceeds of
the offering realized by each), the parties' relative knowledge and access
to information concerning the matter with respect to which the claim was
asserted, the opportunity to correct and prevent any 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). No Underwriter or person controlling such Underwriter shall be
obligated to make contribution hereunder which in the aggregate exceeds the
total public offering price of the Firm Shares and Additional Shares
purchased by such Underwriter under this Agreement, less the aggregate
amount of any damages which such Underwriter and its controlling persons
have otherwise been required to pay in respect of the same or any
substantially similar claim. The Underwriters' obligations to contribute
hereunder are several in proportion to their respective underwriting
obligations and not joint. For purposes of this Section, each person, if
any, who controls an Underwriter within the meaning of Section 15 of the
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, shall have the same rights to
contribution as the Company. Anything in this Section 8(c) to the contrary
notwithstanding, no party shall be liable for contribution with respect to
the settlement of any claim or action effected without its written consent.
This Section 8(c) is intended to supersede any right to contribution under
the Act, the Exchange Act, or otherwise.
9. Representations and Agreements to Survive Delivery. All
--------------------------------------------------
representations, warranties, covenants, and agreements contained in this
Agreement shall be deemed to be representations, warranties, covenants, and
agreements at the Closing Date and any Additional Closing Date, and such
representations, warranties, covenants, and agreements of the Underwriters and
the Company, including the indemnity and contribution agreements contained in
Section 8, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the
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Representative, the Underwriters or any indemnified person, or by or on behalf
of the Company or any person or entity which is entitled to be indemnified under
Section 8(b), and shall survive termination of this Agreement or the delivery of
the Firm Shares and the Additional Shares to the Underwriters. In addition, the
provisions of Sections 5(a), 6, 8, 9, 10, and 12 shall survive termination of
this Agreement, whether such termination occurs before or after the Closing Date
or any Additional Closing Date.
10. Effective Date of This Agreement and Termination Thereof.
--------------------------------------------------------
a. This Agreement shall be executed within 24 hours of the Effective
Date of the Registration Statement and shall become effective on the
Effective Date or at the time of the initial public offering of the Shares,
whichever is earlier. The time of the initial public offering shall mean
the time, after the Registration Statement becomes effective, of the
release by the Representative for publication of the first newspaper
advertisement which is subsequently published relating to the Shares or the
time, after the Registration Statement becomes effective, when the Shares
are first released by the Representative for offering by dealers by letter
or telegram, whichever shall first occur. The Representative or the Company
may prevent this Agreement from becoming effective without liability of any
party to any other party, except as noted below in this Section 10, by
giving the notice indicated in Section 10(c) before the time this Agreement
becomes effective.
b. The Representative shall have the right to terminate this
Agreement at any time prior to the Closing Date or any Additional Closing
Date, as the case may be, by giving notice to the Company if there shall
have been a general suspension of, or a general limitation on prices for,
trading in securities on the New York Stock Exchange or the American Stock
Exchange or in the over-the-counter market; or if there shall have been an
outbreak of major hostilities or other national or international calamity;
or if a banking moratorium has been declared by a state or federal
authority; or if a moratorium in foreign exchange trading by major
international banks or persons has been declared; or if there shall have
been a material interruption in the mail service or other means of
communication within the United States; or if the Company shall have
sustained a material or substantial loss by fire, flood, accident,
hurricane, earthquake, theft, sabotage, or other calamity or malicious act
which, whether or not such loss shall have been insured, will, in the
Representative's opinion, make it inadvisable to proceed with the offering,
sale, or delivery of the Firm Shares or the Additional Shares, as the case
may be; or if there shall have been such material and
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adverse change in the market for securities in general so as to make it
inadvisable to proceed with the offering, sale, and delivery of the Firm
Shares and the Additional Shares, as the case may be, on the terms
contemplated by the Prospectus due to the impaired investment quality of
the Firm Shares or the Additional Shares; or if the Dow Jones Industrial
Average shall have fallen by 15% or more from its closing price on the day
immediately preceding the date that the Registration Statement is declared
effective by the Commission.
c. If the Representative elects to prevent this Agreement from
becoming effective as provided in this Section 10, or to terminate this
Agreement, it shall notify the Company promptly by telephone, telex, or
telegram, confirmed by letter. If, as so provided, the Company elects to
prevent this Agreement from becoming effective, the Company shall notify
the Representative promptly by telephone, telex, or telegram, confirmed by
letter.
d. If this Agreement shall not become effective by reason of an
election pursuant to this Section 10 or if this Agreement shall terminate
or shall otherwise not be carried out for any reason, the Company shall be
obligated to reimburse the Representative for its out-of-pocket expenses.
Should the Representative be required to account for "out-of-pocket"
expenses, any expense incurred by the Representative shall be deemed to be
reasonable and unobjectionable upon a reasonable showing by the
Representative that such expenses were incurred, directly or indirectly, in
connection with the proposed transaction and/or relationship of the parties
hereto, as described herein.
e. Notwithstanding any election hereunder or any termination of this
Agreement, and whether or not this Agreement is otherwise carried out, the
provisions of Sections 5(a), 6, 8, 9, and 10 shall not be in any way
affected by such election or termination or failure to carry out the terms
of this Agreement or any part hereof.
f. Anything in this Agreement to the contrary notwithstanding other
than Section 10(e), if this Agreement shall not become effective by reason
of the Company being acquired, merging, selling all or substantially all of
its assets or otherwise affecting a corporate reorganization with any other
entity or the taking of any other action by the Company which prevents the
Representative from proceeding with the offering and, as a result, the
offering contemplated hereby is abandoned, the Representative shall be
entitled to receive from the Company an amount equal to the non-accountable
expense allowance described in Section 6 above which the Company and the
Representative mutually agree is a fair measure of compensation to the
Representative for the contemplated offering. Such cash fees shall be
-38-
<PAGE>
for services to include, but not be limited to, advising the Company in
connection with the acquisition, merger, sale or reorganization, financial
planning in connection with such acquisition, merger, sale or corporate re-
organization, and other financial assistance. Such cash fees shall be in
addition to payment for expenses and fees as discussed in Section 10(d)
above.
11. Notices. All communications hereunder, except as may be otherwise
-------
specifically provided herein, shall be in writing and, if sent to the
Representative, shall be mailed, delivered, or sent by facsimile transmission
and confirmed by original letter, to Cohig & Associates, Inc., Suite 400, 6300
South Syracuse Way, Englewood, Colorado 80203, Attention: Harold M. Golz, Esq.,
with a copy to Robert W. Walter, Esq., Berliner Zisser Walter & Gallegos, P.C.,
1700 Lincoln Street, Suite 4700, Denver, Colorado 80203; or if sent to the
Company shall be mailed, delivered, or telexed or telegraphed and confirmed by
letter, to Communications Systems International, Inc., Suite 101, 8 South Nevada
Avenue, Colorado Springs, Colorado 80903, Attention: Robert A. Spade,
President, with a copy to Douglas R. Wright, Esq., Parcel, Mauro, Hultin &
Spaanstra, P.C., Suite 3600, 1801 California Street, Denver, Colorado 80202.
All notices hereunder shall be effective upon receipt by the party to which it
is addressed.
12. Parties. This Agreement shall inure solely to the benefit of, and
-------
shall be binding upon, the Underwriters, the Company, and the persons and
entities referred to in Section 8 who are entitled to indemnification or
contribution, and their respective successors, legal representatives, and
assigns (which shall not include any buyer, as such, of the Firm Shares or the
Additional Shares) and no other person shall have or be construed to have any
legal or equitable right, remedy, or claim under or in respect of or by virtue
of this Agreement or any provision herein contained.
13. Construction. This Agreement shall be construed in accordance with
------------
the laws of the State of Colorado, without giving effect to conflict of laws.
Time is of the essence in this Agreement.
If the foregoing correctly sets forth the understanding between us, please
so indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement between us.
Very truly yours,
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
By:___________________________________________
Robert A. Spade, Chief Executive Officer
-39-
<PAGE>
ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN.
COHIG & ASSOCIATES, INC., for itself
By: _________________________________
Harold M. Golz, Esq.,
Director of Corporate Finance
-40-
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
(A COLORADO CORPORATION)
SCHEDULE 1
This Schedule sets forth the name of each Underwriter referred to in the
Underwriting Agreement and the number of Firm Shares of Common Stock to be sold
by the Company.
NUMBER OF
FIRM SHARES OF
NAME COMMON STOCK
-------------------------------- ------------
Cohig & Associates, Inc.
_________
Total 1,000,000
=========
RWW\CSI\UNDERWRI.AG2
-41-
<PAGE>
Exhibit 1.2
SELECTED DEALERS AGREEMENT
PUBLIC OFFERING OF
1,000,000 SHARES OF COMMON STOCK
OFFERING PRICE OF $_________________ PER SHARE
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
___________________________, 1998
Cohig & Associates, Inc., on behalf of itself and other underwriters (the
"Underwriters") for which it is the representative (the "Representative"), has
severally agreed with Communications Systems International, Inc., a Colorado
corporation (the "Company"), to purchase 1,000,000 shares (the "Firm Shares") of
common stock, par value $.001 per share (the "Common Stock") of the Company, and
the Representative has been granted the right to purchase up to an additional
150,000 shares (the "Additional Shares") at its option for the sole purpose of
covering over-allotments in the sale of the Firm Shares (the Firm Shares and
Additional Shares being collectively referred to as the "Shares"). The
Underwriters are offering the Shares to the public at an offering price of
$_____ per Share. Certain other capitalized terms used herein are defined in
the Underwriting Agreement and are used herein as therein defined.
The Representative is offering the Shares to certain selected dealers (the
"Selected Dealers"), when, as and if accepted by the Representative and subject
to withdrawal, cancellation or modification of the offer without notice and
further subject to the terms of (i) the Company's current Prospectus, (ii) the
Underwriting Agreement, (iii) this Agreement, and (iv) the Representative's
instructions which may be forwarded to the Selected Dealer from time to time. A
copy of the Underwriting Agreement will be delivered to you forthwith for
inspection or copying or both, upon your request therefor. This invitation is
made by the Representative only if the Shares may be offered lawfully to dealers
in your state.
The further terms and conditions of this invitation are as follows:
1. Acceptance of Orders. Orders received by the Representative from the
--------------------
Selected Dealer will be accepted only at the price, in the amounts and on the
terms which are set forth in the Company's current Prospectus, subject to
allotment in the Representative's uncontrolled discretion. The Representative
reserves the right to reject any orders, in whole or in part.
2. Selling Concession. As a Selected Dealer, you will be allowed on all
------------------
Shares purchased by you, which the Underwriters have not repurchased or
contracted to repurchase prior to termination of this Agreement at or below the
public offering price, a concession of ______% of the full 10% Underwriting
discount, i.e., $________ per Share as shown in the Company's current
Prospectus. No selling concession will be allowed to any domestic broker-dealer
who is not a member of the National Association of Securities Dealers, Inc. (the
"Association"), or to any foreign broker-dealer eligible for membership in the
Association who is not a member of the Association. Payment of such selling
concession to you will be made only as provided in Section 4 hereof. After the
Shares are released for sale to the public, the Representative is authorized to,
and may, change the public offering price and the selling concession.
<PAGE>
3. Reoffer of Shares. Shares purchased by you are to be bona fide
-----------------
reoffered by you in conformity with this Agreement and the terms of offering set
forth in the Prospectus. You agree that you will not bid for, purchase, attempt
to induce others to purchase, or sell, directly or indirectly, any Shares except
as contemplated by this Agreement and except as a broker pursuant to unsolicited
orders. You confirm that you have complied and agree that you will at all times
comply with the provisions of Rule 10b-6 of the Securities Exchange Act of 1934,
as amended, (the "Exchange Act") applicable to this offering. In respect of
Shares sold by you and thereafter purchased by the Representative at or below
the public offering price prior to the termination of this Agreement as
described hereinafter (or such longer period as may be necessary to cover any
short position with respect to the offering), you agree at the Representative's
option either to repurchase the Shares at a price equal to the cost thereof to
the Representative, including commissions and transfer taxes on redelivery, or
to repay the Representative such part of your Selected Dealers' concessions on
such Shares as the Representative designates.
4. Payment for Shares. Payment for the Shares purchased by you is to be
------------------
made at the net Selected Dealers' price of $______ per Share, at the offices of
Cohig & Associates, Inc., Suite 430, 6300 South Syracuse Way, Englewood,
Colorado 80203, Attention: Syndicate Department, at such time and on such date
as the Representative may designate, by certified or official bank check,
payable in clearing house funds to the order of the Representative, against
delivery of certificates for the Shares so purchased. If such payment is not
made at such time and on such date, you agree to pay the Representative interest
on such funds at the current interest rates. The Representative may in its
discretion deliver the Shares purchased by you through the facilities of the
Depository Trust Company or, if you are not a member, through your ordinary
correspondent who is a member unless you promptly give the Representative
written instructions otherwise.
5. Offering Representations. The Representative has been informed that a
------------------------
Registration Statement in respect of the Shares is expected to become effective
under the Securities Act of 1933, as amended (the "Act"). You are not
authorized to give any information or to make any representations other than
those contained in the Prospectus or to act as agent for the Company or for the
undersigned when offering the Shares to the public or otherwise.
6. Blue Sky. Neither the Representative nor the Underwriters assume any
--------
responsibility or obligations as to your right to sell the Shares in any
jurisdiction, notwithstanding any information furnished in that connection. The
Selected Dealer shall report in writing to the Representative the number of
Shares which have been sold by it in each state and the number of transactions
made in each such state. This state report shall be submitted to the
Representative as soon as possible after completion of billing, but in any event
not more than three days after the closing.
7. Dealer Undertakings. By accepting this Agreement, the Selected Dealer
-------------------
in offering and selling the Shares in the Public Offering (i) acknowledges its
understanding of (a) the Conduct Rules (the "Rules") of the Association and the
interpretations of such Rules promulgated by the Board of Governors of the
Association (the "Interpretations") including, but not limited to the Rule and
Interpretation with respect to "Free-Riding and Withholding" defined therein,
(b) Rule 174 of the rules and regulations promulgated under the Act, (c) Rules
10b-5 and 10b-6 promulgated under the Exchange Act, (d) Release No. 3907 under
the Act, (e) Release No. 4150 under the Act, and (f) Sections 2730, 2740, 2420
and 2750 of the Rules and Interpretations thereunder, and (ii) represents,
warrants, covenants and agrees that it shall comply with all applicable
requirements of the Act and the Exchange Act in addition to the specific
provisions cited in subparagraph (i) above and that it
-2-
<PAGE>
shall not violate, directly or indirectly, any provision of applicable law in
connection with its participation in the Public Offering of the Shares.
8. Conditions of Public Offering. All sales shall be subject to delivery
-----------------------------
by the Company of certificates evidencing the Shares against payment therefore.
9. Failure of Order. If an order is rejected or if a payment is received
----------------
which proves insufficient or worthless, any compensation paid to the Selected
Dealer shall be returned by (i) restoration by the Representative to the
Selected Dealer of the latter's remittance or (ii) a charge against the account
of the Selected Dealer with the Representative, as the latter may elect without
notice being given of such election.
10. Additional Representations, Covenants and Warranties of Selected
----------------------------------------------------------------
Dealer. By accepting this Agreement, the Selected Dealer represents that it is
- ------
registered as a broker-dealer under the Exchange Act; is qualified to act as a
dealer in the states or the jurisdictions in which it shall offer the Shares; is
a member in good standing of the Association; and shall maintain such
registrations, qualifications and membership in full force and effect and in
good standing throughout the term of this Agreement. If the Selected Dealer is
not a member of the Association, it represents that it is a foreign dealer not
registered under the Exchange Act and agrees to make no sales within the United
States, its territories or its possessions or to persons who are citizens
thereof or residents therein, and in making any sales to comply with the
Association's Rules and Interpretations with respect to Free-Riding and
Withholding. Further, the Selected Dealer agrees to comply with all applicable
federal laws including, but not limited to, the Act and Exchange Act and the
rules and regulations of the Commission thereunder; the laws of the states or
other jurisdictions in which Shares may be offered or sold by it; and the
Constitution, Bylaws, and rules of the Association. Further, the Selected
Dealer agrees that it will not offer or sell the Shares in any state or
jurisdiction except those in which the Shares have been qualified or
qualification is not required. The Selected Dealer acknowledges its
understanding that it shall not be entitled to any compensation hereunder for
any period during which it has been suspended or expelled from membership in the
Association.
11. Employees and other Agents of the Selected Dealer. By accepting this
-------------------------------------------------
Agreement, the Selected Dealer assumes full responsibility for thorough and
proper training of its employees and other agents and representatives concerning
the selling methods to be used in connection with the Public Offering of the
Shares, giving special emphasis to the principles of full and fair disclosure to
prospective investors and the prohibitions against "Free-Riding and Withholding"
as set forth in Section 2110 of the Rules and the Interpretations thereunder.
12. Indemnification by the Company. The Company has agreed in Section 8
------------------------------
of the Underwriting Agreement to indemnify and hold harmless the Underwriters,
the Representative and each person if any, who controls the Representative or
any one of the Underwriters within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act against any and all loss, liability, claim,
damage, and expense whatsoever (which shall include, for all purposes of Section
8 of the Underwriting Agreement, but not be limited to, attorneys' fees and any
and all expense whatsoever incurred in investigating, preparing, or defending
against any litigation, commenced or threatened, or any claim whatsoever and any
and all amounts paid in settlement of any claim or litigation) as and when
incurred arising out of, based upon, or in connection with (i) any untrue
statement or alleged untrue statement of a material fact contained (A) in any
Preliminary Prospectus, the Registration Statement, or the Prospectus (as from
time to time amended and supplemented), or
-3-
<PAGE>
any amendment or supplement thereto, or (B) in any application or other document
or communication (in the Underwriting Agreement collectively called an
"application") in any juris diction in order to qualify the Common Stock under
the "blue sky" or securities laws thereof or filed with the Commission or any
securities exchange; or any omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or (ii) any breach of any representation, warranty, covenant, or
agreement of the Company contained in the Underwriting Agreement. The
Representative has agreed to give the Company an opportunity and the right to
participate in the defense or preparation of the defense of any action brought
against the Representative, any Underwriter or any controlling person thereof to
enforce any such loss, claim, demand, liability or expense. The agreement of
the Company under this indemnity is conditioned upon notice of any such action
having been promptly given by the indemnified party to the Company. Failure to
notify the Company as provided in the Underwriting Agreement shall not relieve
the Company of its liability which it may have to the Representative, the
Underwriters, or any controlling person thereof other than pursuant to Section
8(a) of the Underwriting Agreement. This agreement is subject in all respects,
especially insofar as the foregoing description of the indemnification
provisions set forth in the Underwriting Agreement is concerned, to the terms
and provisions of the Underwriting Agreement, a copy of which will be made
available for inspection or copying or both to the Selected Dealer upon written
request to the Representative therefor. The Selected Dealer acknowledges and
confirms that, by signing a counterpart of this Agreement, it shall be deemed an
agent of the Underwriters or a "Representative" for all purposes of Section 8 of
the Underwriting Agreement, as expressly set forth therein.
13. Indemnification by the Selected Dealer. The Selected Dealer shall
--------------------------------------
indemnify and hold harmless the Company, each director of the Company, each
officer of the Company who shall have signed the Registration Statement, each
other person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, to the same extent as the
indemnity from the Company to the Underwriters in Section 8(a) of the
Underwriting Agreement, but only with respect to statements or omissions, if
any, made in any Preliminary Prospectus, the Registration Statement, or the
Prospectus (as from time to time amended and supplemented), or any amendment or
supplement thereto, or in any application, in reliance upon and in conformity
with information furnished to the Representative or the Company with respect to
the Selected Dealer by or on behalf of the Selected Dealer expressly for
inclusion in any Preliminary Prospectus, the Registration Statement, or the
Prospectus, or any amendment or supplement thereto, or in any application, as
the case may be, or are based upon alleged misrepresentations or omissions to
state material facts in connection with statements made by the Selected Dealer
or the Selected Dealer's employees or other agents to the Company or the
Representative orally or by any other means; provided, however, that the
obligation of the Selected Dealer to provide indemnity hereunder shall be
limited to the amount which represents the product of the number of Firm Shares
and Additional Shares sold and the initial public offering price per Share set
forth on the cover page of the Prospectus. If any action shall be brought
against the Company or any other person so indemnified in respect of which
indemnity may be sought against the Selected Dealer pursuant to this provision,
the Selected Dealer shall have the rights and duties given to the Company in the
Underwriting Agreement, and the Company and each other person so indemnified
shall have the rights and duties given to the indemnified parties, by the
provisions of Section 8(a) of the Underwriting Agreement; and the Selected
Dealer shall reimburse the Company and the Representative for any legal or other
expenses reasonably incurred by them in connection with the investigation of or
the defense of any such action or claim. The Representative shall, after
receiving the first summons or other legal process disclosing the nature of the
action being brought against it or the Company in any
-4-
<PAGE>
proceeding with respect to which indemnity may be sought by the Company or the
Representative hereunder, notify promptly the Selected Dealer in writing of the
commencement thereof; and the Selected Dealer shall be entitled to participate
in (and, to the extent the Selected Dealer shall wish, to direct) the defense
thereof at the expense of the Selected Dealer, but such defense shall be
conducted by counsel satisfactory to the Company and the Representative. If the
Selected Dealer shall fail to provide such defense, the Company or the
Representative may defend such action at the cost and expense of the Selected
Dealer. The Selected Dealer's obligation under this Section 13 shall survive
any termination of this Agreement, the Underwriting Agreement and the delivery
of and payment for the Shares under the Underwriting Agreement, and shall remain
in full force and effect regardless of the investigation made by or on behalf of
any Representative within the meaning of Section 15 of the Act.
14. No Authority to Act as Partner or Agent. Nothing herein shall
---------------------------------------
constitute the Selected Dealers as an association or other separate entity or
partners with or agents of the Representative or with each other, but each
Selected Dealer shall be responsible for its pro rata share of any liability or
expense based upon any claims to the contrary. The Representative shall not be
under any liability for or in respect of the value, validity or form of the
Shares, or the delivery of certificates for the Shares or the performance by any
person of any agreement on its part, or the qualification of the Shares for sale
under the laws of any jurisdiction, or for or in respect of any matter in
connection with this Agreement, except for lack of good faith and for
obligations expressly assumed by the Representative in this Agreement.
15. Expenses. No expenses incurred in connection with offers and sales of
--------
the Shares under the Public Offering will be chargeable to the Selected Dealers.
A single transfer tax, if any, on the sale of Shares by the Selected Dealer to
its customers will be paid when such Shares are delivered to the Selected Dealer
for delivery to its customers. Notwithstanding the foregoing, the Selected
Dealer shall pay its proportionate share of any transfer tax or any other tax
(other than the single transfer tax described above) if any such tax shall at
any time be assessed against the Representative and other Selected Dealers.
16. Notices. All notices, demands or requests required or authorized
-------
hereunder shall be deemed given sufficiently if in writing and sent by
registered or certified mail, return receipt requested and postage prepaid, or
by tested telex, telegram, cable or facsimile to, in the case of the
Representative, the address set forth above directed to the attention of the
President of the Representative, and in the case of the Selected Dealer, to the
address provided below by the Selected Dealer, directed to the attention of the
President.
17. Termination. This Agreement may be terminated by the Representative
-----------
with or without cause upon written notice to Selected Dealer to such effect; and
such notice having been given, this Agreement shall terminate at the time
specified therein. Additionally, this Agreement shall terminate upon the
earlier of the termination of the Underwriting Agreement, or at the close of
business thirty days after the Shares are released by the Representative for
sale to the public.
18. General Provisions. This Agreement shall be construed and enforced in
------------------
accordance with and governed by the laws of the State of Colorado. This
Agreement embodies the entire agreement and understanding between the
Representative and the Selected Dealer and supersedes all prior agreements and
understandings related to the subject matter hereof, and this Agreement may not
be modified or amended or any term or provision hereof waived or discharged
except in writing
-5-
<PAGE>
signed by the party against whom such amendment, modification, waiver or
discharge is sought to be enforced. All the terms of this Agreement, whether so
expressed or not, shall be binding upon, and shall inure to the benefit of, the
respective successors, legal representatives and assigns of the parties hereto;
provided, however, that none of the parties hereto can assign this Agreement or
any of its rights hereunder without the prior written consent of the other party
hereto, and any such attempted assignment or transfer without the other party's
prior written consent shall be void and without force or effect. The headings
of this Agreement are for purposes of reference only and shall not limit or
otherwise affect the meaning hereof. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument.
If the foregoing correctly sets forth the terms and conditions of your
agreement to purchase the Shares allotted to you, please indicate your
acceptance thereof by signing and returning to Cohig and Associates, Inc. the
duplicate copy of this Agreement, whereupon this letter and your acceptance
shall become and evidence a binding contract between you and the Representative.
COHIG & ASSOCIATES, INC.
By: _______________________________
Title:_____________________________
-6-
<PAGE>
Gentlemen:
The undersigned confirms its agreement to purchase ____________ Shares of
Communications Systems International, Inc., upon the terms and subject to the
conditions of the foregoing Selected Dealers Agreement, and further agrees that
any agreement by it to purchase additional Shares during the life of such
Agreement will be upon the same terms and subject to the same conditions. The
undersigned acknowledges receipt of the Prospectus relating to the public
offering of the Shares and confirms that in agreeing to purchase such Shares it
has relied on such Prospectus and not on any other statement whatsoever written
or oral.
Firm Name: ______________________________
(Print or Type name of Firm)
By: _____________________________________
(Authorized Agent)
_____________________________________
(Print or Type Name and Title of
Authorized Agent)
Address: ________________________________
_________________________________________
Telephone No. ___________________________
IRS Employer Identification No.: ________
Dated: ____________________________, 1998
-7-
<PAGE>
EXHIBIT 2.1
PLAN OF MERGER
(a) CONSTITUENT
CORPORATIONS: Redden Dynamics, Inc.
(A Delaware Corporation)
Communications Systems International, Inc.
(A Colorado Corporation)
Redden Dynamics, Inc. has only one class of stock
outstanding, that being common stock. Redden Dynamics, Inc.
has 11,050,382 shares of common stock outstanding, with each
share entitled to one vote.
Communications Systems International, Inc. has only one
class of stock outstanding, that being common stock.
Communications Systems International, Inc. has 490,104
shares of common stock issued and outstanding, with each
share entitled to one vote.
(b) SURVIVING
CORPORATION: Communications Systems International, Inc.
(A Colorado Corporation)
(c) Effective as of the date of the merger, (i) all shares of Redden Dynamics,
Inc. shall be cancelled, (ii) all assets of Redden Dynamics, Inc. shall
become assets of Communications Systems International, Inc., (iii) all
liabilities of Redden Dynamics, Inc. shall be assumed by Communications
Systems International, Inc., (iv) each shareholder of Redden Dynamics, Inc.
shall receive one share of Communications Systems International, Inc. for
each 13.5 shares of Redden Dynamics, Inc. held by such shareholder, and (v)
Redden Dynamics, Inc. shall cease to exist.
<PAGE>
ARTICLES OF MERGER
(1) CONSTITUENT CORPORATIONS: Redden Dynamics, Inc.
(A Delaware Corporation)
Communications Systems International, Inc.
(A Colorado Corporation)
(2) PLAN OF MERGER: Effective as of the date of the merger, (i) all shares of
Redden Dynamics, Inc. shall be cancelled, (ii) all assets of
Redden Dynamics, Inc. shall become assets of Communications
Systems International, Inc., (iii) all liabilities of Redden
Dynamics, Inc. shall be assumed by Communications Systems
International, Inc., (iv) each shareholder of Redden
Dynamics, Inc. shall receive one share of Communications
Systems International, Inc. for each 13.5 shares of Redden
Dynamics, Inc. held by such shareholder, and (v) Redden
Dynamics, Inc. shall cease to exist.
(3) The effective date of the merger is September 14, 1995. The number of votes
cast for the Plan of Merger by each voting group entitled to vote separately
on the merger was sufficient for approval by that voting group.
(4) An Agreement of Merger has been approved, adopted, certified, executed and
acknowledged by each of the Constituent Corporations in accordance with
Section 252(c) of the Delaware Corporation Law.
(5) SURVIVING CORPORATION: Communications Systems International, Inc.
(A Colorado Corporation)
(6) The Certification of Incorporation of the Surviving Corporation shall be its
Certificate of Incorporation.
(7) The executed Agreement of Merger is on file at the principal place of
business of the Surviving Corporation. The address of the Surviving
Corporation is:
Communications Systems International, Inc.
8 South Nevada Avenue, Suite 101
Colorado Springs, CO 80903
(8) A copy of the Agreement of Merger wi11 be furnished by the Surviving
Corporation, on request and without cost, to any stockholder of any
Constituent Corporation.
<PAGE>
(9) AUTHORIZED CAPITAL STOCK OF Redden Dynamics, Inc. (A Delaware corpora-
EACH CONSTITUENT CORPORATION tion had, prior to the merger, an authorized
TO THE MERGER WHICH IS NOT A capital of 20,000,000 shares of Common Stock,
COLORADO CORPORATION: $0.001 par value.
DATED: September 14, 1995 REDDEN DYNAMICS, INC.
(A Delaware Corporation)
By /s/ ROBERT SPADE
____________________________
Robert Spade, President
By /s/ ANTHONY THOMASON
____________________________
Anthony Thomason, Secretary
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
(A Colorado Corporation)
By /s/ ROBERT SPADE
____________________________
Robert Spade, President
By /s/ ANTHONY THOMASON
____________________________
Anthony Thomason, Secretary
<PAGE>
MERGER___________________________CONSOLIDATION_________________________________
CANCELLATION OF LIMITED PARTNERSHIP DUE TO MERGER______________________________
DOMESTIC_____________ FOREIGN___________ PROFIT__________ NONPROFIT_________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
MERGER #951138197
REDDEN DYNAMICS, INC.
(DELAWARE CORP NQ)
INTO
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
(COLORADO CORP DP 931044294) THE SURVIVOR
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
KNOW ALL MEN BY THESE PRESENTS, that PAUL W. FIX, 1457 Teller County Road
12, Florissant, Colorado 80816, J. RUDY BAUER, 9190 Chipita Park Rd., Chipita
Park, Colorado 80809, CURTIS BURRIS, 311 E. Sheridan Ave. #21, Woodland Park,
Colorado 80866 desiring to associate ourselves together for the purpose of
becoming a body corporate and politic under and by virtue of the Colorado
Corporation Act of the State of Colorado, do hereby make, execute and verify
these Articles of Incorporation of COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
ARTICLE I
--------
NAME
----
The name and style of said corporation shall be COMMUNICATIONS SYSTEMS
INTERNATIONAL, INC.
ARTICLE II
----------
TERM
----
The said corporation is to have perpetual existence.
ARTICLE III
-----------
PURPOSES
--------
The purposes for which this corporation is organized and the nature of
the business to be transacted, promoted and carried on are as follows, to-wit:
1. To carry on all lawful business as permitted by the Colorado
Corporation Act.
ARTICLE IV
----------
CAPITAL STOCK
-------------
The aggregate number of shares which the corporation shall have
authority to issue is five hundred thousand (500,000) shares of common stock,
which shall be of no par value. Each and every share of stock may be issued from
time to time at the option, choice or discretion of the Board of Directors of
the corporation for any considerations deemed sufficient by the Board and none
of said shares of stock in the hands of any person whomsoever shall be liable or
render such person
<PAGE>
liable for the payment of any assessment or any obligation or payment on
account of debts and obligations of the corporation. The directors may purchase
property and rights necessary for the business of the corporation and issue
shares to the amount of the value thereof in payment thereof and in payment of
any obligation of the corporations and the shares so issued shall be declared
and taken to be fully paid and non-assessable and not liable to any further call
nor shall the holders thereof be liable for any further payments under the
Statutes of this State. The judgment and discretion of the Board of Directors in
all matters pertaining to the issuance of such shares shall be conclusive for
all purposes.
ARTICLE V
--------
DIRECTORS
---------
The number of directors constituting the Board of Directors shall be
not less than five (5) nor more than seven (7). The number of directors
constituting the initial Board of Directors shall be five (5). The names and
addresses of the persons who are to serve as directors until the first annual
meeting of shareholders or until their successors be elected and qualify are as
follows:
Paul W. Fix, 1457 Teller County Road 12, Florissant, CO 80816
J. Rudy Bauer, 9190 Chipita Park Rd., Chipita Park, CO 80813
Curtis Burris, 311 E. Sheridan Ave., #21, Woodland Park, CO 80866
Bruce Hubby, 557 Gold King Dr., CCME, Cripple Creek, CO 80813
Robert A. Spade, 121 E. Pikes Peak Ave. #335, Colorado Springs, CO 80903
ARTICLE VI
----------
MEETINGS
--------
Any and all meetings of the stockholders and of the Board of Directors
of the Corporation may be held within or beyond the limits of the State of
Colorado, at such place or places as may be determined from time to time by the
Board of Directors and the said Board of Directors shall have the power and
authority to meet and transact any business of the company requiring the action
of said Board without the State of Colorado and in such other states as the
exigencies of the company's business may demand, or as may be deemed expedient
or convenient and the proceedings at all such meetings,
<PAGE>
or any of them, shall have the same binding force and effect as if such meetings
were held in the principal office of the Corporation in the State of Colorado.
ARTICLE VII
-----------
OFFICE
------
The initial registered office of the Corporation shall be located at
318 So. 8th Street, Colorado Springs, Colorado 80905, and the name of its
initial Registered Agent at such address shall be Wendell R. Goodbee.
ARTICLE VIII
------------
SALE OR DISPOSITION OF PROPERTY
-------------------------------
The Corporation may, at any meeting of its Board of Directors, by a
majority vote of the whole Board, sell, lease, exchange and/or convey all of its
property and assets, including its good will and its corporate franchises, upon
such terms and conditions and for such consideration or considerations as its
Board of Directors shall deem expedient and for the best interests of the
corporation and said consideration may consist in whole or in part of shares of
stock in, and/or other securities of any other corporation or corporations;
provided, however, in all such cases, the affirmative vote of the holders of a
two-thirds majority of the stock of said corporation then issued and outstanding
and having voting power, shall be voted in ratification of the action of the
Board of Directors, said vote to be taken at the stockholders' meeting of said
corporation duly called for that purpose; provided, however, nothing herein
shall be construed to limit the power of the Board of Directors of the
corporation to sell, lease, exchange and/or convey such parts or parcels of its
real or personal property or assets as the Board of Directors determines are no
longer necessary or expedient to be held by the corporation.
ARTICLE IX
----------
CUMULATIVE VOTING
-----------------
The cumulative system of voting for directors shall be allowed.
<PAGE>
ARTICLE X
---------
BY-LAWS
-------
The Board of Directors of the corporation shall have the power to
make and adopt such prudential by-laws as it may consider proper and expedient
for the conduct and management of its business and affairs and to repeal, alter
and amend the same from time to time as it may see fit; provided, however, that
the same shall in no way be inconsistent with the provisions of these Articles
or with the laws of the State of Colorado.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 12th day
of April, 1993.
/s/ Paul W. Fix
------------------------------------
Paul W. Fix
/s/ J. Rudy Bauer
------------------------------------
J. Rudy Bauer
/s/ Curtis Burris
------------------------------------
Curtis Burris
STATE OK. COLORADO )
)ss.
EL PASO COUNTY )
I, Gwen E. Francis, a Notary Public, hereby certify that on the 12th
day of April, 1993, Paul W. Fix, J. Rudy Bauer and Curtis Burris personally
appeared before me, who being by me first duly sworn, declared themselves to be
the incorporators and that the statements therein contained are true.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 12th day
of April, 1993.
My commission expires: June 7, 1994
/s/ Gwen E. Francis
-------------------------------------
Notary Public
318 So. 8th Street
Colorado Springs, CO 80905
<PAGE>
Please include a typed MAIL TO. FOR OFFICE USE ONLY
self-addressed envelope. SECRETARY OF STATE
CORPORATIONS SECTION
MUST BE TYPED 1560 Broadway, Suite 200
FILING FEE: S25.00* Denver, CO 80202
MUST SUBMIT TWO COPIES (303) 894-2251
--- Fax (303) 894-2242
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
FIRST: The name of the corporation is COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
------------------------------------------
SECOND: The following amendment to the Articles of Incorporation was adopted on
Jan. 14, 1995, as prescribed by the Colorado Business Corporation Act, in the
manner marked with an X below:
______ No shares have been issued or Directors Elected--Action by Incorporators
______ No shares have been issued but Directors Elected--Action by Directors
______ Such amendment was adopted by the board of directors where shares have
been issued.
X Such amendment was adopted by a vote of the shareholders. The number of
- ------ shares voted for the amendment was sufficient for approval.
If these amendments are to have a delayed effective date, please list that date:
- -------------------------------------------------------------------------------
(Not to exceed ninety (90) days from the date of filing)
Amendment(s): Authorization of 500,000 additional shares of no par value common
- -------------------------------------------------------------------------------
stock;
- -------------------------------------------------------------------------------
Removal of cumulative voting for directors of the Company;
- -------------------------------------------------------------------------------
Removal of preemptive rights for stock subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
THIRD: The manner, if not set forth in such amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the amendment
shall be effected, is as follows:
N/A
FOURTH: The manner in which such amendment effects a change in the amount of
stated capital and the amount of stated capital as changed by such amendment, is
as follows:
The amount of authorized no par value common stock is increased from 500,000
shares to 1,000,000 shares.
-----------------------------------------
By SIGNATURE ILLEGIBLE
--------------------------------------
Its CHAIRMAN
-------------------------------------
TITLE
* Fees are subject to change and should be confirmed before filing.
<PAGE>
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
Pursuant to the provisions of the Colorado Business Corporation Act,
Communications Systems International, Inc. adopts the following Articles of
Amendment to its Articles of Incorporation:
The following amendments were adopted on September 14, 1995, in the
manner prescribed by the Colorado Business Corporation Act, in the manner marked
with an "X" below:
_____ Such amendments were adopted by the Board of Directors.
X Such amendments were adopted by a vote of the shareholders. The
---- number of votes cast for the amendments by each voting group
entitled to vote separately on the amendments was sufficient for
approval by that voting group.
ARTICLE IV is amended in its entirety to read as follows:
ARTICLE IV
Capital Stock
-------------
1. The authorized capital stock of the Corporation shall consist of
25,000,000 shares of common stock, no par value, and 5,000,000 shares of
preferred stock, no par value.
2. No share of the common stock shall have any preference over or
limitation in respect to any other share of such common stock. All shares of
common stock shall have equal rights and privileges.
3. Each outstanding share of common stock shall be entitled to one vote
at stockholders' meetings, either in person or by proxy.
4. The designations, powers, rights, preferences, qualifications,
restrictions and limitations of the preferred stock shall be established from
time to time by the Corporation's Board of Directors, in accordance with the
Colorado Business Corporation Act.
5. Cumulative voting shall not be allowed in elections of directors or
for any purpose.
6. No holders of shares of the capital stock of the Corporation shall be
entitled, as such, to any preemptive or preferential right to subscribe to any
unissued stock or any other securities which the Corporation may now or
hereafter be authorized to issue. The Board of Directors of the Corporation,
however, in its discretion by resolution, may determine that any un-
<PAGE>
issued securities of the Corporation shall be offered for subscription solely
to the holders of common stock of the Corporation, or solely to the holders of
any class or classes of such stock, which the Corporation may now or hereafter
be authorized to issue, in such proportions based on stock ownership as said
board in its discretion may determine.
7. The Board of Directors may restrict the transfer of any of the
Corporation's 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 laws of this
State. Any stock so restricted must carry a conspicuous legend noting the
restriction and the place where such restriction may be found in the records of
the Corporation.
8. The judgment of the Board of Directors as to the adequacy of any
consideration received or to be received for any shares, options, or any other
securities which the Corporation at any time may be authorized to issue or sell
or otherwise dispose of shall be conclusive in the absence of fraud, subject to
the provisions of these Articles of Incorporation and any applicable law.
ARTICLE V is amended in its entirety to read as follows:
ARTICLE V
DIRECTORS
---------
The affairs of the Corporation shall be governed by a board of not less
than one (1) director. Directors who shall be elected in accordance with the
Bylaws of the Corporation. Subject to such limitation, the number of directors
shall be fixed by or in the manner provided in the Bylaws of the Corporation, as
may be amended from time to time.
ARTICLE VII is amended in its entirety to read as follows:
ARTICLE VII
PLACE OF BUSINESS
-----------------
The principal office and the principal place of business of the
Corporation shall be:
8 South Nevada, Suite 101
Colorado Springs, CO 80903
The Board of Directors, however, from time to time may establish such
other offices, branches, subsidiaries, or divisions which it may consider to be
advisable. The address of the Corporation's registered office in Colorado
shall be:
8 South Nevada, Suite 101
Colorado Springs, CO 80903
--2--
<PAGE>
The name of the Corporation's registered agent at the address of the
aforesaid registered office shall be:
Robert Spade
ARTICLE VIII is amended in its entirety to read as follows:
ARTICLE VIII
TRANSACTIONS WITH DIRECTORS AND
-------------------------------
OTHER INTERESTED PARTIES
------------------------
No contract or other transaction between the Corporation and any other
corporation, whether or not a majority of the shares of the capital stock of
such other corporation is owned by the Corporation, and no act of the
Corporation shall in any way be affected or invalidated by the fact that any of
the directors of the Corporation are pecuniarily or otherwise interested in, or
are directors or officers of, such other corporation. Any director of the
corporation, individually, or any firm with which such director is affiliated
may be a party to or may be pecuniarily or otherwise interested in any contract
or transaction of the Corporation; provided, however, that the fact that he or
such firm is so interested shall be disclosed or shall have been known to the
Board of Directors of the Corporation, or a majority thereof, at or before the
entering into such contract or transaction; and any director of the Corporation
who is also a director or officer of such other corporation, or who is so
interested, may be counted in determining the existence of a quorum at any
meeting of the Board of Directors of the Corporation which shall authorize such
contract or transaction, with like force and effect as if he were not such
director or officer of such other corporation or not so interested.
ARTICLE IX is amended in its entirety to read as follows:
ARTICLE IX
VOTING
------
When, with respect to any action to be taken by stockholders of this
Corporation, the Colorado Business Corporation Act requires the affirmative vote
of the holders of more than a majority of the outstanding shares entitled to
vote thereon, or of any class or series, such action may be taken by the
affirmative vote of the holders of a majority of the outstanding shares entitled
to vote on such action.
ARTICLE X is amended in its entirety to read as follows:
ARTICLE X
LIMITATION OF DIRECTOR LIABILITY
--------------------------------
AND INDEMNIFICATION
-------------------
No director of the Corporation shall have liability to the Corporation or
to its stockholders or to other security holders for monetary damages for breach
of fiduciary duty as a director; provided, however, that such provisions shall
not eliminate or limit the liability of a director to the Corp-
--3--
<PAGE>
oration or to its shareholders or other security holders for monetary damages
for: (i) any breach of the director's duty of loyalty to the Corporation or to
its shareholders or other security holders; (ii) acts or omissions of the
director not in good faith or which involve intentional misconduct or a knowing
violation of the law by such director; (iii) acts by such director as specified
by the Colorado Business Corporation Act; or (iv) any transaction from which
such director derived an improper personal benefit.
No officer or director shall be personally liable for any injury to
person or property arising out of a tort committed by an employee of the
Corporation unless such officer or director was persona11y involved in the
situation giving rise to the injury or unless such officer or director committed
a crimina1 offense. The protection afforded in the preceding sentence shall not
restrict other common law protections and rights that an officer or director may
have.
The word "director" shall include at least the following, unless limited
by Colorado law: an individual who is or was a director of the Corporation and
an individual who, while a director of a Corporation is or was serving at the
Corporation's request as a director, officer, partner, trustee, employee or
agent of any other foreign or domestic corporation or of any partnership, joint
venture, trust, other enterprise or employee benefit plan. A director shall be
considered to be serving an employee benefit plan at the Corporation's request
if his duties to the Corporation also impose duties on or otherwise involve
services by him to the plan or to participants in or beneficiaries of the plan.
To the extent allowed by Colorado law, the word "director" shall also include
the heirs and personal representatives of all directors.
This Corporation shall be empowered to indemnify its officers and
directors to the fullest extent provided by law, including but not limited to
the provisions set forth in the Colorado Business Corporation Act, or any
successor provision.
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
DATED: September 14, 1995 /s/ Robert A. Spade
------------------------------------------
Robert A. Spade, President
1887D
--4--
<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
(1O%) 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, in any case, sixty (60) days preceding the meeting, for the
determination of stockholders entitled to vote. 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 not less than ten (10) nor more than fifty
(50) 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, which shall
consist of not less than one (1) member. 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 stockholders 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 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 for a
period not exceeding fifty (50) days prior to any meeting of the stockholders or
prior to the payment of dividends; or the Board of Directors may fix in advance
a day not more than fifty (50) 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,
-9-
<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.
-10-
<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, 1995, 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)
-11-
<PAGE>
EXHIBIT 4.1
________________________________________________________________________________
NUMBER SHARES
[0363] COMMUNICATIONS SYSTEMS [ ]
INTERNATIONAL, INC.
ORGANIZED UNDER THE LAWS OF THE STATE OF COLORADO
25,000,000 SHARES AUTHORIZED
[CUSIP 20342C 10 8]
THIS CERTIFIES THAT SEE REVERSE
FOR CERTAIN DEFINITIONS
Is The Owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
transferable only on the books of the Corporation by the holder hereof
in person or by duly authorized Attorney upon surrender of this
Certificate properly endorsed.
IN WITNESS WHEREOF, the Corporation has caused this Certificate
to be signed by its duly authorized officers and its facsimile Corporate Seal to
be hereunto duly affixed.
Dated:
/s/ C A ZAJAC /s/ [SIGNATURE ILLEGIBLE]
SECRETARY PRESIDENT
[CORPORATE SEAL APPEARS HERE]
COUNTERSIGNED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
P.O. Box 1596
Denver, Colorado 80201
By _______________________________________________
Transfer Agent & Registrar Authorized Signature
________________________________________________________________________________
<PAGE>
COMMUNICATIONS SYSTEMS INTERNATIONAL
The following abbreviations when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -as tenants in common UNIF GIFT MIN ACT-..........Custodian............
TEN ENT -as tenants by the entireties (Cust) (Minor)
JT TEN -as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act..........................
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
_______________________________________________________________________________
For Value Received, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
_______________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_________________________________________________________________________Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
attorney-in-fact to transfer the said stock on the books of the within-named
Corporation, with full power of substitution in the premises.
Dated _______________________
____________________________________________________
____________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed:
_____________________________
The signature(s) should be guaranteed by an eligible guarantor institution
(Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with
membership in an approved signature guarantee Medallion Program), pursuant to
S.E.C. Rule 17Ad-15.
<PAGE>
Exhibit 4.2
THE REPRESENTATIVE'S WARRANTS EVIDENCED AND REPRESENTED BY THIS CERTIFICATE (THE
"REPRESENTATIVE'S WARRANTS") AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
(THE "WARRANT SHARES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION AND WITH THE SECURITIES ADMINISTRATORS OF CERTAIN STATES
UNDER THE SECURITIES ("BLUE SKY") LAWS OF SUCH STATES. HOWEVER, NEITHER THE
REPRESENTATIVE'S WARRANTS NOR SUCH WARRANT SHARES MAY BE SOLD, TRANSFERRED,
PLEDGED, OR HYPOTHECATED EXCEPT PURSUANT TO (I) A POST-EFFECTIVE AMENDMENT TO
SUCH REGISTRATION STATEMENT, (II) A SEPARATE REGISTRATION STATEMENT UNDER SUCH
ACT, OR (III) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND UNDER THE
APPLICABLE BLUE SKY LAWS.
THIS REPRESENTATIVE'S WARRANT MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED EXCEPT AS
OTHERWISE PROVIDED HEREIN AND THE HOLDER OF THIS REPRESENTATIVE'S WARRANT, BY
ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS
REPRESENTATIVE'S WARRANT EXCEPT AS OTHERWISE PROVIDED HEREIN.
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
Representative's Warrant for the Purchase of Common Stock
---------------------------------------------------------
No. UW-001 100,000 Representative's Warrants
THIS CERTIFIES that, for receipt in hand of $50 and other value
received, COHIG & ASSOCIATES, INC. (the "Holder"), is entitled to subscribe for
and purchase from COMMUNICATIONS SYSTEMS INTERNATIONAL, INC., a Colorado
corporation (the "Company"), upon the terms and conditions set forth herein, at
any time, or from time to time, after _________, 1999, and before 5:00 p.m.
Mountain time on __________, 2003 (the "Exercise Period"), 100,000 shares of
Common Stock (the "Warrant Shares"), at a price of $_________ per Warrant Share
(the "Exercise Price"), or _____% of the offering price of Common Stock to be
sold by the Company in a public offering (the "Public Offering") at or prior to
the date hereof.
The term the "Holder" as used herein shall include any transferee to
whom this Representative's Warrant has been transferred in accordance with the
above. As used herein the term "this Representative's Warrant" shall mean and
include this Representative's Warrant and any Representative's Warrant or
Representative's Warrants hereafter issued as a consequence of the exercise or
transfer of this Representative's Warrant in whole or in part, and the term
"Common Stock" shall mean and include the Company's Common Stock with ordinary
voting power, which class at the date hereof is publicly traded.
1. This Representative's Warrant may not be sold, transferred,
assigned, pledged or hypothecated until ________, 1999 (12 months from the
Effective Date of the Registration Statement on which it is initially
registered) except that it may be transferred, in whole or in part, (i) to one
or more officers or partners of the Holder (or the officers or partners of any
such partner); (ii) to a member of the underwriting syndicate and/or its
officers or partners; (iii) by reason of reorganization
<PAGE>
of the Company; or (iv) by operation of law. After _________, 1999, this
Representative's Warrant may be sold, transferred, assigned or hypothecated in
accordance with applicable law.
2. a. This Representative's Warrant may be exercised during the Exercise
Period as to the whole or any lesser number of Warrant Shares, by the
surrender of this Representative's Warrant (with the election attached
hereto duly executed) to the Company at its office at Suite 101, 8 South
Nevada Avenue, Colorado Springs, Colorado 80903, or such other place as is
designated in writing by the Company, together with a certified or bank
cashier's check payable to the order of the Company in an amount equal to
the Exercise Price multiplied by the number of Warrant Shares for which
this Representative's Warrant is being exercised.
b. Upon written request of the Holder, and in lieu of payment for the
Warrant Shares by check in accordance with paragraph 2(a) hereof, the
Holder may exercise the Representative's Warrant (or any portion thereof)
for and receive the number of Warrant Shares equal to a fraction, the
numerator of which equals (i) the amount by which the Current Market Price
of the Common Stock for the ten (10) trading days preceding the date of
exercise exceeds the Exercise Price per Share, multiplied by (ii) the
number of Warrant Shares to be purchased; the denominator of which equals
the Current Market Price.
c. For the purposes of any computation under this Representative's
Warrant, the "Current Market Price" at any date shall be the closing price
of the Common Stock on the business day next preceding the event requiring
an adjustment hereunder. If the principal trading market for such
securities is an exchange, the closing price shall be the reported last
sale price on such exchange on such day provided if trading of such Common
Stock is listed on any consolidated tape, the closing price shall be the
reported last sale price set forth on such consolidated tape. If the
principal trading market for such securities is the over-the-counter
market, the closing price shall be the last reported sale price on such
date as set forth by The Nasdaq Stock Market, Inc., or, if the security is
not quoted on such market, the average closing bid and asked prices as set
forth in the National Quotation Bureau pink sheet or the Electronic
Bulletin Board System for such day. Notwithstanding the foregoing, if
there is no reported last sale price or average closing bid and asked
prices, as the case may be, on a date prior to the event requiring an
adjustment hereunder, then the current market price shall be determined as
of the latest date prior to such day for which such last sale price or
average closing bid and asked price is available.
2
<PAGE>
3. Upon each exercise of this Representative's Warrant, the Holder shall
be deemed to be the holder of record of the Warrant Shares issuable upon such
exercise, notwithstanding that the transfer books of the Company shall then be
closed or certificates representing such Warrant Shares shall not then have been
actually delivered to the Holder. As soon as practicable after each such
exercise of this Representative's Warrant, the Company shall issue and deliver
to the Holder a certificate or certificates for the Warrant Shares issuable upon
such exercise, registered in the name of the Holder or its designee. If this
Representative's Warrant should be exercised in part only, the Company shall,
upon surrender of this Representative's Warrant for cancellation, execute and
deliver a new Representative's Warrant evidencing the right of the Holder to
purchase the balance of the Warrant Shares (or portions thereof) subject to
purchase hereunder.
4. The Representative's Warrants shall be registered in a
Representative's Warrant Register as they are issued. The Company shall be
entitled to treat the registered holder of any Representative's Warrant on the
Representative's Warrant Register as the owner in fact thereof for all purposes
and shall not be bound to recognize any equitable or other claim to or interest
in such Representative's Warrant on the part of any other person. The
Representative's Warrants shall be transferable only on the books of the Company
upon delivery thereof duly endorsed by the Holder or by his 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,
executor, administrator, guardian or other legal representative, duly
authenticated evidence of his or its authority shall be produced. Upon any
registration of transfer, the Company shall deliver a new Representative's
Warrant or Representative's Warrants to the person entitled thereto. The
Representative's Warrants may be exchanged, at the option of the Holder thereof,
for another Representative's Warrant, or other Representative's Warrants of
different denominations, of like tenor and representing in the aggregate the
right to purchase a like number of Warrant Shares (or portions thereof) upon
surrender to the Company or its duly authorized agent. Notwithstanding the
foregoing, the Company shall have no obligation to cause Representative's
Warrants to be transferred on its books to any person if, in the opinion of
counsel to the Company, such transfer does not comply with the provisions of the
Securities Act of 1933, as amended (the "Act"), or applicable state blue sky
laws and the rules and regulations thereunder.
5. The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of this Representative's Warrant, such number of shares of Common
Stock as shall, from time to time, be sufficient therefor.
3
<PAGE>
The Company covenants that all Warrant Shares issuable upon exercise of this
Representative's Warrant shall be validly issued, fully paid, nonassessable, and
free of preemptive rights.
6. a. In case the Company shall sell or issue hereafter either its
Common Stock or any rights, options, warrants or obligations or securities
containing the right to subscribe for or purchase any Common Stock ("Options")
or exchangeable for or convertible into Common Stock ("Convertible Securities"),
at a price per share, as determined pursuant to paragraph (b) of this section,
less than the Exercise Price then in effect on the date of such sale or
issuance, then the number of Warrant Shares thereafter purchasable upon exercise
of this Representative's Warrant shall be determined by multiplying the number
of Warrant Shares theretofore purchasable upon exercise of this Representative's
Warrant by a fraction, (i) the numerator of which shall be the number of shares
of Common Stock outstanding on the date of issuance of such Common Stock,
Options or Convertible Securities and (ii) the denominator of which shall be the
number of shares of Common Stock outstanding on the date prior to the date of
issuance of such Common Stock or Convertible Securities plus the number of
shares of Common Stock which the aggregate consideration received by the Company
upon such issuance would purchase on such date at the Exercise Price then in
effect.
b. The following provisions, in addition to other provisions of this
section shall be applicable in determining any adjustment under (a) above:
i. In case of the issuance or sale of Common Stock part or all
of which shall be for cash, the cash consideration received by the
Company therefor shall be deemed to be the amount of cash proceeds of
such sale of shares less any compensation paid or discount allowed in
the sale, underwriting or purchase thereof by underwriters or dealers
or others performing similar services or any expenses incurred in
connection therewith, plus the amounts, if any, determined as provided
in (b)(ii) below.
ii. In case of the issuance or sale of Common Stock wholly or
partly for a consideration other than cash, the amount of the
consideration other than cash received by the Company for such Common
Stock shall be deemed to be the fair value of such consideration as
determined by a resolution adopted by the Board of Directors of the
Company acting in good faith, less any compensation paid or incurred
by the Company for any underwriting of, or otherwise in connection
with such issuance, provided, however, the amount of such
consideration other than cash
4
<PAGE>
shall in no event exceed the cost thereof as recorded on the books of
the Company. In case of the issuance or sale of Common Stock
(otherwise than upon conversion or exchange) together with other stock
or securities or other assets of the Company for a consideration which
is received for both such Common Stock and other securities or assets,
the Board of Directors of the Company acting in good faith shall
determine what part of the consideration so received is to be deemed
to be the consideration for the issuance of such Common Stock, less
any compensation paid or incurred by the Company for any underwriting
of, or otherwise in connection with such issuance, provided, however,
the amount of such consideration other than cash shall in no event
exceed the cost thereof as recorded on the books of the Company. In
case at any time the Company shall declare a dividend or make any
other distribution upon any stock of the Company payable in Common
Stock then such Common Stock issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without
consideration.
iii. The price per share of any Common Stock sold or issued by
the Company (other than pursuant to Options or Convertible Securities)
shall be equal to a price calculated by dividing (A) the amount of the
consideration received by the Company, as determined pursuant to
(b)(i) and (b)(ii) above, upon such sale or issuance by (B) the number
of shares of Common Stock sold or issued.
iv. In case the Company shall at any time after the date hereof
issue any Options or Convertible Securities, the following provisions
shall apply in making any adjustment:
(A) The price per share for which Common Stock is issuable
upon the exercise of the Options or upon conversion or exchange
of the Convertible Securities shall be determined by (1) dividing
the total amount, if any, received or receivable by the Company
as consideration for the issuance of such Options or Convertible
Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon exercise of
such Options or the conversion or exchange of such Convertible
Securities, by (2) the aggregate maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon
the conversion or exchange of such Convertible Securities.
5
<PAGE>
(B) In determining the price per share for which Common
Stock is issuable upon exercise of the Options or conversion or
exchange of the Convertible Securities as set forth above and in
computing any adjustment pursuant to (a) above: the aggregate
maximum number of shares of Common Stock issuable upon the
exercise of such Convertible Securities shall be considered to be
outstanding at the time such Options or Convertible Securities
were issued and to have been issued for such price per share as
determined pursuant to (b)(iv)(A), and the consideration for the
issuance of such Options or Convertible Securities and the amount
of additional consideration payable to the Company upon exercise
of such Options or upon the conversion or exchange of such
Convertible Securities shall be determined in the same manner as
the consideration received upon the issuance or sale of Common
Stock as provided in paragraphs (b)(i) and (b)(ii).
(C) On the expiration of such Options or the termination of
any right to convert or exchange any Convertible Securities, the
number of Warrant Shares subject to this Representative's Warrant
shall forthwith be readjusted to such number of Warrant Shares as
would have been obtained had the adjustments made upon the
issuance of such Options or Convertible Securities been made upon
the basis of the delivery of only the number of shares of Common
Stock actually delivered upon the exercise of such Options or
upon conversion or exchange of such Convertible Securities.
(D) If the minimum purchase price per share of Common Stock
provided for in any Option, or the rate at which any Convertible
Securities are convertible into or exchangeable for Common Stock,
shall change or a different purchase price or rate shall become
effective at any time or from time to time (other than pursuant
to any anti-dilution provisions of such Options or Convertible
Securities) then upon such change becoming effective, the number
of Warrant Shares subject to this Representative's Warrant shall
forthwith be increased or decreased to such number of Warrant
Shares as would have been obtained had the adjustments made upon
the granting or issuance of such Options or Convertible
Securities been made upon the basis of (1) the issuance of the
number of shares of Common Stock theretofore
6
<PAGE>
actually delivered upon the exercise of such Options or upon the
conversion or exchange of such Convertible Securities, and the
total consideration received therefor, and (2) the granting or
issuance at the time of such change of any such Options or
Convertible Securities then still outstanding for the
consideration, if any, received by the Company therefor and to be
received on the basis of such changed price or rate of exchange
or conversion.
v. Except as otherwise specifically provided herein, the date of
issuance or sale of Common Stock shall be deemed to be the date the
Company is legally obligated to issue such Common Stock or the date
the Company is legally obligated to issue any Option or Convertible
Security. If the Company shall take a record date for the purpose of
determining holders of Common Stock entitled to (A) receive a dividend
or other distribution payable in Common Stock or in Options or
Convertible Securities or (B) subscribe for or purchase Common Stock,
Options or Convertible Securities, such record date shall be deemed to
be the date of issue or sale of the Common Stock, Options or
Convertible Securities.
vi. The number of shares of Common Stock outstanding at any
given time shall not include treasury shares but the disposition of
any such treasury shares shall be considered an issue or sale of
Common Stock for the purposes of this section.
vii. Anything hereinabove to the contrary notwithstanding, no
adjustment shall be made pursuant to (a) above to the Exercise Price
or to the number of Warrant Shares purchasable upon:
(A) The issuance or sale by the Company of any Common Stock
pursuant to these Representative's Warrants, any securities
offered in a public offering underwritten by Cohig & Associates,
Inc., any shares, Options or Convertible Securities issued and
outstanding at the effective date of such public offering, any
shares issuable pursuant to the Company's stock option plan
currently in effect or warrants outstanding prior to the
Company's initial public offering, provided the total number of
shares issuable pursuant to such plan and warrants does not
exceed 600,000.
(B) The issuance or sale by the Company of any Common Stock
pursuant to any Options or Convertible Securities issued and
outstanding prior to the date of Effective Date of the
Registration Statement or with
7
<PAGE>
respect to the issuance or sale by the Company of any shares of
Common Stock to the shareholders of International Telephone
Company in a transaction completed simultaneously with the
original issuance of this Representative's Warrant.
(C) The issuance or sale of Common Stock pursuant to the
exercise of Options or conversion or exchange of Convertible
Securities hereinafter issued for which an adjustment has been
made (or was not required to be made) pursuant to the provisions
hereof.
(D) The increase in the number of shares of Common Stock
subject to any Option or Convertible Security referred to in
subsections (A), (B) or (C) hereof pursuant to the provisions of
such Option or Convertible Securities designed to protect against
dilution.
c. If the Company shall at any time subdivide its outstanding Common
Stock by recapitalization, reclassification or split-up thereof, the number
of Warrant Shares subject to this Representative's Warrant immediately
prior to such subdivision shall be proportionately increased, and if the
Company shall at any time combine the outstanding Common Stock by
recapitalization, reclassification or combination thereof, the number of
Warrant Shares subject to this Representative's Warrant immediately prior
to such combination shall be proportionately decreased. Any corresponding
adjustment to the Exercise Price shall become effective at the close of
business on the record date for such subdivision or combination.
d. If the Company after the date hereof shall distribute to the
holders of its Common Stock any securities or other assets (other than a
distribution of Common Stock or a cash distribution made as a dividend
payable out of earnings or out of any earned surplus legally available for
dividends under the laws of the jurisdiction of incorporation of the
Company), the Board of Directors shall be required to make such equitable
adjustment in the Exercise Price in effect immediately prior to the record
date of such distribution as may be necessary to preserve the rights
substantially proportionate to those enjoyed hereunder by the Holder
immediately prior to such distribution. Any such adjustment made in good
faith by the Board of Directors shall be final and binding upon the Holder
and shall become effective as of the record date for such distribution.
e. No adjustment in the number of Warrant Shares subject to this
Representative's Warrant shall be required unless such adjustment would
require an increase
8
<PAGE>
or decrease in such number of Warrant Shares of at least 1% of the then
adjusted number of Warrant Shares issuable upon exercise of this
Representative's Warrant, provided, however, that any adjustments which by
reason of the foregoing are not required at the time to be made shall be
carried forward and taken into account and included in determining the
amount of any subsequent adjustment; and provided further, however, that in
case the Company shall at any time subdivide or combine the outstanding
Common Stock or issue any additional Common Stock as a dividend, said
percentage shall forthwith be proportionately increased in the case of a
combination or decreased in the case of a subdivision or dividend of Common
Stock so as to appropriately reflect the same. If the Company shall make a
record of the holders of its Common Stock for the purpose of entitling them
to receive any dividend or distribution and legally abandon its plan to pay
or deliver such dividend or distribution then no adjustment in the number
of Warrant Shares subject to this Representative's Warrant shall be
required by reason of the making of such record.
f. Whenever the number of Warrant Shares purchasable upon the
exercise of this Representative's Warrant is adjusted as provided herein,
the Exercise Price shall be adjusted (to the nearest one tenth of a cent)
by respectively multiplying such Exercise 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 this Representative's
Warrant immediately prior to such adjustment, and the denominator of which
shall be the number of Warrant Shares purchasable immediately thereafter.
g. In case of any reclassification of the outstanding Common Stock
(other than a change covered by (c) hereof or which solely affects the par
value of such Common Stock) or in the case of any merger or consolidation
of the Company with or into another corporation (other than a consolidation
or merger in which the Company is the continuing corporation and which does
not result in any reclassification or capital reorganization of the
outstanding Common Stock), or in the case of any sale or conveyance to
another corporation of the property of the Company as an entirety or
substantially as an entirety in connection with which the Company is
dissolved, the Holder of this Representative's Warrant shall have the right
thereafter (until the expiration of the right of exercise of this
Representative's Warrant) to receive upon the exercise hereof, for the same
aggregate Exercise Price payable hereunder immediately prior to such event,
the kind and amount of shares of stock or other securities or property
receivable upon such reclassification, capital reorganization, merger
9
<PAGE>
or consolidation, or upon the dissolution following any sale or other
transfer, by a holder of the number of Warrant Shares obtainable upon the
exercise of this Representative's Warrant immediately prior to such event;
and if any reclassification also results in a change in Common Stock
covered by (c) above, then such adjustment shall be made pursuant to both
this paragraph (g) and paragraph (c). The provisions of this paragraph (g)
shall similarly apply to successive re-classifications, or capital
reorganizations, mergers or consolidations, sales or other transfers.
If the Company after the date hereof shall issue or agree to issue
Common Stock, Options or Convertible Securities, other than as described
herein, and such issuance or agreement would in the opinion of the Board of
Directors of the Company materially affect the rights of the Holders of the
Representative's Warrants, the Exercise Price and the number of Warrant
Shares purchasable upon exercise of the Representative's Warrants shall be
adjusted in such matter, if any, and at such time as the Board of Directors
of the Company, in good faith, may determine to be equitable in the
circumstances. The minutes or unanimous consent approving such action
shall set forth the Board of Director's determination as to whether an
adjustment is warranted and the manner of such adjustment. In the absence
of such determination, any Holder may request in writing that the Board of
Directors make such determination. Any such determination made in good
faith by the Board of Directors shall be final and binding upon the
Holders. If the Board fails, however, to make such determination within
sixty (60) days after such request, such failure shall be deemed a
determination that an adjustment is required.
h. i. Upon occurrence of each event requiring an adjustment of the
Exercise Price and of the number of Warrant Shares purchasable upon
exercise of this Representative's Warrant in accordance with, and as
required by, the terms hereof, the Company shall forthwith employ a
firm of certified public accountants (who may be the regular
accountants for the Company) who shall compute the adjusted Exercise
Price and the adjusted number of Warrant Shares purchasable at such
adjusted Exercise Price by reason of such event in accordance
herewith. The Company shall give to each Holder of the
Representative's Warrants a copy of such computation which shall be
conclusive and shall be binding upon such Holders unless contested by
Holders by written notice to the Company within thirty (30) days after
receipt thereof.
10
<PAGE>
ii. In case the Company after the date hereof shall propose (A)
to pay any dividend payable in stock to the holders of its Common
Stock or to make any other distribution (other than cash dividends) to
the holders of its Common Stock or to grant rights to subscribe to or
purchase any additional shares of any class or any other rights or
options, (B) to effect any reclassification involving merely the
subdivision or combination of outstanding Common Stock, or (C) any
capital reorganization or any consolidation or merger, or any sale,
transfer or other disposition of its property, assets and business
substantially as an entirety, or the liquidation, dissolution or
winding up of the Company, then in each such case, the Company shall
obtain the computation described above and if an adjustment to the
Exercise Price is required, the Company shall notify the Holders of
the Representative's Warrants of such proposed action, which shall
specify the record date for any such action or if no record date is
established with respect thereto, the date on which such action shall
occur or commence, or the date of participation therein by the holders
of Common Stock if any such date is to be fixed, and shall also set
forth such facts with respect thereto as shall be reasonably necessary
to indicate the effect of such action on the Exercise Price and the
number, or kind, or class of shares or other securities or property
obtainable upon exercise of this Representative's Warrant after giving
effect to any adjustment which will be required as a result of such
action. Such notice shall be given at least twenty (20) days prior to
the record date for determining holders of the Common Stock for
purposes of any such action, and in the case of any action for which a
record date is not established then such notice shall be mailed at
least twenty (20) days prior to the taking of such proposed action.
iii. Failure to file any certificate or notice or to give any
notice, or any defect in any certificate or notice, shall not effect
the legality or validity of the adjustment in the Exercise Price or in
the number, or kind, or class of shares or other securities or
property obtainable upon exercise of the Representative's Warrants or
of any transaction giving rise thereto.
i. The Company shall not be required to issue fractional Warrant
Shares upon any exercise of the Representative's Warrants. As to any final
fraction of a Share which the Holder of a Representative's Warrant would
otherwise be entitled to purchase upon such
11
<PAGE>
exercise, the Company shall pay a cash adjustment in respect of such final
fraction in an amount equal to the same fraction of the market price of a
share of such stock on the business day preceding the day of exercise. The
Holder of a Representative's Warrant, by his acceptance of a
Representative's Warrant, expressly waives any right to receive any
fractional Warrant Shares.
j. Regardless of any adjustments pursuant to this section in the
Exercise Price or in the number, or kind, or class of shares or other
securities or other property obtainable upon exercise of a Representative's
Warrant, a Representative's Warrant may continue to express the Exercise
Price and the number of Warrant Shares obtainable upon exercise at the same
price and number of Warrant Shares as are stated herein.
k. The number of Warrant Shares, the Exercise Price and all other
terms and provisions of the Company's agreement with the Holder of this
Representative's Warrant shall be determined exclusively pursuant to the
provisions hereof.
l. The above provisions of this section 6 shall similarly apply to
successive transactions which require adjustments.
m. Notwithstanding any other language to the contrary herein, the
anti-dilution terms of this Representative's Warrant will not be enforced
so as to provide the Holder the right to receive, or for the accrual of,
cash dividends prior to the exercise of this Representative's Warrant.
7. The issuance of any Warrant Shares or other securities upon the
exercise of this Representative's Warrant and the delivery of certificates or
other instruments representing such securities, or other securities, shall be
made without charge to the Holder for any tax or other charge in respect of such
issuance. The Company shall not, however, be required to pay any tax which may
be payable in respect of any transfer involved in the issue and delivery of any
certificate in a name other than that of the Holder and the Company shall not be
required to issue or deliver any such certificate unless and until the person or
persons requesting the issue thereof shall have paid to the Company the amount
of such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
8. a. If, at any time after _____________, 1998 (the Effective Date of
the Registration Statement), and ending ____________, 2005 (seven years
after the Effective Date of the Registration Statement), the Company shall
file a registration statement (other than on Form S-4, Form S-8, or any
successor form) with the Securities and Exchange Commission
12
<PAGE>
(the "Commission") while Warrant Shares are available for purchase upon
exercise of this Representative's Warrant or while any Warrant Shares
(collectively, the "Representative's Warrants and the underlying Warrant
Shares, the "Representative's Securities") are outstanding, the Company
shall, on two occasions only, give the Holder and all the then holders of
such Representative's Securities at least 30 days prior written notice of
the filing of such registration statement. If requested by the Holder or
by any such holder in writing within 20 days after receipt of any such
notice, the Company shall, at the Company's sole expense (other than the
fees and disbursements of counsel for the Holder or such holder and the
underwriting discounts, if any, payable in respect of the securities sold
by the Holder or any such holder), register or qualify the Representative's
Securities of the Holder or any such holders who shall have made such
request concurrently with the registration of such other securities, all to
the extent requisite to permit the public offering and sale of the
Representative's Securities requested to be registered, and will use its
best efforts through its officers, directors, auditors and counsel to cause
such registration statement to become effective as promptly as practicable.
Notwithstanding the foregoing, if the managing underwriter of any such
offering shall advise the Company in writing that, in its opinion, the
distribution of all or a portion of the Representative's Securities
requested to be included in the registration 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 Holder or any such holder who shall have requested
registration of his or its Representative's Securities shall delay the
offering and sale of such Representative's Securities (or the portions
thereof so designated by such managing underwriter) for such period, not to
exceed 90 days, as the managing underwriter shall request, provided that no
such delay shall be required as to any Representative's Securities if any
securities of the Company are included in such registration statement for
the account of any person other than the Company and the Holder unless the
securities included in such registration statement for such other person
shall have been reduced pro rata to the reduction of the Representative's
Securities which were requested to be included in such registration.
b. If at any time after __________, 1998 (the Effective Date of the
Registration Statement), and before ___________, 2003 (five years after the
Effective Date of the Registration Statement), the Company shall receive a
written request from holders of Representative's Securities who, in the
aggregate, own (or upon exercise of all Warrant
13
<PAGE>
Shares will own) a majority of the total number of Warrant Shares, the
Company shall, as promptly as practicable, prepare and file with the
Commission a registration statement sufficient to permit the public
offering and sale of the Representative's Securities, and will use its best
efforts through its officers, directors, auditors and counsel to cause such
registration statement to become effective as promptly as practicable;
provided, however, that the Company shall only be obligated to file and
-------- -------
obtain effectiveness of one such registration statement for which all
expenses incurred in connection with such registration (other than the fees
and disbursements of counsel for the Holder or such holders and
underwriting discounts, if any, payable in respect of the Representative's
Securities sold by the Holder or any such holder) shall be borne by the
Company. In addition to the one demand registration provided for
hereinabove, the holders of the Representative's Securities who, in the
aggregate, own (or upon exercise of all Representative's Warrants will own)
a majority of the total number of Warrant Shares issued or issuable upon
exercise of the Representative's Warrants may request that the Company
prepare and file a registration statement to permit the public offering and
sale of the Representative's Securities on two additional occasions only,
but the costs of preparation and filing of such additional registration
statements shall be at the then holders' cost and expense unless the
Company elects to register additional shares of Common Stock, in which case
the cost and expense of such registration statements will be prorated
between the Company and the holders of the Representative's Securities
according to the aggregate sales price of the securities being issued.
c. In the event of a registration pursuant to the provisions of this
paragraph 8, the Company shall use its best efforts to cause the
Representative's Securities so registered to be registered or qualified for
sale under the securities or blue sky laws of such jurisdictions as the
Holder or such holders may reasonably request; provided, however, that the
-------- -------
Company shall not be required to qualify to do business in any state by
reason of this paragraph 8(c) in which it is not otherwise required to
qualify to do business and provided further, that the Company has no
obligation to qualify the Representative's Securities where such
qualification would cause any unreasonable delay or expenditure by the
Company.
d. The Company shall keep effective any registration or qualification
contemplated by this paragraph 8 and shall from time to time amend or
supplement each applicable registration statement, preliminary prospectus,
final prospectus, application, document and communication for such period
of time as shall be required to permit the
14
<PAGE>
Holder or such holders to complete the offer and sale of the
Representative's Securities covered thereby. The Company shall in no event
be required to keep any such registration or qualification in effect for a
period in excess of nine months from the date on which the Holder and such
holders are first free to sell such Representative's Securities; provided,
--------
however, that if the Company is required to keep any such registration or
-------
qualification in effect with respect to securities other than the
Representative's Securities beyond such period, the Company shall keep such
registration or qualification in effect as it relates to the
Representative's Securities for so long as such registration or
qualification remains or is required to remain in effect in respect of such
other securities.
e. In the event of a registration pursuant to the provisions of this
paragraph 8, the Company shall furnish to the Holder and to each such
holder such reasonable number of copies of the registration statement and
of each amendment and supplement thereto (in each case, including all
exhibits), such reasonable number of copies of each prospectus contained in
such registration statement and each supplement or amendment thereto
(including each preliminary prospectus), all of which shall conform to the
requirements of the Act and the rules and regulations thereunder, and such
other documents as the Holder or such holders may reasonably request in
order to facilitate the disposition of the Representative's Securities
included in such registration.
f. In the event of a registration pursuant to the provisions of this
paragraph 8, the Company shall furnish the Holder and each holder of any
Representative's Securities so registered with an opinion of its counsel to
the effect that (i) the registration statement has become effective under
the Act and no order suspending the effectiveness of the registration
statement, preventing or suspending the use of the registration statement,
any preliminary prospectus, any final prospectus, or any amendment or
supplement thereto has been issued, nor to such counsel's actual knowledge
has the Securities and Exchange Commission or any securities or blue sky
authority of any jurisdiction instituted or threatened to institute any
proceedings with respect to such an order and (ii) the registration
statement and each prospectus forming a part thereof (including each
preliminary prospectus), and any amendment or supplement thereto, complies
as to form with the Act and the rules and regulations thereunder. Such
counsel shall also provide a Blue Sky Memorandum setting forth the
jurisdictions in which the Representative's Securities have been registered
or qualified for sale pursuant to the provisions of paragraph 8(c).
15
<PAGE>
g. The Company agrees that until all the Representative's Securities
have been sold under a registration statement or pursuant to Rule 144 under
the Act, it shall keep current in filing all reports, statements and other
materials required to be filed with the Commission to permit holders of the
Representative's Securities to sell such securities under Rule 144.
h. The Holder and any holders who propose to register their
Representative's Securities under the Act shall execute and deliver to the
Company a selling shareholder questionnaire on a form to be provided by the
Company.
9. a. Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless the Holder, any holder of any of the
Representative's Securities, their officers, directors, partners,
employees, agents and counsel, and each person, if any, who controls any
such person within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from
and against any and all loss, liability, charge, claim, damage and expense
whatsoever (which shall include, for all purposes of this Section 9, but
not be limited to, attorneys' fees and any and all expense whatsoever
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts
paid in settlement of any claim or litigation), as and when incurred,
arising out of, based upon, or in connection with (i) any untrue statement
or alleged untrue statement of a material fact contained (A) in any
registration statement, preliminary prospectus or final prospectus (as from
time to time amended and supplemented), or any amendment or supplement
thereto, or (B) in any application or other document or communication (in
this Section 9 collectively called an "application") executed by or on
behalf of the Company or based upon written information furnished by or on
behalf of the Company filed in any jurisdiction in order to register or
qualify any of the Representative's Securities under the securities or blue
sky laws thereof or filed with the Commission or any securities exchange;
or any omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not misleading,
unless such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company with respect
to the Holder or any holder of any of the Representative's Securities by or
on behalf of such person expressly for inclusion in any registration
statement, preliminary prospectus, or final prospectus, or any amendment or
supplement thereto, or in any application, as the case may
16
<PAGE>
be, or (ii) any breach of any representation, warranty, covenant or
agreement of the Company contained in this Representative's Warrant. The
foregoing agreement to indemnify shall be in addition to any liability the
Company may otherwise have, including liabilities arising under this
Representative's Warrant.
If any action is brought against the Holder or any holder of any of
the Representative's Securities or any of its officers, directors,
partners, employees, agents or counsel, or any controlling persons of such
person (an "indemnified party") in respect of which indemnity may be sought
against the Company pursuant to the foregoing paragraph, such indemnified
party or parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall not relieve
the Company from any liability it may otherwise have to Holder or any
holder of any of the Representative's Securities) and the Company shall
promptly assume the defense of such action, including the employment of
counsel (reasonably satisfactory to such indemnified party or parties) and
payment of expenses. Such indemnified party or parties shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
or parties unless the employment of such counsel shall have been authorized
in writing by the Company in connection with the defense of such action or
the Company shall not have promptly employed counsel reasonably
satisfactory to such indemnified party or parties to have charge of the
defense of such action or such indemnified party or parties shall have
reasonably concluded that there may be one or more legal defenses available
to it or them or to other indemnified parties which are different from or
additional to those available to the Company, in any of which events such
fees and expenses shall be borne by the Company and the Company shall not
have the right to direct the defense of such action on behalf of the
indemnified party or parties. Anything in this paragraph to the contrary
notwithstanding, the Company shall not be liable for any settlement of any
such claim or action effected without its written consent.
b. The Holder and each holder agrees to indemnify and hold harmless
the Company, each director of the Company, each officer of the Company who
shall have signed any registration statement covering the Representative's
Securities held by the Holder and each holder and each other person, if
any, who controls the Company within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, to the same extent as the foregoing
indemnity from the Company to the Holder and each holder in paragraph 9(a),
but
17
<PAGE>
only with respect to statements or omissions, if any, made in any
registration statement, preliminary prospectus, or final prospectus (as
from time to time amended and supplemented), or any amendment or supplement
thereto, or in any application, in reliance upon and in conformity with
written information furnished to the Company with respect to the Holder and
each holder by or on behalf of the Holder and each holder expressly for
inclusion in any such registration statement, preliminary prospectus, or
final prospectus, or any amendment or supplement thereto, or in any
application, as the case may be. If any action shall be brought against
the Company or any other person so indemnified based on any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, and in respect of
which indemnity may be sought against the Holder and each holder pursuant
to this paragraph 9(b), the Holder and each holder shall have the rights
and duties given to the Company, and the Company and each other person so
indemnified shall have the rights and duties given to the indemnified
parties, by the provisions of paragraph 9(a).
c. To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to paragraph
9(a) or 9(b) (subject to the limitations thereof) but it is found in a
final judicial determination, not subject to further appeal, that such
indemnification may not be enforced in such case, even though this
Agreement expressly provides for indemnification in such case, or (ii) any
indemnified or indemnifying party seeks contribution under the Act, the
Exchange Act or otherwise because the indemnification provided for in this
Section 9 is for any reason held to be unenforceable by the Company and the
Holder and any holder, then the Company (including for this purpose any
contribution made by or on behalf of any director of the Company, any
officer of the Company who signed any such registration statement and any
controlling person of the Company), as one entity, and the Holder and any
holder of any of the Representative's Securities included in such
registration in the aggregate (including for this purpose any contribution
by or on behalf of the Holder or any holder), as a second entity, shall
contribute to the losses, liabilities, claims, damages and expenses
whatsoever to which any of them may be subject, on the basis of relevant
equitable considerations such as the relative fault of the Company and the
Holder or any such holder in connection with the facts which resulted in
such losses, liabilities, claims, damages and expenses. The relative
fault, in the case of an untrue statement, alleged untrue statement,
omission or alleged omission, shall be
18
<PAGE>
determined by, among other things, whether such statement, alleged
statement, omission or alleged omission relates to information supplied by
the Company, by the Holder or by any holder of Representative's Securities
included in such registration, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement,
alleged statement, omission or alleged omission. The Company and the
Holder agree that it would be unjust and inequitable if the respective
obligations of the Company and the Holder for contribution were determined
by pro rata or per capita allocation of the aggregate losses, liabilities,
claims, damages and expenses (even if the Holder and the other indemnified
parties were treated as one entity for such purpose) or by any other method
of allocation that does not reflect the equitable considerations referred
to in this paragraph 9(c). 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. For purposes of this paragraph 9(c), each
person, if any, who controls the Holder or any holder of any of the
Representative's Securities within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner,
employee, agent and counsel of each such person, shall have the same rights
to contribution as such person and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, each officer of the Company who shall have signed any such
registration statement, and each director of the Company shall have the
same rights to contribution as the Company, subject in each case to the
provisions of this paragraph 9(c). Anything in this paragraph 9(c) to the
contrary notwithstanding, no party shall be liable for contribution with
respect to the settlement of any claim or action effected without its
written consent. This paragraph 9(c) is intended to supersede any right to
contribution under the Act, the Exchange Act or otherwise.
10. Unless the Representative's Securities have been registered or an
exemption from such registration is available, the Warrant Shares issued upon
exercise of the Representative's Warrants shall be subject to a stop transfer
order and the certificate or certificates evidencing any such Warrant Shares
shall bear the following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
NOR HAVE THEY BEEN REGISTERED UNDER THE SECURITIES ("BLUE SKY") LAWS OF ANY
STATE. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED, OR
HYPOTHECATED UNLESS THEY HAVE FIRST BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 AND UNDER THE APPLICABLE STATE SECURITIES ("BLUE SKY") LAWS OR
UNLESS THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT
AND LAWS IS ESTABLISHED TO THE SATISFACTION OF THE
19
<PAGE>
COMPANY, WHICH MAY NECESSITATE A WRITTEN OPINION OF SELLER'S COUNSEL
SATISFACTORY TO COMPANY COUNSEL.
11. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of any Representative's Warrant (and upon
surrender of any Representative's Warrant if mutilated), and upon reimbursement
of the Company's reasonable incidental expenses, the Company shall execute and
deliver to the Holder thereof a new Representative's Warrant of like date, tenor
and denomination.
12. The Holder of any Representative's Warrant shall not have, solely on
account of such status, any rights of a stockholder of the Company, either at
law or in equity, or to any notice of meetings of stockholders or of any other
proceedings of the Company, except as provided in this Representative's Warrant.
13. This Representative's Warrant shall be construed in accordance with
the laws of the State of Colorado, without giving effect to conflict of laws.
Dated: _____________, 1998
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
By:________________________________________
Robert A. Spade, Chief Executive Officer
[SEAL]
20
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Representative's Warrant.)
FOR VALUE RECEIVED, ___________________________________ hereby sells,
assigns and transfers unto ________________________ Representative's Warrants to
purchase __________ shares of Common Stock of Communications Systems
International, Inc. (the "Company"), together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint
____________________________ attorney to transfer such Representative's Warrants
on the books of the Company, with full power of substitution.
Dated:_____________________
Signature:_______________________________________
Signature Guaranteed:
NOTICE
The signature on the foregoing Assignment must correspond to the name
as written upon the face of this Representative's Warrant in every particular,
without alteration or enlargement or any change whatsoever. Signature(s) must
be guaranteed by an eligible guarantor institution which is a participant in a
Securities Transfer Association recognized program.
21
<PAGE>
ELECTION TO EXERCISE
(To be executed by the holder if such holder desires to
exercise the attached Representative's Warrant)
The undersigned hereby exercises his or its rights to subscribe for
__________ shares of Common Stock covered by the within Representative's Warrant
(each as defined in the within Representative's Warrant) and tenders payment
herewith in the amount of $__________ in accordance with the terms thereof, and
requests that certificates for such Warrants be issued in the name of, and
delivered to:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print Name, Address and Social Security or
Tax Identification Number)
and, if such number of Warrants (or portions thereof) shall not be all the
Warrants covered by the within Representative's Warrant, that a new
Representative's Warrant for the balance of the Representative's Warrants (or
portions thereof) covered by the within Representative's Warrant be registered
in the name of, and delivered to, the undersigned at the address stated below.
Name:_________________________________________________________________________
(Print)
Address:______________________________________________________________________
________________________________________
(Signature)
Dated:__________________________________ Signature Guaranteed:
NOTICE
The signature on the foregoing Assignment must correspond to the name
as written upon the face of this Representative's Warrant in every particular,
without alteration or enlargement or any change whatsoever. Signature(s) must be
guaranteed by an eligible guarantor institution which is a participant in a
Securities Transfer Association recognized program.
22
<PAGE>
Exhibit 10.1
10% CONVERTIBLE
PROMISSORY NOTE
$_____________ ___________ , 1996
This PROMISSORY NOTE (this "Note") is executed as of this ___ day of ____,
1996, by COMMUNICATIONS SYSTEMS INTERNATIONAL, INC., a Colorado corporation
("Maker"), whose address is 8 S. Nevada Avenue, Suite 101, Colorado Springs,
Colorado 80903, in favor of ___________ ("Holder"), whose legal address is
__________________.
1. Promise to Pay. For value received, Maker hereby promises to pay to
--------------
the order of Holder the principal sum of $ ("Loan Amount"), together with
interest thereon at the rate as hereinafter specified, all in lawful money of
the United States of America which constitutes legal tender for payment of
debts, public and private, at the time of payment.
2. Interest Rate. Interest on the unpaid principal balance of this Note
-------------
outstanding from the date hereof and from time to time shall be paid at a rate
equal to 10% per annum ("Interest Rate"). Interest payable hereunder shall be
calculated on a 360-day year based on the actual number of days for which any
amounts payable hereunder remain outstanding.
3. Maturity Date. The "Maturity Date" shall mean __________________,
-------------
1998. The entire outstanding principal balance of this Note, together with all
accrued but unpaid interest, shall, if not previously paid, be finally due and
payable on the Maturity Date.
4. Payment Schedule. Interest shall accrue on the outstanding principal
----------------
balance hereunder at the Interest Rate. Payments of interest only shall be
payable commencing March 31, 1997 and continuing semi-annually thereafter until
the Maturity Date at which time the entire outstanding principal balance of this
Note together with all accrued but unpaid interest hereunder shall, if not
previously paid, be fully due and payable.
5. Prepayment Privilege. Maker shall have the right to prepay all or any
--------------------
portion of the Loan Amount, together with accrued interest thereon, at any time
with no prepayment penalty whatsoever. Any such prepayment shall be made pro
rata among the holders of all Convertible Promissory Notes based on their then
outstanding Loan Amounts. Maker shall give Holder at least 30 days' prior
written notice of any proposed prepayment.
6. Warrants. For each $10,000 of Loan Amount evidenced by this Note,
--------
Holder shall receive 1,000 warrants to purchase common stock, no par value
("Common Stock"), of
<PAGE>
Maker (the "Warrants"). The Warrants shall be subject to the terms set forth in
the "Agreement and Terms of Warrants" attached hereto as Exhibit A.
---------
7. Conversion. At any time on or before the earlier of (i) the Maturity
----------
Date, or (ii) the prepayment date if the Note is to be prepaid under Section 5,
Holder by delivery of this Note and written notice to Maker may convert all of
the outstanding Loan Amount and interest due hereunder as of the date of
delivery of such notice (the "Outstanding Amount") into the number of shares
(the "Shares") of Common Stock of Maker equal to the Outstanding Amount divided
by 90% of the average of the bid price and the ask price of Maker's Common Stock
on the day before the date of conversion (the "Conversion Price").
In the event of any capital reorganization or reclassification of the
Shares, any consolidation or merger of Maker with or into another corporation,
limited partnership, limited liability company or other entity or any sale,
lease or other disposition of all or substantially all of the assets of Maker,
that is effected in such a manner that holders of Common Stock are entitled to
receive securities and/or property (including cash) with respect to or in
exchange for Common Stock and that does not result in a prepayment by Maker
pursuant to Section 5, Maker shall, as a condition precedent to such
transaction, cause effective provision to be made so that Holder shall have the
right thereafter to convert this Note for the kind and amount of securities
and/or other property receivable upon such event by a holder of the number of
Shares for which this Note could have been converted immediately prior to such
event, subject to the adjustments which shall be as nearly equivalent as
practicable to the adjustments provided for in this Note.
8. Put Feature. At the end of each six-month period during the term of
-----------
this Note (i.e., each March 31 or September 30) (the "Tender Date"), Holder
shall have the right to tender this Note and to cause Maker to repay the
outstanding Loan Amount and accrued and unpaid interest thereon as of such
Tender Date. Holder shall give Maker written notice of its intention to so
tender the Note at least 30 days prior to the Tender Date.
9. Application of Payments. All payments hereunder shall be applied first
-----------------------
to the payment of accrued and unpaid interest on the principal of this Note,
including interest accrued at the Default Rate as hereinafter provided; and
second, to the reduction of principal of this Note.
10. Default Interest Rate. Any payment not made within five days after
---------------------
the same is due hereunder, and including the entire balance of principal,
interest, and other sums then due, shall bear interest at 3% above the then
current Interest Rate ("Default Rate"), such interest to accrue from the date
due until paid.
11. Default. Each of the following shall constitute an "Event of Default"
-------
under this Note:
-2-
<PAGE>
(a) The failure of Maker to pay in full any amount due hereunder by
the date the same is due, as provided herein, and such failure shall continue
for 10 days after written notice from Holder to Maker of such failure, or
Maker's failure to pay in full any amount due hereunder upon maturity of this
Note, by acceleration or otherwise; or
(b) The failure of Maker to perform, satisfy and observe in full, when
due, any of the obligations, covenants, conditions and restrictions under this
Note, not involving the payment of money, and such failure shall continue for 30
days after written notice from Holder to Maker of such failure, or if said
failure cannot reasonably be cured within said 30-day period, Maker shall not
have cured such failure within a reasonable time after the written notice from
Holder to Maker described above.
12. Right to Accelerate on Event of Default. Upon the occurrence of any
---------------------------------------
Event of Default hereunder, the entire balance of principal, accrued interest,
and any other sums owing hereunder shall, at the option of Holder, become at
once due and payable without prior notice or demand.
13. Waivers of Demand, etc. Maker and all parties now or hereafter liable
-----------------------
for the payment hereof, primarily or secondarily, directly or indirectly, and
whether as endorser, guarantor, surety, or otherwise, severally waive demand,
presentment, notice of dishonor or nonpayment, protest and notice of protest,
and diligence in collecting, and consent to extensions of time for payment,
renewals of this Note and acceptance of partial payments, whether before, at, or
after maturity, all or any of which may be made without notice to any of said
parties and without affecting their liability to Holder.
14. Costs of Collection. Maker and all parties now or hereafter liable
-------------------
for the payment hereof agree to pay all costs and expenses, including reasonable
attorneys' fees, incurred in collecting this Note or any part thereof.
15. No Usury Payable. The provisions of this Note and of all agreements
----------------
between Maker and Holder are hereby expressly limited so that in no contingency
or event whatsoever shall the amount paid, or agreed to be paid, to Holder for
the use, forbearance, or retention of the Loan Amount ("Interest") exceed the
maximum amount permissible under applicable law. If, from any circumstance
whatsoever, the performance or fulfillment of any provision hereof or of any
other agreement between Maker and Holder shall, at the time performance or
fulfillment of such provision shall be due, exceed the limit for Interest
prescribed by law, then, ipso facto, the obligation to be performed or fulfilled
shall be reduced to such limit, and if, from any circumstance whatsoever, Holder
should ever receive as Interest an amount which would exceed the highest lawful
rate, the amount which would be excessive Interest shall be applied to the
reduction of the principal balance owing hereunder (or, at Holder's option, or
if no principal shall be outstanding, be paid over to Maker) and not to the
payment of Interest.
-3-
<PAGE>
16. Subordination; No Security. The indebtedness evidenced by this Note,
--------------------------
including all principal, interest and other sums owing hereunder, are
subordinate and subject in right of payment to the payment in full of all other
indebtedness of Maker. This Note is not secured by any assets of Maker or other
collateral.
17. Severability of Provisions. If any provision hereof shall, for any
--------------------------
reason and to any extent, be invalid or unenforceable, then the remainder of the
instrument in which such provision is contained, the application of the
provision to other persons, entities or circumstances, and any other instrument
referred to herein shall not be affected thereby but instead shall be
enforceable to the maximum extent permitted by law.
18. Successors to Maker or Holder. The term "Maker" as used herein shall
-----------------------------
include the original maker of this Note and any party who may subsequently
become primarily liable for the payment hereof. The term "Holder" as used
herein shall mean the original payee of this Note or, if this Note is
transferred, the then holder of this Note, provided that, until written notice
is given to Maker designating another party as Holder, Maker may consider the
Holder to be the original payee or the party last designated as Holder in a
written notice to Maker.
19. Notices. All notices, consent or other instruments or communications
-------
provided for under this Note shall be in writing, signed by the party giving the
same, and shall be deemed properly given and received when actually delivered
and received or three business days after mailed, if sent by registered or
certified mail, postage prepaid, to the address set forth in the first paragraph
of this Note, or to such other address as a party may designate by written
notice to the other party.
20. Captions for Convenience. The captions to the Sections hereof are for
------------------------
convenience only and shall not be considered in interpreting the provisions
hereof.
21. Governing Law. Regardless of the place of its execution, this Note
-------------
shall be construed and enforced in accordance with the laws of the State of
Colorado.
MAKER:
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
By: ______________________________________
Name: ________________________________
Title: _______________________________
-4-
<PAGE>
Exhibit 10.2
AGREEMENT AND TERMS OF WARRANTS
1. Definitions. As used herein:
-----------
(a) "Common Stock" shall mean the Common Stock, no par value per
------------
share, of the Company, whether now or hereafter authorized, holders of which
have the right to participate in the distribution of earnings and assets of the
Company without limit as to the amount or percentage.
(b) "Company" shall mean Communications Systems International, Inc., a
-------
Colorado corporation.
(c) "Convertible Promissory Notes" shall mean the 10% Convertible
----------------------------
Promissory Notes given by the Company as Maker dated as of ______________, 1996.
(d) "Corporate Office" shall mean the principal office of the Company,
----------------
which is presently located at 8 South Nevada Avenue, Suite 101, Colorado
Springs, Colorado 80903.
(e) "Exercise Date" shall mean the date of surrender for exercise of
-------------
any Warrant Certificate, provided the exercise form on the back of the Warrant
Certificate, or a form substantially similar thereto has been completed in full
by the Warrant Holder or a duly appointed attorney and the Warrant Certificate
is accompanied by payment in full of the Exercise Price.
(f) "Exercise Period" shall mean the period commencing on the date the
---------------
Warrants are issued and extending to and through the Expiration Date.
(g) "Exercise Price" shall mean a purchase price of $_______ per share
--------------
of Common Stock; provided, however, that in the event the Company reduces the
Exercise Price in accordance with Section 8(h) hereof, the Exercise Price shall
be as established by the Company in accordance with such Section.
(h) "Expiration Date" shall mean 5:00 p.m. Colorado Springs, Colorado
---------------
time on the earlier of (i)_____________, 1998, or (ii) the date on which the
Company prepays the Convertible Promissory Notes pursuant to the terms of
Section 5 thereof, or (iii) the date on which the Company repays the Warrant
Holder's Convertible Promissory Note pursuant to the terms of Section 8 thereof;
provided, however, if such date shall be a holiday or a day on which banks are
authorized to close in the State of Colorado, the Expiration Date shall mean
5:00 p.m. Colorado Springs, Colorado time on the next following day which in the
State of Colorado is not
<PAGE>
a holiday or a day on which banks are authorized to close.
(i) "Subsidiary" shall mean any corporation of which shares having
----------
ordinary voting power to elect a majority of the Board of Directors of such
corporation (regardless of whether the shares of any other class or classes of
such corporation shall have or may have voting power by reason of the happening
of any contingency) is at the time directly or indirectly owned by the Company
or one or more Subsidiaries of the Company.
(j) "Warrant" or the "Warrants" shall mean up to 15,000 warrants which
------- --------
shall be issued pursuant to the terms of the Convertible Promissory Notes and
which may be exercised for Warrant Shares.
(k) "Warrant Certificate" shall mean the Warrant Certificate
-------------------
substantially in the form of Attachment 1 hereto with such changes as may be
provided for in this Agreement.
(l) "Warrant Holder" shall mean the person in whose name any Warrant
--------------
Certificate shall be registered on the books maintained by the Company pursuant
to Section 6 of this Agreement.
(m) "Warrant Shares" shall mean and include up to 15,000 authorized
--------------
and unissued shares of Common Stock reserved for issuance on exercise of the
Warrants, and unless otherwise noted, shall include any additional shares of
Common Stock or other property which may hereafter be issuable or deliverable on
exercise of the Warrants pursuant to Section 8 of this Agreement.
2. Warrants and Issuance of Warrant Certificates.
---------------------------------------------
(a) One Warrant shall initially entitle the Warrant Holder to purchase
one share of Common Stock on exercise thereof, subject to modification and
adjustment as hereinafter provided in Section 8. Warrant Certificates
representing 15,000 Warrants and evidencing the right to purchase an aggregate
of 15,000 shares of Common Stock of the Company shall be executed by the proper
officers of the Company. The Company shall deliver Warrant Certificates in
required whole number denominations to the person entitled thereto in connection
with any transfer or exchange permitted under this Agreement.
(b) Except as provided in Section 7 hereof, share certificates
representing the Warrant Shares shall be issued only on or after the Exercise
Date upon exercise of the Warrants or upon transfer or exchange of the Warrant
Shares following exercise of the Warrants.
3. Form and Execution of Warrant Certificates.
------------------------------------------
<PAGE>
(a) The Warrant Certificates shall be substantially in the form
attached hereto as Exhibit A and may have such letters, numbers or other marks
---------
of identification and such legends, summaries or endorsements printed,
lithographed or engraved thereon as the Company may deem appropriate and as are
not inconsistent with the provisions of this Agreement. The Warrant Certificates
shall be dated as of the date of issuance, whether on initial issuance,
transfer, exchange or in lieu of mutilated, lost, stolen or destroyed Warrant
Certificates.
(b) The Warrant Certificates shall be executed on behalf of the
Company by its President and Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a facsimile of the
Company's seal.
4. Exercise.
--------
(a) The Warrants will become exercisable on their issuance. The
exercise of the Warrants in accordance with this Agreement shall only be
permitted during the Exercise Period. Warrants shall be deemed to have been
exercised immediately prior to the close of business on the Exercise Date. The
exercise form shall be executed by the Warrant Holder thereof or his attorney
duly authorized in writing and shall be delivered together with payment to the
Company, in cash or by official bank or certified check, of an amount in lawful
money of the United States of America to the order of the Company in an amount
equal to the aggregate Exercise Price.
(b) The Company shall not be obligated to issue any fractional share
interests in Warrant Shares. If Warrants represented by more than one Warrant
Certificate shall be exercised at one time by the same Warrant Holder, the
number of full Warrant Shares which shall be issuable on exercise thereof shall
be computed on the basis of the aggregate number of full Warrant Shares issuable
on such exercise.
(c) The person entitled to receive the number of Warrant Shares
deliverable on such exercise shall be treated for all purposes as the Warrant
Holder as of the close of business on the Exercise Date. As soon as practicable
on or after the Exercise Date and in any event within 30 days after such date,
the Company shall issue and deliver to the person or persons entitled to receive
the same, a certificate or certificates for the number of Warrant Shares
deliverable on such exercise. No adjustment shall be made in respect of cash
dividends, if any, on Warrant Shares deliverable on exercise of any Warrant.
Following the determination by the Company that collected funds have been
received, the Company shall issue share certificates representing the number of
Warrant Shares purchased by the Warrant Holder.
No issuance of Warrant Shares shall be made unless there is an
effective registration statement under the Securities Act of 1933, as amended
(the "1933 Act"), and registration or qualification of the Warrant Shares, or an
exemption therefrom has been obtained
-3-
<PAGE>
from state or other regulatory authorities in the jurisdiction in which such
Warrant Shares are sold. The Company is authorized to refuse to honor the
exercise of any Warrant if such exercise would result, in the opinion of the
Company upon advice of counsel, in the violation of any law.
5. Reservation of Shares and Payment of Taxes.
------------------------------------------
(a) The Company covenants that it will at all times reserve and have
available from its authorized shares of Common Stock such number of shares of
Common Stock as shall then be issuable on exercise of all outstanding Warrants.
The Company covenants that all Warrant Shares issuable shall be validly issued,
fully paid and nonassessable, and free from all taxes, liens and charges with
respect to the issuance thereof.
(b) The Warrant Holder shall pay all documentary, stamp or similar
taxes and other government charges that may be imposed with respect to the
issuance of the Warrants, or the issuance, transfer or delivery of any Warrant
Shares on exercise of the Warrants. In the event the Warrant Shares are to be
delivered in a name other than the name of the Warrant Holder, no such delivery
shall be made unless the person requesting the same has paid to the Company the
amount of any such taxes or charges incident thereto.
6. Registration of Transfer.
------------------------
(a) The Warrant Certificates may be transferred in whole or in part
but only with the prior consent of the Company and only in compliance with
applicable law, including applicable federal and state securities laws. Warrant
Certificates to be exchanged shall be surrendered to the Company at its
Corporate Office. The Company shall execute, issue and deliver in exchange
therefor, the Warrant Certificate or Certificates which the holder making the
transfer shall be entitled to receive and the Company shall promptly cancel the
surrendered Warrant Certificate.
(b) The Company shall keep at its Corporate Office books for
registration of ownership and transfer of Warrant Certificates on which Warrant
Certificates and the transfer thereof shall be registered. Such books shall
show the names and addresses of the respective holders of the Warrant
Certificates and the number of Warrants evidenced by each such Warrant
Certificate. All Warrant Certificates presented for registration of transfer or
exercise shall be duly endorsed or be accompanied by a written instrument or
instruments of transfer in form satisfactory to the Company. The Company may
require payment of a sum by the Warrant Holder sufficient to cover any tax or
other governmental charge that may be imposed in connection with the transfer of
Warrant Certificates. On due presentment for registration of transfer of any
Warrant Certificate at such office, the Company shall execute, issue and deliver
to the transferee or transferees a new Warrant Certificate or Certificates
representing an equal aggregate number of Warrants.
-4-
<PAGE>
(c) Prior to due presentment for registration of transfer thereof,
the Company may treat the Warrant Holder as the absolute owner thereof
(notwithstanding any notations of ownership or writing thereon made by anyone
other than the Company) and the parties hereto shall not be affected by any
notice to the contrary.
7. Loss or Mutilation. On receipt by the Company of evidence
------------------
satisfactory as to the ownership of and the loss, theft, destruction or
mutilation of any Warrant Certificate, the Company shall execute and deliver in
lieu thereof, a new Warrant Certificate representing an equal aggregate number
of Warrants. In the case of loss, theft or destruction of any Warrant
Certificate, the Warrant Holder requesting issuance of a new Warrant Certificate
shall be required to secure an indemnity bond in favor of the Company in an
amount satisfactory to each of them. In the event a Warrant Certificate is
mutilated, such Warrant Certificate shall be surrendered and canceled by the
Company prior to delivery of a new Warrant Certificate. Applicants for a
substitute Warrant Certificate shall also comply with such other regulations and
pay such other reasonable charges as the Company may prescribe.
8. Adjustment of Exercise Price and Shares.
---------------------------------------
(a) If any time prior to the expiration of the Warrants by their terms
or by exercise of the Warrants, the Company increases or decreases the number of
its issued and outstanding shares of Common Stock, or changes in any way the
rights and privileges of such shares of Common Stock, by means of (i) 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, (ii) a split or
subdivision of shares of Common Stock, or (iii) a consolidation or combination
of shares of Common Stock, then the Exercise Price in effect at the time of such
action and the number of Warrants required to purchase each Warrant Share at
that time shall be proportionately adjusted so that the numbers of rights and
privileges relating to the Warrant Shares then purchasable upon the exercise of
the Warrants shall be increased, decreased or changed in like manner, for the
same aggregate purchase price set forth in the Warrants, as if the Warrant
Shares purchasable upon the exercise of the Warrants 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 the Company 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 Section 8(a) 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.
(b) If, prior to the expiration of the Warrants by exercise or by
their terms, the Company shall be recapitalized by reclassifying its outstanding
shares of Common Stock into
-5-
<PAGE>
shares with a par value or in the event of any other material change of the
capital structure of the Company or of any successor corporation by reason of
any reclassification, equitable, lawful and adequate provision shall be made
whereby any Warrant Holder shall thereafter have the right to purchase, on the
basis and the terms and conditions specified in this Agreement, in lieu of the
Warrant Shares theretofore purchasable on the exercise of any Warrant, such
securities or assets as may be issued or payable with respect to or in exchange
for the number of Warrant Shares theretofore purchasable on exercise of the
Warrants had such reclassification, recapitalization or conveyance not taken
place; and in any such event, the rights of any Warrant Holder to any adjustment
in the number of Warrant Shares purchasable on exercise of such Warrant, as set
forth above, shall continue to be preserved in respect of any stock, securities
or assets which the Warrant Holder becomes entitled to purchase.
(c) In the event the Company, at any time while the Warrants shall
remain unexpired and unexercised, shall sell all or substantially all of its
property, or dissolves, liquidates or winds up its affairs, prompt,
proportionate, equitable, lawful and adequate provision shall be made as part of
the terms of such sale, dissolution, liquidation or winding up such that the
Warrant Holder may thereafter receive, on exercise thereof, in lieu of each
Warrant Shares which he would have been entitled to receive, the same kind and
amount of any stock, securities or assets as may be issuable, distributable or
payable on any such sale, dissolution, liquidation or winding up with respect to
each share of Common Stock; provided, however, that in the event of any such
sale, dissolution, liquidation or winding up, the right to exercise the Warrants
shall terminate on a date fixed by the Company, such date to be not earlier than
5:00 p.m. Colorado Springs, Colorado time on the 45th day next succeeding the
date on which notice of such termination of the right to exercise the Warrants
has been given by mail to the Warrant Holders thereof at such addresses as may
appear on the books of the Company.
(d) On exercise of the Warrants by the Warrant Holders, the Company
shall not be required to deliver fractions of shares of Common Stock; provided,
however, that the Company shall purchase such fraction for an amount in cash
equal to the current value of such fraction computed on the basis of the average
bid price on the trading day immediately preceding the day upon which such
Warrant Certificate was surrendered for exercise in accordance with Section 4
hereof. By accepting a Warrant Certificate, the holder thereof expressly waives
the right to receive a Warrant Certificate evidencing any fraction of a Warrant
or to receive any fractional share of securities upon exercise of a Warrant,
except as expressly provided in this Section 8(d).
(e) If, prior to expiration of the Warrants by exercise or by their
terms, the Company shall determine to take a record of the holders of its shares
of Common Stock for the purpose of determining shareholders entitled to receive
any stock dividend, distribution or other right which will cause any change or
adjustment in the number, amount, price or nature of the shares of Common Stock
or other stock, securities or assets deliverable on exercise of the
-6-
<PAGE>
Warrants pursuant to the foregoing provisions, the Company shall give to the
Warrant Holders at the addresses as may appear on the books of the Company at
least 20 days' prior written notice to the effect that it intends to take such a
record. Such notice shall specify the date as of which such record is to be
taken; the purpose for which such record is to be taken; and the number, amount,
price and nature of the shares of Common Stock or other stock, securities or
assets which will be deliverable on Warrant Shares following exercise of the
Warrants, if such exercise occurs prior to the record date for such action.
Without limiting the obligation of the Company to provide notice to the Warrant
Holders of any corporate action hereunder, failure of the Company to give notice
shall not invalidate such corporate action of the Company.
(f) The Warrants shall not entitle the Warrant Holder to any of the
rights of shareholders or to any dividend declared on the shares of Common Stock
unless the Warrant is exercised and the Warrant Shares purchased prior to the
record date fixed by the Board of Directors of the Company for the determination
of holders of shares of Common Stock entitled to such dividend or other right.
(g) Except as provided in Section 8(a) above, no adjustment of the
Exercise Price shall be made as a result of or in connection with the issuance
of shares of Common Stock.
(h) The Company shall be empowered, in the sole and unconditional
discretion of the Board of Directors, at any time during the Exercise Period, to
reduce the applicable Exercise Price of the Warrants. Any such reduction in the
applicable Exercise Price shall only be effective on 10 days' written notice to
the Warrant Holders, which notice shall be given pursuant to a duly and validly
authorized resolution of the Board of Directors of the Company. Any such
reduction in the Exercise Price shall not entitle the Warrant Holders to
issuance of any additional shares of Common Stock pursuant to the adjustment
provisions set forth elsewhere herein, regardless of whether the reduction in
the Exercise Price was effected either prior to or following exercise of
Warrants by the Warrant Holders. A nonexercising Warrant Holder shall have no
remedy or rights to receive any additional Warrant Shares as a result of any
reduction in any applicable Exercise Price pursuant to this subsection.
(i) Before taking any action that would cause an adjustment pursuant
to this Section 8 reducing the Exercise Price required to purchase one share of
Common Stock below the then par value (if any) of a share of such Common Stock,
the Company will use its best efforts to take any corporate action which, in the
opinion of its counsel, may be necessary in order that the Company may validly
and legally issue fully paid and non-assessable shares of such Common Stock.
9. Modification of Agreement. The Company may by supplemental agreement
-------------------------
make any changes or corrections in this Agreement it shall deem appropriate to
cure any ambiguity or to correct any defective or inconsistent provision or
mistake or error herein
-7-
<PAGE>
contained. Additionally, the Company may make any changes or corrections deemed
necessary which shall not adversely affect the interests of the Warrant Holders;
provided, however, this Agreement shall not otherwise be modified, supplemented
or altered in any respect except with the consent in writing of the Warrant
Holders who hold not less than a majority of the Warrants outstanding and
provided further that no such amendment shall accelerate the Warrant Expiration
Date or increase the Exercise Price without the approval of all the holders of
all outstanding Warrants.
10. Notices. All notices, demands, claims, elections, opinions, requests
-------
or other communications hereunder (however characterized or described) shall be
in writing and shall be deemed duly given or made if (and then two business days
after) sent by registered or certified mail, return receipt requested, postage
prepaid and addressed to, in the case of the Company:
Communications Systems International, Inc.
8 South Nevada Avenue, Suite 101
Colorado Springs, Colorado 80903
Attention: ________________________
and if the Warrant Holder, at the address of the Company as set forth on the
books maintained by the Company.
The Company may send any notice, demand, claim, election, opinion,
request or communication hereunder to the intended recipient at the address set
forth above using any other means (including personal delivery, expedited
courier, messenger service, telecopy, telex, ordinary mail or electronic mail),
but no such notice, demand, claim, election, opinion, request or other
communication shall be deemed to have been duly given or made unless and until
it actually is received by the intended recipient. The Company may change the
address to which notices, demands, claims, elections, opinions, requests and
other communications hereunder are to be delivered by giving the Warrant Holders
notice in the manner herein set forth.
11. Persons Benefiting. This Agreement shall be binding upon and inure to
------------------
the benefit of the Company and its respective successors and assigns and the
Warrants Holders. Nothing in this Agreement is intended or shall be construed
to confer on any other person any right, remedy or claim or to impose on any
other person any duty, liability or obligation.
12. Severability. If any term contained herein shall be held, declared or
------------
pronounced void, voidable, invalid, unenforceable or inoperative for any reason
by any court of competent jurisdiction, government authority or otherwise, such
holding, declaration or pronouncement shall not affect adversely any other term,
which shall otherwise remain in full force and effect, and the effect of such
holding, declaration or pronouncement shall be limited to the territory or
jurisdiction in which made.
-8-
<PAGE>
13. Termination. This Agreement shall terminate as of the close of
-----------
business on the Expiration Date, or such earlier date upon which all Warrants
shall have been exercised.
14. Governing Law. These terms and each Warrant Certificate issued
-------------
hereunder shall be deemed to be a contract under the laws of the State of
Colorado and for all purposes shall be construed in accordance with the laws of
said state without giving effect to conflicts of laws provisions of such state.
15. Agreement Available to Warrant Holders. A copy of these terms shall
--------------------------------------
be available at all reasonable times at the office of the Company for inspection
by any Warrant Holder. As a condition of such inspection, the Company may
require any Warrant Holder to submit a Warrant Certificate held of record for
inspection.
-9-
<PAGE>
ATTACHMENT 1
[FORM OF WARRANT CERTIFICATE]
The Warrants evidenced by this certificate were issued in connection with a
Convertible Promissory Note dated as of ____________, 1996 given by the Company
as Maker to the Warrant Holder ("Warrant"). One Warrant entitles the Warrant
Holder to purchase one share of Common Stock. The Warrants may only be
exercised when either (a) a current registration statement under the Securities
Act of 1993, as amended, is effective or (b) an exemption from such registration
is available to the Company, in either case, without undue expense or hardship.
Additionally, Warrants are only exercisable when such exercise, and the issuance
of the underlying Common Stock, can be effected in compliance with applicable
state Blue Sky laws. The Company will be under no obligation whatsoever to take
any steps in states other than California to allow Warrants to be exercised.
W-____________________ _____________ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that _________ or registered assigns
(the "Warrant Holder"), is the registered owner of the above-indicated number of
Warrants ("Warrants") expiring at 5:00 p.m., Colorado Springs, Colorado local
time, on _____________, 1998 (as extended or accelerated pursuant to the
Agreement and Terms of Warrants (the "Warrant Terms"), the "Expiration Date").
One Warrant entitles the Warrant Holder to purchase from Communications Systems
International, Inc., a Colorado corporation (the "Company"), at any time before
the Expiration Date, one fully paid and non-assessable share of Common Stock of
the Company at a purchase price of $_______ per share (the "Exercise Price") in
lawful money of the United States of America for one Warrant represented hereby
upon surrender of this Warrant Certificate, with the exercise form hereon duly
completed and executed, with payment of the Exercise Price at the principal
office of the Company, but only subject to the conditions set forth herein and
in the Agreement and Terms of Warrants. The Exercise Price, the number of
shares purchasable upon exercise of each Warrant, the number of Warrants
outstanding and the Expiration Date are subject to adjustments upon the
occurrence of certain events set forth in the Warrant Terms. Reference is
hereby made to the other provisions of this Warrant Certificate and the
provisions of the Warrant Terms, all of which are hereby incorporated by
reference herein and made a part of this Warrant Certificate and which shall for
all purposes have the same effect as though fully set forth at this place.
Upon due presentment 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, subject to any adjustments made in accordance with the
Attachment 1-1
<PAGE>
Warrant Terms, shall be issued to the transferee in exchange of this Warrant
Certificate, subject to the limitations provided in the Warrant Terms entered
into between the Company and the original holder of the Warrant regarding
restrictions on transfer and, upon payment of the transfer fee and any tax or
other governmental charge imposed in connection with such transfer.
The Warrant Holder of the Warrants evidenced by this Warrant Certificate
may exercise all or any whole number of such Warrants in the manner stated
hereon and in the Warrant Terms. The Exercise Price shall be payable in lawful
money of the United Sates of America in cash or by certified or cashier's check
or bank draft payable to the order of the Company. Upon any exercise of any
Warrants evidenced by this Warrant Certificate in an amount less than the number
of Warrants so evidenced, there shall be issued to the Warrant Holder a new
Warrant Certificate evidencing the number of Warrants not so exercised. No
adjustment shall be made for any dividends on any shares issued upon exercise of
this Warrant.
No Warrant may be exercised after 5:00 p.m. Colorado Springs, Colorado,
local time, on the Warrant Expiration Date (as defined in the Warrant Terms),
and any Warrant not exercised by such time shall become void.
COPIES OF THE WARRANT TERMS, WHICH DEFINE THE RIGHTS, RESPONSIBILITIES
AND OBLIGATIONS OF THE COMPANY AND THE WARRANT HOLDERS ARE ON FILE
WITH THE COMPANY. ANY WARRANT HOLDER MAY OBTAIN A COPY OF THE WARRANT
TERMS, FREE OF CHARGE, BY A REQUEST TO THE PRINCIPAL OFFICES OF THE
COMPANY, ATTENTION: SECRETARY.
This Warrant Certificate, when surrendered to the Company at its principal
office by the Warrant Holder, in person or by attorney duly authorized in
writing, may be exchanged, in the manner and subject to the limitations provided
in the Warrant Terms, without payment of a charge, except for any tax or other
governmental charge impose in connection with such exchange, for another Warrant
Certificate or Warrant Certificates of like tenor and evidencing a like number
of Warrants, subject to any adjustments made in accordance with the Warrant
Terms.
The Company may deem and treat the registered holder hereof as the absolute
owner of this Warrant Certificate (notwithstanding any notation of ownership or
other writing hereon made by anyone) for all purposes and the Company shall not
be affected by any notice to the contrary. No Warrant Holder, as such, shall
have any rights of a shareholder of the Company, either at law or in equity, and
the rights of the Warrant Holder, as such, are limited to those rights expressly
provided in the Warrant Terms and in the Warrant Certificates.
Attachment 1-2
<PAGE>
The Company shall not be required to issue fractions of warrants upon any
such adjustment or to issue fractions of shares upon the exercise of any
Warrants after any such adjustment, but the Company, in lieu of issuing any such
fractional interest, shall pay an amount in cash equal to such fraction times
the current market value of one share, determined in accordance with the Warrant
Terms.
Unless the amendment is able to be effected by the Company in accordance
with the Warrant Terms, the Warrant Terms are subject to amendment upon the
approval of holders of not less than a majority of the outstanding Warrants,
except that no such amendment shall accelerate the Warrant Expiration Date or
increase the Exercise Price without the approval of all the holders of all
outstanding Warrants. A copy of the Warrant Terms shall be available at all
reasonable times at the principal office of the Company for inspection by any
Warrant Holder. As a condition of such inspection, the Company may require any
Warrant Holder to submit his Warrant Certificate for inspection.
IMPORTANT: The Warrants represented by this Certificate may not be
---------
exercised by a Warrant Holder unless at the time of exercise the underlying
shares of Common Stock are qualified for sale, by registration or otherwise, in
the state where the Warrant Holder resides or unless the issuance of the shares
of Common Stock would be exempt under the applicable state securities laws.
Further, a registration statement under the Securities Act of 1933, as amended,
covering the exercise of the Warrants must be in effect and current at the time
of exercise unless the issuance of shares of Common Stock upon any exercise is
exempt from the registration requirements of the Securities Act of 1933, as
amended. Notwithstanding the provisions hereof, unless such registration
statement and qualification are in effect and current at the time of exercise,
or unless exemptions are available, the Company may decline to permit the
exercise of the Warrants and the holder hereof would then only have the choice
of either attempting to sell the Warrants, if a market existed therefor, or
letting the Warrants expire.
The certificates representing the shares of Common Stock to be received by
the Warrant Holder upon any exercise of the Warrants shall bear a restrictive
legend substantially as follows:
The shares represented by this Certificate may only be transferred by
operation of law or with the prior written consent of the Company.
The shares represented by this Certificate are also subject to
restrictions on transfer under the Securities Act of 1933, as amended,
and state securities laws, and may not be offered for sale, sold,
assigned, transferred, pledged or otherwise disposed of unless
registered and qualified under all applicable securities laws or
unless an exemption exists and can be satisfied by the transferor, the
availability of which is to be established by an opinion of
Attachment 1-3
<PAGE>
counsel (which opinion and counsel shall both be reasonably
satisfactory to the Company). The Company is under no obligation to
register or qualify the shares which this Certificate represents under
any applicable securities laws.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
signed by its President and by its Secretary, each by a facsimile of said
officers' signatures, and has caused a facsimile of its corporate sale to be
imprinted hereon.
Dated: _____________________ COMMUNICATIONS SYSTEMS
INTERNATIONAL, INC.
By: ________________________ By: __________________________
____________, Secretary Robert A. Spade, President
Attachment 1-4
<PAGE>
EXHIBIT 10.3
GENERAL TERMS AND CONDITIONS FOR CARRIER AGREEMENTS
[LOGO OF CABLE AND 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 CWIs 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, fees and other charges, including any assessment and amount of any
surcharges for a particular Service. If CWI increases any of the
international rates set forth in this Agreement and Carrier subsequently
discontinues routing traffic to CWI for a country for which such increased
rate applies, then 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, 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 the 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 CWIs 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 minimum 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. __Or
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) or 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 the 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 set forth in the "General Rules and Regulations" section of CWI's
interstate tariff, as may be amended by CWI in accordance with applicable
laws and regulations, or if such tariff is withdrawn by CWI, as the tariff
was in effect as of the date of withdrawal. 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 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 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.
CARRIER'S REPRESENTATIVE INITIALS /S/ INITIALS ILLEGIBLE DATE
----------------------- ----------
<PAGE>
CARRIER AGREEMENT
[LOGO OF CABLE & WIRELESS, INC. APPEARS HERE]
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-96B (12/96) attached
hereto are part of this Agreement.
- --------------------------------------------------------------------------------
ORDER INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S>
1. Initial Term: 13 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 Communications Systems International, Inc. and dated 3/4/97
------------------------------------------------ ----------
Intrastate rates are applicable within: Colorado
-------------------------------------------------------------
Directory Assistance: CWIs then-standard per-call rates
--------------------
T-1 Port Charges: Monthly Charge per T-1 Port............................ $ 70.00
---------------- -------
Non-Recurring Installation Charge per T-1 Port......... $ 150.00
-------
Initial Quantity of T-1 Ports.......................... 2
-------
Reporting Options: (insert "X" in box for the required option)
-----------------
[_] Second copy of call detail: Monthly Charge $ n/a
-------
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........................ $ n/a
-------
Monthly....................... $ n/a
-------
3. Payments/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....... yes
-------------------------- -------
<C>
Initial Security Deposit Amount:... $ 50,000
----------
Continuing Security Deposit Amount:.. one times the amount of usage charges incurred over any six week period
---------- ----------
Deposit Release Period:.............. 12 Months
----------
Estimated Payments Required:........... n/a
--------------------------- ----------
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
----------
<CAPTION>
4. Minimum Monthly Payment Obligations:
-----------------------------------
Month after Service Initiation Minimum Amount each Month* Month after Service Initiation Minimum Amount each Month*
------------------------------ -------------------------- ------------------------------ --------------------------
<S> <C> <C> <C>
1 $ 0.00 2 $ 10,000
------------- ------------- ------------- -------------
3 $ 15,000 4 $ 20,000
------------- ------------- ------------- -------------
5-25 $ 25,000 $
------------- ------------- ------------- -------------
$ $
------------- ------------- ------------- -------------
* Minimums apply to international usage only; domestic usage shall not contribute towards meeting minimum monthly
payments obligations
<CAPTION>
COMMUNICATIONS SYSTEMS
---------------------- CABLE & WIRELESS, INC.
INTERNATIONAL, INC. ----------------------
-------------------
<S> <C>
Signature: Signature:
------------------------------- -------------------------------
Printed Name: Printed Name: Elaine M. Beiseigel
------------------------------- -------------------------------
Title: Title: Contract Manager
------------------------------- -------------------------------
Date: Date:
------------------------------- -------------------------------
</TABLE>
<PAGE>
SERVICE QUALITY ADDENDUM
TO CARRIER AGREEMENT
[LOGO OF CABLE & WIRELESS, INC. APPEARS HERE]
Cable & Wireless, Inc. ("CWI") and its carrier customer signing this Service
Quality Addendum ("Carrier") agree that their Carrier Agreement ("Agreement") is
modified as follows:
- --------------------------------------------------------------------------------
If Carrier is not satisfied with the quality of calls placed over CWI's network
during the first thirty (30) days after service is initiated ("INITIAL MONTH"),
Carrier may so notify CWI in writing no later than ten (10) days after the end
of such Initial Month. Carrier may, upon prior written notice to CWI, terminate
the Agreement and all services provided thereunder if CWI does not correct the
problem(s) with call quality to Carrier's satisfaction within thirty (30) days
of CWI's receipt of the initial notice. In the event of such termination, the
following shall apply: (i) Carrier shall pay CWI for all charges incurred up
through the date service is discontinued; (ii) the contract discontinuance fee
shall be waived; and (iii) neither party shall have any liability or obligation
to one another resulting from CWI not correcting the service quality or
resulting from such a termination.
Communications Systems Cable & Wireless, Inc.
International, Inc.
---------------------- ----------------------
Signature: /s/ R. A. Spade Signature:
-------------------------- ----------------------
Printed Name: R. A. Spade Printed Name: Elaine M. Beiseigel
-------------------------- ----------------------
Title: CEO Title: Contract Manager
-------------------------- ----------------------
Date: 4-10-97 Date:
-------------------------- ----------------------
<PAGE>
SPECIAL TERMS AND CONDITIONS ADDENDUM
TO CARRIER AGREEMENT
[LOGO OF CABLE & WIRELESS, INC. APPEARS HERE]
Cable & Wireless, Inc. ("CWI") and its Carrier customer signing this Special
Terms and Conditions Addendum ("Carrier") agree that the 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.
- --------------------------------------------------------------------------------
1. Payment
-------
Reference to "forty-five (45) days" in the third paragraph of Section 4
(Payment) of the General Terms and Conditions for Carrier Agreements is
---------
deleted and replaced by "sixty (60) days".
2. Confidentiality
---------------
Each party may, either orally, in written form, or otherwise, disclose to the
other party or the other party may otherwise obtain the disclosing party's
confidential information ("Confidential Information") in connection with this
Agreement. The terms and conditions of this Agreement are Confidential
Information except that CWI shall have the right to disclose the terms and
conditions of this Agreement to its affiliates. In order to be Confidential
Information, any information disclosed in tangible form must be conspicuously
marked as being the disclosing party's confidential information, and any
other information must be clearly indicated as being confidential at the time
of disclosure and reduced to writing and sent to the receiving party within
ten (10) days of disclosure. Regardless of when disclosed or obtained,
Confidential Information shall only be used by the receiving party in its
performance under this Agreement, and it shall not be disclosed by the
receiving party except to those employees, affiliates, advisors, and
consultants who have a need to know and an obligation to treat Confidential
Information in accordance with this clause. If any of the following apply to
any information, such information shall not be considered as Confidential
Information: (i) it is or becomes available to the public through no wrongful
act of the receiving party; (ii) it is already in the possession of the
receiving party and not subject to any agreement of confidence between the
parties; (iii) it is received from a third party without any restriction
known to the receiving party for the benefit of the disclosing party; or (iv)
it is independently developed by the receiving party. The receiving party may
disclose the disclosing party's Confidential Information pursuant to a
requirement of a duly empowered government agency or a court of competent
jurisdiction after due notice and an adequate opportunity to intervene is
given to the disclosing party unless legally prohibited. Upon termination or
expiration of this Agreement, the receiving party shall, at the disclosing
party's written direction, either return to the disclosing party or destroy
all of the disclosing party's Confidential Information and so certify in
writing. The obligations of this provision shall survive for three (3) years
after any termination or expiration of this Agreement.
3. Additional Charges
------------------
It is acknowledged that Carrier shall access CWI's network at CWI's Denver
POP. In addition to all other charges, Carrier shall pay CWI $800.00 per
month for backhaul from such POP to a CWI switch site designated by CWI
("BACKHAUL CHARGE").
Notwithstanding the provisions of the second paragraph of Section 2 (Term and
--------
Termination) of the General Terms and Conditions for Carrier Agreements to
-----------
the contrary, in the event that Carrier terminates this Agreement prior to
the end of the Initial Term, as provided for therein, 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 (i) the sum of
the minimum monthly payment obligations for each of the remaining Months in
the Initial Term, plus (ii) the sum of the Backhaul Charges for each of the
remaining Months in the Initial Term.
Communications Systems International, Inc. Cable & Wireless, Inc.
- ------------------------------------------ ----------------------
Signature: /s/ R. A. Spade Signature:
--------------------------- ----------------------
Printed Name: R. A. Spade Printed Name:
--------------------------- ----------------------
Title: CEO Title:
--------------------------- ----------------------
Date: 4-10-97 Date:
--------------------------- ----------------------
<PAGE>
EXHIBIT 10.4
PROMISSORY NOTE
$ ____________ ____________, 1997
This PROMISSORY NOTE (this "Note") is executed as of this ___ day of
________________, 1997, by COMMUNICATIONS SYSTEMS INTERNATIONAL, INC., a
Colorado corporation ("Maker"), whose address is 8 S. Nevada Avenue, Suite 101,
Colorado Springs, Colorado 80903, in favor of _______________ ("Holder"), whose
legal address is _______________ .
1. Promise to Pay. For value received, Maker hereby promises to pay to
--------------
the order of Holder the principal sum of $_____ ("Loan Amount"), together with
interest thereon at the rate as hereinafter specified, all in lawful money of
the United States of America which constitutes legal tender for payment of
debts, public and private, at the time of payment.
2. Interest Rate. Interest on the unpaid principal balance of this Note
-------------
outstanding from the date hereof and from time to time shall be paid at a rate
equal to 15% per annum ("Interest Rate"). Interest payable hereunder shall be
calculated on a 360-day year based on the actual number of days for which any
amounts payable hereunder remain outstanding.
3. Maturity Date. The "Maturity Date" shall mean __________________,
-------------
1997 [6 MONTHS FROM NOTE DATE]; provided, however, that Maker at its sole option
on 10 days' prior written notice to Holder may extend the Maturity Date to
__________________, 1998 [12 MONTHS FROM NOTE DATE]. The entire outstanding
principal balance of this Note, together with all accrued but unpaid interest,
shall, if not previously paid, be finally due and payable on the Maturity Date.
4. Payment Schedule. Interest shall accrue on the outstanding principal
----------------
balance hereunder at the Interest Rate and shall be due and payable on the
Maturity Date along with the entire outstanding principal balance of this Note,
if not previously paid.
5. Prepayment Privilege. Maker shall have the right to prepay all or any
--------------------
portion of the Loan Amount, together with accrued interest thereon, at any time
with no prepayment penalty whatsoever. Any such prepayment shall be made pro
rata among the holders of all promissory notes having the same interest rate and
terms as this Note based on their then outstanding loan amounts. Maker shall
give Holder at least 10 days' prior written notice of any proposed prepayment.
6. Warrants. For each $10,000 of Loan Amount evidenced by this Note,
--------
Holder shall receive 1,000 warrants to purchase common stock, no par value
("Common
<PAGE>
Stock"), of Maker (the "Warrants"); provided, however, that if Maker shall
extend the term of this Note as of the Maturity Date pursuant to Paragraph 3
hereof, Maker shall issue to Holder additional Warrants in an amount equal to
the number of Warrants issued pursuant to this Note. The Warrants (and such
additional Warrants), if any, shall be subject to the terms set forth in the
"Agreement and Terms of Warrants" attached hereto as Exhibit A.
---------
7. Application of Payments. All payments hereunder shall be applied
-----------------------
first to the payment of accrued and unpaid interest on the principal of this
Note, including interest accrued at the Default Rate as hereinafter provided;
and second, to the reduction of principal of this Note.
8. Default Interest Rate. Any payment not made within five days after
---------------------
the same is due hereunder, and including the entire balance of principal,
interest, and other sums then due, shall bear interest at 3% above the then
current Interest Rate ("Default Rate"), such interest to accrue from the date
due until paid.
9. Default. Each of the following shall constitute an "Event of Default"
-------
under this Note:
(a) The failure of Maker to pay in full any amount due hereunder by
the date the same is due, as provided herein, and such failure shall continue
for 10 days after written notice from Holder to Maker of such failure, or
Maker's failure to pay in full any amount due hereunder upon maturity of this
Note, by acceleration or otherwise; or
(b) The failure of Maker to perform, satisfy and observe in full, when
due, any of the obligations, covenants, conditions and restrictions under this
Note, not involving the payment of money, and such failure shall continue for 30
days after written notice from Holder to Maker of such failure, or if said
failure cannot reasonably be cured within said 30-day period, Maker shall not
have cured such failure within a reasonable time after the written notice from
Holder to Maker described above.
10. Right to Accelerate on Event of Default. Upon the occurrence of any
---------------------------------------
Event of Default hereunder, the entire balance of principal, accrued interest,
and any other sums owing hereunder shall, at the option of Holder, become at
once due and payable without prior notice or demand.
11. Waivers of Demand, etc. Maker and all parties now or hereafter liable
-----------------------
for the payment hereof, primarily or secondarily, directly or indirectly, and
whether as endorser, guarantor, surety, or otherwise, severally waive demand,
presentment, notice of dishonor or nonpayment, protest and notice of protest,
and diligence in collecting, and consent to extensions of time for payment,
renewals of this Note and acceptance of partial payments, whether before, at, or
after maturity, all or any of which may be made without notice to any of said
parties and without affecting their liability to Holder.
2
<PAGE>
12. Costs of Collection. Maker and all parties now or hereafter liable
-------------------
for the payment hereof agree to pay all costs and expenses, including reasonable
attorneys' fees, incurred in collecting this Note or any part thereof.
13. No Usury Payable. The provisions of this Note and of all agreements
----------------
between Maker and Holder are hereby expressly limited so that in no contingency
or event whatsoever shall the amount paid, or agreed to be paid, to Holder for
the use, forbearance, or retention of the Loan Amount ("Interest") exceed the
maximum amount permissible under applicable law. If, from any circumstance
whatsoever, the performance or fulfillment of any provision hereof or of any
other agreement between Maker and Holder shall, at the time performance or
fulfillment of such provision shall be due, exceed the limit for Interest
prescribed by law, then, ipso facto, the obligation to be performed or fulfilled
shall be reduced to such limit, and if, from any circumstance whatsoever, Holder
should ever receive as Interest an amount which would exceed the highest lawful
rate, the amount which would be excessive Interest shall be applied to the
reduction of the principal balance owing hereunder (or, at Holder's option, or
if no principal shall be outstanding, be paid over to Maker) and not to the
payment of Interest.
14. Subordination; No Security. The indebtedness evidenced by this Note,
--------------------------
including all principal, interest and other sums owing hereunder, are
subordinate and subject in right of payment to the payment in full of all other
indebtedness of Maker. This Note is not secured by any assets of Maker or other
collateral.
15. Severability of Provisions. If any provision hereof shall, for any
--------------------------
reason and to any extent, be invalid or unenforceable, then the remainder of the
instrument in which such provision is contained, the application of the
provision to other persons, entities or circumstances, and any other instrument
referred to herein shall not be affected thereby but instead shall be
enforceable to the maximum extent permitted by law.
16. Successors to Maker or Holder. The term "Maker" as used herein shall
-----------------------------
include the original maker of this Note and any party who may subsequently
become primarily liable for the payment hereof. The term "Holder" as used
herein shall mean the original payee of this Note or, if this Note is
transferred, the then holder of this Note, provided that, until written notice
is given to Maker designating another party as Holder, Maker may consider the
Holder to be the original payee or the party last designated as Holder in a
written notice to Maker.
17. Notices. All notices, consent or other instruments or communications
-------
provided for under this Note shall be in writing, signed by the party giving the
same, and shall be deemed properly given and received when actually delivered
and received or three business days after mailed, if sent by registered or
certified mail, postage prepaid, to the address set forth in the first paragraph
of this Note, or to such other address as a party may designate by written
notice to the other party.
18. Captions for Convenience. The captions to the Sections hereof are for
------------------------
convenience only and shall not be considered in interpreting the provisions
hereof.
3
<PAGE>
19. Governing Law. Regardless of the place of its execution, this Note
-------------
shall be construed and enforced in accordance with the laws of the State of
Colorado.
MAKER:
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
By: ____________________________________
Name: ______________________________
Title: _____________________________
4
<PAGE>
EXHIBIT 10.6
LEASE
THIS AGREEMENT OF LEASE made and entered into on this 9th
------------------------
day of October , l996 by and between THE MINING EXCHANGE PARTNERS, LTD.,
------------- --
a Partnership organized under the laws of the State of Colorado, hereinafter
referred to as Landlord and
Communications Systems International (CSI)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
hereinafter referred to as Tenant,
WITNESSETH:
For and in consideration of the covenants and agreements herein contained,
Landlord does hereby lease to Tenant and Tenant does hereby lease from Landlord
the premises known and described as Suites 001/200/201 (5,128 Rentable Sq. Ft.)
--------------------------------------------
- --------------------------------------------------------------------------------
in the Mining Exchange Building at 8 South Nevada Ave.
---------------------- ----------------------------------------
- ---------------------------- in the City of Colorado Springs for such term
and such rental and subject to the convents and agreements set forth
hereinafter.
1. TERM:
The term of this lease shall be for a period of Two Years Four Months (2 1/3)
---------------------------------
year(s) commencing on September 1 , l996 and
-------------------------- --
terminating on December 31 , l998.
------------- --
2. RENTAL:
Tenant agrees to pay to Landlord as rent for said premises for the full term
aforesaid the total sum of One Hundred Twelve Thousand Four Hundred and
--------------------------------------------------
40/100 - - - - - - - - - - - - - - - - - - ($ 112,400.40) Dollars, payable as
- -------------------------------------------
follows:
9/O1/96 - 11/30/96 $2,035.00 per month $6,105.00
12/01/96 - 12/31/97 4,047.00 per month 52,611.00
01/01/98 - 12/31/98 4,473.70 per month 53,684.40
which said sum shall be due and payable in advance on the First day of
-------
each and every calendar month during said term at the office of Landlord, or
such other place in the City of Colorado Springs, Colorado as the Landlord from
time to time in writing may designate.
1
<PAGE>
3. SERVICES:
Landlord agrees, during the period of this lease:
a. To heat the demised premises whenever necessary during reasonable
business hours or customary heating season.
b. To provide the use of the passenger elevators (if the building is so
equipped) at all time during reasonable business hours, Sundays and
Holidays excepted.
c. To provide janitor service for the demised premises (trash everyday,
vacuuming three days a week).
d. To cause to be supplied, during ordinary business hours, a reasonable
amount of electric current for lighting said premises and public halls,
during the time and in the manner customary in said building. Tenant agrees
to use only such electric current as shall be supplied by Landlord for
lighting, air conditioning, and business machines and shall pay on demand
for use of electric current after ordinary business hours (8:00 AM to 6:00
PM) for any other purpose, or for any waste of electric current.
Tenant agrees that Landlord shall not be held liable for failure to supply
such heating, elevator, janitor or lighting services, or any of them, when such
failure is not due to negligence on Landlord's part, it being understood that
Landlord reserves the right to temporarily discontinue such services, or any of
them, at such times as may be necessary by reason of accident, repairs,
alterations or improvements, or whenever, by reason of strikes, lockouts, riots,
acts of God, or any other happening, Landlord is unable to furnish such
services.
Tenant agrees that if any payment of rent as herein provided shall remain
unpaid for more than ten (10) days, after the same shall become due, Landlord
may, without notice to Tenant, discontinue furnishing lighting, heating and
janitor services, or any of them, until all areas of rent shall have the first
been paid and discharged, and that Landlord shall not be liable for damages and
that such action shall in no way operate to release Tenant from the obligations
hereunder.
4. CHARACTER OF OCCUPANCY
Tenant agrees:
a. That the demised premises shall be used and occupied only as General
-----------
0ffices in a careful, safe and proper manner.
-----------
b. That it will pay on demand for any damage to the premises
2
<PAGE>
caused by the misuse of same by it, or its agents or employees or invitees.
c. That it will not use or permit the demised premises to be used for any
purposes prohibited by the laws of the United States or the State of
Colorado, or the ordinances of the City of Colorado Springs.
d. That it will not use or keep any substance or material in or about the
demised premises which may vitiate or endanger the validity of the
insurance on said building or increase the hazard of the risk, or which may
prove of offensive or annoying to other Tenants of the building.
e. That it will not permit any nuisance in the demised premises.
5. ALTERATIONS:
a. Landlord shall have the right at any time to enter the demised premises
to examine and inspect the same, or to make such repairs, additions, or
alterations as it may deem necessary or proper for the safety, improvement
or preservation thereof, and shall at all times have the right, at its
election, to make such alterations or changes to other portions of said
building as it may from time to time deem necessary and desirable.
b. Tenant shall make no alterations in or additions to the demised premises
without first obtaining the written consent of Landlord, and all additions
or improvements made by Tenant (except only moveable office furniture)
shall be deemed a part of the real estate and the permanent structure
thereon and shall remain upon and be surrendered with said premises as a
part thereof at the end of the said term, by lapse of time, or otherwise,
or at the option of Landlord, shall be removed at Tenant's expense and the
premises restored to their original state.
6. SUBLETTING:
Tenant agrees that it will not sublet the demised premises, or any part
thereof, nor assign this lease, or any interest therein, without the written
consent of Landlord first had and obtained.
7. INSOLVENCY:
Any assignment for the benefit of creditors or by operation of law shall
not be effective to transfer any rights hereunder to the said assignee without
the written consent of Landlord first having been obtained.
It is further agreed between the parties hereto that if Tenant shall be
declared insolvent or bankrupt, or if any assignment of Tenant's property shall
be made for the
3
<PAGE>
benefit of creditors or otherwise, or if Tenant's leasehold interest herein
shall be levied upon under execution, or seized by virtue of any writ of any
court of law, or a Trustee in Bankruptcy or a Receiver be appointed for the
property of Tenant, whether under the operation of State or Federal statues,
then and in any such case, Landlord may, at its option, immediacy, with or
without notice (notice being expressly waived) terminate this lease and
immediately retake possession of said premises, using such force as may be
necessary without being guilty of any manner of trespass or forcible entry or
detainer, and without same working any forfeiture of the obligations of Tenant
hereunder.
8. DEFAULT:
a. The following events are referred to, collectively, as "events of
default" or, individually, as an "event of default":
(1) Tenant defaults in the due and punctual payment of rent, and such
default continues for five days after written notice from Landlord;
however, Tenant will not be entitled to more than one written notice
for monetary defaults during any 12-month period, and if after such
written notice any rent is not paid when due, an event of default will
be considered to have occurred without further notice;
(2) Tenant vacates or abandons the premises;
(3) This lease or the premises or any part of the premises are taken
upon execution or by other process of law directed against Tenant, or
are taken or subject to any attachment by any creditor of Tenant or
claimant against Tenant, and said attachment is not discharged or
disposed of within fifteen days after its levy;
(4) Tenant files a petition in bankruptcy or insolvency or for
reorganization or arrangement under the bankruptcy laws of the United
States or under any insolvency act of any state, or admits the
material allegations of any such petition by answer or other wise, or
is dissolved or makes an assignment for the benefit or creditors;
(5) Involuntary proceedings under any such bankruptcy law or
insolvency act or for the dissolution of Tenant are instituted against
Tenant, or a receiver or trustee is appointed for all or substantially
all of the property of Tenant, and such proceeding is not dismissed or
such receivership or trusteeship vacated within sixty days after such
institution or appointment;
(6) Tenant breaches any of the other agreements, terms, covenants, or
conditions that this lease requires Tenant to perform, and such breach
continues for a period of thirty days after written notice from
Landlord to Tenant or, if such breach cannot be cured reasonably
within such thirty day period, if Tenant fails to diligently
commence to cure such breach within
4
<PAGE>
thirty days after written notice from Landlord and to complete such
cure within a reasonable time thereafter.
b. If any one or more events of default set forth in Section "a." occurs
then Landlord has the right, at its election:
(1) To give Tenant one written notice of Landlord's intention to
terminate this lease on the earliest date permitted by law or on any
later date specified in such notice, in which case Tenant's right to
possession of the premises will cease and this lease will be
terminated, except as to Tenant's liability, as if the expiration of
the term fixed in such notice were the end of the term;
(2) Without further demand or notice, to reenter and take possession
of the premises or any part of the premises, repossess the same, expel
Tenant and those claiming through or under Tenant, and remove the
effects of both or either, using such force for such purposes as may
be necessary, without being liable for prosecution, without being
deemed guilty of any manner or trespass, and without prejudice to any
remedies for arrears of monthly rent or other amounts payable under
this lease or as a result of any preceding breach of covenants or
conditions; or
(3) Without further demand or notice to cure any event of default and
to charge Tenant for the cost of effecting such cure, including
without limitation reasonable attorneys' fees and interest on the
amount so advanced at the rate of eighteen percent (18%) per annum,
provided that Landlord will have no obligation to cure any such event
of default of Tenant.
Should Landlord elect to reenter as provided in subsection (2), or should
Landlord take possession pursuant to legal proceedings or pursuant to any
notice provide by law, Landlord may, from time to time, without terminating
this lease, relet the premises or any part of the premises in Landlord's or
Tenant's name, but for the account of Tenant, for such term or terms (which
may be greater or less than the period which would otherwise have
constituted the balance of the term) and on such conditions and upon such
other terms (which may include concessions of free rent and alteration and
repair of the premises) as Landlord, in its reasonable discretion, may
determine, and Landlord may collect and receive the rent. Landlord will in
no way be responsible or liable for any failure to relet the premises, or
any part of the premises, or for any failure to collect any rent due on
such reletting. No such reentry or taking possession of the premises by
Landlord will be construed as an election on Landlord's part to terminate
this lease unless a written notice of such intention is given to Tenant. No
written notice from Landlord under this Section or under a forcible or
unlawful entry and detainer
5
<PAGE>
statute or similar law will constitute an election by Landlord to terminate
this lease unless such notice specifically so states. Landlord reserves the
right following any such reentry or reletting to exercise its right to
terminate this lease by giving Tenant such written notice, in which event
this lease will terminate as specified in such notice.
c. In the event that Landlord does not elect to terminate this lease as
permitted in Section 8 b.(l), but on the contrary elects to take possession
as provided in Section 8 b.(2), Tenant will pay to Landlord monthly rent
and other sums as provided in this lease that would be payable under this
lease if such repossession had not occurred, less the net proceeds, if any,
of any reletting of the premises after deducting all of Landlord's
reasonable expenses in connection with such reletting, including without
limitation all repossession costs, brokerage commissions, attorneys' fees,
expenses of employees, alteration and repair costs, and expenses of
preparation for such reletting. If, in connection with any reletting, the
new lease term extends beyond the existing term, or part of the premises, a
fair apportionment of the rent received from such reletting and the
expenses incurred in connection with such reletting as provided in this
Section will be made in determining the net proceeds from such reletting,
and any rent concessions will be equally apportioned over the term of the
new lease. Tenant will pay such rent and other sums to Landlord monthly on
the day on which the monthly rent would have been payable under this lease
if possession had not been retaken, and Landlord will be entitled to
receive such rent and other sums from Tenant on each such day.
d. If this lease is terminated on account of the occurrence of an event of
default, Tenant will remain liable to Landlord for damages in an amount
equal to monthly rent and other amounts that would have been owing by
Tenant for the balance of the term, had this lease not been terminated,
less the net proceeds, if any, of any reletting of the premises by Landlord
subsequent to such termination, after deducting all of Landlord's expenses
in connection with such reletting, including without limitation the
expenses enumerated in Section c. (above). Landlord will be entitled to
collect such damages from Tenant monthly on the day on which monthly rent
and other amounts would have been payable under his lease if this lease had
not been terminated. Alternatively, at the option of Landlord, in the event
this lease is so terminated, Landlord will be entitled to recover against
Tenant as damages for loss of the bargain and not as penalty:
(1) The worth at the time of award of the unpaid rent that had been
earned at the time of termination;
(2) The worth at the time of award of the amount by which the unpaid
rent that 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;
6
<PAGE>
(3) The worth at the time of award of the amount by which the unpaid
rent for the balance of the term of this lease (had the same not been
so terminated by Landlord) after the time of award exceeds the amount
of such rental loss that Tenant proves could be reasonably avoided;
(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.
The "worth at the time of award" of the amounts referred to in clauses
(1) and (2) above is computed by adding interest at the per annum interest
rate described in Section 8 a. (3) (above) on the date on which this lease
terminated from the date of termination until the time of the award.
e. Any suit or suits for the recovery of the amounts and damages set forth
in Sections 8 c. and 8 d. may be brought by Landlord, from time to time, at
Landlord's election, and nothing in this lease will be deemed to require
Landlord to await the date upon which this lease or the term would have
expired had there occurred no event of default. Each right and remedy
provided for in this lease is cumulative and is in addition to every other
right or remedy for in this lease or now or after the lease date existing
at law or in equity or by statute or otherwise, and the exercise or
beginning of the exercise by Landlord of any one or more of the rights or
remedies provided for in this lease or now or after the lease date
existing at law or in equity or by statute or otherwise will not preclude
the simultaneous or later exercise Landlord of any or all other rights or
remedies provided for in this lease or now or after the lease date
existing at law or in equity or by statute or otherwise. All costs incurred
by Landlord in collecting any amounts and damages owing by Tenant pursuant
to the provisions of this lease or to enforce any provision of this lease,
including reasonable attorneys' fees from the date any such matter is
turned over to an attorney, whether or not one or more actions are
commenced by Landlord, will also be recoverable by Landlord from Tenant.
f. Tenant waives any right of redemption arising as a result of Landlord's
exercise of its remedies under this Article 8.
g. Any rent that is not paid when due will accrue interest at the rate of
eighteen percent (18%) per annum (but in no event in an amount in excess
of the maximum rate allowed by applicable law) from the date on which it
was due until the date on which it is paid in full with accrued interest.
In addition, in the event any payment due under this lease is not received
on or before the tenth day after the due date, Tenant shall pay to Landlord
a late charge equal to five percent (5%) of the past due amount, which
charge will help compensate Landlord for the administrative and other
expenses incurred by Landlord as a result of the late payment.
7
<PAGE>
9. PREMISES VACATED DURING TERM OF LEASE:
If Tenant shall abandon or vacate said premises before the end of the term
of this lease, Landlord may, at its option and without notice, enter said
premises, remove any signs of Tenant therefrom, and re-let the same, or any part
of thereof, as it may see fit, without thereby voiding or terminating this
lease, and, for the purpose of such re-letting, Landlord is authorized to make
any repairs, changes, alterations or additions in or to said premises, as may,
in the option of Landlord, be necessary or desirable for the purpose of such re-
letting, all at the cost of Tenant, and if a sufficient sum shall not be
realized from said re-letting (after payment of all costs and expenses of such
repairs, changes or alterations, and the expense of said re-letting and the
collection of rent accruing therefrom), each month to equal the monthly rental
agreed to be paid by Tenant under the provisions of this lease, then Tenant
agrees to pay such deficiency each month upon demand therefor.
10. REMOVAL OF TENANTS PROPERTY:
If Tenant shall fail to remove all effects from said premises upon the
abandonment thereof or upon the termination of this lease for any cause
whatsoever, Landlord, at its option, may remove the same in any manner that it
shall choose and store the said effects without liability to Tenant for loss
thereof, and Tenant agrees to pay Landlord on demand, any and all expenses
incurred in such removal, including court costs and attorney's fees and storage
charges on such effects for any length of time the same shall be in Landlords
possession; or Landlord, at its option, without notice, may sell said effects,
or any of the same, at private sale and without legal process, for such prices
as Landlord may obtain, and apply the proceeds of such sale upon any amounts due
under this lease from Tenant to Landlord and upon the expense incident to the
removal and sale of said effects, rendering the surplus if any, to Tenant.
11. LOSS OR DAMAGE TO TENANTS PROPERTY:
All personal property or leasehold improvements of any kind or description
whatsoever in the demised premises shall be at Tenant's sole risk, and Landlord
shall not be held liable for any damage done to or loss of such personal
property, or for damage or loss suffered by the business or occupation of Tenant
arising from any act or neglect of covenants or other occupants of the building,
or of their employees or the employees of the Landlord or of other persons, or
from fire of other casualty, bursting, overflowing or leaking of water, sewer or
steam pipes, or from heating or plumbing fixtures, or from electric wires, or
from gases, or odors, or caused in any other manner whatsoever, except in the
case of willful neglect on the part of Landlord.
8
<PAGE>
12. LIEN ON TENANT'S FURNISHINGS:
Tenant hereby conveys to Landlord all of the personal property situated on
the leases premises as security for the payment of all rentals due or to become
due hereunder. Said property shall not be removed therefrom without the consent
of Landlord until all rentals due or to become due hereunder shall have first
been paid and discharged. It is intended by the parties hereto that this
instrument shall have the effect of a mortgage and lien upon such property, and
Landlord, upon default of Tenant in the payment of rent, may take possession of
said property either to its own use or to sell the same for the best price that
can be obtained at public or private sale, and out of the money arising
therefrom pay the amount due to Landlord, and all costs growing out of the
execution of the provisions hereof, paying the surplus, if any, to Tenant. If
said property, or any portion thereof, shall be offered at public auction,
Landlord may become the purchaser thereof.
13. SURRENDER OF POSSESSION:
Tenant agrees to deliver up and surrender to Landlord possession of said
premises at the expiration or termination of this lease, by lapse of time or
otherwise, in as good repair as when Tenant obtained the same at the
commencement of said term, excepting only ordinarily wear and decay.
14. ACCEPTANCE OF PREMISES BY TENANT:
The taking possession of said premises by Tenant shall be conclusive
evidence as against Tenant that said premises were in good and satisfactory
conditions when possession of the same was taken.
15. WAIVER:
No waiver of any breach of any one or more of the conditions or covenants
of this lease by Landlord shall be deemed to imply or constitute a waiver of any
succeeding or other breach hereunder.
16. AMENDMENT OR MODIFICATION:
Tenant acknowledges and agrees that it has not relied upon any statements,
representations, agreements or warranties, except such as are expressed herein,
and that no amendment or modifications of this lease shall be valid or binding
unless expressed in writing and executed by the parties hereto in the same
manner as the execution of this lease.
9
<PAGE>
17. PAYMENTS AFTER TERMINATION:
No payments of money by Tenant to Landlord after the termination of this
lease, in any manner, or after the giving of any notice (other than a demand
for the payment of money) by Landlord to Tenant shall reinstate, continue or
extend the term of this lease or affect any notice given to Tenant prior to the
payment of such money, it being agreed that after the service of notice or the
commencement of a suit or after final judgment granting Landlord possession of
said premises, Landlord may receive and collect any sums of rent due, or any
other sums of money due under the terms of this lease, and the payment of such
sums of money whether as rent of otherwise, shall not waive said notice, or in
any manner affect any pending suit or any judgment therefore.
18. HOLDING AFTER TERMINATION:
It is mutually agreed that if, after the expiration of this lease, Tenant
shall remain in possession of said premises without a written agreement as to
such holding, then such holding over shall be deemed and taken to be a holding
upon a tenancy from month to month at a monthly rental equivalent to one and
one-half times the last monthly payment hereinbefore provided for, payable in
advance on the same day of each month as above provided, all other terms and
conditions of this lease remaining the same.
19. RULES AND REGULATIONS:
Landlord reserves the right to adopt rules and regulations from time to
time governing the management of the building and use thereof by Tenants. Tenant
agrees that its employees and agents, or any others permitted by Tenant, to
occupy or enter said premises, will at all times abide by said rules and
regulations as they may be amended from time to time, and that a default in the
performance and observance thereof shall operate the same as any other defaults
herein.
Attached hereto as Exhibit "A" is the current list of rules and regulations
presently in force and effect. At such time as Landlord adopts any amendments to
such rules and regulations, Landlord shall provide Tenant with copy thereof at
least ten (10) days prior to the enforcement of the provisions of any such
amendments.
20. SECURITY DEPOSITS:
It is agreed that Tenant, concurrently with the execution of this lease,
has deposited with Landlord, and will keep $680.00, as security for the
-------
payment by Tenant of the rent and other charges herein agreed to be paid, and
for the performance of all the terms, conditions and covenants of this lease.
If, at any time during the term of this lease, Tenant shall be in default in the
performance of any provision of this lease, Landlord shall have the right to use
said deposit, or so much thereof as necessary, in payment of any rental in
default as aforesaid and in reimbursement of any expense incurred by Landlord
10
<PAGE>
and in payment of any damages incurred by Landlord by reason or Tenant's
default, or at the option of Landlord, the same may be retained by Landlord, and
applied in Liquidation or any damages suffered by it by reason of Tenant's
default. In such event, Tenant shall, on written demand of Landlord, forwith
remit to Landlord a sufficient amount in cash to restore said deposit to its
original amount. In the event said deposit has not been utilized as aforesaid,
said deposit, or so much thereof as has not been utilized for said purposes,
shall be refunded to Tenant, without interest, upon full performance of this
lease by Tenant. Said return shall be made within 60 days after the termination
date of this lease. Landlord shall have the right to commingle said deposit with
other funds or Landlord. Landlord shall deliver the balance of said funds, if
any, deposited herein by Tenant to the purchaser or Landlord's interest in the
leased premises in the event such interest be sold and, thereupon, Landlord
shall be discharged from further liability with respect to such deposit.
21. QUIET POSSESSION:
Provided Tenant is not in default under this lease, Landlord shall warrant
and defend Tenant in the enjoyment and peaceful possession of the premises
during the term aforesaid and all terms, conditions and convenience to be
observed and performed by the parties hereto shall be applicable to and binding
upon their heirs, administrator, executors, successors or assigns.
22. DEMOLITION NOTICE:
It is agreed that at any time during the terms of this lease, Lessor,
(Landlord) shall have the right to terminate this lease if it or it's assignees,
grantees or any successor in interest should desire to demolish the building
containing the demised premises. Termination shall be made by delivering written
notice to Lessee of such intention to demolish, which notice shall require
Lessee to vacate said premises no sooner than ninety (90) days from the date of
said notice. Lessor or it's assignees, grantees or any successor in interest may
commence the demolition of said building at any time subsequent to the date
Lessee is required to vacate the premises.
23. OTHER PROVISIONS:
11
<PAGE>
IN WITNESS WHEREOF, the said Landlord and Tenant have caused their
respective names and seals to be affixed hereto in triplicate the day and year
first above written.
LANDLORD
ATTEST: THE MINING EXCHANGE PARTNERS, LTD.
By: /s/ signature illegible
- ------------------------- ------------------------------
MANAGER
TENANT
By: /s/ signature illegible
- ------------------------- ------------------------------
12
<PAGE>
Exhibit A
RULES AND REGULATIONS
---------------------
1. The sidewalks, entries, passages, stairways and elevators shall not be
obstructed by the Tenant, or its agents, or used by them for any purpose
other than ingress and egress to and from their offices.
2. a. Furniture, equipment or supplies shall be moved in or out of the
building only during such hours and in such manner as may be
prescribed by Landlord.
b. No safe or article, the weight of which may constitute a hazard or
danger to the building or its equipment shall be moved into the
premises.
c. Safes and other equipment, the weight of which is not excessive, shall
be moved into, from or about the building only during such hours and
in such manner as shall be prescribed by Landlord, and Landlord shall
have the right to designate the location of such articles in the space
hereby demised.
3. Signs, notices, advertisements or other inscriptions shall not be placed
upon any part of the building except in such locations and by such sign
writers, and of such size, form and color, as shall be first specified by
Landlord.
4. Water closets and other water fixtures shall not be used for any purpose
other than that for which the same are intended, and any damage resulting
to the same from misuse on the part of Tenant, its agents or employees,
shall be paid for by Tenant, no person shall waste water by tying back or
wedging the faucets, or in any other manner.
5. No animals, except handicap aid dogs, shall be allowed in the offices,
halls, corridors and elevators in the building.
6. Bicycles or other vehicles shall not be permitted in the offices, halls,
corridors and elevators in the building, nor shall any obstruction of
sidewalks or entrances of the building by such be permitted.
7. No person shall disturb the occupants of this or adjoining buildings or
premises by the use of any radio or musical instrument or by the making of
loud or improper noises.
8. No additional lock or locks shall be placed by Tenant on any door in the
building unless written consent of the Landlord shall first have been
obtained. A reasonable number of keys to the demised premises and to the
toilet rooms will be furnished by Landlord, and neither Tenant, its agents
or employees, shall have any duplicate key made. At the termination of this
tenancy, Tenant shall promptly return to Landlord all keys to offices,
toilet rooms or vaults.
9. No equipment, awnings, or any other items shall be placed on the exterior
of the building or on any window ledge without written consent from the
Landlord.
10. Tenant, before closing and leaving the demised premises at any time, shall
see that all windows are closed, in order to avoid possible damage from
fire, storm or freezing, and shall re-lock all outside building doors if
used during non-business hours.
11. Tenant shall not install or operate any steam or gas engine or boiler, or
carry on any mechanical business in the demised premises. The use of oil,
gas or flammable liquids for heating, lighting or any other purpose is
expressly prohibited. Explosives or other articles deemed extra hazardous
shall not be brought in to the building.
12. Any painting or decorating as may be agreed to be done by and at the
expense of Landlord shall be done during regular working hours, should
Tenant desire such work done on Sundays, holidays or outside of regular
working hours, Tenant shall pay for the extra cost thereof.
13. Tenant shall not mark upon, paint signs upon, cut drill into, drive nails
or screws into, or in any way deface the walls, ceilings, partitions or
floors of the demised premises or of the building, and any defacement,
damage or injury caused by Tenant, its agents or employees, shall be paid
for by Tenant.
14. No parking is permitted in the alleys except for deliveries and workmen.
15. All requests for service, repair or other maintenance shall be made
directly to the office of Landlord.
16. Smoking is not permitted in any area of the building, including individual
offices.
17. Landlord shall at all times have the right, by its officer or agents, to
enter the demised premises to inspect and examine the same, and to show the
same to persons wishing to lease them, and may at any time within fifteen
days next preceding the termination of this tenancy, place upon the doors
and windows of the premises the notice "For Rent", which said notice shall
not be removed by Tenant.
18. Landlord reserves the right to make such other and further reasonable rules
and regulations as, in its judgment, may from time to time be needful and
desirable for the safety, care and cleanliness of premises and for the
preservation of good order therein.
<PAGE>
LEASE
THIS AGREEMENT OF LEASE made and entered into on this 9th day of October, 1996,
--- ------- --
by and between THE MINING EXCHANGE PARTNERS, LTD., a Partnership organized under
the laws of the State of Colorado,
hereinafter
referred to as Landlord and
Communications Systems International (CSI)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
hereinafter referred to as Tenant,
WITNESSETH:
For and in consideration of the covenants and agreements herein contained,
Landlord does hereby lease to Tenant and Tenant does hereby lease from Landlord
the premises known end described as Suites 001/200/201 (5,128 Rentable Sq. Ft.)
-------------------------------------------
in the Mining Exchange Building at 8 South Nevada Ave. in the City of Colorado
--------------- -------------------
Springs for such term and such rental and subject to the convents and agreements
set forth hereinafter.
1. TERM:
The terms of this lease shall be for a period of Two Years Four Months (2 1/3)
-----------------------------
year(s) commencing on September 1, 1996 and terminating on December 31, 1998.
----------- -- ----------- --
2. RENTAL:
Tenant agrees to pay to Landlord as rent for said premises for the full term
aforesaid the total sum of One Hundred Twelve Thousand Four Hundred and
-----------------------------------------------------
40/100 - - - - - - - -($ 112,400.40 Dollars, payable as follows:
- ----------------------
9/01/96 - 11/30/96 $2,035.00 per month $6,105.00
12/01/96 - 12/31/97 4,047.00 per month 52,611.00
01/01/98 - 12/31/98 4,473.70 per month 53,684.40
which said sum shall be due and payable in advance on the First day of each and
-----
every calendar month during said term at the office of Landlord, or such other
place in the City of Colorado Springs, Colorado as the Landlord from time to
time in writing may designate.
1
<PAGE>
MINING EXCHANGE PARTNERS, LTD.
121 East Pikes Peak, Suite 335
Colorado Springs, CO 80903
(719) 575-0075
(Fax) 575-0065
March 31, 1997
ADDENDUM TO LEASE
This addendum to the lease dated October 9, 1996 between the Mining
Exchange Partners, Ltd., Landlord, and Communications Systems International
(CSI), Tenant is for the purpose to add Vault No. 2B on the second floor through
the term of the lease (December 31, 1998) and the voice mail unit currently
under a master lease with Union Federal Savings, Indianapolis, Indiana which
extends through September 5, 1998. The lease for the mail unit, carries a buy-
out option at the end of the lease at the then current market value.
The additional rent is a follows: Vault 2B 25.00 per Month
Voice Mail Unit 130.00 per Month
Mining Exchange Partners, Ltd.
/s/ Charles C. Brown
----------------------------------
Charles C. Brown
Property Manager
Acknowledged and Accepted:
/s/ SIGNATURE ILLEGIBLE
- ---------------------------
CS International, Tenant
<PAGE>
MINING EXCHANGE PARTNERS, LTD.
121 East Pikes Peak, Suite 335
Colorado Springs, CO 80903
(719) 575-0075
(Fax) 575-0065
January 24, 1997
ADDENDUM TO LEASE
This addendum to the lease between Mining Exchange Partners, Ltd.,
Landlord, and Communications Systems International, (CSI), Tenant, dated October
9, 1996, is for the purpose to add 517 rentable square feet adjacent to the
leased area known as Suite 200/202 in the Mining Exchange Building.
This additional lease space will increase the above noted lease payments as
follows:
February 1, 1997 - December 31, 1997 $4,477.80 per month
January 1, 1998 - December 31, 1998 4,947.60 per month
All other conditions of the lease will remain in effect.
Mining Exchange Partners, Ltd.
/s/ Charles C. Brown
-------------------------------
Charles C. Brown
Property Manager
Acknowledged and Accepted:
SIGNATURE ILLEGIBLE
- ------------------------------
CS International, Tenant
<PAGE>
MINING EXCHANGE PARTNERS, LTD.
121 EAST PIKES PEAK AVENUE, SUITE 335
Colorado Springs, CO 80903
(719) 575-0075
Fax 575-0065
November 11, 1996
Mr. Ken Weiland
CS International
8 South Nevada Avenue, #101
Colorado Spring, CO 80903
Dear Ken,
According to the lease dated December 1, 1994 between the Mining Exchange
Partners, Ltd. and CSI, CSI has the option to extend the lease for three (3)
years at the following rates:
Jan. 1, 1997 - Dec. 1997 $5,528.00 per month
Jan. 1, 1998 - Dec. 1998 6,449.00 per month
Jan. 1, 1999 - Dec. 1999 7,371.00 per month
If you intend to exercise this option please acknowledge this letter by
signing in the appropriate place. Thanks for your attention.
Mining Exchange Partners, Ltd.
/s/ Charles C. Brown
------------------------------
Property Manager
Acknowledged and Accepted
SIGNATURE ILLEGIBLE
- ------------------------------
CS International
<PAGE>
LEASE
THIS AGREEMENT OF LEASE made and entered into on this 1 (first) day of
---------
December , 1994, by and between THE MINING EXCHANGE PARTNERS, LTD., a
- ----------------
Partnership organized under the laws of the State of Colorado, hereinafter
referred to as Landlord and Communication Systems International (CSI)
-----------------------------------------
hereinafter referred to as Tenant,
WITNESSETH:
For and in consideration of the covenants and agreements herein contained,
Landlord does hereby lease to Tenant and Tenant does hereby lease from Landlord
the premises known and described as Suite 101 in the Mining Exchange Building at
--------- --------------
8 S. Nevada in the City of Colorado Springs for such term and such rental and
- -----------
subject to the convents and agreements set forth hereinafter.
1. TERM:
The term of this lease shall be for a period of 2 (two) year(s) commencing on
-------
December 1, 1994 and terminating on December 31, 1996.
- ---------------- -----------------
2. RENTAL:
Tenant agrees to pay to Landlord as rent for said premises for the full term
aforesaid the total sum of $105,794.00 (One hundred thousand five, seven hundred
-----------------------------------------------------
ninety-four dollars. ($ ) Dollars, payable as follows:
- --------------------
$3300/Month x 4 = $13,200 = $7.16/sq. ft. 12-1-94 through 3-31-95
$4146/Month x 9 = $37,314 = $9.00/sq. ft. 4-1-95 through 12-31-95
$4606/Month x 12 = $55,280 = $10.00/sq. ft. 1-1-96 through 12-31-96
Total of 5528 sq.ft.
which said sum shall be due and payable in advance on the 1 (first) day of
---------
each and every calendar month during said term at the office of Landlord, or
such other place in the City of Colorado Springs, Colorado as the Landlord from
time to time in writing may designate.
1
<PAGE>
3. SERVICES:
Landlord agrees, during the period of this lease:
a. To heat the demised premises whenever necessary during reasonable
business hours or customary heating season.
b. To provide the use of the passenger elevators (if the building is so
equipped) at all time during reasonable business hours, Sundays and
Holidays excepted.
c. To provide janitor service for the demised premises (trash everyday,
vacuuming three days a week).
Tenant agrees that Landlord shall not be held liable for failure to supply
such heating, elevator, janitor or lighting services, or any of them, when such
failure is not due to negligence on Landlord's part, it being understood that
Landlord reserves the right to temporarily discontinue such services, or any of
them, at such times as may be necessary by reason of accident, repairs,
alterations or improvements, or whenever, by reason of strikes, lockouts, riots,
acts of God, or any other happening, Landlord is unable to furnish such
services.
Tenant agrees that if any payment of rent as herein provided shall remain
unpaid for more than ten (10) days, after the same shall become due, Landlord
may, without notice to Tenant, discontinue furnishing lighting, heating and
janitor services, or any of them, until all areas of rent shall have the first
been paid and discharged, and that Landlord shall not be liable for damages and
that such action shall in no way operate to release Tenant from the obligations
hereunder.
4. CHARACTER OF OCCUPANCY
Tenant agrees:
a. That the demised premises shall be used and occupied only as general
-------
offices in a careful, safe and proper manner.
-------
b. That it will pay on demand for any damage to the premises
2
<PAGE>
caused by the misuse of same by it, or its agents or employees or invitees.
c. That it will not use or permit the demised premises to be used for any
purposes prohibited by the laws of the United States or the State of
Colorado, or the ordinances of the City of Colorado Springs.
d. That it will not use or keep any substance or material in or about the
demised premises which may vitiate or endanger the validity of the
insurance on said building or increase the hazard of the risk, or which may
prove offensive or annoying to other Tenants of the building.
e. That it will not permit any nuisance in the demised premises.
5. ALTERATIONS:
a. Landlord shall have the right at any time to enter the demised premises
to examine and inspect the same, or to make such repairs, additions, or
alterations as it may deem necessary or proper for the safety, improvement
or preservation thereof, and shall at all times have the right, at its
election, to make such alterations or changes to other portions of said
building as it may from time to time deem necessary and desirable.
b. Tenant shall make no alterations in or additions to the demised premises
without first obtaining the written consent of Landlord, and all additions
or improvements made by Tenant (except only moveable office furniture)
shall be deemed a part of the real estate and the permanent structure
thereon and shall remain upon and be surrendered with said premises as a
part thereof at the end of the said term, by lapse of time, or otherwise,
or at the option of Landlord, shall be removed at Tenant's expense and the
premises restored to their original state.
6. SUBLETTING:
Tenant agrees that it will not sublet the demised premises, or any part
thereof, nor assign this lease, or any interest therein, without the written
consent of Landlord first had and obtained.
7. INSOLVENCY:
Any assignment for the benefit of creditors or by operation of law shall
not be effective to transfer any rights hereunder to the said assignee without
the written consent of Landlord first having been obtained.
It is further agreed between the parties hereto that if Tenant shall be
declared insolvent or bankrupt, or if any assignment of Tenant's property shall
be made for the
3
<PAGE>
benefit of creditors or otherwise, or if Tenant's leasehold interest herein
shall be levied upon under execution, or seized by virtue of any writ of any
court of law, or a Trustee in Bankruptcy or a Receiver be appointed for the
property of Tenant, whether under the operation of State or Federal statues,
then and in any such case, Landlord may, at its option, immediacy, with or
without notice (notice being expressly waived) terminate this lease and
immediately retake possession of said premises, using such force as may be
necessary without being guilty of any manner of trespass or forcible entry or
detainer, and without same working any forfeiture of the obligations of Tenant
hereunder.
8. DEFAULT:
a. The following events are referred to, collectively, as "events of
default" or, individually, as an "event of default":
(1) Tenant defaults in the due and punctual payment of rent, and such
default continues for five days after written notice from Landlord;
however, Tenant will not be entitled to more than one written notice
for monetary defaults during any 12-month period, and if after such
written notice any rent is not paid when due, an event of default will
be considered to have occurred without further notice;
(2) Tenant vacates or abandons the premises;
(3) This lease or the premises or any part of the premises are taken
upon execution or by other process of law directed against Tenant, or
are taken or subject to any attachment by any creditor of Tenant or
claimant against Tenant, and said attachment is not discharged or
disposed of within fifteen days after its levy;
(4) Tenant files a petition in bankruptcy or insolvency or for
reorganization or arrangement under the bankruptcy laws of the United
States or under any insolvency act of any state, or admits the material
allegations of any such petition by answer or other wise, or is
dissolved or makes an assignment for the benefit or creditors;
(5) Involuntary proceedings under any such bankruptcy law or insolvency
act or for the dissolution of Tenant are instituted against Tenant, or
a receiver or trustee is appointed for all or substantially all of the
property of Tenant, and such proceeding is not dismissed or such
receivership or trusteeship vacated within sixty days after such
institution or appointment;
(6) Tenant breaches any of the other agreements, terms, covenants, or
conditions that this lease requires Tenant to perform, and such breach
continues for a period of thirty days after written notice from
Landlord to Tenant or, if such breach cannot be cured reasonably within
such thirty day period, if Tenant fails to diligently commence to
cure such breach within
4
<PAGE>
thirty days after written notice from Landlord and to complete such
cure within a reasonable time thereafter.
b. If any one or more events of default set forth in Section "a." occurs
then Landlord has the right, at its election:
(1) To give Tenant one written notice of Landlord's intention to
terminate this lease on the earliest date permitted by law or on any
later date specified in such notice, in which case Tenant's right to
possession of the premises will cease and this lease will be
terminated, except as to Tenant's liability, as if the expiration of
the term fixed in such notice were the end of the term;
(2) Without further demand or notice, to reenter and take possession of
the premises or any part of the premises, repossess the same, expel
Tenant and those claiming through or under Tenant, and remove the
effects of both or either, using such force for such purposes as may be
necessary, without being liable for prosecution, without being
deemed guilty of any manner or trespass, and without prejudice to any
remedies for arrears of monthly rent or other amounts payable under
this lease or as a result of any preceding breach of covenants or
conditions; or
(3) Without further demand or notice to cure any event of default and
to charge Tenant for the cost of effecting such cure, including without
limitation reasonable attorneys' fees and interest on the amount so
advanced at the rate of eighteen percent (18%) per annum, provided
that Landlord will have no obligation to cure any such event of default
of Tenant.
Should Landlord elect to reenter as provided in subsection (2), or should
Landlord take possession pursuant to legal proceedings or pursuant to any
notice provide by law, Landlord may, from time to time, without terminating
this lease, relet the premises or any part of the premises in Landlord's or
Tenant's name, but for the account of Tenant, for such term or terms (which
may be greater or less than the period which would otherwise have
constituted the balance of the term) and on such conditions and upon such
other terms (which may include concessions of free rent and alteration and
repair of the premises) as Landlord, in its reasonable discretion, may
determine, and Landlord may collect and receive the rent. Landlord will in
no way be responsible or liable for any failure to relet the premises, or
any part of the premises, or for any failure to collect any rent due on
such reletting. No such reentry or taking possession of the premises by
Landlord will be construed as an election on Landlord's part to terminate
this lease unless a written notice of such intention is given to Tenant. No
written notice from Landlord under this Section or under a forcible or
unlawful entry and detainer
5
<PAGE>
statute or similar law will constitute an election by Landlord to terminate
this lease unless such notice specifically so states. Landlord reserves the
right following any such reentry or reletting to exercise its right to
terminate this lease by giving Tenant such written notice, in which event
this lease will terminate as specified in such notice.
c. In the event that Landlord does not elect to terminate this lease as
permitted in Section 8 b.(1), but on the contrary elects to take possession
as provided in Section 8 b.(2), Tenant will pay to Landlord monthly rent
and other sums as provided in this lease that would be payable under this
lease if such repossession had not occurred, less the net proceeds, if any,
of any reletting of the premises after deducting all of Landlord's
reasonable expenses in connection with such reletting, including without
limitation all repossession costs, brokerage commissions, attorneys' fees,
expenses of employees, alteration and repair costs, and expenses of
preparation for such reletting. If, in connection with any reletting, the
new lease term extends beyond the existing term, or part of the premises, a
fair apportionment of the rent received from such reletting and the
expenses incurred in connection with such reletting as provided in this
Section will be made in determining the net proceeds from such reletting,
and any rent concessions will be equally apportioned over the term of the
new lease. Tenant will pay such rent and other sums to Landlord monthly on
the day on which the monthly rent would have been payable under this lease
if possession had not been retaken, and Landlord will be entitled to
receive such rent and other sums from tenant on each such day.
d. If this lease is terminated on account of the occurrence of an event of
default, Tenant will remain liable to Landlord for damages in an amount
equal to monthly rent and other amounts that would have been owing by
Tenant for the balance of the term, had this lease not been terminated,
less the net proceeds, if any, of any reletting of the premises by Landlord
subsequent to such termination, after deducting all of Landlord's expenses
in connection with such reletting, including without limitation the
expenses enumerated in Section c. (above). Landlord will be entitled to
collect such damages from Tenant monthly on the day on which monthly rent
and other amounts would have been payable under his lease if this lease had
not been terminated. Alternatively, at the option of Landlord, in the event
this lease is so terminated, Landlord will be entitled to recover against
Tenant as damages for loss of the bargain and not as penalty:
(1) The worth at the time of award of the unpaid rent that had been
earned at the time of termination;
(2) The worth at the time of award of the amount by which the unpaid
rent that 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;
6
<PAGE>
(3) The worth at the time of award of the amount by which the unpaid rent
for the balance of the term of this lease (had the same not been so
terminated by Landlord) after the time of award exceeds the amount of such
rental loss that Tenant proves could be reasonably avoided;
(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.
The "worth at the time of award" of the amounts referred to in clauses (1)
and (2) above is computed by adding interest at the per annum interest rate
described in Section 8 a.(3) (above) on the date on which this lease terminated
from the date of termination until the time of the award.
e. Any suit or suits for the recovery of the amounts and damages set forth in
Sections 8 c. and 8 d. may be brought by Landlord, from time to time, at
Landlord's election, and nothing in this lease will be deemed to require
Landlord to await the date upon which this lease or the term would have expired
had there occurred no event of default. Each right and remedy provided for in
this lease is cumulative and is in addition to every other right or remedy for
in this lease or now or after the lease date existing at law or in equity or by
statute or otherwise, and the exercise or beginning of the exercise by Landlord
of any one or more of the rights or remedies provided for in this lease or now
or after the lease date existing at law or in equity or by statute or otherwise
will not preclude the simultaneous or later exercise Landlord of any or all
other rights or remedies provided for in this lease or now or after the lease
date existing at law or in equity or by statute or otherwise. All costs incurred
by Landlord in collecting any amounts and damages owing by Tenant pursuant to
the provisions of this lease or to enforce any provision of this lease,
including reasonable attorney's fees from the date any such matter is turned
over to an attorney, whether or not one or more actions are commenced by
Landlord, will also be recoverable by Landlord from Tenant.
f. Tenant waives any right of redemption arising as a result of Landlord's
exercise of its remedies under this Article 8.
g. Any rent that is not paid when due will accrue interest at the rate of
eighteen percent (18%) per annum (but in no event in an amount in excess of the
maximum rate allowed by applicable law) from the date on which it was due until
the date on which it is paid in full with accrued interest. In addition, in the
event any payment due under this lease is not received on or before the tenth
day after the due date, Tenant shall pay to Landlord a late charge equal to five
percent (5%) of the past due amount, which charge will help compensate Landlord
for the administrative and other expenses incurred by Landlord as a result of
the late payment.
7
<PAGE>
9. PREMISES VACATED DURING TERM OF LEASE:
If Tenant shall abandon or vacate said premises before the end of the term
of this lease, Landlord may, at its option and without notice, enter said
premises, remove any signs of Tenant therefrom, and re-let the same, or any part
of thereof, as it may see fit, without thereby voiding or terminating this
lease, and, for the purpose of such re-letting, Landlord is authorized to make
any repairs, changes, alterations or additions in or to said premises, as may,
in the option of Landlord, be necessary or desirable for the purpose of such re-
letting, all at the cost of Tenant, and if a sufficient sum shall not be
realized from said re-letting (after payment of all costs and expenses of such
repairs, changes or alterations, and the expense of said re-letting and the
collection of rent accruing therefrom), each month to equal the monthly rental
agreed to be paid by Tenant under the provisions of this lease, then Tenant
agrees to pay such deficiency each month upon demand therefor.
10. REMOVAL OF TENANTS PROPERTY:
If Tenant shall fail to remove all effects from said premises upon the
abandonment thereof or upon the termination of this lease for any cause
whatsoever, Landlord, at its option, may remove the same in any manner that it
shall choose and store the said effects without liability to Tenant for loss
thereof, and Tenant agrees to pay Landlord on demand, any and all expenses
incurred in such removal, including court costs and attorney's fees and storage
charges on such effects for any length of time the same shall be in Landlords
possession; or Landlord, at its option, without notice, may sell said effects,
or any of the same, at private sale and without legal process, for such prices
as Landlord may obtain, and apply the proceeds of such sale upon any amounts due
under this lease from Tenant to Landlord and upon the expense incident to the
removal and sale of said effects, rendering the surplus if any, to Tenant.
11. LOSS OR DAMAGE TO TENANTS PROPERTY:
All personal property or leasehold improvements of any kind or description
whatsoever in the demised premises shall be at Tenant's sole risk, and Landlord
shall not be held liable for any damage done to or loss of such personal
property, or for damage or loss suffered by the business or occupation of
Tenant arising from any act or neglect of covenants or other occupants of the
building, or of their employees or the employees of the Landlord or of other
persons, or from fire of other casualty, bursting, overflowing or leaking of
water, sewer or steam pipes, or from heating or plumbing fixtures, or from
electric wires, or from gases, or odors, or caused in any other manner
whatsoever, except in the case of willful neglect on the part of Landlord.
8
<PAGE>
12. LIEN ON TENANT'S FURNISHINGS:
Tenant hereby conveys to Landlord all of the personal property situated on
the leases premises as security for the payment of all rentals due or to become
due hereunder. Said property shall not be removed therefrom without the consent
of Landlord until all rentals due or to become due hereunder shall have first
been paid and discharged. It is intended by the parties hereto that this
instrument shall have the effect of a mortgage and lien upon such property, and
Landlord, upon default of Tenant in the payment of rent, may take possession of
said property either to its own use or to sell the same for the best price that
can be obtained at public or private sale, and out of the money arising
therefrom pay the amount due to Landlord, and all costs growing out of the
execution of the provisions hereof, paying the surplus, if any, to Tenant. If
said property, or any portion thereof, shall be offered at public auction,
Landlord may become the purchaser thereof.
13. SURRENDER OF POSSESSION:
Tenant agrees to deliver up and surrender to Landlord possession of said
premises at the expiration or termination of this lease, by lapse of time or
otherwise, in as good repair as when Tenant obtained the same at the
commencement of said term, excepting only ordinarily wear and decay.
14. ACCEPTANCE OF PREMISES BY TENANT:
The taking possession of said premises by Tenant shall be conclusive
evidence as against Tenant that said premises were in good and satisfactory
conditions when possession of the same was taken.
15. WAIVER:
No waiver of any breach of any one or more of the conditions or covenants
of this lease by Landlord shall be deemed to imply or constitute a waiver of any
succeeding or other breach hereunder.
16. AMENDMENT OR MODIFICATION:
Tenant acknowledges and agrees that it has not relied upon any statements,
representations, agreements or warranties, except such as are expressed herein,
and that no amendment or modifications of this lease shall be valid or binding
unless expressed in writing and executed by the parties hereto in the same
manner as the execution of this lease.
9
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17. PAYMENTS AFTER TERMINATION:
No payments of money by Tenant to Landlord after the termination of this
lease, in any manner, or after the giving of any notice (other than a demand for
the payment of money) by Landlord to Tenant shall reinstate, continue or extend
the term of this lease or affect any notice given to Tenant prior to the
payment of such money, it being agreed that after the service of notice or the
commencement of a suit or after final judgment granting Landlord possession of
said premises, Landlord may receive and collect any sums of rent due, or any
other sums of money due under the terms of this lease, and the payment of such
sums of money whether as rent of otherwise, shall not waive said notice, or in
any manner affect any pending suit or any judgment therefore.
18. HOLDING AFTER TERMINATION:
It is mutually agreed that if, after the expiration of this lease, Tenant
shall remain in possession of said premises without a written agreement as to
such holding, then such holding over shall be deemed and taken to be a holding
upon a tenancy from month to month at a monthly rental equivalent to one and
one-half times the last monthly payment hereinbefore provided for, payable in
advance on the same day of each month as above provided, all other terms and
conditions of this lease remaining the same.
19. RULES AND REGULATIONS:
Landlord reserves the right to adopt rules and regulations from time to
time governing the management of the building and use thereof by Tenants. Tenant
agrees that its employees and agents, or any others permitted by Tenant, to
occupy or enter said premises, will at all times abide by said rules and
regulations as they may be amended from time to time, and that a default in the
performance and observance thereof shall operate the same as any other defaults
herein.
Attached hereto as Exhibit "A" is the current list of rules and regulations
presently in force and effect. At such time as Landlord adopts any amendments to
such rules and regulations, Landlord shall provide Tenant with copy thereof at
least ten (10) days prior to the enforcement of the provisions of any such
amendments.
20. SECURITY DEPOSITS:
It is agreed that Tenant, concurrently with the execution of this lease,
has deposited with Landlord, and will keep $______________, as security for the
payment by Tenant of the rent and other charges herein agreed to be paid, and
for the performance of all the terms, conditions and covenants of this lease.
If, at any time during the term of this lease, Tenant shall be in default in the
performance of any provision of this lease, Landlord shall have the right to use
said deposit, or so much thereof as necessary, in payment of any rental in
default as aforesaid and in reimbursement of any expense incurred by Landlord
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and in payment of any damages incurred by Landlord by reason of Tenant's
default, or at the option of Landlord, the same may be retained by Landlord, and
applied in liquidation of any damages suffered by it by reason of Tenant's
default. In such event, Tenant shall, on written demand of Landlord, forwith
remit to Landlord a sufficient amount in cash to restore said deposit to its
original amount. In the event said deposit has not been utilized as aforesaid,
said deposit, or so much thereof as has not been utilized for said purposes,
shall be refunded to Tenant, without interest, upon full performance of this
lease by Tenant. Said return shall be made within 60 days after the termination
date of this lease. Landlord shall have the right to commingle said deposit
with other funds of Landlord. Landlord shall deliver the balance of said funds,
if any, deposited herein by Tenant to the purchaser of Landlord's interest in
the leased premises in the event such interest be sold and, thereupon, Landlord
shall be discharged from further liability with respect to such deposit.
21. QUIET POSSESSION:
Provided Tenant is not in default under this lease, Landlord shall warrant
and defend Tenant in the enjoyment and peaceful possession of the premises
during the term aforesaid and all terms, conditions and convenience to be
observed and performed by the parties hereto shall be applicable to and binding
upon their heirs, administrator, executors, successors or assigns.
22. DEMOLITION NOTICE:
It is agreed that at any time during the terms of this lease, Lessor,
(Landlord) shall have the right to terminate this lease if it or it's assignees,
grantees or any successor in interest should desire to demolish the building
containing the demised premises. Termination shall be made by delivering written
notice to Lessee of such intention to demolish, which notice shall require
Lessee to vacate said premises no sooner than ninety (90) days from the date of
said notice. Lessor or it's assignees, grantees or any successor in interest may
commence the demolition of said building at any time subsequent to the date
Lessee is required to vacate the premises.
23. OTHER PROVISIONS:
Tenant has the option to renew lease per the following:
Three year option:
$5528/Month x 12 = $66,336 = $12.00/sq.ft. 1-1-97 through 12-31-97
$6449/Month x 12 = $77,392 = $14.00/sq.ft. 1-1-98 through 12-31-98
$7371/Month x 12 = $88,448 = $16.00/sq.ft. 1-1-99 through 12-31-99
11
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IN WITNESS WHEREOF, the said Landlord and Tenant have caused their
respective names and seals to be affixed hereto in triplicate the day and year
first above written.
LANDLORD
ATTEST: THE MINING EXCHANGE PARTNERS, LTD.
BY: /s/ signature illegible
- ------------------------ -------------------------------
PROPERTY MANAGER
TENANT
BY: /s/ signature illegible
------------------------ -------------------------------
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Exhibit A
RULES AND REGULATIONS
---------------------
1. The sidewalks, entries, passages, stairways and elevator shall not be
obstructed by the Tenant or its agents or used by them for any purpose
other than ingress and egress to and from their offices.
2. Furniture, equipment or supplies shall be moved in or out of the building
only during such hours and in such manner as may be prescribed by Landlord.
b. No safe or article, the weight of which may constitute a hazard or
danger to the building or its equipment shall be moved into the
premises.
c. Safes and other equipment, the weight of which is not excessive, shall
be moved into. from or about the building only during such hours and
in such manner as shall be prescribed by Landlord, and Landlord shall
have the right to designate the location of such articles in the space
hereby demised.
3. Signs, notices, advertisements or other inscriptions shall not be placed
upon any part or the building except in such locations and by such sign
writers, and of such size, form and color, as shall be first specified by
Landlord.
4. Water closets and other water fixtures shall not be used for any purpose
other than the for which the same are intended, and any damage resulting to
the same from misuse on the part of Tenant, its agents or employees, shall
be paid for by Tenant, no person shall waste water by tying back or wedging
the faucets, or in any other manner.
5. No animals, except handicap aid dogs, shall be allowed in the office halls,
corridors and elevators in the building.
6. Bicycles or other vehicles shall not be permitted in the office halls
corridors and elevators in the building, nor shall any obstruction of
sidewalks or entrances of the building by such be permitted.
7. No person shall disturb the occupants of this or adjoining buildings or
premises by the use of any radio or musical instrument or by the making of
loud or improper noises.
8. No additional lock or locks shall be placed by Tenant on any door in the
building unless written consent of the Landlord shall first have been
obtained. A reasonable number of keys to the demised premises and to the
toilet rooms will be furnished by Landlord, and neither Tenant, its agents
or employees, shall have any duplicate key made. At the termination of this
tenancy, Tenant shall promptly return to Landlord all keys to offices,
toilet rooms or vaults.
9. No equipment, awnings, or any other items shall be placed on the exterior
of the building or on any window ledge without written consent from the
Landlord.
10. Tenant, before closing and leaving the demised premises at any time, shall
see that all windows are closed, in order to avoid possible damage from
fire, storm or freezing, and shall re-lock all outside building doors if
used during non-business hours.
11. Tenant shall not install or operate any steam or gas engine or boiler, or
carry on any mechanical business in the demised premises. The use of oil,
gas or flammable liquids for heating, lighting or any other purpose is
expressly prohibited. Explosives or other articles deemed extra hazardous
shall not be brought in to the building.
12. Any painting or decorating as may be agreed to be done by and at the
expense of Landlord shall be done during regular working hours, should
Tenant desire such work done on Sundays, holidays or outside of regular
working hours, Tenant shall pay for the extra cost thereof.
13. Tenant shall not mark upon, paint signs upon, cut drill into, drive nails
or screws into, or in any way deface the walls, ceilings, partitions or
floors of the demised premises or of the building, and any defacement,
damage or injury caused by Tenant, its agents or employees, shall be paid
for by Tenant.
14. No parking is permitted in the alleys except for deliveries and workmen.
15. All requests for service, repair or other maintenance shall be made
directly to the office of Landlord.
16. Smoking is not permitted in any area of the building, including individual
offices.
17. Landlord shall at all times have the right, by its officer or agents, to
enter the demised premises to inspect and examine the same, and to show the
same to persons wishing to lease them, and may at any time within fifteen
days next preceding the termination of this tenancy, place upon the doors
and windows of the premises the notice "For Rent", which said notice shall
not be removed by Tenant.
18. Landlord reserves the right to make such other and further reasonable rules
and regulations as, in its judgment, may from time to time be needful and
desirable for the safety, care and cleanliness of premises and for the
preservation of good order therein.
<PAGE>
EXHIBIT 10.7
LINK-US/PC AGREEMENT
This Agreement is entered into between COMMUNICATIONS SYSTEMS
INTERNATIONAL, INC., a Colorado corporation ("CSI"), and GARY KAMIENSKI
("Developer"), for the purpose of specifying the conditions under which
Developer will develop a computerized transparent callback switch to be used at
hotels and other large businesses for the exclusive use and ownership of CSI.
I. DEFINITIONS
1.1 "CPU" shall mean a single computer or central processing unit.
1.2 "CSI" shall mean and include CSI's divisions and departments within
CSI's organization, but shall not include wholly or partially owned subsidiaries
or affiliates (unless such subsidiaries or affiliates are directly involved in
the deployment or business of Link-Us/PC) or independent third parties.
1.3 "Link-Us/PC" shall mean the PC-based implementation of an automatic
dialback switch developed by Developer to be deployed at remote locations as
described in EXHIBIT A, as the same may be modified or improved from time to
time.
1.4 "Supporting Documentation" shall mean information that describes the
format, organization, and content of the computer-readable program to be
supplied to CSI under the terms of this Agreement.
1.5 "User's Manual" shall mean a written guide describing the use and
operation of the Link-Us/PC, together with any related Supporting Documentation.
II. TRANSFER OF LINK-US/PC
2.1 Developer hereby grants, conveys and transfers to CSI, and CSI hereby
accepts, subject to the terms and conditions set forth in this Agreement, the
ownership and all exclusive rights in and to the Link-Us/PC, the Supporting
Documentation, User's Manual, and all associated software, source code, tables,
and related items, data, and information, as each of such items may be modified
or improved from time to time. To the extent any of such items are not currently
available, such items shall be developed and delivered to CSI by Developer as
soon as reasonably possible. The term "exclusive rights" as used in this
Agreement shall mean and include all rights of ownership, and Developer shall
retain no rights in and to the Link-Us/PC except as may be specifically set
forth in this Agreement.
2.2 In transferring the Link-Us/PC, Developer agrees that he shall not:
<PAGE>
a. Transfer or allow the transfer or delivery of any materials,
equipment, programs, or other information related to the Link-Us/PC to any party
other than CSI, unless requested by CSI;
b. Use or install the Link-Us/PC at locations other than those owned,
operated, under contract with, or controlled by CSI or any of CSI's designated
affiliates;
c. Make copies or make use of the Link-Us/PC or User's Manual except
as expressly set forth in this Agreement; or
d. Attempt to do anything that might adversely affect the operation
of the system or otherwise tamper with the program in such a way as to interfere
with the efficient operation of the system.
III. ITEMS PROVIDED BY DEVELOPER AND CSI
3.1 On or before October 1, 1996, Developer shall deliver to CSI a
completed fully operational Link-Us/PC system, Supporting Documentation, and
User's Manual which performs the functions set forth in Exhibit A.
3.2 CSI will pay the costs of installation of the Link-Us/PC in the field,
including all marketing costs, travel costs and costs of supplying and
installing hardware, including the delivery and installation of any
enhancements, which will utilize the system. Upon complete execution of this
Agreement, CSI agrees to purchase from Developer the NMS telephone switching
hardware suitable for development of the Link-Us/PC system at a cost of
approximately $5,100, which cost shall be substantiated by Developer delivering
copies of invoices or other reasonable evidence establishing the value of such
hardware.
IV. ROYALTY AND SUPPORT PAYMENTS
4.1 In consideration of the rights granted and conveyed by Developer and
the other services supplied by Developer pursuant hereto for the use of the
Link-Us/PC as set forth herein, CSI agrees to pay a royalty in accordance with
terms set forth herein:
a. CSI shall pay to Developer within forty-five days after the end of
each calendar month a royalty payment equal to four percent (4%) of the gross
revenues actually received by CSI in such calendar month from users utilizing
the entire three component Link-Us/PC system. The three components include the
Hotel Component Telephone Switch, the Trigger Sender, and the Trigger Receiver,
all as more particularly described in EXHIBIT B attached hereto. Notwithstanding
the foregoing, the obligation to pay such royalty shall remain in effect whether
the triggering
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mechanism is X.25 or any other suitable trigger delivery mechanism developed by
Developer. By way of example, the royalty shall not be paid with respect to the
Argentine-type situation in which the Tina boxes are providing the trigger
sending function. In the event a substantial modification or substantial
enhancement to the Link-Us/PC system is made by someone other than Developer, or
if enhancement or adaptation are deemed necessary or appropriate by CSI to keep
the Link-Us/PC system working satisfactorily, and the Developer is unwilling or
unable to make those changes, the royalty payment set forth in this subparagraph
shall be equitably adjusted by the parties. If the parties cannot agree on the
adjustment to the royalty, the parties may submit such issue to binding
arbitration pursuant to the rules of the American Arbitration Association.
b. The royalty provided in this Section shall be paid with respect to
all telephone call receipts for calls utilizing the Link-Us/PC system during the
term of this Agreement.
c. The parties agree that the royalty payment set forth in this
Section is the sole means of compensation for Developer's services, and no
salary or other compensation shall be payable, except as provided in
subparagraph e below.
d. Developer will provide support, as needed, in connection with the
deployment of the Link-Us/PC system, and for each installation Developer will be
paid a flat fee of $1,500 if such installation produces gross revenues of
between $10,000 and $20,000 in its first full calendar month of operation, and a
flat fee of $3,000 if such installation produces gross revenues of more than
$20,000 in its first full calendar month of operation. Developer agrees that
once a site is selected by CSI, Developer will work diligently to install or
assist in the installation of such system at the earliest possible time. Such
installation fee shall be paid forty-five days after CSI has determined, in its
reasonable discretion, that the system has operated accurately and efficiently
in accordance with its projected specifications for one full calendar month
after deployment. Developer shall install, with the assistance of CSI personnel,
the first five systems, and CSI shall thereafter supply support personnel to
assist Developer in subsequent installations.
e. Developer will provide on-going maintenance, support and
consulting services to CSI, including, without limiting the generality of the
foregoing, general supervision of CSI's maintenance and support personnel to the
extent they are involved in the Link-Us/PC operation, to assure the successful
operation of the Link-Us/PC systems, and shall be paid for such services for so
long as such systems are in operation for CSI at the rate of $4,000 per month
through September 1, 1997, and $5,200 per month thereafter until the earlier of
(i) the end of the term
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of this Agreement; or (ii) the date upon which Developer no longer provides on-
going consulting services on a day-to-day basis in accordance with the
specifications set forth on EXHIBIT C attached hereto and incorporated herein by
this reference.
f. CSI shall have the right, at its sole election to buy out all
future royalty obligations to Developer on the following terms:
(1) at any time from the effective date hereof through and
including the last day of the 12th calendar month following such effective date
for the sum of $1,500,000.
(2) at any time from and after the first day of the 13th calendar
month following such effective date for a cash buyout price of an amount equal
to three times the total royalties paid and payable to Developer during the
twelve month period immediately preceding the date of notice of the buyout,
which amount shall in no event be less than $2,500,000.
4.2 Effective immediately upon the closing of a royalty buyout pursuant to
this section and payment of the required cash consideration to Developer,
Developer shall be released from any further obligations or requirements with
respect to installation or maintenance, operation or upgrade of any existing or
future deployment of the System and CSI shall be released from any further
obligations or requirements under this Agreement, including any monetary
obligations hereunder.
4.3 Developer understands and agrees that the royalty rights set forth
above shall provide the sole royalty compensation to be paid to Developer for
work performed for CSI. In the event that during the term of this Agreement
Developer develops computer systems and technology which are unrelated to the
Link-US/PC system and for which CSI is willing to negotiate a compensation
package for Developer, such compensation shall be based upon stock option
incentives rather than royalty or commission-type compensation. At the option of
CSI, in order to assist in the determination of a compensation structure for
such additional systems or technology, a committee composed of designated
persons within the technology department of CSI may be formed to make
recommendations to CSI with regard to such compensation. CSI may consider the
recommendations made by such committee, but shall not be bound by any such
proposals. Throughout the term of this Agreement, Developer agrees to work and
cooperate with the other technical development employees of CSI to develop new
technology for the benefit of CSI which is unrelated to the Link-US/PC system.
It is the intent of the parties that each shall endeavor to promote a spirit of
cooperation and teamwork among the technical development persons to help enhance
the possibility of developing creative and beneficial technologies for the
benefit of
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CSI.
V. ENHANCEMENTS AND SUPPORT
5.1 Developer shall make available and transfer, assign, and convey to CSI
all updates and enhancements to the Link-Us/PC as the same become available. The
ownership and use of all such updates and enhancements by CSI shall be
exclusively reserved to CSI and shall be subject to the terms and conditions of
this Agreement.
5.2 Developer shall supply maintenance and support of the Link-Us/PC
system pursuant to the terms and conditions of the attached Maintenance
Agreement, including, without limitation, correcting any technical defects in
order to ensure that the system works in accordance with the specifications set
forth on Exhibit A attached hereto. During the term of this Agreement, if CSI
notifies Developer of program or system errors or defects, Developer shall use
his best efforts to verify and correct the problems within three days. Developer
shall promptly notify CSI if a problem cannot be corrected within the time
specified in this Section. If such a problem materially and adversely affects
the operation of the system, CSI shall have the right to terminate this
Agreement by delivering written notice thereof to Developer.
5.3 For the duration of this Agreement, Developer shall supply, as
developed and at no additional charge to CSI, program enhancements that improve
performance or utility of the systems, including all appropriate updates and
revisions to the User Manual and Supporting Documentation which shall be
delivered promptly upon the development of any such enhancements. Delivery of
updated User Manuals and Supporting Documentation promptly is a material factor
in Developer's performance under this Agreement.
5.4 CSI currently anticipates that it will develop a support staff to
assist in the deployment, maintenance and support of the Link-Us/PC system. The
timing and structure of the development of such support personnel shall be at
the sole discretion of CSI. Developer agrees to train such support personnel in
all aspects of the system, and will provide such assistance until the staff is
adequately trained, as determined by CSI.
VI. TERM OF AGREEMENT
6.1 The term of this Agreement shall commence as of the last date this
Agreement is executed by CSI and Developer and shall continue for the period
during which the Link-Us/PC is in active operation by CSI, until no later than
September 1, 2006, unless earlier terminated as provided below.
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VII. TERMINATION OF AGREEMENT
7.1 In the event of a material default by either party or such party's
agent or representative, of any provision of this Agreement, the other party may
terminate this Agreement upon thirty (30) days written notice, except that the
defaulting party shall have thirty (30) days from receipt of notice of
termination in which to cure any such defaults, and upon any such cure, this
Agreement will continue in full force and effect. If this Agreement is
terminated by CSI due to a default by Developer, Developer shall not have any
rights with respect to the Link-Us/PC system. This restriction shall survive the
termination of this Agreement. This Agreement shall also terminate upon the
death of Developer, with the exception that the royalty payment provided in
Section 4.1 above shall continue until the end of the term of this Agreement so
long as the Link US/PC system continues to be utilized in the format developed
by Developer.
7.2 In the event of any violation or threatened violation of this
Agreement CSI shall be entitled to injunctive and other equitable relief on the
grounds that such conduct, if not restrained and/or other equitable relief not
granted, would result in irreparable and serious harm for which damages would be
an inadequate remedy.
7.3 Unless agreed otherwise by the parties, if this Agreement is
terminated for any reason other than (i) CSI's buyout pursuant to Section 4.1f
of this Agreement; (ii) the material default of Developer under this Agreement;
or (iii) the expiration of the term of this Agreement, the royalty payments
shall continue to be paid for those sites which are operational and providing
revenue for CSI through the use of the Link-Us/PC system.
VIII. COPYRIGHT AND PROPRIETARY INFORMATION
8.1 Developer acknowledges that the Link-Us/PC system and all User's
Manuals and other Supporting Documentation constitute valuable property of CSI
and that all title and ownership rights in the Link-Us/PC and related materials
remain exclusively with CSI.
8.2 CSI reserves all rights with respect to the Link-Us/PC, User's
Manual, and all Supporting Documentation under all applicable laws for the
protection of proprietary information, including, but not limited to, trade
secrets, copyrights, trademarks and patents.
8.3 Except as otherwise provided in this Agreement, Developer shall not
cause or permit unauthorized copying, reproduction or disclosure of any portion
of the program, or any
6
<PAGE>
instructions, manuals, or other documentation in any way related to the Link-
US/PC system or any other technology, information, or data relating to the
operations of CSI, or the delivery or distribution of any part thereof to any
third person or entity, for any purpose whatsoever, without the prior written
permission of CSI. This restriction shall continue to bind Developer and his
agents and representatives for a period of ten years beyond the termination of
this Agreement.
8.4 Within ten days after any twelve month period in which Developer has
been paid a minimum of $500,000 by CSI whether in the form of compensation,
salary, bonuses, royalties, benefits realized from the exercise of stock options
(which benefits are equal to the difference between the option price of the
stock and the bid price of the stock on the date the options were exercised), or
other payments by CSI, and thereafter promptly upon their creation, Developer
shall completely disclose in writing, to such person as the Board of Directors
of CSI may designate, all developments, codes, inventions and improvements
heretofore or hereafter made, developed, perfected, devised, conceived or
acquired by Developer, either solely or in collaboration with others, during the
period in which Developer has provided consulting services to CSI commencing
February 1, 1994, and throughout the term of this Agreement, whether or not made
during regular working hours or made with facilities, funds, or equipment of
CSI, relating in any way to the business, developments, products, or potential
products of CSI; and if so requested by CSI, shall assign, transfer and convey
to CSI all right, title and interest in and to all such developments, inventions
and improvements. CSI shall have the right to designate an individual to study,
test, and analyze the Link-US/PC system and any other development, invention, or
improvement to be conveyed to CSI pursuant to this Agreement, to ensure that the
system will be fully operational without the presence or involvement of
Developer, and Developer shall provide complete cooperation with such
individual. All information pertaining to the operating and programming of the
Link-Us PC system and related systems and technology shall be maintained in a
lock-box or other secured area pursuant to CSI's technical policy in order to
preserve the confidentiality of such information. Such repository shall include
such information and instructions as would permit a competent technical person
to fully operate the Link-Us/PC system and all aspects of such system.
8.5 Developer agrees at the request and expense of CSI to make, execute
and deliver any and all application papers, assignments or instruments, and to
perform or cause to be performed such other lawful acts as CSI may deem
desirable or necessary in making or prosecuting applications, domestic or
foreign, for patents, copyright and re-issues and extensions thereof, and to
assist and cooperate (without expense to
7
<PAGE>
Developer) with CSI or its representative in any controversy or legal
proceedings relating to said developments, inventions and improvements and the
patents or copyrights which may be procured thereon.
8.6 Developer agrees that he will not directly or indirectly use or
disclose to others at any time any of CSI's designs, devices, methods of
production, systems, technology, dealings or the like or information relating
thereto, knowledge of which he may acquire directly or indirectly during the
period of his consulting work with CSI.
8.7 At all times hereafter, both during and after the term of this
Agreement, and whether or not this Agreement is terminated for cause, Developer
shall treat as confidential all information, in any media or form (referred to
in this Agreement as "Information") that may be disclosed to him or which he may
acquire as a result of or through his consulting arrangement with CSI (unless
the same has clearly come into the public domain) concerning the operations,
business or financial affairs, know-how, process, techniques, trade secrets,
products, services, properties, research and development, plans or projections
of CSI or any of its affiliated companies, or of any entity including, without
limit, any actual or potential customer, dealer, distributor, supplier, joint
venturer or licensor. Toward the objective of maintaining such confidentiality,
Developer shall keep the information secret, neither directly nor indirectly
using, divulging or furnishing it nor making it available either to or for the
benefit of any person or entity (other than to or for CSI exclusively) or to any
employee or officer of CSI with the exception of any person designated in
writing by the Board of Directors of CSI.
IX. WARRANTIES
9.1 Developer warrants that the Link-Us/PC will be fully functional,
that it will reliably perform its intended functions, and that the system will
perform in accordance with Exhibit A. In the event such system is not operating
in accordance with its intended functions or Exhibit A, and such system problems
are not remedied within thirty days of the date notice of such problems is given
by CSI to Developer, the royalty payments will cease and CSI will be entitled to
exercise such other remedies as may be permitted by applicable law. If CSI in
good faith determines that the Link-Us/PC system does not meet the
specifications set forth in Exhibit A, CSI will have the right to terminate this
Agreement upon written notice to Developer. If CSI elects to not deploy any
additional Link-US/PC systems for a continuous period of one year, then CSI's
exclusive rights to the Link-Us/PC system will terminate and thereafter the
royalty payment required by Section
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4.1 of this Agreement shall be reduced to two percent (2%) of the gross revenues
actually received by CSI.
9.2 Developer warrants that Developer has the legal right to grant CSI
the rights conveyed under this Agreement, and such grant does not infringe any
third parties' property or rights.
9.3 CSI warrants as follows:
a. That it has the full legal right and power to enter into this
Agreement and that all requisite corporate approvals have been obtained;
b. CSI shall supply funds to permit the installation of two average
Link-Us/PC installations in any month, provided that such installations have
been authorized by CSI in advance. In the event CSI fails to supply such funds
and as a result an installation is prevented or delayed by more than sixty days,
Developer's royalty payment pursuant to Section 4.1 above shall be increased to
six percent of gross revenues until such time as the funds are made available
for the additional installation. Such increase in the royalty payment shall be
Developer's sole remedy in the event of CSI's failure to maintain the required
funds.
X. INDEMNIFICATION
10.1 CSI agrees to indemnify and hold Developer harmless from claims by
third parties which arise out of CSI's use or operation of the Link-Us/PC
system, except to the extent any of such claims result from the actions or
inactions of Developer.
10.2 Developer agrees to indemnify and hold CSI harmless from claims by
third parties arising out of any breach by Developer of its warranties or
obligations set forth in this Agreement.
10.3 The indemnifying party shall pay all costs and attorneys' fees
incurred in connection with any claim for which such party is required to
indemnify the other party under this Article X.
XI. NON-COMPETITION
11.1 Developer agrees not to develop or market programs in the subject
area of computerized transparent callback service at hotel and large business
sites or which in any way might compete with the Link-Us/PC system or other
business in which CSI is involved or has contemplated becoming involved with for
a period of ten years, or during any period in which CSI is utilizing the
technology, whichever is longer, except with respect to enhancements or
modifications to the system obtained for the exclusive use of CSI pursuant to
this Agreement, or except as may be approved in writing by CSI.
9
<PAGE>
XII. ASSIGNMENT
12.1 This Agreement shall be binding upon the parties hereto and their
respective successors and assigns. CSI shall have the right to assign and
delegate its rights and obligations under this Agreement to any third party
which may acquire or control all or part of CSI or its business or which is
otherwise affiliated with CSI. With the exception of an assignment of his right
to receive royalties hereunder, Developer may not assign or delegate his rights
or duties under this Agreement without the prior written consent of CSI.
XIII. GENERAL PROVISIONS
13.1 All warranty and indemnification obligations set forth in this
Agreement shall survive the termination of this Agreement.
13.2 This Agreement may be modified or amended only by means of a
writing executed by both parties to this Agreement.
13.3 This Agreement shall be governed and construed in accordance with
the laws of the State of Colorado.
13.4 In the event of any legal action concerning the terms of this
Agreement, the prevailing party shall be entitled to recover its reasonable
attorneys' fees and costs from the other party.
13.5 This Agreement sets forth the entire agreement between the parties
concerning the subject matter hereof.
13.6 Any written notice from one party to the other required by this
Agreement shall be deemed made on the earlier of the date actually received or
three days after such notice was sent by certified mail, return receipt
requested, and addressed as follows:
Communication Systems International, Inc
121 East Pikes Peak Avenue, Suite 335
Colorado Springs, Colorado
Attention: Robert A. Spade 80903
with a copy to:
Richard F. Nipert, Esq.
Bright, Gibson & Nipert, P.C.
1140 Grant Street, Suite 100
Denver, Colorado 80203
10
<PAGE>
Gary Kamienski
P.O. Box 6566
220 Pennsylvania Avenue
Woodland Park, Colorado 80866
13.7 Developer acknowledges that he has consulted legal counsel with
respect to this Agreement and that this Agreement
11
<PAGE>
shall be construed as if both parties equally participated in the creation of
this Agreement.
COMMUNICATIONS SYSTEMS
INTERNATIONAL, INC., a Colorado corporation
By:_____________________________________
Its:____________________________________
DEVELOPER
________________________________________
GARY KAMIENSKI
12
<PAGE>
AMENDMENT NO. 1 TO LINK-US/PC AGREEMENT
This Amendment No. 1 to Link-Us/PC Agreement is entered into as of the ___
day of April, 1997 between Communications Systems International, Inc. ("CSI")
and Gary Kamienski ("Developer").
WHEREAS, Developer and CSI have entered into that certain Link-Us/PC
Agreement ("Agreement") which concerns Developer's development of certain
technology ("Technology") for use by CSI; and
WHEREAS, Developer has developed an enhancement to the Technology and
desires to ensure that this enhancement is covered by the terms of the
Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and conditions contained herein, the parties agree as follows:
1. DEVELOPMENT OF CABO. Developer has developed a software enhancement
-------------------
which will allow the use of the entire Link-Us/PC system with an operator
assisted call, which technology is know as the calls assisted by operator or
"CABO" system. The parties agree that this CABO system is an enhancement to the
Link-US/PC system and, as a result, is and will be assigned, transferred, and
conveyed to CSI for the exclusive use of CSI, as is more particularly described
in the Agreement.
2. CABO INCLUDED IN AGREEMENT. Since CABO is acknowledged to be an
--------------------------
enhancement to the Link-US/PC System and utilizes all aspects of the Link-US/PC
system, the terms and conditions of the Agreement shall be fully applicable to
such technology, including, without limiting the generality of the foregoing,
Developer's right to royalty payments for use of the Link-US/PC system.
3. AGREEMENT IN FULL FORCE AND EFFECT. Except as specifically amended
----------------------------------
hereby, the parties acknowledge that the Agreement shall remain in full force
and effect.
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
BY:___________________________
ROBERT A. SPADE, PRESIDENT
______________________________
GARY KAMIENSKI
<PAGE>
EXHIBIT 10.8
COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.
DISTRIBUTOR AGREEMENT
______________________________________________________________________________
THIS AGREEMENT is made and entered into by and between COMMUNICATIONS
SYSTEMS INTERNATIONAL, INC., a Colorado corporation ("CSI"), whose address is 8
South Nevada Avenue, Suite 101, Colorado Springs, Colorado 80903, and
______________________________________ ("Distributor"), whose address is
_________________________________________________________________.
I. AGENCY RELATIONSHIP
The following are the basic terms of the Distributor Agreement, which terms
are supplemented with the "Additional Provisions" which are attached hereto.
1.1 Engagement of Distributor. CSI hereby agrees to engage Distributor as
-------------------------
CSI's agent for selling all of CSI's products and services, whether currently
available or developed and provided in the future. Distributor hereby accepts
engagement as CSI's agent for selling such services, which may include Callback
Services, Phone Debit Cards and other services designated by CSI, in accordance
with the terms and conditions contained in this Agreement.
1.2 Term and Renewal. The term of this Agreement shall commence as of the
----------------
date that it has been signed by an authorized officer of CSI, and shall continue
in effect until ____________, 199_, unless sooner terminated in accordance with
the provisions of this Agreement. The term of this Agreement may be renewed for
______ additional terms of _____ years each upon strict compliance with the
Additional Provisions.
1.3 Fees and Costs. The rights granted to Distributor by this Agreement
--------------
are granted free of charge, and no distributor fee shall be payable by
Distributor. Distributor shall be responsible for paying all expenses relating
to the establishment and conduct of the business contemplated by this
Agreement, except as specifically set forth otherwise in this Agreement.
1.4 Authority of Agent. Distributor shall have the authority to solicit
------------------
offers from potential customers to subscribe to or purchase CSI's products and
services. Distributor has no right to enter into a contract on behalf of CSI or
to bind CSI in any manner not expressly authorized under this Agreement.
1.5 Territory. Distributor may exercise the rights granted by this
---------
Agreement and market CSI products and services throughout _____________.
Distributor shall not be entitled to market CSI products and services anywhere
else in the world without the execution by CSI of an Addendum to this Agreement
specifying such additional approved territory.
1.6 Status of Parties. CSI and Distributor agree that their relationship
-----------------
is that of principal
<PAGE>
and agent for the limited purpose of selling CSI's products and services in
accordance with this Agreement. Distributor is an independent contractor and not
an employee, partner, or joint venturer of or with CSI.
II. PAYMENT AND COLLECTION TERMS
2.1 Customer Orders, Billing and Collection, and Customer Service. All
-------------------------------------------------------------
customer orders shall be processed on CSI's standard form Service Agreement
which shall be executed by Distributor and the customer. CSI will maintain
responsibility to bill and collect from all customers. Distributor shall be
responsible for all direct customer service and contact with Distributor's
customers. These customer-oriented responsibilities are defined with more
specificity in the Additional Provisions attached hereto.
III. DISTRIBUTOR'S COMPENSATION
3.1 Commission Rate. CSI shall pay to Distributor within fifteen days of
---------------
the second month following its receipt of Distributor's Collected Revenues (as
defined in the Additional Provisions) ____________ percent (___%) of
Distributor's Collected Revenues for such month of collections.
IV. MARKETING STANDARDS
4.1 Marketing and Advertising Standards. Distributor shall comply with
-----------------------------------
the marketing standards, advertising requirements, and other requirements as set
forth in Section IV of the Additional Provisions.
4.2 Performance Standards. Within the earlier of: (i) _______ months
---------------------
after the effective date of this Agreement; or (ii) ______ months after
Distributor has obtained its license from _________, Distributor must achieve
and maintain thereafter a minimum of $_______ U.S. Dollars per month in Callback
Services billing and collections. The failure to meet the foregoing billing
requirements in a timely manner will be a material breach of this Agreement and
shall give CSI the right to terminate this Agreement upon ______ days' written
notice of termination to Distributor.
V. ADDITIONAL PROVISIONS
This Agreement shall include all of the terms and conditions contained in
the attached "Additional Provisions" which are hereby incorporated herein by
this reference.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the day and year so indicated.
2
<PAGE>
CSI:
COMMUNICATIONS SYSTEMS
INTERNATIONAL, INC., a Colorado corporation
By:___________________________________________
Title:_______________________________________________
Date:___________________________________________
By:___________________________________________
Title:_______________________________________________
Date:___________________________________________
DISTRIBUTOR:
By:___________________________________________
Title:_______________________________________________
Date:___________________________________________
3
<PAGE>
DISTRIBUTOR AGREEMENT
ADDITIONAL PROVISIONS
The following Additional Provisions are attached to and made a part of that
certain Distributor Agreement between Communications Systems International, Inc.
("CSI") and ____________________________ ("Distributor").
CSI is in the business of providing international long distance
telecommunications services. Such services include, but are not limited to,
callback services consisting of CSI's normal automated callback services that
route international long distance calls through Colorado Springs, Colorado, at
United States long distance rates, "Tina" boxes for routing international long
distance calls through Colorado Springs, Colorado, and an X.25 network for
routing telecommunications (collectively referred to as "Callback Services"),
and long distance telephone debit cards ("Phone Debit Cards"). CSI may develop
new and additional products and services during the term of this Agreement.
Distributor wishes to represent CSI and market CSI's products and services, and,
in doing so, is willing to utilize CSI's standards, methods and operating
procedures, as the same are more specifically described in this Agreement. From
time to time, CSI may make reasonable changes in the standards, methods and
operating procedures, and Distributor agrees to comply with such changes within
thirty days after it has received written notice of the changes so long as such
changes do not unreasonably burden Distributor and do not materially conflict
with the spirit and intent of this Agreement. CSI is willing to engage
Distributor as its agent pursuant to the terms and conditions set forth in this
Agreement.
ARTICLE I
AGENCY RELATIONSHIP
--------------------
1.1 Renewal.
-------
(a) Renewal. If Distributor has complied with all of the terms and
-------
conditions of this Agreement and has complied with the marketing standards
established by CSI for its agents throughout the term of this Agreement, then,
at the expiration of the original term, this Agreement may be renewed, but only
if:
(1) Distributor agrees to comply with CSI's standards for agents
then in effect, subject to the limitations set forth in the second paragraph of
Page 1 of this Agreement, and agrees to make other changes in products,
services, marketing and business practices to be consistent with the then
current requirements and practices of CSI; and
(2) Distributor provides CSI with written notice of
Distributor's intention to renew at least six months prior to expiration of the
original term of this Agreement. Within 30 days after receipt of such notice of
Distributor's intention to renew, CSI shall provide Distributor with a statement
as to whether it is entitled to renew. If Distributor is entitled to renew, this
Agreement will be extended for the additional period on the same terms and
conditions as are contained in this Agreement. There shall be no renewal fee. If
Distributor desires any changes in this Agreement, such changes will only be
effective upon agreement by both Distributor and CSI, and such agreement must be
reached at least thirty days prior to the end of the original term.
1.2 Fees and Costs. Expenses payable by Distributor include but are not
--------------
limited to travel, entertainment, supplies, postage, shipping and any and all
compensation to agents and employees of Distributor. Any charges incurred by
Distributor for using any of CSI's vendor accounts, such as overnight delivery
services, shall be charged back to Distributor by CSI and Distributor shall
promptly pay CSI for any and all such charges.
1.3 Authority of Agent. Offers from customers solicited by Distributor
------------------
shall be subject to acceptance by CSI and no contract for the provision of
products or services shall exist until CSI and the customer have entered into an
agreement for services pursuant to Section 2.1 of this Agreement. CSI has the
right, in its sole discretion, to reject any customer who is not creditworthy or
who is not legally eligible to receive certain CSI products or services.
1.4 Limitation on Liability. Distributor has no power or authority to
-----------------------
bind or obligate CSI to third parties. CSI shall have no liability whatsoever
for the acts and omissions of Distributor, and Distributor shall have no
liability whatsoever for the acts and omissions of CSI.
ARTICLE II
PAYMENT AND COLLECTION TERMS
-------------------------------
2.1 Customer Orders. If a customer obtained by Distributor wishes to
---------------
purchase any of CSI's products and services, the Distributor and the customer
shall both sign CSI's standard form service agreement ( a "Service Agreement"),
which CSI will provide to Distributor. Distributor shall submit the signed
Service Agreement to CSI. Every order must be approved by CSI before the account
becomes effective, and the account will become effective only when CSI signs the
Service Agreement. Prior to the time CSI signs the Service Agreement, no
commission shall be paid to Distributor.
2.2 Billing and Collection. CSI, and not Distributor, will be responsible
----------------------
for all billing of and collection from customers relating to this
Initial _____
<PAGE>
Agreement. CSI will directly bill all customers obtained by Distributor for all
products and services used by those customers. Distributor shall have no right
or obligation to bill or collect any payments from customers or potential
customers for products or services provided or to be provided under this
Agreement. Distributor will not represent to potential or existing customers
that it has the right to bill or collect from customers, and will not so bill or
collect. In the event that Distributor collects or attempts to collect fees from
customers, CSI may promptly terminate this Agreement without notice to
Distributor. CSI will provide Distributor with a list of delinquent accounts
during the middle of the billing cycle each month in order to allow Distributor
to inquire as to problems customers may be experiencing or to monitor delinquent
accounts.
2.3 Customer Service. Distributor shall be responsible for soliciting and
----------------
servicing customers, and for all contact with customers. Distributor's duties
prior to obtaining orders include educating and informing potential customers of
the products and services of CSI. CSI shall be responsible for all billing and
collection responsibilities after CSI has signed a Service Agreement with that
customer. After acceptance of a Service Agreement by CSI, Distributor shall be
obligated only to provide ongoing customer service.
ARTICLE III
DISTRIBUTOR'S COMPENSATION
---------------------------
3.1 Distributor's Commissions. Commissions will be paid to Distributor by
-------------------------
CSI based on the amount of revenue actually collected and received by CSI from
customers who have been solicited by Distributor and have entered into a Service
Agreement with Distributor. (Such revenues from customers obtained by
Distributor that are received and collected by CSI are referred to in this
Agreement as "Distributor's Collected Revenues.") CSI shall pay commissions
owed to Distributor no later than the 15th day of the second month after CSI
receives the Distributor's Collected Revenues on which the commissions are
based. For example, CSI shall pay the commissions owed for Distributor's
Collected Revenues received by CSI in the month of May no later than July 15.
CSI's obligation to pay commissions earned pursuant to this Section 3.1 shall
survive such termination.
3.2 Residual Commissions. After the end of the term of this Agreement,
--------------------
CSI shall continue to pay to Distributor commissions equal to ___ percent of
Distributor's Collected Revenues received by CSI, with respect to telephone
services provided during the term of this Agreement. Once CSI has paid
commission equal to ___ percent of Distributor's Collected Revenues received by
CSI, Distributor shall have no right to receive, and C. S. International shall
have no obligation to pay, any additional commissions. CSI's obligation to pay
commissions in accordance with this Section 3.2 shall survive termination of
this Agreement, unless CSI terminates this Agreement because of a default by
Distributor, as provided in Section 7.2.
ARTICLE IV
MARKETING STANDARDS
--------------------
4.1 Sales Literature; Assistance. CSI will provide Distributor with an
----------------------------
understanding of CSI's products and services and assistance in selling these
products and services. Assistance will not include expenses for brochures,
stationery, sales scripts, rate sheets and marketing letters, all of which shall
be produced at the expense of Distributor. Distributor will also pay all other
marketing and advertising expenses in connection with all of CSI's products and
services.
4.2 Demo Lines. To assist Distributor in marketing Callback Services, CSI
----------
will make a long distance calling demonstration line (a "Demo Line") available
to Distributor on the following basis:
(a) Distributor must supply CSI with an active credit card account to
assure payment of all charges on the Demo Line;
(b) Distributor will receive a $50.00 per month credit against
charges on the Demo Line for each $50,000.00 per month billed to customers
obtained by Distributor, not to exceed a total credit of $500.00 per month; and
(c) Each $50.00 credit earned may be applied to only one Demo Line.
4.3 Trade Names and Trademarks. During the term of this Agreement,
--------------------------
Distributor shall use the trade names, trademarks and service marks of CSI in
connection with the marketing and sale of products and services pursuant to this
Agreement, subject to the approval of C.S.. International as provided below in
Section 4.4. All trade names, trademarks and service marks owned or employed by
CSI or any subsidiary or affiliate of CSI used or employed in CSI's business
operations shall remain the sole and exclusive property of CSI, or such
subsidiary or affiliate. No title or rights whatsoever to any of CSI's trade
names, trademarks, service marks and other intellectual property shall pass to
Distributor by this Agreement or any actions undertaken pursuant to this
Agreement. Distributor shall immediately discontinue any use of CSI's marks and
names upon termination of this Agreement.
4.4 Advertising. From time to time, CSI shall establish standards for all
-----------
advertising, promotional and customer training materials used or distributed by
Distributor that relate to CSI's products and services, and Distributor, at its
expense, shall comply with such standards. The current standards for
advertising, promotional and customer training materials are described with more
particularity in Exhibit A attached hereto. Distributor
Initial _____
2
<PAGE>
agrees to comply with any changes to such standards as CSI may propose from time
to time within thirty days after written notice of such changes is given by CSI
to Distributor, provided that the changes do not unreasonably burden Distributor
and do not involve a substantial increase in the cost of providing such
materials. Distributor shall provide to CSI, for its prior review and written
approval, all promotional, advertising or other materials or activity using or
displaying CSI's trade name, trademarks, service marks, products or services or
referring to Distributor as an authorized agent, branch office or distributor of
CSI.
4.5 Presentation of Products, Services and Rates. Distributor will
--------------------------------------------
present CSI and CSI's products and services to potential customers in a
responsible way, never making claims of greater savings or service than actually
exist. Distributor will adhere to the appropriate CSI rate and price structure
applicable at the time of soliciting customers unless a different structure is
agreed to in writing by CSI. Distributor shall quote prices for CSI's products
and services only at the levels authorized by CSI. These rates may be revised
from time to time by CSI in accordance with CSI's generally applicable criteria
and as required by the prevailing rate schedules. CSI will inform Distributor
of any changes in its rates in a timely manner such that Distributor may
continue to accurately represent the services to the public. CSI shall have the
absolute right to establish the long distance rates, payment terms and
advertising and promotional policies for its services. Distributor shall comply
with all of CSI's customer service procedures regarding CSI's products and
services.
4.6 Distributor's Agents and Employees. Distributor has the right to hire
----------------------------------
and train agents and employees working for Distributor under the following terms
and conditions: (a) Distributor shall disclose to each agent and employee the
relationship between Distributor and CSI; (b) Distributor shall require all
agents and employees of Distributor to abide by all of the terms and conditions
of this Agreement; (c) CSI will not actively solicit any of Distributor's agents
or employees to become agents of CSI; (d) all customers obtained by
Distributor's agents or employees will be customers of Distributor and will not
be allowed to become customers of the agent or employee without Distributor's
consent; (e) Distributor's agents and employees shall not be considered agents
or employees of CSI for any purpose whatsoever; (f) CSI will provide Distributor
with a monthly accounting of sales made by Distributor's agents; and (g)
Distributor shall be solely responsible for paying any and all compensation owed
to its agents or employees, together with any and all taxes associated with such
compensation. CSI shall have no obligation whatsoever to Distributor's agents
and employees. All agents engaged by Distributor will be assigned their own
account numbers by CSI solely for the purpose of accounting for sales made by
such agents so that Distributor may calculate any commissions payable by
Distributor.
ARTICLE V
ASSIGNMENT
----------
5.1 Assignment by CSI. This Agreement may be assigned by CSI to an
-----------------
affiliate or successor of CSI or any other firm or entity capable of performing
CSI's obligations under this Agreement with the approval of Distributor, unless
CSI determines, in its reasonable discretion, that the assignment is likely to
materially and adversely affect Distributor's ability to perform its obligations
under this Agreement, or if the assignee is not able to provide reasonably
competitive rates, in which case Distributor shall have the right to deliver
written notice to CSI of its refusal to permit the assignment within twenty days
after Distributor has received notice of the proposed assignment. The failure
to deliver such notice within ten days shall be deemed a waiver of Distributor's
right to reject the proposed assignment. Such assignment will not release CSI
from its obligations under this Agreement.
5.2 Assignment by Distributor. This Agreement may not be assigned by
-------------------------
Distributor to any other person or entity without the prior written approval of
CSI, which approval may be withheld or granted in CSI's sole and absolute
discretion.
ARTICLE VI
NON-COMPETITION
---------------
6.1 Non-Competition. Distributor understands, acknowledges and agrees
---------------
that, during the term of this Agreement, and for a period of three years
thereafter, Distributor shall not undertake any conduct or activity or engage in
any business, either directly or indirectly, that competes in any way with the
business of CSI, and Distributor shall not contract with, or provide money,
goods or services to, any other person or entity who is engaged in the business
of providing international long distance telecommunications or otherwise
competes with CSI. Distributor, for its own account, may engage in other
businesses and activities that are not in competition with CSI, provided that
such activities do not interfere with Distributor's performance of its
obligations under this Agreement.
Notwithstanding the foregoing, in the event CSI is unable to supply reasonably
competitive services to customers of Distributor, Distributor shall give written
notice of such fact to CSI. If CSI has not improved its services such that its
services are reasonably competitive in the market within thirty days after the
receipt of such written notice, Distributor shall have the right to terminate
this Agreement by delivering written notice of termination to CSI within another
thirty days after the end of CSI's thirty day "cure" period. Upon the
termination pursuant to this paragraph, the provisions of this Article VI
concerning non-competition occurring after the term of this Agreement will not
be applicable.
6.2 Proprietary Information. During the term of this Agreement and for a
-----------------------
period of ten years thereafter, Distributor shall retain in confidence, and
shall require its directors, officers, employees, consultants, representatives
and agents to retain in confidence, any and all Proprietary Information (as
defined below). The parties agree that Proprietary Information constitutes
trade secrets of CSI and that the disclosure of Proprietary
Initial _____
3
<PAGE>
Information in contravention of this Agreement would constitute an unfair trade
practice. "Proprietary Information" means information relating to the business
and operations of CSI or its subsidiaries, affiliates, clients, customers,
consultants and agents, including, but not limited to, all customer lists and
all technical, marketing and financial information relating thereto, any
information relating to the pricing, methods, processes, financial data, lists,
apparatus, statistics, programs, research, development or related information of
CSI, its subsidiaries or affiliates, or CSI's clients and customers, concerning
past, present or future business activities or operations of said entities or
the results of the provision of services performed by Distributor under this
Agreement. Distributor shall take reasonable steps to prevent unauthorized
disclosure or misuse of Proprietary Information by any of its agents or
employees or by any other person having access to such information.
6.3 No Disclosure of Terms of Agreement. Neither CSI nor Distributor
-----------------------------------
shall disclose the terms and conditions of this Agreement to any person or
entity without the prior written consent of the other party.
ARTICLE VII
DEFAULT, REMEDIES AND TERMINATION
------------------------------------
7.1 Events of Default. Each of the following shall constitute an "Event
-----------------
of Default": (a) the failure of Distributor to comply with or to satisfy any of
the terms of this Agreement; and (b) the violation or failure by either party to
comply with any term or provision of this Agreement and the failure of such
defaulting party to cure such violation or failure within thirty days after
receiving written notice of the violation or failure.
7.2 Remedies. Upon the occurrence of an Event of Default, the
--------
nondefaulting party shall have all rights and remedies expressly set forth in
this Agreement and all other rights and remedies available at law or in equity,
including but not limited to specific performance, damages, injunctive relief
and termination of this Agreement. If the nondefaulting party elects to
terminate this Agreement because of Event of Default caused by the other party,
the nondefaulting party may terminate this Agreement by delivering written
notice of termination to the defaulting party at least thirty days prior to the
effective date of termination. CSI's obligation to pay commissions under
Section 3.1 that have been earned prior to termination shall survive
termination, but CSI's termination pursuant to this Section 7.2 shall release
the parties from all other obligations to each other, including CSI's obligation
to pay residual commissions under Section 3.2.
7.3 Regulatory Approval. This Agreement shall terminate automatically and
-------------------
without liability or further obligation on the part of either party to the other
party if, by order, act or omission of any court or government agency with
regulatory authority over CSI or long distance telephone services, or as the
result of the revocation or expiration of any required licenses or other
authority, CSI is denied or loses the right, power or authority to provide
Callback Services as contemplated by this Agreement. If such authority is lost,
suspended or not renewed with regard to only part of Callback Services or only
within a certain geographic area or areas where Callback Services have been
provided, then this Agreement shall terminate automatically and without
liability or further obligation on the part of either party to the other party
with regard only to the Callback Service or area affected. The provisions of
this Section 7.3 shall only apply to Callback Services; other services shall not
be affected by the terms of this Section 7.3. In the event of a termination
pursuant to this Section 7.3, CSI shall continue to have the obligation to pay
to Distributor the commissions required to be paid pursuant to Section 3.1 and
3.2 of this Agreement.
7.4 Fees and Expenses. In any action to enforce this Agreement, or to
-----------------
collect damages on account of any Event of Default, the prevailing party shall,
in addition to any damages and other relief awarded, be entitled to collect all
of its costs in such action, including court costs, costs of investigation and
settlement, reasonable attorneys' fees and all additional costs incurred in
collecting any judgment rendered in such action.
ARTICLE VIII
MISCELLANEOUS
-------------
8.1 Applicable Law. This Agreement shall be governed by the laws of the
--------------
State of Colorado, United States of America. With regard to international
service, this Agreement shall be governed by applicable federal statutes and
regulations of the United States of America. The parties stipulate to
jurisdiction and venue in the State of Colorado, United States of America.
8.2 Notices. Any notice or other documents or materials required or
-------
permitted to be delivered under this Agreement may be personally delivered or
sent by mail, with postage prepaid, by commercial delivery service or by
electronic facsimile. Notices shall be deemed effective upon receipt by the
party to whom the same are to be delivered, and shall be addressed as follows:
If to CSI, to Communications Systems International, Inc., 8 South
Nevada Avenue, Suite 101, Colorado Springs, Colorado 80920, Attention:
___________________________, Facsimile Number 719-471-2893.
If to Distributor, to
___________________________________________________________________________
___________________________________________________________________________
__________________________________________________________________________.
Either party may, by notice properly delivered, change the person or address to
which future notices and deliveries to that party shall be made.
Initial _____
4
<PAGE>
8.3 Headings. The article and section headings in this Agreement are for
--------
convenience only, and shall not be used in its interpretation or considered part
of this Agreement.
8.4 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.5 Effect of Agreement. All negotiations relative to the matters
-------------------
contemplated by this Agreement are merged herein and there are no other
understandings or agreements relating to the matters and things herein set forth
other than those incorporated in this Agreement. This instrument sets forth the
entire agreement between the parties and rescinds and replaces any and all prior
understandings and agreements, whether written or verbal, between Distributor
and CSI or any of its officers, directors or employees, and any such
understandings and agreements are hereby rendered null and void and shall have
no effect on or consequence to either party. No provision of this Agreement
shall be altered, amended, revoked or waived except by an instrument in writing
signed by the party to be charged with such amendment, revocation or waiver.
Subject to the provisions of Article V, this Agreement shall be binding upon the
shall inure to the benefit of the parties hereto and their respective successors
and assigns.
8.6 No Implied Waiver. The failure of either party at any time to require
-----------------
the performance by the other party of any obligation under this Agreement shall
not affect in any way the right to require such performance at any later time,
nor shall the waiver by either party of one breach of any provision of this
Agreement be taken or held to be a waiver of any other breach of that provision
or any other provision of this Agreement.
8.7 Severability. If any clause or provision of this Agreement is
------------
illegal, invalid or unenforceable under applicable present or future laws, then
it is the intention of the parties that the remainder of this Agreement shall
not be affected, and that in lieu of any such clause or provision there be added
as a part hereof a substitute clause or provision as similar in terms and effect
to such illegal, invalid or unenforceable clause or provision as may be
possible.
8.8 Time. Time is of the essence of this Agreement.
----
8.9 Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement, or the breach thereof, shall be settled by arbitration in
Colorado Springs, Colorado, before a single arbitrator in accordance with
applicable Colorado law concerning arbitration, and pursuant to the Commercial
Rules of the American Arbitration Association. Judgment upon the award rendered
by the arbitrator may be entered in any court having jurisdiction.
Initial _____
5
<PAGE>
EXHIBIT 10.9
C.S. INTERNATIONAL
BRANCH OFFICE AGENCY AGREEMENT
------------------------------
THIS AGREEMENT is made and entered into by and between COMMUNICATIONS SYSTEMS
INTERNATIONAL INCORPORATED, a Colorado corporation ("C.S. International"), whose
address is 8 South Nevada Avenue, Suite 101, Colorado Springs, Colorado 80903,
and __________________________________, a ___________________________ ("Managing
Agent"), whose address is ___________________________
____________________________________.
C.S. International is in the business of providing international long distance
telecommunications services. Such services include, but are not limited to,
callback services consisting of C.S. International's normal automated callback
services that route international long distance calls through Colorado Springs,
Colorado at United States long distance rates, "Tina" boxes for routing
international long distance calls through Colorado Springs, Colorado, and an
X.25 network for routing telecommunications (collectively referred to as
"Callback Services"), and long distance telephone debit cards ("Phone Debit
Cards"). C.S. International may develop new and additional products and
services during the term of this Agreement.
C.S. International wishes to establish a branch office to market C.S.
International's products and services and to provide customer service. Managing
Agent wishes to represent C.S. International, market C.S. International's
products and services and manage a branch office for C.S. International. In
doing so, Managing Agent is willing to utilize C.S. International's standards,
methods and operating procedures in accordance with the terms and conditions
contained in this Agreement. C.S. International is willing to engage Managing
Agent as its agent to manage a branch office pursuant to the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants set forth below, the
parties agree as follows:
ARTICLE I
BRANCH OFFICE
-------------
1.1 Engagement of Managing Agent. C.S. International hereby agrees to engage
----------------------------
Managing Agent to open and operate a branch office for C.S. International in
________________________, as C.S. International's agent for selling all of C.S.
International's products and services, whether currently available or developed
and provided in the future. Managing Agent hereby agrees to open a branch
office and accepts engagement as C.S. International's agent for selling Callback
<PAGE>
Services, Phone Debit Cards and all of C.S. International's other products and
services presently or subsequently available, in accordance with the terms and
conditions contained in this Agreement.
1.2 Establishment of Office. No later than _______________, 199__, Managing
-----------------------
Agent shall obtain office space and establish a branch office in _______________
at a location selected by Managing Agent, subject to the reasonable approval of
C.S. International. The office shall be identified as C.S. International of
______________________. Managing Agent shall market C.S. International's
products and services through the branch office established by Managing Agent
under C.S. International's trademarks and service marks. Managing Agent, all
agents and employees engaged or hired by Managing Agent as provided below in
section 1.3 and all other personnel selling C.S. International's products and
services and servicing C.S. International's customers through the branch office
established by Managing Agent pursuant to this Agreement are collectively
referred to in this Agreement as the "Branch Office."
1.3 Branch Office Agents and Employees. Managing Agent has the right to hire
----------------------------------
and train agents and employees working for Managing Agent under the following
terms and conditions: (a) Managing Agent shall disclose to each agent and
employee the relationship between Managing Agent and the Branch Office and C.S.
International; (b) Managing Agent shall require all agents and employees of
Managing Agent to abide by all of the terms and conditions of this Agreement;
(c) C.S. International will not actively solicit any of Managing Agent's agents
or employees to become agents of C.S. International; (d) all customers obtained
by Managing Agent's agents or employees will be customers of Managing Agent and
the Branch Office and will not be allowed to become customers of the agent or
employee without Managing Agent's consent; (e) Managing Agent's agents and
employees shall not be considered agents or employees of C.S. International for
any purpose whatsoever; (f) C.S. International will provide Managing Agent with
a monthly accounting of sales made by the Branch Office and Managing Agent's
agents; and (g) Managing Agent shall be solely responsible for paying any and
all compensation owed to its agents and employees, together with any and all
taxes associated with such compensation. C.S. International shall have no
obligation whatsoever to Managing Agent's agents and employees or other
personnel of the Branch Office, except as expressly st forth in this Agreement.
1.4 Term and Renewal.
----------------
(a) Term. This Agreement shall become effective
----
-2-
<PAGE>
only after it has been duly signed by a principal or authorized officer
of each party to this Agreement. This Agreement shall remain in effect
for a period of three years thereafter unless sooner terminated in
accordance with the provisions of this Agreement.
(b) Renewal. If the Branch Office and Managing Agent have complied with
-------
all of the terms and conditions of this Agreement and have complied with
the marketing standards and criteria established by C.S. International
for the Branch Office throughout the term of this Agreement, then, at the
expiration of the original three-year term, this Agreement may be renewed
for one additional term of three years, but only if:
(1) Managing Agent agrees to upgrade or change the Branch Office so
that it complies with C.S. International's standards for branch offices
then in effect and agrees to make other changes in products, services,
marketing and business practices to be consistent with the then current
requirements and practices of C.S. International; and
(2) Managing Agent provides C.S. International with written notice
of Managing Agent's intention to renew at least six months prior to
expiration of the original three-year term of this Agreement. Within 30
days after receipt of such notice of Managing Agent's intention to renew,
C.S. International shall provide Managing Agent with a statement as to
whether it is entitled to renew. If Managing Agent is entitled to renew,
C.S. International shall provide to Managing Agent with such statement of
renewal a new Branch Office Agency Agreement, which may differ from this
Agreement (the "Renewal Agreement"). Managing Agent shall sign and return
the Renewal Agreement to C.S. International within 30 days after
receiving it from C.S. International. There shall be no renewal fee. If
Managing Agent desires any changes in the Renewal Agreement proposed by
C.S. International, such changes will only be effective upon agreement by
both Managing Agent and C.S. International, and such agreement must be
reached at least 30 days prior to the end of the original three-year
term. If Managing Agent fails to comply with the requirements contained
in this section 1.4(b), or if a Renewal Agreement has not been signed by
both C.S. International and Managing Agent at least 30 days prior to the
end of the original three-year term, then C.S. International may revoke
any approval of renewal given by C.S. International, in which case this
Agreement and the agency relationship between Managing Agent and C.S.
International shall terminate and the Branch Office and Managing Agent
shall cease operations on behalf of
-3-
<PAGE>
C.S. International as of the end of the original three-year term.
1.5 Fees and Costs. As consideration for the rights granted to Managing
--------------
Agent and the Branch Office by this Agreement, Managing Agent shall pay to C.S.
International, upon execution of this Agreement, a fee in the amount of
$10,000.00 U.S.D. Managing Agent and the Branch Office shall be responsible for
paying all expenses relating to the establishment of the Branch Office and all
costs and expenses incurred in operating the Branch Office and conducting the
business contemplated by this Agreement.
1.6 Authority of Branch Office. The Branch Office shall have the authority
--------------------------
to solicit offers from potential customers to subscribe to or purchase C.S.
International's products and services. Neither Managing Agent nor any other
personnel of the Branch Office can enter into a contract on C.S. International's
account or bind C.S. International in any manner not expressly authorized under
this Agreement. Offers from customers solicited by the Branch Office shall be
subject to acceptance by C.S. International and no contract for the provision of
products or services shall exist until C.S. International and the customer have
entered into an agreement for services pursuant to section 2.1 of this
Agreement. C.S. International has the right, in its sole discretion, to reject
any customer who is not creditworthy or who is not legally eligible to receive
certain C.S. International products or services.
1.7 Territory. Managing Agent, operating through the Branch Office and its
---------
personnel, may exercise the rights granted by this Agreement and market C.S.
International's products and services throughout _____________________ and in
all other regions of the world. Before soliciting customers in any region
outside of _______________________, the Branch Office shall contact C.S.
International to determine whether or not another C.S. International branch
office (an "Existing Office") exists in that region, and, if there is such an
Existing Office, Managing Agent shall notify that Existing Office of the
intention of the Branch Office to conduct business in that region. The Branch
Office shall not solicit existing customers of the Existing Office in that
region.
1.8 Status of Parties. C.S. International and Managing Agent acknowledge and
-----------------
agree that their relationship is that of principal and agent for the limited
purpose of selling C.S. International's products and services in accordance with
this Agreement. Managing Agent is an independent contractor. Neither Managing
Agent nor any other person associated with the Branch Office is an employee or
partner of C.S. International.
-4-
<PAGE>
Managing Agent and the Branch Office have no power or authority to bind or
obligate C.S. International to third parties. C.S. International shall have no
liability whatsoever for the acts and omissions of the Branch Office or Managing
Agent, and Managing Agent and the Branch Office shall have no liability
whatsoever for the acts and omissions of C.S. International.
ARTICLE II
PAYMENT AND COLLECTION TERMS
----------------------------
2.1 Customer Orders. If a customer obtained by the Branch Office wishes to
---------------
purchase any of C.S. International's products and services, Managing Agent (or
an authorized agent of the Branch Office) and the customer shall both sign C.S.
International's standard form service agreement (a "Service Agreement"), which
C.S. International will provide to the Branch Office. The Branch Office shall
submit the signed Service Agreement to C.S. International. Every order must be
approved by C.S. International before the account becomes effective, and the
account will become effective only when C.S. International signs the Service
Agreement.
2.2 Billing and Collection. The Branch Office will be responsible for all
----------------------
billing of and collection from customers relating to this Agreement. The Branch
Office will directly bill all customers obtained by Branch Office personnel for
all products and services used by those customers, except as provided in the
following sentence. If a customer pays his bill by means of a credit card
account established with C.S. International, those credit card revenues will be
paid directly to C.S. International, and the Branch Office will not be
responsible for collecting those revenues. The Branch Office will remit all
revenues collected from customers to C.S. International twice a month, on the
_____ and _____ days of each month. In the event that any customer of the
Branch Office has not paid any charges to the Branch Office or C.S.
International within 120 days after the customer has been billed for such
charges, the amount unpaid shall be considered a bad debt. The Branch Office
shall be liable to C.S. International for 100 percent of all bad debts, and
shall pay such 100 percent to C.S. International with the next remittance to
C.S. International after the charges become a bad debt.
2.3 Customer Service. The Branch Office shall be responsible for soliciting
----------------
customers, and for all customer service and other contact with customers. The
Branch Office's duties prior to obtaining orders include educating and informing
potential customers of the products and services of C.S. International. After
acceptance of a Service Agreement by C.S. International, the Branch Office shall
be responsible for
-5-
<PAGE>
providing service to customers, handling customer complaints and otherwise
responding to customer demands.
ARTICLE III
COMMISSIONS
-----------
3.1 Branch Office Commissions. As compensation for the services of Managing
-------------------------
Agent and the personnel of the Branch Office pursuant to this Agreement, C.S.
International will pay to the Branch Office commissions based on the amount of
revenue actually collected and received by C.S. International, including
revenues received through the Branch Office, from customers who have been
solicited by the Branch Office and have entered into a Service Agreement with
the Branch Office. (Such revenues from customers obtained by the Branch Office
that are received by C.S. International are referred to in this Agreement as
"Branch Office Collected Revenues.") C.S. International shall pay the Branch
Office commissions in accordance with the following schedule:
<TABLE>
<CAPTION>
AMOUNT OF MONTHLY PERCENTAGE OF COLLECTED
BILLINGS BY BRANCH OFFICE REVENUES PAYABLE AS COMMISSIONS
------------------------- -------------------------------
<S> <C>
$0-49,999.99 U.S.D. 13 percent
$50,000.00-99,999.99 U.S.D. 14 percent
$100,000.00 or more U.S.D. 15 percent
</TABLE>
C.S. International shall pay commissions owed to the Branch Office no later than
the 15th day of the second month after C.S. International receives the Branch
Office's Collected Revenues on which the commissions are based. For example,
C.S. International shall pay the commissions owed for the Branch Office's
Collected Revenue received by C.S. International in the month of May no later
than July 15. C.S. International shall provide Managing Agent with a monthly
accounting of all commissions earned by the Branch Office. Managing Agent shall
be responsible for dividing up the commissions paid by C.S. International among
the Branch Office personnel entitled to share in such commissions and shall pay
all compensation owed to the Branch Office personnel.
3.2 Residual Commissions. After the end of the term of this Agreement or any
--------------------
Renewal Agreement, C.S. International shall continue to pay to Managing Agent
commissions equal to 10 percent of the Branch Office's Collected Revenues
received by C.S. International for a period of six months after this Agreement
terminates. Once C.S. International has paid commissions equal to 10 percent of
the Branch Office's Collected Revenues received by C.S. International during the
six-month period following termination of this Agreement, Managing Agent
-6-
<PAGE>
shall have no right to receive, and C.S. International shall have no obligation
to pay, any additional commissions. C.S. International's obligation to pay
commissions in accordance with this section 3.2 shall survive termination of
this Agreement, unless C.S. International terminates this Agreement because of a
default by Managing Agent or the Branch Office, as provided below in section
7.2.
3.3 Only Compensation. The commissions payable pursuant to sections 3.1 and
-----------------
3.2 are the only compensation required to be paid to Managing Agent an the
Branch Office by C.S. International.
ARTICLE IV
MARKETING STANDARDS
-------------------
4.1 Sales Literature; Assistance. C.S. International will provide the Branch
----------------------------
Office with an understanding of C.S. International's products and services and
assistance in selling these products and services. Assistance will not include
expenses for brochures, stationery, sales scripts, rate sheets and marketing
letters, all of which shall be produced at the expense of the Branch Office.
The Branch Office will also pay all other marketing and advertising expenses in
connection with all of C.S. International's products and services.
4.2 Demo Lines. To assist the Branch Office in marketing Callback Services,
----------
C.S. International will make a long distance calling demonstration line (a "Demo
Line") available to the Branch Office on the following basis:
(a) The Branch Office must supply C.S. International with an active
credit card account to assure payment of all charges on the Demo Line;
(b) The Branch Office will receive a $50.00 per month credit against
charges on the Demo Line for each $50,000.00 per month billed to customers
obtained by the Branch Office, not to exceed a total credit of $500.00 per
month; and
(c) each $50.00 credit earned may be applied to only one Demo Line.
4.3 Trade Names and Trademarks. During the term of this Agreement, the
--------------------------
Branch Office shall use the tradenames, trademarks and service marks of C.S.
International in connection with the marketing and sale of products and services
pursuant to this Agreement, subject to the approval of C.S. International as
provided below in section 4.4. All trade names, trademarks and
-7-
<PAGE>
service marks owned or employed by C.S. International or any subsidiary or
affiliate of C.S. International used or employed in C.S. International's
business operations shall remain the sole and exclusive property of C.S.
International, or such subsidiary or affiliate. No title or rights whatsoever
to any of C.S. International's trade names, trademarks, service marks and other
intellectual property shall pass to Managing Agent or the Branch Office by this
Agreement or any actions undertaken pursuant to this Agreement. The Branch
Office and Managing Agent shall immediately discontinue any use of C.S.
International's marks and names upon termination of this Agreement.
4.4 Advertising. From time to time, C.S. International shall establish
-----------
standards for all advertising, promotional and customer training materials used
or distributed by the Branch Office that relate to C.S. International's products
and services, and the Branch Office, at its expense, shall comply with such
standards. The Branch Office shall provide to C.S. International, for its prior
review and written approval, all promotional, advertising or other materials or
activity using or displaying C.S. International's tradename, trademarks, service
marks, products or services or referring to Managing Agent or the Branch Office
as an authorized agent, branch office or distributor of C.S. International.
4.5 Conduct of Branch Office. The Branch Office will present C.S.
------------------------
International and C.S. International's products and services to potential
customers in a responsible way, never making claims of greater savings or
service than actually exist. The Branch Office will adhere to the appropriate
C.S. International rate and price structure applicable at the time of soliciting
customers unless a different structure is agreed to in writing by C.S.
International. The Branch Office shall quote prices for C.S. International's
products and services only at the levels authorized by C.S. International.
These rates may be revised from time to time by C.S. International in accordance
with C.S. International's generally applicable criteria and as required by the
prevailing rate schedules. C.S. International will inform the Branch Office of
any changes in its rates in a timely manner such that the Branch Office may
continue to accurately represent the services to the public. C.S. International
shall have the absolute right to establish the long distance rates, payment
terms and advertising and promotional policies for its services. The Branch
Office shall comply with all of C.S. International's customer service procedures
regarding C.S. International's products and services.
4.6 Performance Requirements. The Branch Office must achieve the following
------------------------
levels of billings for Callback Services used by the Branch Office's customers
during the respective time periods set forth below:
-8-
<PAGE>
<TABLE>
<CAPTION>
TIME AFTER EFFECTIVE CALLBACK SERVICES
DATE OF THIS AGREEMENT BILLING REQUIREMENTS
---------------------- --------------------
<C> <S>
6 Months $ 20,000.00 U.S.D./Month
12 Months 50,000.00 U.S.D./Month
18 Months 100,000.00 U.S.D./Month
24 Months 150,000.00 U.S.D./Month
30 Months 200,000.00 U.S.D./Month
36 Months 250,000.00 U.S.D./Month
</TABLE>
Failure to meet any of the foregoing billing requirements in a timely manner
will be a material breach of this Agreement on the part of Managing Agent and
shall give C.S. International the right to terminate this Agreement upon 30 days
written notice. The foregoing billing requirements apply only to Callback
Services and do not include or affect any other products or services.
ARTICLE V
ASSIGNMENT
----------
5.1 Assignment by C.S. International. This Agreement may be assigned
--------------------------------
by C.S. International to an affiliate or successor of C.S. International or any
other firm or entity capable of performing C.S. International's obligations
under this Agreement without the approval of Managing Agent. Such assignment
will not release C.S. International from its obligations under this Agreement.
5.2 Assignment by Managing Agent. This Agreement may not be assigned
----------------------------
by Managing Agent to any other person or entity without the prior written
approval of C.S. International, which approval may be withheld or granted in
C.S. International's sole and absolute discretion.
-9-
<PAGE>
ARTICLE VI
NON-COMPETITION
---------------
6.1 Non-Competition. Managing Agent understands, acknowledges and
---------------
agrees that, during the term of this Agreement, Managing Agent shall not
undertake any conduct or activity or engage in any business, either directly or
indirectly, that competes in any way with the business of C.S. International,
and Managing Agent shall not contract with, or provide money, goods or services
to, any other person or entity who is engaged in the business of providing
international long distance telecommunications or otherwise competes with C.S.
International. Managing Agent, for its own account, may engage in other
businesses and activities that are not in competition with C.S. International,
provided that such activities do not interfere with Managing Agent's performance
of its obligations under this Agreement.
6.2 Proprietary Information. During the term of this Agreement and
-----------------------
for a period of three years thereafter, Managing Agent shall retain in
confidence, and shall require its directors, officers, employees, consultants,
representatives, agents and all personnel of the Branch Office to retain in
confidence, any and all Proprietary Information (as defined below). The parties
agree that Proprietary Information constitutes trade secrets of C.S.
International and that the disclosure of Proprietary Information in
contravention of this Agreement would constitute an unfair trade practice.
"Proprietary Information" means information relating to the business and
operations of C.S. International or its subsidiaries, affiliates, clients,
customers, consultants and agents, including, but not limited to, all customer
lists and all technical, marketing and financial information relating thereto,
any information relating to the pricing, methods, processes, financial data,
lists, apparatus, statistics, programs, research, development or related
information of C.S. International, its subsidiaries or affiliates, or C.S.
International's clients and customers, concerning past, present or future
business activities or operations of said entities or the results of the
provision of services performed by Managing Agent or the Branch Office under
this Agreement. Managing Agent shall take reasonable steps to prevent
unauthorized disclosure or misuse of Proprietary Information by any of its
agents or employees or by any other person having access to such information.
6.3 No Disclosure of Terms of Agreement. Neither C.S. International
-----------------------------------
nor Managing Agent shall disclose the terms and conditions of this Agreement to
any person or entity without the prior written consent of the other party.
-10-
<PAGE>
ARTICLE VII
DEFAULT, REMEDIES AND TERMINATION
---------------------------------
7.1 Events of Default. Each of the following shall constitute an
-----------------
"Event of Default": (a) the failure of Managing Agent or the Branch Office to
comply with or to satisfy the terms of section 2.2, section 4.4, section 4.5,
section 4.6, section 5.2, section 6.1 or section 6.2 of this Agreement; and (b)
the violation or failure by either Managing Agent or C.S. International to
comply with any term or provision of this Agreement and the failure of such
defaulting party to cure such violation or failure within 30 days after
receiving written notice of the violation or failure.
7.2 Remedies. Upon the occurrence of an Event of Default, the
--------
nondefaulting party shall have all rights and remedies expressly set forth in
this Agreement and all other rights and remedies available at law or in equity,
including but not limited to specific performance, damages, injunctive relief
and termination of this Agreement. If the nondefaulting party elects to
terminate this Agreement because of an Event of Default caused by the other
party, the nondefaulting party may terminate this Agreement by delivering
written notice of termination to the defaulting party at least 30 days prior to
the effective date of termination. C.S. International's obligation to pay
commissions under section 3.1 that have been earned prior to termination shall
survive termination, but termination pursuant to this section 7.2 shall release
the parties from all other obligations to each other, including C.S.
International's obligation to pay residual commissions under section 3.2.
7.3 Regulatory Approval. This Agreement shall terminate automatically
-------------------
and without liability or further obligation on the part of either party to the
other party if, by order, act or omission of any court or government agency with
regulatory authority over C.S. International or long distance telephone
services, or as the result of the revocation or expiration of any required
licenses or other authority, C.S. International is denied or loses the right,
power or authority to provide Callback Services as contemplated by this
Agreement. If such authority is lost, suspended or not renewed with regard to
only part of Callback Services or only within a certain geographic area or areas
where Callback Services have been provided, then this Agreement shall terminate
automatically and without liability or further obligation on the part of either
party to the other party with regard only to the Callback Service or area
affected. The provisions of this section 7.3 shall only apply to Callback
Services; other services shall not be affected by the terms of this section 7.3.
-11-
<PAGE>
7.4 Fees and Expenses. In any action to enforce this Agreement, or
-----------------
to collect damages on account of any Event of Default, the prevailing party
shall, in addition to any damages and other relief awarded, be entitled to
collect all of its costs in such action, including court costs, costs of
investigation and settlement, reasonable attorneys' fees and all additional
costs incurred in collecting any judgment rendered in such action.
ARTICLE VIII
MISCELLANEOUS
-------------
8.1 Applicable Law. This Agreement shall be governed by the laws of
--------------
the State of Colorado, United States of America. With regard to international
service, this Agreement shall be governed by applicable federal statutes and
regulations of the United States of America. The parties stipulate to
jurisdiction and venue in the State of Colorado, United States of America.
8.2 Notices. Any notice or other documents or materials required or
-------
permitted to be delivered under this Agreement may be personally delivered or
sent by mail, with postage prepaid, by commercial delivery service or by
electronic facsimile. Notices shall be deemed effective upon receipt by the
party to whom the same are to be delivered, and shall be addressed as follows:
If to C.S. International, to Communications Systems International
Incorporated, 8 South Nevada Avenue, Suite 101, Colorado Springs, Colorado
80920, Attention: _________________________, Facsimile Number
_______________.
If to Managing Agent, to _______________________________________________
_____________________________________________________________________________
_________________________, Facsimile Number ________________________________.
Either party may, by notice properly delivered, change the person or address to
which future notices and deliveries to that party shall be made.
8.3 Headings. The article and section headings in this Agreement are
--------
for convenience only, and shall not be used in its interpretation or considered
part of this Agreement.
8.4 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.5 Effect of Agreement. All negotiations relative to
-------------------
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<PAGE>
the matters contemplated by this Agreement are merged herein and there are no
other understandings or agreements relating to the matters and things herein set
forth other than those incorporated in this Agreement. This instrument sets
forth the entire agreement between the parties. No provision of this Agreement
shall be altered, amended, revoked or waived except by an instrument in writing
signed by the party to be charged with such amendment, revocation or waiver.
Subject to the provisions of Article V, this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns.
8.6 No Implied Waiver. The failure of either party at any time to require
-----------------
the performance by the other party of any obligation under this Agreement shall
not affect in any way the right to require such performance at any later time,
nor shall the waiver by either party of one breach of any provision of this
Agreement be taken or held to be a waiver of any other breach of that provision
or any other provision of this Agreement.
8.7 Severability. If any clause or provision of this Agreement is illegal,
------------
invalid or unenforceable under applicable present or future laws, then it is the
intention of the parties that the remainder of this Agreement shall not be
affected, and that in lieu of any such clause or provision there be added as a
part hereof a substitute clause or provision as similar in terms and effect to
such illegal, invalid or unenforceable clause or provision as may be possible.
8.8 Time. Time is of the essence of this Agreement.
----
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the day and year so indicated.
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<PAGE>
C.S. INTERNATIONAL:
------------------
COMMUNICATIONS SYSTEMS
INTERNATIONAL INCORPORATED, a
Colorado corporation
By_________________________________
Title____________________________
Date_____________________________
By_________________________________
Title____________________________
Date_____________________________
MANAGING AGENT:
--------------
__________________________________,
a _______________________________
By_________________________________
Title____________________________
Date_____________________________
Tax ID #___________________________
-14-
<PAGE>
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made on the ___ day of
_______________, 1997, by and between COMMUNICATIONS SYSTEMS INTERNATIONAL,
INC., a Colorado corporation ("Company or CSI"), and ROBERT A. SPADE
("Employee").
WHEREAS, the Company has retained Employee to serve as President and
Chief Executive Officer of the Company upon the terms and conditions set forth
herein; and
WHEREAS, Employee believes he can contribute substantially to the
future success of the Company and desires to continue employment upon the terms
and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the Company and Employee, intending to be legally bound
hereby, agree as follows:
I. SCOPE OF EMPLOYMENT
-------------------
1.1 The Company agrees to employ Employee in the capacity of President and
Chief Executive Officer, and Employee agrees to accept such employment, upon the
terms and conditions set forth herein. Employee shall faithfully and to the best
of his abilities perform such responsibilities and exercise such authority as
may from time to time be assigned or delegated to him by the Board of Directors
of the Company.
II. REPRESENTATIONS AND WARRANTIES
------------------------------
2.1 Employee represents and warrants to the Company that his execution,
delivery and performance of this Agreement does not violate or constitute a
breach of any other agreement, whether oral or written, binding upon Employee.
2.2 The Company warrants that it has the full legal right and power to
enter into this Agreement and that all requisite corporate approvals have been
obtained.
III. TERM OF EMPLOYMENT
------------------
3.1 The term of Employee's employment under this Agreement shall commence
May 1, 1997 and shall continue for a term of three years unless earlier
terminated as provided in this Agreement.
IV. COMPENSATION
------------
4.1 The Company shall compensate Employee for his service as set forth
below:
<PAGE>
(a) Benefits. During the term of employment under this Agreement,
--------
Employee shall be entitled to participate in such benefit programs as may be
available from time to time to other executives of the Company, such as medical
coverage.
(b) Salary. Employee will be paid at the rate of $150,000.00 per
------
year, which amount shall be subject to annual increases of four percent
effective on the first day of May each year commencing in the year 1998.
(c) Incentive Bonus. Employee shall have the opportunity to earn
---------------
annual bonuses equal to a maximum of sixty-five percent of the per annum base
salary set forth above pursuant to the Company's bonus plan as adopted from time
to time by the Company's Board of Directors. The bonus, if any is earned, shall
be calculated based upon the performance of the Company and Employee for each
fiscal year of the Company, and shall be paid within thirty days after the end
of each fiscal year.
(d) Stock Options. Employee shall be eligible to receive stock
-------------
options under the incentive stock option plan in effect from time to time, as
adopted by the Board of Directors.
(e) Option to Convert Bonus to Stock Options. Subject to the
----------------------------------------
availability of stock options, as determined by the Board, at the election of
Employee, Employee shall have the right to convert his right to receive a cash
bonus pursuant to subparagraph (c) above to the acquisition of additional stock
options. Such options shall be fixed at the price of such stock on the first day
of the fiscal year for which such right to a bonus is calculated. Employee shall
have five (5) years within which to exercise such option.
(f) Option to Defer and Accrue Salary and/or Bonus. At the sole
----------------------------------------------
option of Employee, Employee may elect to defer receipt of all or any portion of
his salary or bonus, and to receive such deferred amounts, together with
interest at the rate of ten percent per annum, at any later date upon his
demand.
V. CONFIDENTIAL INFORMATION
------------------------
5.1 At all times hereafter, both during and after the term of Employee's
employment with the Company, Employee shall not use any Confidential Information
(as hereinafter defined) for his own benefit or the benefit of others, and shall
not publish or disclose any Confidential Information to any person, firm, or
corporation, except as authorized and approved in writing by the Board of
Directors. Employee agrees that upon leaving the Company's employ, he shall not
take with him, without the prior written consent of the Board of Directors, any
or all documents, papers, drawings, magnetic media or other tangible property,
or any copies thereof, belonging or relating to the Company. Any and
2
<PAGE>
all documents, papers, drawings, magnetic media and other tangible property made
or compiled by, or made available to Employee prior to or during the course of
his employment and any copies thereof, which relate to the Company, whether or
not they contain Confidential Information, are and shall be the property of the
Company and shall be delivered to the Company by Employee immediately upon the
termination of his employment. For purposes of this paragraph, Confidential
Information shall mean trade secrets and confidential and proprietary technical,
business and financial information, whether or not in written form, including,
but not limited to, information with respect to know-how, process, techniques,
products, research and development information, plans or projections of the
Company, customer lists, marketing and financial information, personnel, sales
and statistical data, computer programs and information with respect to various
techniques, procedures, programs, processes and methods and any other
information learned or created by Employee during the course of his employment
with the Company. Toward the objective of maintaining such confidentiality,
Employee shall keep the information secret, neither directly nor indirectly
using, divulging or furnishing it nor making it available either to or for the
benefit of any person or entity (other than to any person designated in writing
by the Board of Directors or the Company).
VI. COVENANT NOT TO COMPETE UNREASONABLY WITH COMPANY
-------------------------------------------------
6.1 Employee agrees that during the term of his employment and for a
period of three years after termination of his employment, Employee:
(a) shall not undertake any employment, ownership, or financial
involvement with, or render any assistance to, any person, firm, association,
partnership, corporation or enterprise which is engaged in operating,
developing, or marketing the same or functionally similar products as the
Company is operating, developing, or marketing or plans to operate, develop, or
market or has services or products competitive with or similar to the services
or products of the Company and its affiliates, if such products or services are
to be used within an area within a radius of 500 miles from where the Company is
or contemplates doing business at the time of termination; and
(b) shall not persuade or attempt to persuade any of the Company's
employees to terminate their employment with the Company.
6.2 In the event that a court of law finds this Article to be overly
broad, and therefore unenforceable, the court shall modify this Article to
reflect the maximum restraint allowable, and shall then enforce this Article as
so modified.
3
<PAGE>
VII. REMEDIES FOR BREACH
-------------------
7.1 Employee agrees that his violation of any terms contained in Articles
IV, V, or VI of this Agreement will cause irreparable damage to the Company, the
amount of which will be impossible to estimate or determine. Therefore, Employee
further agrees that the Company shall be entitled, as a matter of course, to an
injunction restraining any violation or further violations of any such covenant
or covenants by Employee, his employees, partners, agents or associates, such
right to an injunction to be cumulative and in addition to any other remedies,
at law or otherwise, which the Company might have. Employee further agrees that
his violation of any of the terms of Articles IV, V, or VI during the course of
his employment with the Company shall be a cause for his termination under this
Agreement. Such covenants contained in Articles IV,V,or VI shall be severable,
and if the same shall be held invalid by reason of length of time, area covered,
or activity covered, or any or all of them, shall be reduced to the extent
necessary to cure such invalidity.
7.2 In the event of a material default by either party, or such party's
agent or representative, of any provision of this Agreement, the other party may
terminate this Agreement upon thirty (30) days written notice, except that the
defaulting party shall have thirty (30) days from receipt of notice of
termination in which to cure any such defaults, and upon any such cure, this
Agreement will continue in full force and effect; provided, that no such notice
or cure period shall be required with respect to a violation of the provisions
of Articles IV,V, or VI. This restriction shall survive the termination of this
Agreement. This Agreement shall also terminate upon the death of Employee. In
addition, any material default by any party to the Employment Agreement which is
not cured within any applicable cure periods provided in such agreement shall
constitute a material default under this Agreement.
7.3 In the event of any violation or threatened violation of this
Agreement CSI shall be entitled to injunctive and other equitable relief on the
grounds that such conduct, if not restrained and/or other equitable relief not
granted, would result in irreparable and serious harm for which damages would be
an inadequate remedy.
7.4 CSI shall have the right to enforce the provisions of Articles IV, V,
and VI even after a wrongful termination of Employee.
VIII. TERMINATION
-----------
8.1 Employee's employment under this Agreement and all rights to
compensation pursuant hereto, shall terminate upon the
4
<PAGE>
occurrence of any of the following:
(a) Death of Employee;
(b) Employee's mental or physical inability to perform substantially
all his duties under this Agreement for a period of three consecutive months, or
his absence from his duties for a period of three consecutive months because of
such mental or physical inability, or certification by a competent physician
that such inability will persist for three months or more;
(c) An occurrence that constitutes "cause" for termination, or
Employee engages in any act, omission or conduct that constitutes "cause" for
termination. For purposes of this Agreement, Company shall have "cause" to
terminate Employee's employment and compensation under any of the following
circumstances:
(1) a breach by Employee of any provision of this Agreement
including, but not limited to, the provisions under Articles IV, V and/or VI;
(2) the failure by Employee to perform or fulfill his duties,
after the Company identifies reasonable deficiencies in his performance and
gives his a reasonable opportunity to correct those deficiencies (for purposes
of this subparagraph, "reasonable opportunity" means three months notice with
periodic intervening reports to Employee);
(3) the refusal or willful failure to follow the lawful
directions of the Board of Directors;
(4) an act of dishonesty in the performance of his duties;
(5) any conduct that is disloyal and prejudicial to the business
of the Company;
(6) the commission by Employee of any felony or other crime that
would adversely affect the reputation of Employee or the Company;
(7) any misrepresentation or concealment of a material fact by
Employee for the purpose of securing employment hereby; or
(8) any act of willful misconduct by Employee which is injurious
to the material business interests of the Company.
5
<PAGE>
IX. INDEMNIFICATION
---------------
9.1 The Company agrees to indemnify and hold Employees harmless from
claims by third parties which arise out of breach by the Company of its
warranties or obligations set forth in this Agreement.
9.2 Employee agrees to indemnify and hold the Company harmless from claims
by third parties arising out of any breach by Employee of his warranties or
obligations set forth in this Agreement.
9.3 The indemnifying party shall pay all costs and attorneys' fees
incurred in connection with any claim for which such party is required to
indemnify the other party under this Article IX.
X. MISCELLANEOUS
-------------
10.1 Notices. Any and all notices and communications provided for herein
-------
shall be given in writing and hand delivered or mailed by registered or
certified mail, return receipt requested, and shall be addressed as follows:
Communication Systems International, Inc
8 S. Nevada
Colorado Springs, Colorado 80903
Attention: Chief Financial Officer
with a copy to:
Richard F. Nipert, Esq.
Bright, Gibson & Nipert, P.C.
1140 Grant Street, Suite 100
Denver, Colorado 80203
Robert A. Spade
Communications Systems International, Inc.
8 S. Nevada
Colorado Springs, Colorado 80903
10.2 Legal Counsel. Employee acknowledges that he has been advised to
-------------
consult legal counsel with respect to this Agreement and that this Agreement
shall be construed as if both parties equally participated in the creation of
this Agreement.
10.3 Titles not to Affect Interpretation. The headings of paragraphs in
-----------------------------------
this Agreement are inserted for the convenience of reference only and they
neither form a part of this Agreement nor are they to be used in the
construction or interpretation hereof.
6
<PAGE>
10.4 Invalid Provision. The invalidity or unenforceability of any
-----------------
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed as if such invalid or unenforceable provisions
are omitted.
10.5 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Colorado, notwithstanding any conflict-
of-laws doctrines of such state.
10.6 Entire Agreement; Modification. This Agreement contains the entire
------------------------------
agreement between the parties relating to the subject matter hereof and
supersedes all prior agreements, whether written or oral, with respect to the
subject matter hereof. This Agreement may be modified by a writing signed by the
Company and Employee.
10.7 Attorneys' Fees and Costs. In the event of any legal action
-------------------------
concerning the terms of this Agreement, the prevailing party shall be entitled
to recover its reasonable attorneys' fees and costs from the other party.
10.8 Survival. All warranty, indemnification, and obligations set forth in
--------
Articles IV, V, and VI of this Agreement shall survive the termination of this
Agreement.
10.9 Board Action. Wherever the term "Board" or "Board of Directors" is
------------
used herein, it refers to the action of a majority of the Board members as
provided in the Bylaws of the Company.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
Attest: Communications Systems International, Inc., a Colorado
corporation
_______________________ By:_____________________________________
"Employee"
________________________________________
Robert A. Spade
Accepted and approved this ___ day of ______________, 1997 by the Board of
Directors of Communications Systems International:
_______________________________
Secretary
7
<PAGE>
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made on the ___ day of
October, 1997, by and between COMMUNICATIONS SYSTEMS INTERNATIONAL, INC., a
Colorado corporation ("Company or CSI"), and PATRICK R. SCANLON ("Employee").
WHEREAS, the Company has retained Employee to serve as President of
the Company upon the terms and conditions set forth herein; and
WHEREAS, Employee believes he can contribute substantially to the
future success of the Company and desires to continue employment upon the terms
and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the Company and Employee, intending to be legally bound
hereby, agree as follows:
I. SCOPE OF EMPLOYMENT
-------------------
1.1 The Company agrees to employ Employee in the capacity of President,
and Employee agrees to accept such employment, upon the terms and conditions set
forth herein. Employee shall faithfully and to the best of his abilities perform
such responsibilities and exercise such authority as may from time to time be
assigned or delegated to him by the Board of Directors of the Company.
II. REPRESENTATIONS AND WARRANTIES
------------------------------
2.1 Employee represents and warrants to the Company that his execution,
delivery and performance of this Agreement does not violate or constitute a
breach of any other agreement, whether oral or written, binding upon Employee.
2.2 The Company warrants that it has the full legal right and power to
enter into this Agreement and that all requisite corporate approvals have been
obtained.
III. TERM OF EMPLOYMENT
------------------
3.1 The term of Employee's employment under this Agreement shall commence
August 25, 1997 and shall continue for a term of three years unless earlier
terminated as provided in this Agreement.
IV. COMPENSATION
------------
4.1 The Company shall compensate Employee for his services as set forth
below:
<PAGE>
(a) Benefits. During the term of employment under this Agreement,
--------
Employee shall be entitled to participate in such benefit programs as may be
available from time to time to other executives of the Company, such as medical
coverage.
(b) Salary. Employee will be paid at the initial rate of $140,000.00
------
per year. The Company agrees that upon the approval of the Board of Directors of
the Company, such salary may be increased to reflect the market rate for a
person in a comparable position, or, in the alternative, the Board may elect to
offer cash bonuses in lieu of an increase in salary in order to reasonably
compensate Employee for his services.
(c) Incentive Bonus. Employee shall have the opportunity to earn
---------------
annual bonuses equal to a maximum of ________ percent of the per annum base
salary set forth above pursuant to the Company's bonus plan as adopted from time
to time by the Company's Board of Directors. The bonus, if any is earned, shall
be calculated based upon the performance of the Company and Employee for each
fiscal year of the Company, and shall be paid within thirty days after the end
of each fiscal year.
(d) Stock Options. Employee shall be eligible to receive stock
-------------
options under the incentive stock option plan in effect from time to time, as
adopted by the Board of Directors of the Company. As an initial reward for
outstanding performance, effective ______________, 1997, Employee shall be
granted 100,000 stock options upon the terms set forth in the Resolution of the
Board of Directors set forth on EXHIBIT A attached hereto and incorporated
herein by this reference.
(e) Option to Convert Bonus to Stock Options. Subject to the
----------------------------------------
availability of stock options, as determined by the Board of Directors, at the
election of Employee, Employee shall have the right to convert his right to
receive a cash bonus pursuant to subparagraph (c) above to the acquisition of
additional stock options. Such options shall be fixed at the price of such stock
on the first day of the fiscal year for which such right to a bonus is
calculated. Employee shall have five (5) years within which to exercise such
option.
V. CONFIDENTIAL INFORMATION
------------------------
5.1 At all times hereafter, both during and after the term of Employee's
employment with the Company, Employee shall not use any Confidential Information
(as hereinafter defined) for his own benefit or the benefit of others, and shall
not publish or disclose any Confidential Information to any person, firm, or
corporation, except as authorized and approved in writing by the Board of
Directors. Employee agrees that upon leaving the Company's employ, he shall not
take with him, without the prior written consent of the Board of Directors, any
or all documents, papers, drawings, magnetic media or other tangible property,
or any copies thereof, belonging or relating to the Company. Any and all
documents,
2
<PAGE>
papers, drawings, magnetic media and other tangible property made or compiled
by, or made available to Employee prior to or during the course of his
employment and any copies thereof, which relate to the Company, whether or not
they contain Confidential Information, are and shall be the property of the
Company and shall be delivered to the Company by Employee immediately upon the
termination of his employment. For purposes of this paragraph, Confidential
Information shall mean trade secrets and confidential and proprietary technical,
business and financial information, whether or not in written form, including,
but not limited to, information with respect to know-how, process, techniques,
products, research and development information, plans or projections of the
Company, customer lists, marketing and financial information, personnel, sales
and statistical data, computer programs and information with respect to various
techniques, procedures, programs, processes and methods and any other
information learned or created by Employee during the course of his employment
with the Company. Toward the objective of maintaining such confidentiality,
Employee shall keep the information secret, neither directly nor indirectly
using, divulging or furnishing it nor making it available either to or for the
benefit of any person or entity (other than to any person designated in writing
by the Board of Directors or the Company).
VI. COVENANT NOT TO COMPETE UNREASONABLY WITH COMPANY
-------------------------------------------------
6.1 Employee agrees that during the term of his employment and for a
period of three years after termination of his employment, Employee:
(a) shall not undertake any employment, ownership, or financial
involvement with, or render any assistance to, any person, firm, association,
partnership, corporation or enterprise which is engaged in operating,
developing, or marketing the same or functionally similar products as the
Company is operating, developing, or marketing or plans to operate, develop, or
market or has services or products competitive with or similar to the services
or products of the Company and its affiliates, if such products or services are
to be used within an area within a radius of 500 miles from where the Company is
or contemplates doing business at the time of termination; and
(b) shall not persuade or attempt to persuade any of the Company's
employees to terminate their employment with the Company.
6.2 In the event that a court of law finds this Article to be overly
broad, and therefore unenforceable, the court shall modify this Article to
reflect the maximum restraint allowable, and shall then enforce this Article as
so modified.
3
<PAGE>
VII. REMEDIES FOR BREACH
-------------------
7.1 Employee agrees that his violation of any terms contained in Articles
IV, V, or VI of this Agreement will cause irreparable damage to the Company, the
amount of which will be impossible to estimate or determine. Therefore, Employee
further agrees that the Company shall be entitled, as a matter of course, to an
injunction restraining any violation or further violations of any such covenant
or covenants by Employee, his employees, partners, agents or associates, such
right to an injunction to be cumulative and in addition to any other remedies,
at law or otherwise, which the Company might have. Employee further agrees that
his violation of any of the terms of Articles IV, V, or VI during the course of
his employment with the Company shall be a cause for his termination under this
Agreement. Such covenants contained in Articles IV,V,or VI shall be severable,
and if the same shall be held invalid by reason of length of time, area covered,
or activity covered, or any or all of them, shall be reduced to the extent
necessary to cure such invalidity.
7.2 In the event of a material default by either party, or such party's
agent or representative, of any provision of this Agreement, the other party may
terminate this Agreement upon thirty (30) days written notice, except that the
defaulting party shall have thirty (30) days from receipt of notice of
termination in which to cure any such defaults, and upon any such cure, this
Agreement will continue in full force and effect; provided, that no such notice
or cure period shall be required with respect to a violation of the provisions
of Articles IV,V, or VI. This restriction shall survive the termination of this
Agreement. This Agreement shall also terminate upon the death of Employee. In
addition, any material default by any party to the Employment Agreement which is
not cured within any applicable cure periods provided in such agreement shall
constitute a material default under this Agreement.
7.3 In the event of any violation or threatened violation of this
Agreement CSI shall be entitled to injunctive and other equitable relief on the
grounds that such conduct, if not restrained and/or other equitable relief not
granted, would result in irreparable and serious harm for which damages would be
an inadequate remedy.
7.4 CSI shall have the right to enforce the provisions of Articles IV, V,
and VI even after a wrongful termination of Employee.
VIII. TERMINATION
-----------
8.1 Employee's employment under this Agreement and all
4
<PAGE>
rights to compensation pursuant hereto, shall terminate upon the occurrence of
any of the following:
(a) Death of Employee;
(b) Employee's mental or physical inability to perform substantially
all his duties under this Agreement for a period of three consecutive months, or
his absence from his duties for a period of three consecutive months because of
such mental or physical inability, or certification by a competent physician
that such inability will persist for three months or more;
(c) An occurrence that constitutes "cause" for termination, or
Employee engages in any act, omission or conduct that constitutes "cause" for
termination. For purposes of this Agreement, Company shall have "cause" to
terminate Employee's employment and compensation under any of the following
circumstances:
(1) a breach by Employee of any provision of this Agreement
including, but not limited to, the provisions under Articles IV, V and/or VI;
(2) the failure by Employee to perform or fulfill his duties,
after the Company identifies reasonable deficiencies in his performance and
gives his a reasonable opportunity to correct those deficiencies (for purposes
of this subparagraph, "reasonable opportunity" means three months notice with
periodic intervening reports to Employee);
(3) the refusal or willful failure to follow the lawful
directions of the Board of Directors;
(4) an act of dishonesty in the performance of his duties;
(5) any conduct that is disloyal and prejudicial to the business
of the Company;
(6) the commission by Employee of any felony or other crime that
would adversely affect the reputation of Employee or the Company;
(7) any misrepresentation or concealment of a material fact by
Employee for the purpose of securing employment hereby; or
(8) any act of willful misconduct by Employee which is injurious
to the material business interests of the Company.
5
<PAGE>
IX. INDEMNIFICATION
---------------
9.1 The Company agrees to indemnify and hold Employees harmless from
claims by third parties which arise out of breach by the Company of its
warranties or obligations set forth in this Agreement.
9.2 Employee agrees to indemnify and hold the Company harmless from claims
by third parties arising out of any breach by Employee of his warranties or
obligations set forth in this Agreement.
X. MISCELLANEOUS
-------------
10.1 Notices. Any and all notices and communications provided for herein
-------
shall be given in writing and hand delivered or mailed by registered or
certified mail, return receipt requested, and shall be addressed as follows:
Communication Systems International, Inc
8 S. Nevada
Colorado Springs, Colorado 80903
Attention: Chief Financial Officer
with a copy to:
Richard F. Nipert, Esq.
Bright, Gibson & Nipert, P.C.
1140 Grant Street, Suite 100
Denver, Colorado 80203
Patrick R. Scanlon
______________________
______________________
10.2 Legal Counsel. Employee acknowledges that he has been advised to
-------------
consult legal counsel with respect to this Agreement and that this Agreement
shall be construed as if both parties equally participated in the creation of
this Agreement.
10.3 Titles not to Affect Interpretation. The headings of paragraphs in
-----------------------------------
this Agreement are inserted for the convenience of reference only and they
neither form a part of this Agreement nor are they to be used in the
construction or interpretation hereof.
10.4 Invalid Provision. The invalidity or unenforceability of any
-----------------
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed as if such invalid or unenforceable provisions
are omitted.
10.5 Governing Law. This Agreement shall be governed by and
-------------
6
<PAGE>
construed in accordance with the laws of the State of Colorado, notwithstanding
any conflict-of-laws doctrines of such state.
10.6 Entire Agreement; Modification. This Agreement contains the entire
------------------------------
agreement between the parties relating to the subject matter hereof and
supersedes all prior agreements, whether written or oral, with respect to the
subject matter hereof. This Agreement may be modified by a writing signed by the
Company and Employee.
10.7 Attorneys' Fees and Costs. In the event of any legal action
-------------------------
concerning the terms of this Agreement, the prevailing party shall be entitled
to recover its reasonable attorneys' fees and costs from the other party.
10.8 Survival. All warranty, indemnification, and obligations set forth in
--------
Articles IV, V, and VI of this Agreement shall survive the termination of this
Agreement.
10.9 Board Action. Wherever the term "Board" or "Board of Directors" is
------------
used herein, it refers to the action of a majority of the Board members as
provided in the Bylaws of the Company.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
Attest: Communications Systems International, Inc., a Colorado
corporation
_______________________ By:_____________________________________
Robert A. Spade, Chairman of the
Board
"Employee"
________________________________________
Patrick R. Scanlon
Accepted and approved this ___ day of ______________, 1997 by the Board of
Directors of Communications Systems International:
_______________________________
Secretary
7
<PAGE>
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made on the ___ day of
December, 1997, by and between COMMUNICATIONS SYSTEMS INTERNATIONAL, INC., a
Colorado corporation ("Company or CSI"), and DANIEL HUDSPETH ("Employee").
WHEREAS, the Company has retained Employee to serve as Vice President
of Finance and Chief Financial Officer of the Company upon the terms and
conditions set forth herein; and
WHEREAS, Employee believes he can contribute substantially to the
future success of the Company and desires to continue employment upon the terms
and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the Company and Employee, intending to be legally bound
hereby, agree as follows:
I. SCOPE OF EMPLOYMENT
-------------------
1.1 The Company agrees to employ Employee in the capacity of Vice
President of Finance and Chief Financial Officer, and Employee agrees to accept
such employment, upon the terms and conditions set forth herein. Employee shall
be responsible for overseeing and managing the Company's financial affairs and
performing such other duties as are customarily undertaken by the Chief
Financial Officer of similar companies, all of which responsibilities shall be
performed under the direction of the President and Chairman of the Board of
Directors of the Company. Employee shall faithfully and to the best of his
abilities perform such responsibilities and exercise such authority as may from
time to time be assigned or delegated to him by the President and Chairman of
the Board of Directors of the Company.
II. REPRESENTATIONS AND WARRANTIES
------------------------------
2.1 Employee represents and warrants to the Company that his execution,
delivery and performance of this Agreement does not violate or constitute a
breach of any other agreement, whether oral or written, binding upon Employee.
2.2 The Company warrants that it has the full legal right and power to
enter into this Agreement and that all requisite corporate approvals have been
obtained.
III. TERM OF EMPLOYMENT
------------------
3.1 The term of Employee's employment under this Agreement shall commence
December 1, 1997 and shall continue for a term of one year unless earlier
terminated as provided in this Agreement.
<PAGE>
IV. COMPENSATION AND RELOCATION EXPENSES
------------------------------------
4.1 The Company shall compensate Employee for his services as set forth
below:
(a) Benefits. During the term of employment under this Agreement,
--------
Employee shall be entitled to participate in such benefit programs as may be
available from time to time to other executives of the Company, such as health
insurance and vacation plans. In the event the Company's health insurance plan
does not permit Employee's daughter to continue seeing her existing physicians,
Employee may elect to waive coverage under the Company's plan. In such event,
the Company will reimburse Employee for all reasonable premiums incurred to
maintain Employee's existing health insurance plan.
(b) Salary. Employee will be paid at the rate of $110,000.00 per
------
year, payable in semi-monthly payments of $4,583.33 each.
(c) Incentive Bonus. Employee shall have the opportunity to earn
---------------
annual bonuses equal to a maximum of thirty-five percent of the per annum base
salary set forth above pursuant to the Company's bonus plan as adopted from time
to time by the Company's Board of Directors, in its sole discretion. The payment
of any bonus shall in any event be made in the sole discretion of the Company's
Board of Directors. The bonus, if any is earned, shall be calculated based upon
the performance of the Company and Employee for each fiscal year of the Company,
and shall be paid within thirty days after the end of each fiscal year.
(d) Stock Options. Employee shall be eligible to receive stock
-------------
options under the incentive stock option plan in effect from time to time, as
adopted by the Board of Directors of the Company. Employee shall be granted
50,000 stock options (pre-reverse split) upon completion of the Company's
initial public offering upon the terms set forth in the Resolution of the Board
of Directors set forth on EXHIBIT A attached hereto and incorporated herein by
this reference. All stock options given Employee shall vest upon any sale of
substantially all of the assets of the Company or other sale of a controlling
interest in the Company.
(e) Relocation Expenses. The Company shall reimburse Employee for all
-------------------
reasonable moving expenses incurred by Employee in connection with the
relocation of his home, including all packing, transporting and unpacking of
household goods and furnishings, and any temporary living expenses. In addition
to the above reimbursement of expenses, the Company shall pay Employee upon the
completion of its initial public offering a relocation
2
<PAGE>
fee in the amount of $10,000 to compensate Employee for any other costs related
to the relocation.
V. CONFIDENTIAL INFORMATION
------------------------
5.1 At all times hereafter, both during and after the term of Employee's
employment with the Company, Employee shall not use any Confidential Information
(as hereinafter defined) for his own benefit or the benefit of others, and shall
not publish or disclose any Confidential Information to any person, firm, or
corporation, except as authorized and approved in writing by the Board of
Directors. Employee agrees that upon leaving the Company's employ, he shall not
take with him, without the prior written consent of the Board of Directors, any
or all documents, papers, drawings, magnetic media or other tangible property,
or any copies thereof, belonging or relating to the Company. Any and all
documents, papers, drawings, magnetic media and other tangible property made or
compiled by, or made available to Employee prior to or during the course of his
employment and any copies thereof, which relate to the Company, whether or not
they contain Confidential Information, are and shall be the property of the
Company and shall be delivered to the Company by Employee immediately upon the
termination of his employment. For purposes of this paragraph, Confidential
Information shall mean trade secrets and confidential and proprietary technical,
business and financial information, whether or not in written form, including,
but not limited to, information with respect to know-how, process, techniques,
products, research and development information, plans or projections of the
Company, customer lists, marketing and financial information, personnel, sales
and statistical data, computer programs and information with respect to various
techniques, procedures, programs, processes and methods and any other
information learned or created by Employee during the course of his employment
with the Company. Toward the objective of maintaining such confidentiality,
Employee shall keep the information secret, neither directly nor indirectly
using, divulging or furnishing it nor making it available either to or for the
benefit of any person or entity (other than to any person designated in writing
by the Board of Directors or the Company).
VI. COVENANT NOT TO COMPETE UNREASONABLY WITH COMPANY
-------------------------------------------------
6.1 Employee agrees that during the term of his employment and for a
period of three years after termination of his employment, Employee:
(a) shall not undertake any employment, ownership, or financial
involvement with, or render any assistance to, any person, firm, association,
partnership, corporation or enterprise which is engaged in operating,
developing, or marketing the same or functionally similar products as the
Company is operating, developing, or marketing or plans to operate, develop, or
market
3
<PAGE>
or has services or products competitive with or similar to the services or
products of the Company and its affiliates, if such products or services are to
be used within an area within a radius of 500 miles from where the Company is or
contemplates doing business at the time of termination; and
(b) shall not persuade or attempt to persuade any of the Company's
employees to terminate their employment with the Company.
6.2 In the event that a court of law finds this Article to be overly
broad, and therefore unenforceable, the court shall modify this Article to
reflect the maximum restraint allowable, and shall then enforce this Article as
so modified.
VII. REMEDIES FOR BREACH
-------------------
7.1 Employee agrees that his violation of any terms contained in Articles
IV, V, or VI of this Agreement will cause irreparable damage to the Company, the
amount of which will be impossible to estimate or determine. Therefore, Employee
further agrees that the Company shall be entitled, as a matter of course, to an
injunction restraining any violation or further violations of any such covenant
or covenants by Employee, his employees, partners, agents or associates, such
right to an injunction to be cumulative and in addition to any other remedies,
at law or otherwise, which the Company might have. Employee further agrees that
his violation of any of the terms of Articles IV, V, or VI during the course of
his employment with the Company shall be a cause for his termination under this
Agreement.
7.2 In the event of a material default by either party, or such party's
agent or representative, of any provision of this Agreement, the other party may
terminate this Agreement upon thirty (30) days written notice, except that the
defaulting party shall have thirty (30) days from receipt of notice of
termination in which to cure any such defaults, and upon any such cure, this
Agreement will continue in full force and effect; provided, that no such notice
or cure period shall be required with respect to a violation of the provisions
of Articles IV,V, or VI. This restriction shall survive the termination of this
Agreement. This Agreement shall also terminate upon the death of Employee. In
addition, any material default by any party to the Employment Agreement which is
not cured within any applicable cure periods provided in such agreement shall
constitute a material default under this Agreement.
7.3 In the event of any violation or threatened violation of this
Agreement CSI shall be entitled to injunctive and other equitable relief on the
grounds that such conduct, if not restrained and/or other equitable relief not
granted, would result in irreparable and serious harm for which damages would be
an
4
<PAGE>
inadequate remedy.
7.4 CSI shall have the right to enforce the provisions of Articles IV, V,
and VI even after a wrongful termination of Employee.
VIII. TERMINATION
-----------
8.1 Employee's employment under this Agreement and all rights to
compensation pursuant hereto, shall terminate upon the occurrence of any of the
following:
(a) Death of Employee;
(b) Employee's mental or physical inability to perform substantially
all his duties under this Agreement for a period of three consecutive months, or
his absence from his duties for a period of three consecutive months because of
such mental or physical inability, or certification by a competent physician
that such inability will persist for three months or more;
(c) An occurrence that constitutes "cause" for termination, or
Employee engages in any act, omission or conduct that constitutes "cause" for
termination. For purposes of this Agreement, Company shall have "cause" to
terminate Employee's employment and compensation under any of the following
circumstances:
(1) a breach by Employee of any provision of this Agreement
including, but not limited to, the provisions under Articles IV, V and/or VI;
(2) the failure by Employee to perform or fulfill his duties,
after the Company identifies reasonable deficiencies in his performance and
gives his a reasonable opportunity to correct those deficiencies (for purposes
of this subparagraph, "reasonable opportunity" means three months notice with
periodic intervening reports to Employee);
(3) the refusal or willful failure to follow the lawful
directions of the Board of Directors;
(4) an act of dishonesty in the performance of his duties;
(5) any conduct that is disloyal and prejudicial to the business
of the Company;
(6) the commission by Employee of any felony or other crime that
would adversely affect the reputation of Employee or the Company;
5
<PAGE>
(7) any misrepresentation or concealment of a material fact by
Employee for the purpose of securing employment hereby; or
(8) any act of willful misconduct by Employee which is injurious
to the material business interests of the Company.
IX. INDEMNIFICATION
---------------
9.1 The Company agrees to indemnify and hold Employees harmless from
claims by third parties which arise out of breach by the Company of its
warranties or obligations set forth in this Agreement.
9.2 Employee agrees to indemnify and hold the Company harmless from claims
by third parties arising out of any breach by Employee of his warranties or
obligations set forth in this Agreement.
X. MISCELLANEOUS
-------------
10.1 Notices. Any and all notices and communications provided for herein
-------
shall be given in writing and hand delivered or mailed by registered or
certified mail, return receipt requested, and shall be addressed as follows:
Communication Systems International, Inc
8 S. Nevada
Colorado Springs, Colorado 80903
Attention: Chief Financial Officer
with a copy to:
Richard F. Nipert, Esq.
Bright, Gibson & Nipert, P.C.
1140 Grant Street, Suite 100
Denver, Colorado 80203
Daniel Hudspeth
______________________
______________________
10.2 Legal Counsel. Employee acknowledges that he has been advised to
-------------
consult legal counsel with respect to this Agreement and that this Agreement
shall be construed as if both parties equally participated in the creation of
this Agreement.
10.3 Titles not to Affect Interpretation. The headings of paragraphs in
-----------------------------------
this Agreement are inserted for the convenience of reference only and they
neither form a part of this Agreement nor
6
<PAGE>
are they to be used in the construction or interpretation hereof.
10.4 Invalid Provision. The invalidity or unenforceability of any
-----------------
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed as if such invalid or unenforceable provisions
are omitted.
10.5 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Colorado, notwithstanding any conflict-
of-laws doctrines of such state.
10.6 Entire Agreement; Modification. This Agreement contains the entire
------------------------------
agreement between the parties relating to the subject matter hereof and
supersedes all prior agreements, whether written or oral, with respect to the
subject matter hereof. This Agreement may be modified by a writing signed by the
Company and Employee.
10.7 Attorneys' Fees and Costs. In the event of any legal action
-------------------------
concerning the terms of this Agreement, the prevailing party shall be entitled
to recover its reasonable attorneys' fees and costs from the other party.
10.8 Survival. All warranty, indemnification, and obligations set forth in
--------
Articles IV, V, and VI of this Agreement shall survive the termination of this
Agreement.
10.9 Board Action. Wherever the term "Board" or "Board of Directors" is
------------
used herein, it refers to the action of a majority of the Board members as
provided in the Bylaws of the Company.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
Attest: Communications Systems International, Inc., a Colorado
corporation
_______________________ By:_____________________________________
Patrick R. Scanlon, President
"Employee"
________________________________________
Daniel Hudspeth
Accepted and approved this ___ day of ______________, 1997 by the Board of
Directors of Communications Systems International:
7
<PAGE>
_______________________________
Secretary
8
<PAGE>
EXHIBIT 10.14
AIT CARRIER SERVICE AGREEMENT FOR ITC
-------------------------------------
THIS AGREEMENT is entered into with the effective date of June 1, 1997, by and
between AMERICAN INTERNATIONAL TELEPHONE, INC., a Delaware corporation (the
"Company" or "AIT"), having its main office at 287 Bowman Avenue, Purchase, NY
10577 and INTERNATIONAL TELEPHONE COMMUNICATIONS, INC. d/b/a ITC ("ITC" or
"Customer") having an address at 110 East Broward Boulevard, Suite 6l0, Ft.
Lauderdale, Florida 33301. This Agreement supersedes the agreement between AIT
and Customer dated January 23, 1996 and all other prior agreements by and among
the parties.
W I T N E S S E T H
-------------------
WHEREAS, the Company is in the business of providing long distance
telecommunications services as a reseller and Customer desire to utilize the
Company's services;
WHEREAS, ITC and the Company desire to replace the January 23, 1996 agreement;
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants
and agreements set forth herein, the parties agree as follows:
1. Long Distance Service. AIT will provide Customer long distance telephone
---------------------
service pursuant to T-l access (the "Facilities") for international,
interstate and intrastate calls.
2. Term. The term of this agreement is for one year unless earlier terminated by
----
either party upon 30 days notice, if without cause, and immediately if for
cause. For cause is defined herein as a breach of this agreement, bankruptcy
or assignment for the benefit of creditors, fraud or material
misrepresentation or the failure of Customer to provide financial information
set forth in paragraph 13. AIT shall also have the right to terminate this
agreement or modify its rates in the event its underlying carriers cancel
service, change their rates, provide unacceptable services or change the way
they conduct business so as to materially impact AIT or if Customer becomes
financially unsound.
3. Billing and Charges for Facilities. AIT shall bill ITC on the basis of the
----------------------------------
rates set forth on Schedules A and A-1 attached hereto. ITC shall be
-------------------
responsible for all Federal excise taxes, telecommunications taxes,
surcharges and sales tax since it is a carrier reselling services. AIT will
periodically advise ITC of any changes in its rates. Billing shall be 30/06
for international, except Mexico shall be 60/60. Domestic billing will be in
6 second increments. Customer shall pay AIT one-half of all access charges or
other facilities charges which AIT is billed by third parties related to
maintaining the private lines.
4. Payment of Bills. ITC agrees to pay its bills in a timely fashion and in all
----------------
events a manner which preserves AIT's credit with its carriers. In the event
AIT is charged interest by its underlying carriers, it will pass on such
charges to ITC and ITC agrees to pay them in the event they are not waived.
In the event AIT is required to make prepayments, AIT will have the right to
request prepayments in return from Customer.
5. Confidentiality. Customer agrees to keep all rate information strictly
---------------
confidential and acknowledges that Company may be irreparably harmed by any
disclosure of rate
<PAGE>
information. Customer agrees that AIT may seek an injunction to enforce
this clause. AIT will keep all relevant information regarding Customer
confidential.
6. Compliance With Federal and State Laws. Customer agrees to abide by all
--------------------------------------
Federal, state and local rules, regulations and laws and Customer shall be
responsible for any tariff filings it may be required to make and payment
of all applicable local, state and federal taxes.
7. Notices. All communications, notices, requests, instructions, consents or
-------
demands given under this agreement will be in writing and will be deemed to
have been duly given when delivered to, or mailed prepaid registered or
certified mail addressed to, the party for whom intended, as follows, or to
such other address as may be furnished by such party in the manner provided
herein:
If to AIT: American International Telephone, Inc.
287 Bowman Avenue
Purchase, NY 10577
Attention: Charles S. Eisenberg
If to Customer: International Telephone Communications, Inc.
110 East Broward Boulevard
Suite 610
Ft. Lauderdale, Florida 33301
Attention: Phil Thomas
8. Liability and Indemnification. AIT shall not be liable for consequential,
-----------------------------
special, punitive or incidental damages or lost profits relating to service
interruptions or the providing of service. AIT shall not be liable for any
fraudulent calls relating to Customer's account. Customer agrees to
indemnify and hold harmless AIT from any claims of third parties associated
with Customer.
9. Governing Law. This agreement will in all respects be governed by and
-------------
construed under the laws of the State of New York without giving effect to
provisions thereof concerning conflict of laws. The parties agree to
jurisdiction within the State of New York and all disputes relating hereto
shall be brought in state or Federal Courts located within the State of New
York.
10. Entire Agreement. This agreement sets forth the entire understanding of the
----------------
parties hereto with respect to the subject matter, merges and supersedes
all prior and contemporaneous understandings and may not be waived or
modified, in whole or in part, except by a writing signed by each of the
parties hereto. No waiver of any provision of this agreement in any
instance may be deemed to be a waiver of the same or any other provisions
in any other instance.
-2-
<PAGE>
11. Binding Agreement. This agreement will be binding upon, unenforceable
-----------------
against, and inure to the benefit of, the parties hereto and their
respective successors and assigns, and nothing herein is intended to confer
any right, remedy or benefit upon any other person.
12. Enforceability. If any provision of this agreement is held to be invalid or
--------------
unenforceable by a court of competent jurisdiction, this agreement will be
interpreted and enforceable as if such provision were not contained herein,
the provisions of this agreement being severable in any such instance.
13. Further Assurances. Customer hereby authorizes AIT to obtain credit
------------------
information on Customer. Customer will, upon request, provide financial
statements, tax returns, business plans, TRW and D&B Reports, company
brochures or other literature on Customer which is reasonably available to
Customer. Customer hereby grants AIT the right to file UCC-1 Financing
Statements or other liens in the event Customer does not pay its bills
within 30 days.
AMERICAN INTERNATIONAL
TELEPHONE, INC. INTERNATIONAL TELEPHONE INC.
By: SIGNATURE ILLEGIBLE By: SIGNATURE ILLEGIBLE
----------------------------- ------------------------------
Title: President Title: President
-------------------------- ---------------------------
-3-
<PAGE>
EXHIBIT 10.15
CARRIER SERVICES AGREEMENT
--------------------------
THIS AGREEMENT by and between TresCom U.S.A., Inc. a Florida Corporation
with its principal place of business located at TresCom International, Inc., 200
East Broward Boulevard, Fort Lauderdale, Florida 33301 ("TresCom") and
International Telephone Company a Florida Corporation with its principal place
of business located at 110 East Broward Blvd. - Suite 610, Fort Lauderdale, FL
33301 ("Customer").
RECITALS
TRESCOM is in the business of providing switched and dedicated,
international telecommunications services. Customer desires to purchase, and
TRESCOM desires to sell to Customer, such services, in accordance with the
terms and conditions set forth in this Agreement.
ACCORDINGLY, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto mutually agree as follows:
ARTICLE 1
---------
PROVISION OF SERVICES
---------------------
1.1 PURCHASE AND SALE OF SERVICES. Subject to the terms and
-----------------------------
conditions of this Agreement and, through incorporation by reference, the terms
and conditions of TRESCOM's Tariff on file with the Federal Communications
Commission ("FCC") and any changes thereto ("Tariff"), Customer agrees to
purchase from TRESCOM and TRESCOM agrees to sell to Customer, switched,
international telecommunications services to the points and at the rates set
forth in Schedule 1.1 hereto ("Services"). If there is any conflict or
inconsistency between any of the terms and conditions of this Agreement and any
of the terms and conditions of the Tariff, the terms of the Tariff shall
control.
1.2 REPRESENTATION. TRESCOM represents to Customer that it has and will
---------------
maintain during the term of the Agreement all licenses, approvals and other
authorizations necessary or appropriate to provide the Services under this
Agreement.
1.3 RESALE OF SERVICES. All Services provided under this Agreement are
-------------------
provided for resale to Customer's subscribers. Customer is solely responsible
for billing and collection from its subscribers. Customer is solely responsible
for obtaining and maintaining all licenses, approvals and other
authorizations necessary or appropriate for the resale of Services to its
subscribers. Customer represents to TRESCOM that it has and will maintain during
the term of this Agreement all such licenses, approvals and authorizations.
ARTICLE 2
---------
TERM AND TERMINATION
--------------------
2.1 TERM. This Agreement shall commence on June 20th, 1996 (the
----
"Effective Date") and shall continue for one (1) year from the "Effective Date."
This Agreement shall automatically
<PAGE>
continue beyond the Termination Date unless terminated by either party upon
thirty (30) days prior written notice or otherwise terminated in accordance with
the terms of this Agreement.
2.2 TERMINATION. This Agreement shall terminate prior to the expiration
-----------
of its then current term upon the happening of any of the following events:
2.2.1 A material breach of this Agreement by either party and the
breaching party fails to cure the breach within thirty (30) calendar days after
notice of the breach from the nonbreaching party.
2.2.2 Notwithstanding the foregoing Section 2.2.1, a failure by
Customer to pay any amounts due to TRESCOM under this Agreement after ten (10)
calendar days from the due date, upon notice of nonpayment from TRESCOM and
failure of Customer to pay the amount due within five (5) calendar days
thereafter.
2.2.3 Either party ceases doing business as a going concern, makes
an assignment for the benefit of creditors, admits in writing its inability to
pay debts as they become due, files a voluntary petition in bankruptcy, is
adjudicated bankrupt or insolvent, seeks reorganization, arrangement,
composition, adjustment, liquidation, dissolution or similar arrangement under
any statute, law or regulation or, consents to or acquiesces in the appointment
of a trustee, receiver, or liquidator for all or any substantial part of its
assets or properties, or its shareholders attempt to dissolve or liquidate.
2.2.4 A petition in bankruptcy is filed against either party or,
without the party's consent or acquiescence, a trustee, receiver or liquidator
of it or of all or any substantial part of its assets and properties is
appointed.
2.2.5 Immediately upon a determination by any governmental authority
with jurisdiction over the parties that the provision of the Services under this
Agreement is contrary to existing laws, rules or regulations.
2.2.6 Upon thirty (30) days' prior written notice that in the
reasonable judgment of TRESCOM the passage or adoption of any law, rule or
regulation will make it materially more expensive or difficult to provide the
Services under this Agreement.
2.2.7 Notwithstanding the provisions of Section 3.5 below, Customer
does not meet the monthly minimum usage commitment within three (3) months of
this Agreement and for each succeeding month for the term of this Agreement.
2.2.8 During the first ninety (90) days of Services, Customer may
terminate without cause. After such ninety (90) day period, if TRESCOM fails to
provide the Services to customer in accordance with industry standards, the
Customer shall notify TRESCOM in writing of its concerns and allow a reasonable
amount of time for TRESCOM to resolve such Services issues. If issues remain
unresolved after a thirty (30) day period, then Customer may terminate the
Agreement.
2.2.9 By the mutual consent of the parties.
-2-
<PAGE>
2.3 CONSEQUENCES OF EXPIRATION OR TERMINATION. Upon the expiration or
-----------------------------------------
termination of this Agreement for any reason, TRESCOM shall immediately cease
providing Services to Customer. All amounts due to TRESCOM from Customer shall
become due and payable immediately upon such expiration or termination. In
addition, the non-breaching party shall have any other rights as are available
in law or equity. Notwithstanding the expiration or termination of this
Agreement for any reason, the provisions of Articles 4, 5, and 6 shall
continue to apply.
ARTICLE 3
---------
PAYMENT TERMS
-------------
3.1 INVOICING. TRESCOM shall invoice all Service charges, as set forth on
---------
Schedule 1.1, on a monthly basis. Payment is due upon receipt of invoice.
3.1.1 Invoices shall be provided on magnetic tape or computer floppy
disk, with all necessary usage data to permit Customer to bill its subscribers.
3.1.2 Payment of each invoice shall be in U.S. currency either by wire
transfer or in accordance with instructions provided to Customer by TRESCOM.
3.2 TAXES. The prices in this Agreement do not include any applicable
-----
federal, state, or local taxes. Unless Customer is exempt, Customer shall pay
such taxes upon receipt of an itemized invoice. Such taxes, duties and charges
shall be separately stated on the invoice and shall be paid directly to TRESCOM
at the same time as all other charges set forth on the invoice. If Customer
claims any exemption from such taxes, it shall provide TRESCOM with a valid tax
exemption certificate or other evidence reasonably satisfactory to TRESCOM that
Customer is not subject to such taxes, duties or charges.
3.3 PAYMENT SECURITY. Customer is required to place a security deposit of
----------------
$_______ with TRESCOM prior to TRESCOM providing Services.
3.3.1 TRESCOM may offset against the security any amount due under
this Agreement owed by Customer that is not paid when due. Upon the expiration
or termination of this Agreement for any reason, TRESCOM shall have the right to
offset against the security any amounts owed to it by Customer whether or not
such amounts are in dispute and shall remit the balance promptly to Customer,
without interest. Any disputed amounts shall be noticed and resolved in the
manner set forth in Section 3.4 below.
3.4 DISPUTED CHARGES. If Customer in good faith disputes the amount or
----------------
appropriateness of a charge included in an invoice from TRESCOM, Customer shall
notify TRESCOM in writing and provide supporting documentation establishing such
claim. Short calls are deemed to be completed calls and are not subject to
dispute. Such documentation supporting disputed charges shall include a detailed
analysis showing the difference between the specific invoice amount and the
Customer's specific asserted amount. A summary of the disputed charges will not
be accepted. Customer shall further provide all information reasonably
requested by TRESCOM including, but not limited to, CDR's to resolve the
dispute. Such notification shall not relieve Customer of the obligation to make
all payments, including the amounts disputed, by the due date as set forth in
this Agreement. Any resolutions made by TRESCOM in favor of Customer will be
credited to Customer's next invoice.
-3 -
<PAGE>
Failure to contest a charge within forty-five (45) days of the date of the
invoice shall create an irrebuttable presumption of the correctness of the
charge.
3.5 MINIMUM USAGE. Customer will ramp up to $________ in Services per
-------------
month within ninety (90) days of this Agreement; after the fourth month and for
each month during the term of this Agreement thereafter, Customer will utilize
$____ in Services per month. If Customer fails to satisfy the monthly minimum,
Customer shall be subject to an increase in rates charged at the rate of $_____
for each minute less than the monthly minimum not utilized by Customer. TRESCOM
shall have the right, upon seven (7) days, prior written notice to Customer, to
change the amount of such charge set forth in Schedule 1.1 to reflect documented
changes in TRESCOM's costs. Upon receipt of such notice, Customer shall have the
option of terminating this Agreement by delivery of a written notice to TRESCOM
within such 7-day period. If Customer has not terminated this Agreement within
such 7-day period, the new charges shall apply from the first day of the billing
week immediately following the expiration of the 7-day period.
ARTICLE 4
---------
LIABIILITY
----------
4.1 SERVICE INTERRUPTIONS AND OUTAGES. TRESCOM shall not be liable for
---------------------------------
interruptions or outages in the provision of Services to Customer caused by or
resulting from any act of God, flood, earthquake, storm, lightning, fire
epidemic, war, outbreak of hostilities (whether or not war is declared), riot,
strikes or other labor unrest, civil disturbance, sabotage, mechanical failures,
fiber or cable cut, accidents, defects in transmission, expropriation by
governmental authorities, interruptions by regulatory or judicial authorities or
other acts or events that are outside the reasonable control of TRESCOM. In the
event of interruptions or outages of Services as a result of mechanical
failures, fiber or cable cut, accidents, defects in transmission or
interruptions by regulatory or judicial authorities that are caused by the acts
or omissions of TRESCOM or its representatives, TRESCOM's liability shall be
limited to a reduction of Customer's monthly minimum requirement or any other
recurring charge pro rata of the number of days of interruption or outages of
Services during such month.
4.2 DAMAGES. In no event will TRESCOM be liable for indirect,
-------
consequential, special, incidental or punitive damages, or lost profits,
revenue, customers, goodwill or opportunity, of any kind whatsoever, resulting
from a breach of this Agreement.
4.3 WARRANTY. TRESCOM WARRANTS TO CUSTOMER ONLY THAT IT WILL PROVIDE THE
--------
SAME QUALITY OF LONG DISTANCE SERVICE IT PROVIDES TO ITS OTHER CUSTOMERS WHICH
SHALL EITHER MEET OR EXCEED INDUSTRY STANDARDS.
4.4 FRAUDULENT CALLS. TRESCOM shall not be liable for any fraudulent
----------------
calls processed by TRESCOM and billed to Customer's account. TRESCOM shall
notify Customer promptly of any fraudulent calling of which TRESCOM has actual
knowledge, it being understood that TRESCOM is under no obligation to
investigate the authenticity of calls charged to Customer's account. However,
the parties agree that any fraudulent calls billed to Customer must originate
from telephones served by Customer.
-4-
<PAGE>
ARTICLE 5
---------
CONFIDENTIALITY
---------------
5.1 CONFIDENTIALITY. During the term of this Agreement, the parties may
---------------
disclose to each other certain "proprietary" and/or "confidential" information.
The parties desire to assure the confidential and proprietary status of such
information which may be disclosed to each other and therefore for themselves,
their subsidiaries and their affliates, agree as follows:
5.1.1 All information disclosed shall be deemed to be confidential and
proprietary. All information contained in this Agreement, including Schedule
1.1 hereto, as well as all traffic volume and distribution information and rate
information of TRESCOM given to or learned by Customer in connection with this
Agreement shall be considered Proprietary, information without further act of
either party.
5.1.2 Each party agrees to use the Proprietary Information received
from the other party only for the purpose of this Agreement and shall not be
reproduced in any form or orally communicated except as required to accomplish
the intent of this Agreement.
5.1.3 The receiving party shall provide at a minimum the same care to
avoid disclosure or unauthorized use of the Proprietary Information as it
provides to protect its own proprietary information. It is agreed that all
Proprietary Information shall be retained by the receiving party in a
secure place with access limited to only such of the receiving party's
employees or agents who need to know such information for purposes of this
Agreement.
5.1.4 All Proprietary Information shall remain the property of the
disclosing party, shall be used by the receiving party only for the purpose
intended and shall be returned to the disclosing party or destroyed after the
receiving party's need for it has expired or upon the request of the disclosing
party, and, in any event, upon termination of this Agreement.
5.1.5 Each party agrees not to reveal the terms of this Agreement to
any third party except as contemplated by this Agreement or unless required by
law, provided that any written information describing the relationship of the
parties that one party desires or is obligated to disclose shall first be
disclosed to the other party which shall have an opportunity to object to such
disclosure.
5.2 USE OF NAME. Each party agrees that, without the other party's written
-----------
consent, it will not use the name, service marks or trademarks of the other
party or of any of its affliated companies in any advertising, publicity
releases or sales presentations. Neither party shall take any action that will
in any manner compromise the other party's registered trademarks or service
marks.
5.3 REMEDIES FOR BREACH. The parties agree that a breach or threatened
-------------------
breach of the terms of this Article 5 may result in irreparable injury to the
non-breaching party for which a remedy in damages would be inadequate. The
parties agree that in the event of such breach or threatened breach, the non-
breaching party shall be entitled to seek an injunction to prevent the breach
or threatened breach, and the breaching party hereby waives any defense that an
adequate remedy in law exists and acknowledges that such a breach or threatened
breach would result in irreparable injury to the non-breaching party.
- 5 -
<PAGE>
ARTICLE 6
---------
MISCELLANEOUS
-------------
6.1 MISCELLANEOUS. This Agreement which includes Schedule 1.1: (a)
-------------
constitutes the entire agreement of the parties and supersedes all previous
agreements or understandings, whether oral or written; (b) may not be amended or
modified except by a written instrument signed by all parties; (c) is
binding upon and will inure to the benefit of the parties and their respective
successors, and permitted assigns; (d) may not be assigned without the prior
written consent of the other party; and (e) may be executed in duplicate
originals.
6.2 NOTICES. Any notices, consents or other communications required or
-------
permitted under this Agreement must be in writing and executed by the party
giving the notice or its authorized representative. Any such notice or
communication must be given, and will be deemed to have been duly given, if
either (a) hand delivered by independent courier or (b) mailed by U.S. first
class mail, postage prepaid, certified or registered, in either case to the
following addresses:
If to TRESCOM: If to Customer:
TresCom U.S.A., Inc. International Telephone Company
c/o TresCom International, Inc. 110 East Broward Boulevard., Suite 610
200 East Broward Boulevard, Suite 2100 Fort Lauderdale, Florida 33301
Fort Lauderdale, Florida 33301 Attn: Sean Thomas
Attn: Thomas Scott
Any notice given in the manner set forth in this section shall be deemed
delivered (i) at the time of the actual delivery, if hand delivered, (ii) five
(5) days after mailing, if mailed, or (iii) one (1) day after sending next day
delivery. Any party may change its address for the giving of notices by
notifying the other party of the change in the manner set forth in this
section. Any such change of address shall not be effective until five (5) days
after receipt of the notice by the other party, as determined under this
section.
6.3 WAIVER. The failure of any party to exercise any right or remedy
------
under this Agreement shall not constitute a waiver of such right or remedy, and
the waiver of any violation or breach of this Agreement by a party shall not
constitute a waiver of any prior or subsequent violation or breach. No waiver
under this Agreement shall be valid unless in writing and executed by the
waiving party.
6.4 SEVERABILITY. If any provision of this Agreement is determined by a
------------
court or other governmental authority to be invalid, illegal or unenforceable,
such invalidity, illegality or unenforceability shall not affect the validity,
legality or enforceability of any other provision of this Agreement. Further,
the provision that is determined to be invalid, illegal or unenforceable shall
be reformed and construed to the extent permitted by law so that it will be
valid, legal and enforceable to the maximum extent possible.
-6-
<PAGE>
6.5 HEADINGS. The headings used in this Agreement are included for the
--------
convenience of the parties for reference purposes only and are not to be used
in construing or interpreting this Agreement.
6.6 JURISDICTION AND VENUE. Any action brought to enforce this Agreement
----------------------
shall be brought in the federal or state courts of Florida, and the parties
acknowledge and agree that venue in Broward County, Florida shall be proper for
such action.
6.7 LITIGATION COSTS. The prevailing party in any proceeding brought to
----------------
enforce the provisions of this Agreement or to seek a remedy for any breach
(including arbitration or an administrative proceeding) will be entitled to
receive its attorneys' and paralegal fees as well as court costs, litigation
expenses and other disbursements incurred in connection with such proceedings,
induding fees and expenses incurred in any appellate proceedings.
6.8 NO PARTNERSHIP. Nothing in this Agreement shall be deemed to create a
--------------
partnership, joint venture or other relationship other than a vendor-customer
relationship.
6.9 ASSIGNMENT. This Agreement and all of the provisions hereof shall be
----------
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests, or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other party.
Notwithstanding the foregoing, TRESCOM may assign this Agreement at any time to
any person or entity affiliated with, controlled by, or under common control
with TRESCOM.
6.10 INDEMNIFICATION. Customer agrees to defend, hold harmless and
---------------
indemnify TRESCOM from and against all claims, demands, actions, causes of
action, judgments, costs, attorney's fees and expenses of any kind or nature for
bodily injury, death, property damage, goodwill, or other damages of any kind
incurred by Customer, its employees, or third parties arising under this
Agreement due to Customer's negligence or willful misconduct.
IN WIINESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
TRESCOM U.S.A., INC.
By: _______________________________________
Print Thomas Scott
_______________________________________
Title Vice President - Carrier Sales
_______________________________________
CUSTOMER:
By: ______________________________________
Print Sean Thomas
______________________________________
Title: Vice President - Operations
______________________________________
FEL # ______________________________________
-7-
Initials ___
___
<PAGE>
[LOGO OF CABLE & WIRELESS, INC.] EXHIBIT 10.16
CARRIER AGREEMENT
This Carrier Agreement ("Agreement") is entered into by and between Cable &
Wireless, Inc. ("CWI") and its carrier customer signing below ("Carrier"). The
Dedicated Access Services Agreement signed by the Carrier on the date indicated
below and the General Terms and Conditions for Carrier Agreements CAR-95A (4/95)
attached hereto are part of this Agreement.
- --------------------------------------------------------------------------------
ORDER INFORMATION
- --------------------------------------------------------------------------------
1. Services to be Provided by CWI: (insert "X" in box for each type of service
------------------------------
to be provided by CWI)
[X] Domestic Outbound [_] Domestic Inbound
[X] International Outbound [_] Directory Assistance
2. Term: 15 months
---- ----
<TABLE>
<S> <C> <C> <C>
3. Rates: (per minute except for Directory Assistance)
-----
Interstate Outbound (US mainland originated):
Terminating in a "Super Saver" LATA as listed in the attachment hereto: .. $0. 06
----
Terminating in a US mainland LATA other than a "Super Saver" LATA: ....... $0. 07
----
Terminating in Alaska, Hawaii, Puerto Rico, and US Virgin Islands: ....... $0. 09
----
Intrastate Outbound: ....................................................... $0. 07 within Connecticut
---- -------------
....................................................... $0. 085 within Florida
---- -------------
Interstate Inbound (US mainland originated and terminated): ................ $0. NA
----
Intrastate Inbound: ........................................................ $0. NA within NA
---- -------------
International Outbound: See attached schedule entitled International Telephone Co. and dated 8/1/95
----------------------------- --------
Directory Assistance: CWI's then-standard per-call rates
</TABLE>
<TABLE>
<S> <C> <C>
4. 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 ........................................ YES
-------------------------- ----------
Initial Security Deposit Amount: ................................ $113,000
----------
Continuing Security Deposit Amount: ............................. 1.5 times the amount of usage charges incurred
---------- over any 30 period
----
Deposit Release Period: ......................................... 12 months
----------
Estimated Payments Required: ...................................... YES
--------------------------- ----------
Estimated Usage Period: ....................................first 20 days of each monthly billing period
----------
Estimated Payment Due Date: .................................... 1 business days after CWI notifies the
</TABLE>
5. 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>
1 $ 0 2 $ 50,000
--------- --------- --------- ---------
3-15 $ 75,000 $
--------- --------- --------- ---------
$ $
--------- --------- --------- ---------
$ $
--------- --------- --------- ---------
</TABLE>
Dedicated Access Services Agreement dated
-------------
INTERNATIONAL TELEPHONE COMPANY CABLE & WIRELESS, INC.
------------------------------- ----------------------
Signature: /s/ Phillip Thomas Signature: /s/ Richard A. Berman
------------------- ---------------------
Printed Name: Phillip Thomas Printed Name: Richard A. Berman
------------------- ---------------------
Title: CFO Title: CFO
------------------- ---------------------
Date: 8/21/95 Date: 8/29/95
------------------- ---------------------
<PAGE>
[LOGO OF CABLE & WIRELESS, INC. APPEARS HERE]
GENERAL TERMS AND CONDITIONS FOR CARRIER AGREEMENTS
1. Service to be Provided by CWI: CWI will provide the long-distance services
-----------------------------
set forth in the Order Information section of this Agreement (hereinafter
collectively, "Services").
The Carrier will access CWI's network 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: The term of this Agreement will start as of the date it is fully
----
executed and it will continue thereinafter for the number of months after
service is initiated set forth in the "Term" portion of the Order
Information section of this Agreement ("Term").
3. Rates and Taxes: The Carrier will pay any monthly, usage, and one-time
---------------
charges set forth in the Dedicated Access Service Agreement, and the rates
set forth or referenced in the Order Information section of 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.
4. Payment: CWI will provide monthly involves covering designated 30-day
-------
periods which will be due and payable within the "Payment Period" set forth
in the Order Information section of this Agreement.
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 CWI monthly billing period, CWI will provide an invoice for
the usage charges actually incurred that month less that month's Estimated
Payment; provided, however, that if a minimum 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 bearing on the Carrier's
financial condition.
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) or 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.
7. Minimum Payment Obligations: If the total amount of usage charges incurred
---------------------------
by the Carrier 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 that month, and (ii) the amount of the
then-applicable minimum monthly payment obligation.
8. Termination: Prior to the end of the 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) a discontinuance charge
equal to the sum of the minimum monthly payment obligations for each of the
remaining months in the Term.
If the Carrier fails to do any of the following when due and then does not
cure such failure within three (3) business 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.
9. 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 set forth in the "General Rules and Regulations"
section of CWI's interstate 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 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 exclusive
<PAGE>
[LOGO OF CABLE & WIRELESS, INC. APPEARS HERE]
GENERAL TERMS AND CONDITIONS FOR CARRIER AGREEMENTS
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. The
terms and conditions pre-printed on the front and reverse side of the Dedicated
Access Services Agreement form are not part of this Agreement.
<PAGE>
CARRIER AGREEMENT AMENDMENT
[LOGO OF CABLE & WIRELESS, INC. APPEARS HERE]
The Carrier Agreement identified below which was entered into by and between
Cable & Wireless, Inc. ("CWI") and its carrier customer identified below, as
such Agreement may have previously been modified ("AGREEMENT"), is modified (or
if applicable, is further modified) as set forth in this Carrier Agreement
Amendment ("AMENDMENT"). This Amendment is effective upon the date of signature
of the last party to sign
- --------------------------------------------------------------------------------
1. AGREEMENT: The Agreement being modified by this Amendment was entered into by
and between CWI and ("CARRIER") effective as of August 29, l995.
2. TERM: The number of months set forth in Section 2 (Term) of the Order
Information section of the Agreement is deleted and replaced by "18".
3. MINIMUM MONTHLY PAYMENT OBLIGATIONS: Section 5 (Minimum Monthly Payment
-----------------------
Obligations) of the Order Information Section is replaced by the following:
-----------
-----------------------------------------------------------------
MONTH AFTER SERVICE INITIATION MINIMUM AMOUNT EACH MONTH
-----------------------------------------------------------------
1 0
-----------------------------------------------------------------
2 50,000
-----------------------------------------------------------------
3-4 75,000
-----------------------------------------------------------------
5 50,000
-----------------------------------------------------------------
6-18 75,000
-----------------------------------------------------------------
It is acknowledged that (i) Carrier has not met the minimum payment
obligations for Months 3 and 4 as set forth above and that CWI has the right
to bill Carrier a shortfall amount for each such month pursuant to Section 7
of the General Terms and Conditions for Carrier Agreements, and (ii) although
CWI has not billed Carrier for the shortfall amounts, CWI is not waiving its
right to bill Carrier such amounts or any future shortfall amounts that may
arise.
The Agreement as modified herein, constitutes the entire understanding of the
parties with respect to the subject matter hereof, and it supersedes all prior
or contemporaneous oral or written agreements, understandings and
representations with respect thereto.
INTERNATIONAL TELEPHONE COMPANY CABLE & WIRELESS, INC.
------------------------------- ----------------------
Signature: /s/Sean Thomas Signature: /s/Elaine M. Beiseigel
----------------------- -----------------------
Printed Name: Sean Thomas Printed Name: Elaine M. Beiseigel
----------------------- -----------------------
Title: Vice President Title: Contract Manager
----------------------- -----------------------
Date: 3-11-96 Date: 3-25-96
----------------------- -----------------------
<PAGE>
EXHIBIT 10.17
TELECOMMUNICATIONS SERVICES AGREEMENT
THIS TELECOMMUNICATIONS SERVICES AGREEMENT ("Agreement") is entered into on
17 March, 1997 (the "Effective Date"), between:
TELEGLOBE USA INC., a Delaware corporation having a business address at 1751
Pinnacle Drive, McLean, Virginia 22102 (hereinafter "Teleglobe"); and
INTERNATIONAL TELEPHONE COMPANY, a corporation having a business address at 290
Pratt Street, Meridan, CT 06450 (hereinafter the "Customer");
and with Teleglobe, collectively referred to as the "Parties" and individually,
a "Party".
W I T N E S S E T H:
--------------------
WHEREAS, Teleglobe is a provider of international telecommunications services;
and
WHEREAS, Customer desires to purchase certain telecommunications services
provided by Teleglobe and described below on the terms and conditions contained
herein.
WHEREAS, the Parties desire to enter into an agreement pursuant to Section 211
of the Communications Act of 1934, as amended, for carrier to carrier
telecommunications services;
NOW THEREFORE, the Parties, in consideration of the mutual covenants and
agreements hereinafter set forth, agree as follows:
1. DESCRIPTION OF SERVICES
1.1 Teleglobe shall provide those telecommunications switching services and
facilities to Customer to route Customer's international telecommunications
traffic to and from various destinations around the world, as more
particularly described in Annex 1 attached hereto and incorporated herein
by reference (the "Services"). Additional services may be added from time
to time to this Agreement upon terms and conditions to be mutually agreed
upon by the Parties and to be included by adding an amended Annex 1 to this
Agreement.
1.2 The destinations offered by Teleglobe for the provision of the Services are
listed in Annex 2 attached hereto and incorporated herein by reference (the
"Destinations"), which Destinations may be amended from time to time by
Teleglobe by providing Customer with fifteen (15) days prior written
notice.
2. TERM
2.1 This Agreement shall commence on the Effective Date and shall continue for
an initial term ("Term") of one (1) year. Thereafter this Agreement shall
remain in effect unless terminated by either party by providing a written
six (6) months notice of termination to the other party.
2.2 Teleglobe will endeavour to provide the Services on the date of completion
of testing (the "Service Date"), and will notify Customer when such testing
is completed.
1
<PAGE>
3. VOLUME COMMITMENT
3.1 As of the Service Date, Customer shall send annually to the Destinations,
via Teleglobe's facilities, the minimum volume of minutes of traffic, if
any, set forth in Annex 3.
3.2 In addition to the Minimum Volume Commitment, if any, specified in Annex 3,
commencing with the second month after the Service Date, Customer shall
send a minimum of 150,000 minutes of traffic per month per each T1 facility
("Facility") provisioned by Teleglobe. In the event Customer fails to meet
such minimum traffic volume for such Facility, Teleglobe shall have the
right to terminate any and all such Facilities immediately and to provide
written notice thereof to Customer.
4. OPERATIONAL AND COMMERCIAL MATTERS
4.1 The point of interconnection with the Customer shall be Teleglobe's
facilities at 60 Hudson Street, New York, NY (the "Interconnection
Location"). Customer shall be responsible to procure, at its own expense,
the necessary facilities or equipment required to bring traffic to the
Interconnection Location. The initial traffic routing will be via
Teleglobe's arranged gateways.
4.2 The Parties shall coordinate the management of their respective system
facilities, with each Party being responsible for providing and operating,
at its own expense, its respective network facilities. The Parties also
shall interface on a 24 hours/7 days a week basis to assist each other with
the isolation and repair of any facility faults in their respective
networks, and with the identification, investigation and mitigation of real
time traffic flow problems to/from any Destinations.
4.3 Customer shall provide Teleglobe with prompt and accurate traffic
forecasting information in order to allow Teleglobe to provision the
Services. Such forecasts shall be provided by Customer prior to
implementation of the Services and thereafter as may be reasonably
requested by Teleglobe. Such forecasts shall be in form satisfactory to
Teleglobe and shall specify the traffic volumes, daily and seasonal
profiles and peak periods for each Destination.
4.4 Customer hereby appoints Teleglobe as its agent for purposes of
establishing related services with domestic and international underlying
carriers as may be required in connection with this Agreement.
4.5 Teleglobe reserves the right to cancel and/or temporarily suspend any or
all of the Services if Customer engages in activities which, in the
reasonable opinion of Teleglobe, may cause disruption or damage to
Teleglobe's network of facilities. Teleglobe shall use commercially
reasonable efforts to provide Customer with advance notice of such
suspension and or cancellation and in any case shall endeavour to provide
written confirmation of such suspension and or cancellation within a
commercially reasonable time thereafter.
5. PRICING AND BILLING
5.1 For the Services provided pursuant to this Agreement, Customer shall pay
Teleglobe the rates by Destination set forth in Annex 2 attached hereto and
incorporated herein by
2
<PAGE>
reference (the "Rates"), which Rates may be adjusted by Teleglobe from time
to time by providing fifteen (15) days prior written notice to Customer.
5.2 Teleglobe shall provide a monthly invoice for the Services provided
hereunder in accordance with the then-current Rates as soon as practicable
after the end of each month. Such invoice will be based on the chargeable
duration of the calls routed pursuant to this Agreement and rounded to the
nearest six (6) second increment. The invoice will include traffic by
destination, tariffs by destination and total amount due. Chargeable calls
for Services shall begin on the earlier of Teleglobe receiving answer
supervision or when Teleglobe is charged by its carrier supplier and/or
provider.
5.3 All amounts due hereunder by Customer shall be payable to Teleglobe in U.S.
Dollars in immediately available funds within thirty (30) days of the date
of Teleglobe's invoice. If Customer in good faith disputes any invoiced
amount, it shall submit to Teleglobe within thirty (30) days following
receipt of such disputed invoice, full payment of the undisputed portion of
the invoice and written documentation identifying the minutes and/or rates
which are in dispute. The Parties shall investigate the matter and upon
mutual agreement, either a credit against future invoices will be issued by
Teleglobe or the withheld amount shall be paid by Customer, along with
interest as set forth below. Any amounts due hereunder that are not paid
when due shall accrue interest at the rate of one and one-half percent
(1.5%) per month, compounded daily, beginning with the day following the
date on which payment was due, and continuing until paid in full. Further,
Teleglobe shall have the right to set off any amounts due hereunder which
are not paid when due against any amounts owed to Customer by Teleglobe or
any of its affiliates pursuant to any other agreement or arrangement.
5.4 Teleglobe reserves the right at any time to require Customer to issue a
deposit, irrevocable letter of credit or other form of security acceptable
to Teleglobe if Customer's financial circumstances or payment history is or
becomes unacceptable to Teleglobe.
5.5 All Rates and other charges due hereunder are exclusive of all applicable
taxes, including value added tax, sales taxes, and duties or levies imposed
by any authority, government or government agency, all of which shall be
paid promptly when due by Customer, and Customer agrees to indemnify and
hold Teleglobe harmless from any liability therefor.
6. TERMINATION
6.1 In addition to any other rights at law or in equity and notwithstanding
Article 2.1 above, Teleglobe may terminate this Agreement immediately in
the event that Customer (i) fails to make any payment when due hereunder;
(ii) becomes insolvent or bankrupt or ceases paying its debts generally as
they mature; or (iii) commits a breach of any of the terms of this
Agreement (other than a breach of a payment obligation as addressed in (i)
above) and fails to remedy such breach within thirty (30) days after
receipt of written notice thereof from Teleglobe.
6.2 In the event of any termination pursuant to this Article 6, Customer shall
pay to Teleglobe any Rates for Services rendered through and including the
date of termination as well as any amounts due on account of any minimum
volume commitment obligations and Shortfall charges, if any, arising
pursuant to Annex 3.
3
<PAGE>
7. LIMITATION OF LIABILITY
7.1 Customer acknowledges that Teleglobe has no control over how a foreign
administration or third party carrier establishes its own rules and
conditions pertaining to international telecommunications services.
Customer agrees that Teleglobe shall not be liable for any loss or damage
sustained by Customer, its interconnecting carriers or its end users due to
any failure in or breakdown of the communication facilities associated with
providing the Services, for any interruption or degradation of the Services
whatsoever shall be the cause or duration thereof, or for any other cause
or claim whatsoever arising under this Agreement.
7.2 In no event shall Teleglobe be liable to the Customer for consequential,
special or indirect losses or damages howsoever arising and whether under
contract, tort or otherwise (including, without limitation, third party
claims, loss of profits, loss of customers, or damage to reputation or
goodwill).
8. ASSIGNMENT
This Agreement is personal to the Parties hereto and may not be assigned or
transferred by either Party without the prior written consent of the other
Party; except that Teleglobe may assign this Agreement without consent to
any affiliated entity or successor in interest whether by merger,
reorganization, or transfer of all or substantially all of its assets or
otherwise.
9. FORCE MAJEURE
No failure or omission by Teleglobe to carry out or observe any of the
terms and conditions of this Agreement by Teleglobe shall give rise to any
claim against Teleglobe or be deemed a breach of this Agreement if such
failure or omission arises from an act of God or any other circumstance
commonly known as force majeure, an act of Government, or any other cause
beyond the reasonable control of Teleglobe.
10. PUBLICITY, CONFIDENTIALITY
10.1 For a period of two (2) years from the date of disclosure thereof, each
Party shall maintain the confidentiality of all information or data of any
nature ("Information") provided to it by the other Party hereto provided
such Information contains a conspicuous marking identifying it as
"Confidential" or "Proprietary". Each party shall use the same efforts (but
in no case less than reasonable efforts) to protect the Information it
receives hereunder as it accords to its own Information. The above
requirements shall not apply to Information which is already in the
possession of the receiving Party through no breach of an obligation of
confidentiality to the disclosing Party or any third party, is already
publicly available through no breach of this Article 10, or has been
previously independently developed by the receiving Party. This Agreement
shall not prevent any disclosure of Information pursuant to applicable law
or regulation, provided that prior to making such disclosure, the receiving
Party shall use reasonable efforts to notify the disclosing Party of this
required disclosure. All Information provided by any Party to the other
hereunder shall be used solely for the purpose for which it is supplied.
10.2 Without Teleglobe's prior written consent, Customer shall not (i) refer to
itself as an authorized representative of Teleglobe in promotional,
advertising, or other materials, (ii) use
4
<PAGE>
Teleglobe's logos, trade marks, service marks, or any variations thereof in
any of its promotional, advertising, or other materials, or (iii) release
any public announcements referring to Teleglobe or this Agreement without
first having obtained Teleglobe's prior written consent.
11. NOTICE
11.1 All notices, requests, or other communications hereunder shall be in
writing, addressed to the parties as follows:
If to Customer: International Telephone Company
290 Pratt Street
Meridan
CT 06450
Attention: John Lynch, President
Facsimile:(203) 238-1699
If to Teleglobe: Teleglobe USA Inc.
1751 Pinnacle Drive, Suite 1600
McLean, Virginia 22102
Attention: Vice President, US Sales
Facsimile: (703) 714-6653
11.2 Notices mailed by registered or certified mail shall be conclusively deemed
to have been received by the addressee on the fifth business day following
the mailing of sending thereof. Notices sent by telex or facsimile shall be
conclusively deemed to have been received when the delivery confirmation is
received if followed by first class mail, postage prepaid. If either Party
wishes to alter the address to which communications to it are sent, it may
do so by providing the new address in writing to the other Party.
12. COMPLIANCE WITH LAWS
12.1 Customer shall not use the Services in any manner or for any purpose which
constitutes a violation of the laws of the United States or the laws of any
foreign jurisdiction in which the Services are being provided. Customer
further agrees to refrain from engaging in sales, advertising or marketing
within or outside of the United States which Teleglobe believes could
impair its or its affiliates' relationship with any overseas authority or
carrier.
12.2 The Parties hereby acknowledge that this Agreement shall be subject to
Section 211 of the Communications Act, as amended, and shall govern
Teleglobe's provision of the Services to the Customer. It is also
understood and agreed that the terms and conditions hereof shall in all
cases supersede any terms set forth in any Teleglobe tariff on file and in
effect with the Federal Communications Commission.
12.3 This Agreement and the continuance hereof by the Parties is contingent upon
the obtaining and the continuance of such approvals, consents, governmental
and regulatory authorizations, licenses and permits as may be required or
deemed necessary by the Parties, and the Parties shall use commercially
reasonable efforts obtain and continue same in full force and effect.
5
<PAGE>
13. MISCELLANEOUS
13.1 Any Article or any other provision of this Agreement which is or becomes
illegal, invalid or unenforceable shall be severed herefrom and shall be
ineffective to the extent of such illegality, invalidity or
unenforceability and shall not affect or impair the remaining provisions
hereof, which provisions shall be severed from any illegal, invalid or
unenforceable Article or any other provision of this Agreement and shall
otherwise remain in full force and effect.
13.2 No waiver by either Party to any provisions of this Agreement shall be
binding unless made in writing, any such waiver shall relate only to such
specific matter, non-compliance or breach to which it relates to and shall
not apply to any subsequent matter, non-compliance or breach.
13.3 The relationship between the Parties shall not be that of partners, and
nothing herein contained shall be deemed to constitute a partnership
between them or a merger of their assets or their fiscal or other
liabilities or undertakings. Neither Party shall have the right to bind the
other Party, except as expressly provided for herein.
13.4 This Agreement shall be governed by the laws of the Commonwealth of
Virginia, without reference to its principles of conflict of laws. Customer
irrevocably consents and submits to personal jurisdiction in the courts of
the Commonwealth of Virginia for all matters arising under this Agreement.
13.5 This Agreement may be executed in multiple counterparts, each of which
shall be deemed an original.
13.6 This Agreement, including the following Annexes:
Annex 1 Service Description
Annex 2 Destinations and Rates
Annex 3 Minimum Volume Commitments and Shortfall
represents the entire understanding between the Parties in relation to the
matters herein and supersedes all previous agreements made by either Party,
whether oral or written. This Agreement may only be modified by a writing
signed by both Parties.
IN WITNESS WHEREOF, the Parties have executed this Agreement in duplicate,
or caused this Agreement to be executed in duplicate by a duly authorized
officer, as of the date first above written.
TELEGLOBE USA INC. INTERNATIONAL TELEPHONE
COMPANY
By: /s/signature illegible By: /s/Sean Thomas
----------------------- -----------------------
Name: name illegible Name: Sean Thomas
--------------------- ---------------------
Title: V.P./G.M. Title: V.P. Sales
-------------------- --------------------
6
<PAGE>
ANNEX 1
SERVICE DESCRIPTION
-------------------
1. International Direct Distance Dialing (IDDD) -- Teleglobe will connect
--------------------------------------------
facilities to route international telecommunications traffic (IDDD type)
and will arrange with authorized international carriers to provide service
to various destinations around the world.
7
<PAGE>
Exhibit 10.18
PROMISSORY NOTE
---------------
Colorado Springs, CO
$159,915.54 April 30, 1996
FOR VALUE RECEIVED, COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. ("Maker")
promises to pay to the order of Robert A. Spade ("Payee") at 8 So. Nevada, Suite
200, Colorado Springs, Colorado 80903, the principal sum of ONE HUNDRED FWW-NINE
THOUSAND NINE HUNDRED FIFTEEN DOLLARS AND FIFTY-FOUR CENTS ($159,915.54),
together with interest at the rate of 10% per annum. Principal, interest and all
other sums payable hereunder are to be paid in lawful money of the United States
of America.
Principal Payments. The principal amount of this note, together with
------------------
accrued interest thereon, shall be payable on May 31, 1999.
Prepayment. Maker shall have the privilege of prepaying, in whole or in
----------
part, the unpaid principal balance of this note, together with accrued interest
thereon, at any time.
Default. If Maker defaults in timely payment of this note, interest shall
-------
be computed on the unpaid principal balance of this note at a rate of 18% per
annum.
Nonwaiver. Neither the failure nor any delay on the part of the holder of
---------
this note to exercise any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or privilege preclude any other right, power or privilege.
Presentment, Etc. Maker and any subsequent endorser or guarantor hereof
----------------
hereby waive presentment for payment except at Maturity, notice of nonpayment at
Maturity, notice of protest, protest and notice of dishonor.
1
<PAGE>
Notices. Any notice which the holder of this note may desire or may be
-------
required to give to Maker shall be given by certified or registered United
States mail, postage prepaid, return receipt requested, and addressed to Maker
as follows:
Communications Systems International, Inc.
8 So. Nevada, Suite 200
Colorado Springs, CO 80903
Maker may change the address for notices by written notice to the holder hereof
delivered at the place for payment hereof.
Collection Expenses. If this note is not paid as agreed and the holder
-------------------
hereof undertakes collection of the indebtedness evidenced hereby, Maker agrees
to pay all costs reasonably incurred by the holder in collecting the same,
including reasonable attorneys' fees.
Binding Effect. All of the foregoing promises are the promises of Maker and
--------------
shall bind Maker, its successors and assigns.
Choice of Law. This note shall be construed in accordance with and governed
-------------
by the laws of the State of Colorado.
MAKER:
COMMUNICATIONS SYSTEMS
INTERNATIONAL, INC.
By: /s/ Robert A. Spade
-----------------------------
Robert A. Spade
President
RAS:nkh
2
<PAGE>
Exhibit 21
List of Subsidiaries
Upon the completion of the ITC Acquisition:
International Telephone Company, a Delaware corporation
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of Communications Systems
International, Inc. on Form SB-2 of our report dated June 2, 1997, August 11,
1997, September 17, 1997, October 9, 1997, October 31, 1997 and December 30,
1997 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
February 27, 1998
<PAGE>
Exhibit 23.3
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to inclusion of our report dated December 12, 1997 relating to the
financial statements of International Telephone Company as of October 31, 1997
and for the ten months ended October 31, 1997 and the year ended December 31,
1996 in this Registration Statement on Form SB-2 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
February 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
COMMUNICATIONS SYSTEM INTERNATIONAL SHARES AND STATEMENT AND IS QUALIFIED IN ITS
ENTIRETY BY PERFORMANCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> APR-30-1997 APR-30-1998
<PERIOD-START> MAY-01-1996 MAY-01-1997
<PERIOD-END> APR-30-1997 OCT-31-1997
<CASH> 146,686 143,632
<SECURITIES> 0 0
<RECEIVABLES> 1,239,722 1,410,804
<ALLOWANCES> (186,489) (318,693)
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,283,881 1,498,824
<PP&E> 650,218 713,325
<DEPRECIATION> (194,427) (260,235)
<TOTAL-ASSETS> 1,946,491 2,278,015
<CURRENT-LIABILITIES> 3,615,136 3,531,880
<BONDS> 0 0
0 0
0 0
<COMMON> 2,366,066 2,750,285
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 1,946,491 2,278,015
<SALES> 11,865,412 6,371,549
<TOTAL-REVENUES> 11,865,412 6,371,549
<CGS> 7,754,897 3,807,066
<TOTAL-COSTS> 7,754,897 3,807,066
<OTHER-EXPENSES> 4,207,386 3,053,588
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (162,602) (87,905)
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (259,473) (577,010)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (259,473) (577,010)
<EPS-PRIMARY> (.03) (.06)
<EPS-DILUTED> 0 0
</TABLE>
